ZIMBABWE’ ECONOMIC PROSPECTS

1. ZIMBABWE’ ECONOMIC PROSPECTS PRESENTATION AT THE AFRICAN STUDIES CENTRE, LEIDEN, THE NETHERLANDS, APRIL 2010

2. OUTLINE OF PRESENTATION The presentation is structured as follows: Zimbabwe’s Socio-Economic Outlook Strategic Objectives and Thrusts Measures undertaken by the Inclusive Government Way Forward Key Challenges

3. ABJECT POVERTY IN A RESOURCE-RICH ECONOMY: A PARADOX Like most African countries, Zimbabwe is resource-rich, yet poverty stricken – indeed a paradox. As stated in the Monetary Policy Statement (MPS) of 2 February 2009: “The fact that in spite of the presence of so much mineral resources and human capacities in our country, we remain unable to utilize the same signifies the need for a total paradigm shift in the way we conduct our economic and financial affairs as a country, as a people, and Government,” (paragraph 1.57). That MPS goes on to list the estimated mineral resources against the low levels of current extraction (paragraph 1.58).

4. SOCIO-ECONOMIC OUTLOOK A. Macroeconomic Management • Cumulative economic decline of at least 51% between 1999 and 2008. • Hyperinflation officially estimated at 231 million percent by July 2009 • Unsustainable budget deficits and unmanageable public sector debt, foreign and domestic • Uncontrolled monetary expansion driven by quasi-fiscal activities • Volatile and unpredictable exchange-rate systems (multiple exchange rates, rapid dollarization and a collapsing currency) • Pervasive controls in the financial sector • Central bank engaged in quasi-fiscal operations

5. 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% 1994 1996 1998 2000 2002 2004 2006 years 1994-2007 ZIMBABWE’S GDP GROWTH: 1994-2007

6. GDP GROWTH (%):ZIMBABWE, SSA & AFRICA, 1980-2006

7. B. Productive Sectors • Diminishing international competitiveness • Lack of secure and predictable property rights • Rapidly-worsening shortage of skills arising from out-migration • Hostile investment climate characterized by excessive, volatile and mutually-conflicting government interventions and uncertainty over economic empowerment initiatives • Acute shortages of essential inputs, especially fuel, raw materials and intermediate inputs • Uncertain agricultural land rights and land tenure insecurity • All sectors operating well below capacity levels (capacity utilisation in industry was at 18.9% in 2007, down from 35.8% in 2005) • High operating costs on account of infrastructural deficiencies, especially electricity • Business decision-making undermined by volatile, often contradictory, regulatory environment • Inadequate and dilapidated productive infrastructure • Inefficient and subsidy-dependent public enterprises

8. C. Poverty • High levels of unemployment and decent work deficits: 72% of the population below the poverty line by 2003, up from 55% in 1995 • The percentage of the population employed in the formal sector declined from 14% in 1980 to 10% by 2004 & around 6% by 2007. • Growing informalization and deepening dualism in the economy: 4 out of 5 jobs were informalized by 2004 • Inequality worsened: the gini-coefficient increased from 0.53 in 1995 to 0.61 in 2003. • The disappearance of a middle class: the ‘missing middle’ • Serious and rapidly increasing social distress and chronic food insecurity • Supply-driven education system without a ‘pathways’ approach • Inadequate and dilapidated social infrastructure • HIV and AIDS (adult prevalence rate of 15.9%) & the re-emergence of diseases that had been controlled (malaria, TB, cholera).

9. D. How the State Does Business • Fixation with short-term considerations: fire fighting mode • Institutional incoherence, inconsistency & overlap • Contraction of the revenue base • Deteriorating governance indicators • Estrangement from traditional development partners and processes • Zimbabwe’s isolation from the ‘mainstream’ of international development means that when re-engagement takes place it will have a poor understanding of how to do business with the aid community • Concepts, principles, processes developed since 1997 will be new to the country.

10. E. Data deficiencies The quality of data has declined over the last few years. This is serious given that reliable baselines are key to the formulation of sound strategies, the setting of targets and the monitoring of progress.

