Economics  

 
Africa  insight:     3  September  2010  
   
   
 
 
Zimbabwe:  How  far  have  we  come?  Where  to  from    
here?   Yvette  Babb  

Introduction expanded under the 2010 budget on the back of increased revenue
collections, while transfers from development partners remained
The economy of Zimbabwe turned a corner at the onset of the Global subdued, restricting public investment.
Political Agreement (GPA), which has now been in place for almost two
years (from 15 September 2008). Gains have been made in achieving Public investment in essential services constrained
macroeconomic stability as a result of the economic reforms under the In the first half of 2010, revenue collections increased from on average
Short Term Economic Recovery Plan (STERP). As we come closer to US$142.4 million per month in the last quarter of 2009 to on average
the second anniversary of the GPA, it seems to be becoming more US$157.1 million per month in the first quarter and US$182.2 million in
evident that without further reforms imbalances will continue to mount. the second quarter of 2010. Collections were 12% above target in this
A number of issues stand in the way of sustainable economic growth. period. Tax on income and profits, and value added tax (VAT) were the
These relate to the security of land tenure and enforcement of property largest contributors to revenue income, providing 38% and 35% of the
rights (in the agriculture sector), sovereign debt, poor supply of utilities US$1 018.1 million collected, respectively.
and the dominance of recurrent expenditure in fiscal policy. The
Figure 1: Revenue collections (USD millions)
banking sector is also believed to be growing increasingly fragile as a
result of rapid credit growth and exposure to vulnerabilities at the 200
central bank and in the agriculture sector. 180
160
Growth is estimated to have reached between 4.0 and 4.7% in 2009, 140
from a decline of more than 14% in 2008. The IMF estimates that the 120
nominal size of the economy was equal to US$4.4 billion in 2009. 100
Under the current circumstances, we believe that growth will be 80
sustained in 2010 as a result of relatively stable prices that support 60
household consumption, increased investment in various sectors and 40
20
higher levels of government consumption expenditure.
0
However, tKH UHFRYHU\ RI =LPEDEZH¶V HFRQRP\ remains precarious Jan-­‐09 May-­‐09 Sep-­‐09 Jan-­‐10 May-­‐10
and, without corrective policy measures to address the imbalances Other  indirect  taxes Value  Added  Tax  (VAT)
mentioned above, the growth could potentially stagnate beyond 2011. Excise  duties Customs  duties
Fears remain that foreign investment in fixed capital will remain Tax  on  income  and  profits
subdued in other industries pending further review of the indigenisation
Source: Ministry of Finance
plans that have been submitted by existing businesses to government
under the Indigenisation and Economic Empowerment (General) Total expenditure amounted to US$813.4 million in the same period, of
Regulations, 2010. Anecdotal evidence suggests that capital which 89% was current. Employment costs make up over half of
expenditure in selected industries is defying these fears. Domestic overall expenditure. The Minister of Finance reported that the wage bill
investors seeking (off-shore) capital have, nevertheless, faced high increased in 2010 as a result of net growth in employment, in
costs as a result of tight liquidity in domestic markets and the elevated predominantly the ministries of education, sport, arts and culture.
levels of sovereign risk attributed to Zimbabwe. Fiscal expenditure has
Water and sanitation have been the main focus of development
support
A mere US$123.7 million was dedicated to capital development
projects. These projects included the procurement of critical parts at
the Hwange power plant, maintenance and rehabilitation of transport
infrastructure, investment in telecommunications, housing
development, and repairs to essential water and sanitation services as
well as support to the agriculture sector. These projects were assisted
by the US$207 million that emerged under the Vote of Credit, originally
envisaged to attract US$810 million in support. The main funders
consisted of UNICEF, the Global Fund, various other UN agencies and
Prudent fiscal policies are the cornerstone of macroeconomic
stability
Under the current monetary regime, fiscal policy is the cornerstone of
macroeconomic stability. As such it is vital that the budget remains in
balance and foreign reserves are not further depleted to fund budget
