The establishment of a Government of National Unity (GNU) in February 2009 and the adoption of macroeconomic stabilisation policies including the multi-currency regime resulted in early signs of economic recovery. GDP growth was estimated at 8.2% in 2010 and 7.8% in 2011, driven by rapid expansion of mining output and exports, and agriculture.

Mining output has risen spectacularly – 8.5% in 2009 and a record level of 47% in 2010 largely due to increased mining investment. Agricultural output rose 15% in 2009 and 34% in 2010, largely from a doubling of tobacco production. Manufacturing growth, however, slowed down to less than 3% in 2010 compared to 10% in 2009.

Following the adoption of the multi-currency regime, consumer prices fell by 7.7% during 2009, before rising by 2.5% in the first ten months of 2010. Inflation is estimated to have averaged 4.9% in 2010 – year-on-year inflation was 4.2% in November 2010 – and is officially forecast to increase marginally to 5.9% in 2011. However, food inflation remains a problem with food prices up 7.3% in the year to December 2010.

Exports are estimated to have increased by 35% in 2010 to 2.1 billion US dollars (USD) while imports increased by 13.5% to USD 3.6 billion leaving a trade deficit of USD 1.5 billion. The overall balance of payments improved from a deficit of USD 1.77 billion in 2009 to USD 460 million in 2010.

During the years of economic decline the budget deficit was financed by credit creation by the Reserve Bank of Zimbabwe, setting off the hyperinflation of 2007/08, which exacerbated the situation. The multi-currency regime contained inflation, revived financial intermediation and imposed fiscal discipline through implementation of cash budgeting.1

The improved political climate and the fiscal and monetary reforms by the GNU brightened economic prospects. The Reserve Bank of Zimbabwe asserts that the banking sector has stabilised and is now “sound,” with low inflation, foreign direct investment (FDI) and portfolio investment inflows have shown signs of recovery.  Emerging partners are exploring new trading opportunities and untapped potential in mining, tobacco and other agricultural sub-sectors. South Africa remains a dominant trading and investment partner while China is becoming more important.

Source:IMF and local authorities’ data; estimates and projections based on authors’ calculations.

Source:National authorities’ data; estimates and projections based on authors’ calculations.

Zimbabwe’s economy grew by 5.7% in 2009, by an estimated 8.2% in 2010 and growth of 7.8% is predicted for 2011. These impressive figures are put into perspective however by the steep decline that the country went through in the decade before 2008. 

While mining has seen a dramatic improvement since the national unity government took power in early 2009, there has been a considerable loss of industrial output and commercial farming has been decimated with more focus now on smallholder farming.

Large-scale farm operations will contribute to agriculture’s recovery, especially for sugar, tea and coffee, but smallholder agriculture will play a greater role with important implications for farm financing and marketing.

Tobacco production figures for 2010 show that smallholders produced upwards of 75% of the crop compared to less than 10% two years previously. Much of the 2010 expansion of the tobacco crop can be attributed to the extension of contract farming schemes financed indirectly by commercial banks lending to tobacco merchants and processors.

Contract growers produced two-thirds of the tobacco crop in 2009 and 2010 and the same contract model is widely used in cotton, a predominantly smallholder crop where expansion prospects are promising as world cotton prices rise.

A second far-reaching structural change has been the improved performance of the mining industry which had performed poorly for most of the period after independence in 1980. Mining has become the fastest growing sector since 2009, helped by strong international commodity prices. Platinum accounts for 45% of mineral export revenue while gold contributes 22%. With the relative decline of agricultural and manufactured exports, mining now accounts for 64.7% of merchandise exports. The importance of platinum and gold and the emerging importance of diamonds suggest that Zimbabwe is now treading a resource-driven development path.

In the 1990s, the focus was on manufacturing. However the contribution of manufacturing to GDP shrunk from 28% in 2000 to 10% in 2008, before recovering to 17% in 2009. Manufacturing suffers from low capacity utilisation, estimated at 43% in 2009, still an improvement on 2008, when it was below 20%.