11. F. The global economic recession: • Sources of funding, including foreign direct investment, lines of credit and migrant remittances are expected to decline significantly. • The duration and depth of the recession will depend on the efficacy of the stimulus monetary and fiscal support measures. • Zimbabwe has already experienced a worsening balance of payments deficit, from US$33 million in 2007 to US$410 million in 2008. • Mineral exports, which accounted for 51% of total exports in 2008, declined by 15.7% in that year.

12. STRATEGIC OBJECTIVES AND THRUSTS A) Establish sound macroeconomic management Strategic Thrusts • Achieve price and exchange rate stabilisation • Carry out fiscal consolidation and exercise monetary restraint • Establish independent central bank • Improve national management of aid flows based on Paris principles

13. B) Revive and restructure the productive sectors Strategic Thrusts • Rebuild competitive markets • Establish clear property rights and land tenure security • Utilize diaspora skills and capital effectively • Implement relevant Doing Business reforms • Ease skills constraint • Improve efficiency of public enterprises • Provide well maintained productive infrastructure

14. C) Ensure pro-poor growth Strategic Thrusts • Rapidly improve human development indicators • Transform the dualistic structures in the economy • Strengthen household food security • Develop more demand-driven education and training systems • Promote employment-intensive growth within a decent work framework • Provide well maintained social infrastructure • Engage with international donor community

15. D) Build a developmental state and good governance Strategic Thrusts • Reform national institutions • Expand the revenue base • Promote stakeholder participation in national decision-making • Strengthen the rule of law • Transform State into a facilitator of development

16. Measures undertaken by the Inclusive Government Just before the advent of the Inclusive Government, the 2009 budget & Monetary Policy Statement introduced the following measures: • use of multiple foreign currencies; ‘multicurrencing.’ • Liberalization of the domestic pricing regime with the role of the National Incomes and Pricing Commission (NIPC) reduced to monitoring price trends in the region. • Decentralization of the management of water to local authorities with effect from 1 February 2009, with ZINWA reverting to its status prior to 9 May 2005. • Payment of allowances to civil servants at US$100 a month. • Cessation of quasi-fiscal operations with the RBZ reverting to its core mandate of ensuring price and financial sector stability.

17. The Short-term Emergency Recovery Programme (STERP) unveiled by the Inclusive Government had 3 key goals and 3 priority areas. The goals were: • To stabilize the macro and micro economy • To recover the levels of savings • To lay the basis of a more transformative mid-term to long-term programme that would turn Zimbabwe into a developmental state. The priority areas being: • Political and governance issues • Social protection • Stabilisation.

18. Key focus areas of STERP include: • Social protection measures to mitigate poverty by strengthening humanitarian assistance • Support the revival of the productive sectors • Creation of a conducive investment climate • Restoration of a stable macroeconomic environment • Collection of taxes in foreign currency • A cash budget as part of fiscal austerity measures • Cessation of quasi-fiscal expenditures to stem fiscal discipline • Restoration of positive real interest rates to boost domestic savings and attract portfolio investment. Successful implementation of STERP will depend on the mobilisation of US$8.3 billion, a task that has proven illusive.

19. Government has adopted partial dollarisation because it cannot finance full dollarisation, with official foreign currency reserves at 0.8 months of import cover in 2008 Full dollarisation involves the RBZ buying the deposits of the banks and financial system as a whole, and converting them to US dollars, which is not feasible without external assistance

20. The major advantages of (partial) dollarisation include: • Enhances policy credibility • Promotes macroeconomic stability by immediately killing hyperinflation • Instills fiscal austerity. Its main disadvantages are: • Loss of financial sovereignty • RBZ loses its role as lender of last resort • Limits government’s capacity to respond to economic shocks • Loss of seigniorage revenue (revenue from printing money) • Leaves the majority of the people out of the system (the Minister of Finance has stated that ‘you eat what you kill.’)

21. WAY FORWARD • Pro-poor growth Future growth must be ‘pro-poor’ i.e. broad-based and inclusive. This can be done by ensuring that the ‘integrability’ of the poor in a growth dynamic is enhanced. ‘Integrability’ refers to the extent to which the poor are able to integrate into economic processes such that, as growth and employment expand, they can take advantage of the opportunities that arise to improve the quality and quantity of their employment. Robust growth must be translated into employment growth which is the key nexus between growth and poverty reduction.

