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Vol 57 No 20

Published 7th October 2016


Fears of a great unravelling

Calls for an emergency financing conference are growing amid deepening risks of economic and political chaos

After a flash of mid-year optimism about the prospects of a deal to settle Zimbabwe's foreign debt arrears and an injection of new money, there is a political impasse about how to fix the economy. The rival factions in power differ over economic strategy while the increasingly vocal opposition opposes any foreign money deal, which it sees as bailing out President Robert Mugabe's ailing government (AC Vol 57 No 17, Patriotism, politics and position).

Chart Copyright © Africa Confidential 2016

Yet as the money runs out, the country is heading relentlessly towards an economic disaster that would have the most serious political and social consequences. Neither government nor opposition would benefit from such a crisis but more lives would be wrecked. Accordingly, there are rising calls for an emergency financing conference which could address both the deepening short-term needs and reach broad-based agreement on longer-term economic priorities. Many Zimbabweans worry that the combination of an economic crash and the rising political volatility over Mugabe's successor could tip the country into uncontrollable chaos.

Political divisions are sharpening, some backed openly by armed factions. Meanwhile, among outsiders, there is a sense of inertia after two decades of failed policies on Zimbabwe. The International Monetary Fund (IMF) will release its latest projections this month but there is scant sign of new ideas from outside.

Chart Copyright © Africa Confidential 2016

No one questions the dire prospects. On 8 September, Finance Minister Patrick Chinamasa set out the grim facts underlying the decline: he forecast economic growth of just over 1% in aggregate this year. Nevertheless, growth in key sectors such as agriculture would decline. He spelled out a recovery plan but a lack of finance hampers the government's ability to implement it. The deficit is predicted to reach over US$1 billion by the end of the year and the banking system is fragile.

Already, more than four million Zimbabweans need food aid, 80% are unemployed or are sustained by 'hand-to-mouth' informal occupations, and basic goods and power are scarce. There is a risk of widespread hunger or even starvation, say economists at the Overseas Development Institute in London. Judith Tyson, a research fellow and specialist in financial market development at the ODI argues the economic decline is so serious for Zimbabwe's people and for the wider region that international institutions such as the IMF should rethink its refusal to make funds available before the question of the foreign debt arrears is resolved (AC Vol 57 No 15, Dollar crisis puts opposition on the streets).

Chart Copyright © Africa Confidential 2016

Lima locked
The Lima Process, under which Zimbabwe was to repay its arrears with the help of a guarantee from the Cairo-based Afreximbank, appears to have run into the ground. The offers of financing are on hold while dollar reserves dwindle further. A week after Chinamasa's budget speech, the IMF – which with the World Bank, provides only technical assistance – reiterated its position that there would be no discussions on, let alone disbursements of, a financing package until the debt arrears were cleared.

Some critics of the Fund's position say that it doesn't understand the severity of the situation. Since 2014, successive IMF projections concerning Zimbabwe's growth have shown that the organisation has underestimated the speed of economic collapse. For example, its initial estimates of 2015 and 2016 growth were more than two or three times actual growth.

While the government forecast gross domestic product growth of only 1.1% in 2016 and 2017, the IMF in April expected growth to reach 5.6% in 2017 (Figure 3). Given its recent record, economists such as Tyson believe that projection to be wildly optimistic.

The divergence between the IMF and government forecasts stems from differing expectations for the agriculture and electricity sectors, with the IMF forecasting a resurgence in 2017 and the government forecasting continued decline. Both sectors have been battered by a drought related to the climate cycle known as El Niño, which devastated agricultural and hydro-electric output. Only the mining sector has kept the economy from falling into a sharp recession.

A recovery of the sort predicted by the IMF would be heavily dependent upon an end to the drought. Yet, even if rainfall returns to normal in 2017, the economic gains may not be felt for several years. Hydro-electric production will take three years to normalise, according to the budget. Given the acute food shortages and lack of investment in irrigation, agricultural output may also take several years to recover, ODI economists argue.