The multi-currency system has had an adverse impact on industry competitiveness as manufacturing is heavily import-dependent and 50% of Zimbabwe’s imports come from South Africa. The strengthening of the South African rand against the dollar has increased input costs significantly. While firms continued to shed jobs in 2010, businesses faced strong wage inflation pressures attributable to high living costs. The poverty line for a family of five is estimated at USD 500 a month by Zimbabwe Statistics, which trade unions have set as their target minimum wage.  

A related indirect consequence of the multicurrency system is tight liquidity in the banking sector. According to a Business Tendency Survey carried out by Zimbabwe Statistics, mining companies (35% of respondents) and industrial firms (28%) said “cash flow difficulties” were the main constraint on production and profitability.

Industry competitiveness is further undermined by reliance on ageing and often obsolete equipment with frequent interruptions to production and high maintenance costs.

All sectors of the economy continue to be constrained by Zimbabwe’s infrastructure deficit. Power generating capacity is lower than it was in 1980. Power outages are frequent and widespread, exacerbating cost pressures and threatening product quality and delivery schedules. Water supply and fixed line telecommunications are also problems. However, cell phone penetration rates are very high and rising rapidly. The country’s largest mobile phone operator, Econet, boasts more than 5 million subscribers in a population of about 12.5 million.

Overall, Zimbabwe’s economy should grow by more than 5% a year in coming years, but there are risks.

There is uncertainty over the global recovery in 2011-12 which could hit the higher commodity prices for gold, platinum and ferrochrome at the heart of Zimbabwe’s growth prospects.

There is also confusion and uncertainty over laws which state that all companies with more than USD 500 000 in assets must submit proposals to ensure that indigenous Zimbabweans own 51% of the business within five years. By the end of 2010, some 620 companies had submitted proposals. Business leaders have opposed the programmes and the government softened its stance by appointing 13 committees to make recommendations on local ownership procedures for different industries.

In March 2011, the government published “Regulations in the Mining Sector”. The Regulations specify that indigenisation policy will have to apply to every business in the sector where the value of assets is equal to USD 1 or above (even though the initial threshold was USD 500 000).  The value of the shares to be disposed of will be calculated on the basis of valuation to be agreed between the government and the business concerned and will take into account the ownership of minerals to be exploited or proposed to be exploited (even if in the ground). The Regulations specify that the entities concerned must submit an indigenisation implementation plan within 45 days (initially this was five years) and that Mining Entities are compelled to dispose of their shares to five designated entities.

But the indigenisation policy and constraints faced by domestic industry make the business environment less conducive for accelerated and sustained growth.

The future direction of the US dollar is also a concern. A strong dollar would further undermine competitiveness, while a weak dollar would boost exports and enhance competitiveness. A weak dollar could stoke inflation however, especially for food and imported fuel.

Source:IMF and local authorities’ data; estimates and projections based on authors’ calculations.

Private Sector Development

Other Recent Developments

There are 25 banking institutions, 16 asset management companies and 107 microfinance and moneylending institutions operating under central bank supervision. By September 2010, 15 of the banks were fully compliant with minimum paid-up equity capital requirements (USD 12.5 million for commercial banks) that took effect 31 March 2010. The compliance deadline was subsequently extended to 31 December 2010 and a further extension is likely. The non-compliant institutions are smaller, fringe players and the central bank is confident that the system is “sound” with no systemic threats to financial sector stability. Bank lending is constrained by the absence of a lender of last resort and the lack of an active interbank market where banks can cover liquid shortfalls, because there are no acceptable collateral instruments. There is neither an active money market nor a gilts market (i.e. government or public sector bonds) though there has been some revival in new corporate bonds.

During 2010, loans and advances increased 122% to USD 1.53 billion and the advance-deposit ratio increased from 50% at the start of the year to 66%, compared with regional norms of 70%-90%. The ratio of non-performing loans increased in the first half of 2010 from 1.8% to 3.2%.