22. The need to build a ‘developmental state’ A state committed to a technically-sound, long-term national development agenda. Developmental states are able to trigger and sustain growth and poverty reduction over extended periods of time leading to a structural transformation of the economy and society. They successfully remove impediments (capability deprivation) to participation of the poor in a growth dynamic.

23. Developmental states also demonstrate: • Sound management of public finances • Effective public borrowing • Effective investment in human capital formation • Provide and maintain infrastructure • Cooperate with and stimulate the private sector • Respect private property rights

24. The importance of catch-up A rapid process of familiarisation with the new aid architecture is essential because: • In line with the Paris Declaration, it will have to exercise leadership in national development • It will be a key partner in ensuring the efficiency and effectiveness of aid received and accountable for it both domestically and externally. Some key prerequisites for productive Zimbabwe-donor interactions • A single overarching, technically sound, Government document based on extensive consultations around which donor harmonisation and alignment can take place. • Rapid Government moves to address donor fiduciary risk concerns through Public Financial Management (PFM) reforms. • Begin work as soon as possible on operationalising the mutual accountability principle through a Performance Assessment Framework (PAF).

25. Debt management capacity HIPC debt relief, if granted, is not a panacea. The dangers of slippage i.e. a return to unsustainable debt levels after HIPC, are real. Therefore rapid progress should be made in terms of strengthening national debt management capacity so that the past is not repeated again.

26. Key Challenges The key challenge facing recovery is lack of progress in the implementation of the Global Political Agreement (GPA). The main areas of disagreement include the following: • Appointment of the Governor of the Central Bank and the Attorney General; • Appointments of permanent secretaries, ambassadors, provincial governors and the deputy minister of Agriculture; • Security sector, media, electoral reforms (a new electoral act is in place and a new Electoral Commission has been appointed);

27. Governance reforms (removal of draconian pieces of legislation – POSA, AIPPA, the Broadcasting Services Act, the Criminal Law Codification and Reform Act etc); • These laws are still being used to restrict individuals and organizations’ rights (e.g. ZCTU); • Land, public sector employment and payroll, and debt audits. • ZANU (P.F.) insists the key issues are the lifting of ‘sanctions’ and closing of the ‘pirate’ radio stations transmitting anti-Zimbabwe propaganda from bases outside the country.

28. In December 2009, the ZANU (P.F.) Congress resolved that it would not make any further concessions until ‘sanctions’ are removed; • This position was reiterated on 26 January in response to a statement from the British Foreign Secretary, David Milliband who told the House of Commons on 19 January that their position on sanctions would be informed by the MDC; • Clearly, ZANU (P.F.) is stalling progress apparently to ensure that MDC does not exploit the space created by the GPA; • On 29 January 2010, the Indigenization and Economic Empowerment Regulations were gazetted stipulating that any business with an asset value of US$500,000 to cede 51% of ownership to indigenous Zimbabweans – no consultations were held with the MDC;

29. The Prime Minister’s spokesperson announced after the cabinet meeting on the 13th of April that the regulations were set aside; • The President responded in the government daily newspaper, The Herald of the 15th of April that they were not set aside but were being improved; • On February 2, the chief secretary to cabinet announced that all Ministers would now report to the deputy Presidents and not to the Prime Minister, a position that was quickly reversed; • When President Zuma came to review progress on the implementation of the SADC Maputo resolutions, he announced that all the sticking issues were being attended to, only for the ZANU (P.F.) Central Committee to announced three days after Zuma left that it still upholds the resolution of its Congress.

30. The Constitution making process has stalled, despite the putting in place of the various sub-committees; • The president has indicated elections could be held in 2011; • The Prime Minister also has said the same, but insists that before then there should be a credible electoral system in place and a mechanism for the transfer of power. • It seems that the strategy of ZANU (P.F.) is to use whatever means at its disposal to have the Inclusive Government collapse and revert to the old order where it can run elections as it sees fit.