Tough decisions
Even if the IMF were to be convinced of the need to act on financing, it would face a barrage of tough political decisions in Zimbabwe but initially in relation to other international institutions and governments in Europe, Asia and North America. It's clear that Finance Minister Chinamasa's approach is at odds with IMF orthodoxy. 

In May 2016, after a visit to Zimbabwe, the IMF commended the reforms that have been carried out and acknowledged the 'heavy toll on social well-being' of the current economic situation. Yet the report's proposals were almost entirely focused on controlling government spending and creating a 'pro-business environment'. Some proposals were uncontroversial, such as the need to reduce the public sector wage bill and tackle chronic corruption.

Chinamasa, though, has been advocating a more active industrial policy and close partnership with private investors to finance and build infrastructure and diversify private sector growth. He argues that Zimbabwe, with its history of manufacturing and processing, is well placed to follow the strategies pursued by countries such as Kenya, Ethiopia and Rwanda. They have maintained robust growth in 2016 and secured enough external financing to counter the effects of a generalised economic slowdown in Africa.

In his latest budget, Chinamasa emphasises the need for infrastructure development in energy, water, transport and information technology, and partnership with the private sector in mining and agro-processing, and to establish special economic zones. That is just a pipe dream without finance to back it up and private investors are unable or unwilling to step in, wary of corruption and instability. However, the IMF's report was more reminiscent of its laissez-faire structural adjustment programmes of the 1980s and 1990s. The emphasis was on cutting back government.

Costly failure
Some development agencies outside the IMF-World Bank consensus argue that the failure to finance investment is likely to increase the risks of economic and humanitarian disaster. As a result, Japan, the European Union and the Swiss government are providing new financing, especially in sectors where it will help poverty alleviation, such as agriculture. Yet these fall far short of financing requirements, even to keep the economy ticking over let alone to generate sustainable growth. Queues outside banks and the government's attempts to introduce bond notes, as a 'surrogate currency' according to President Mugabe, are signs of hastening economic deterioration. The worst drought in Southern Africa is adding to the danger of famine.

Long patient and hopeful of peaceful political change, Zimbabweans show signs of rising frustration as civil unrest grows. As factions within the ruling Zimbabwe African National Union-Patriotic Front turn on each other, opposition parties sense a new opportunity. Former Vice-President Joice Mujuru has started her own opposition grouping and speaks of constructive cooperation with Morgan Tsvangirai, the veteran oppositionist. This week Mujuru is in London, drawing much interest from foreign investors and diaspora Zimbabweans.


As the dollars disappear

It was the replacement of the Zimbabwean dollar by a multi-currency regime that defeated hyperinflation in 2009 under a 'power-sharing' government (AC Vol 50 No 8, Good-bye to Zimbabwe's dollar). Harare adopted a basket of convertible currencies as legal tender but the United States dollar and the South African rand dominated. The currency change also resuscitated economic growth, with the economy expanding at twice the regional pace in 2012.

Since then, the country has fallen behind the region in almost all indicators, including growth and inflation. Today the US dollar is used for 95% of transactions. That, combined with a shortage of physical currency and a rise in the value of the US dollar, is disrupting trade. Although South Africa is Zimbabwe's main trading partner, the rand has been progressively marginalised since 2009.

In March 2016, the government announced a liquidity facility to promote exports, which it called 'bond notes'. The US$200 million facility was meant to have been guaranteed by Afreximbank but the financing of the facility is shrouded in mystery. Even without those concerns, there is scepticism about the notes from exporters and foreign investors, who see them as a backdoor way to reinstate the Zimbabwe dollar.

Alternative policy options are limited. Replenishing physical US currency is difficult due to US sanctions, international money laundering regulations and the inability of the government to finance note purchases from alternative sources. Despite this, the central bank injected some physical currency last month. It would be more realistic in the longer term to rebalance the system towards the rand. That would enable Zimbabwe to access currency from the Reserve Bank of South Africa and could help to stabilise terms of trade with SA. It would also stabilise remittance incomes from the large expatriate workforce there.

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