The financial sector, especially banking, faces two main challenges. First, although most banks have met minimum capital requirements, bank capital in Zimbabwe is largely held in real estate. It is not easily accessible and at risk from property market value fluctuations. In 2010 this forced some banks to write down their capital.  The second challenge relates to the absence of a credit bureau. Household debt in the form of credit provided by retailers and distributors to buy consumer durables and motor vehicles has mushroomed. This could pose a threat to market stability unless carefully monitored. Discussions are in progress to establish a credit bureau.

The Zimbabwe Stock Exchange (ZSE), once one of the largest in sub-Saharan Africa after South Africa and Nigeria, closed at the height of the hyperinflation crisis in November 2008. It resumed operations in February 2009 with prices listed in US dollars for the first time and new stock market indices (February 2009 = 100). At present, 78 companies are listed, though three are suspended. Of the actively quoted companies, 72 are industrial shares and three mining counters. The ZSE index of industrial share prices peaked at 155 in October 2009. As a result of low domestic savings, most of which were wiped out by hyperinflation, trading activity is low. However, since the exchange reopened, foreign investors have become active. Initial uncertainty over indigenisation regulations introduced in February 2010 led to a selloff of Zimbabwe equities and a steep fall of the industrials index. It recovered to end 2010 at about 150, virtually unchanged on the year.

Financing problems lie at the heart of Zimbabwe’s infrastructure deficit in transport, power, water and telecommunications. More than 80% of the 88 100 kilometers of roads are in need of rehabilitation. The railway network of Zimbabwe has also seen a dramatic decline. The amount of freight carried dropped from more than 14 million tons in 1990 to 9.4 million tons in 2000 and 3.8 million tons in 2008.

Water and sanitation equipment across the country is badly dilapidated.

Infrastructure rehabilitation is therefore a government priority and forms one of the pillars of the 2011 budget. Major renovation of roads, bridges, rail and airports is planned. Donors have pledged additional support for selected rehabilitation projects in the water, sanitation and energy sectors.

During the economic crisis there was minimal investment in utilities and in 2010, Zimbabwe, with a population of 12 million people, had less generating capacity than it did when it became independent in 1980 when there were only 7 million people.

At the end of 2010, domestic power generation was 1 200 MW against demand of 2 200 MW and installed capacity of 1 950 MW. The Kariba South power station on the Zambezi River was generating 650 MW against installed capacity of 750 MW, while the Hwange thermal power station was providing 550 MW, well below its capacity of 920 MW. In 2011, generation is expected to increase to 1 650 MW. This will be achieved through an expansion of power generation at Hwange to 780 MW, restoring electricity production at Kariba to full capacity (750 MW) and another 120 MW from the three small thermal stations.

New power projects include the Lupane gas-fired plant with capacity of 250 MW, expansion of Hwange to generate an additional 600 MW, a 300 MW expansion at Kariba and the Gokwe North thermal station which would produce 1 400 MW. Implementation of these projects would double installed capacity to 3 950 MW at an estimated cost of USD 2.4 billion.

Electricity is sold at a loss. Generation/distribution costs are 9.5 US cents per kilowatt hour (kwh) and the national average tariff is 7.53 cents per kwh. The regional average tariff was 8.8 cents a unit in 2009. However, the loss is understated as various maintenance activities are not being undertaken. Zimbabwe Electricity Supply Authority (ZESA) owes some USD 300 million to suppliers at home and in neighbouring countries, but is owed about USD 360 million by household and industrial/commercial consumers, including mining companies. It believes it can collect the bulk of the arrears.

Total sales in 2009 came to 7 050 gigawatts – about a third below the peak of 2005. Consumption is forecast to grow by an average of more than 8% a year up to 2020. Thereafter growth is expected to decline to just over 3% annually until 2030 when consumption is forecast to have trebled from current levels – though be just over double the 2005 peak.

Bringing down the infrastructure barriers is a priority for sustainable rapid economic recovery and growth.