GHILFLWV=LPEDEZH¶V EXGJHW LVFXUUHQWO\ FORVH WR KDOI RI WKH HVWLPDWHG
nominal size of GDP, with, as mentioned above, thHOLRQ¶VVKDUHEHLQJ
consumed by costs of employment and other goods and services. The
dominance of employment costs in fiscal expenditure is highly
unsustainable as it clearly crowds out capital expenditure. The lack of
growth-enhancing investment will lead to a deterioration of the
the 8QLWHG .LQJGRP¶V 8. Department for International Development
(DFID).
Estimates of revenue receipts were increased in mid-term review
In the mid-term budget review, the Minister of Finance adjusted
estimations of revenue collections by US$300 million
US$1 750 million, with expenditure to remain at US$2 250 million. The
balance is to be financed by external credit concessional lines and
grants from development partners. The minister also reiterated a
number of revenue measures that will be implemented in 2010. These
include the revision of the Income Tax Act to increase the tax base.
The revision will allow for taxation of net gains from the sale of assets,
the reduction of the number of deductions as well as the introduction of
a residence-based taxation system. The minister attempted to support
consumption expenditure by increasing the tax-free threshold for
personal income tax from US$160 to US$175, effective from
1 September 2010. In a bid to reduce transaction costs in capital
markets, the minister decreased capital gains tax on unlisted securities
from 10% to 5% (in line with listed securities), also effective
1 September. Further measures were implemented to increase tax
collections from the mining sector: these include an increase in royalty
tax on precious metals from 3.5% to 4% of the gross market value
(effective 1 October 2010) and an increase in export tax on chrome ore
and fines from 15% to 20% (effective 1 August 2010). These taxes add
to the costs of mining houses that in some cases are still frail and in
need of building levels of working capital.
A number of products imported from within the Southern African
Development Community (SADC) face customs duties in Zimbabwe
despite the free trade area which was launched in 2010. These tariffs
were implemented in a bid to support local manufacturers and include
tariffs on food preparations, piping, galvanised steel and plastic
packaging. Previously suspended duties on various basic goods have
been reintroduced; remaining suspensions will remain in place until the
end of this year pending review under the 2011 budget. These duties
are likely to exert pressure on domestic prices as a result of the
relatively high cost structure of local producers (related to, amongst
other things, outdated capital equipment). Customs duties on various
inputs used by local industry have, on the other hand, been
suspended.
macroeconomic environment. Further strengthening of the public
finance management systems as well as adjustment to the payroll and
non-essential capital expenditure are needed to create fiscal space for
investment that is geared toward sustainable growth and poverty
reduction. Adjustments to the tax regime are believed to have limited
to capacity for increasing revenue collections. Estimations by the IMF
show that revenue measures can possibly generate between 1.5 and
2% of GDP in additional collections. Essentially, however, the
refurbishment (and expansion) of existing infrastructure will require
external capital, access to which is currently constrained by current
sovereign debt equal to an estimated 160% of GDP.
Agreement on debt strategy necessary for external support to
resume
Increased concessional funding from international financial institutions
(IFIs), such as the World Bank and the African Development Bank, will
hinge on, in first instance, the rescheduling of arrears that have been
accumulated on external debt. A comprehensive arrears strategy
would need to be agreed upon with official creditors. Agreement
between coalition partners on the approach to achieving this will,
however, need to be reached first. There has been some resistance
(by domestic stakeholders) to debt-relief initiatives and usage of highly
concessional IFI funding to support development strategies, with some
suggesting that mineral wealth could generate sufficient funds to clear
arrears as well as fund fiscal expenditure. The IMF has made
estimations of the present value of mining revenues, based on
extraction of proven reserves of gold and platinum mineral deposits as
well as diamonds. In an optimistic scenario the net present value of
mining wealth would amount to US$5.4 billion. The IMF therefore
emphasises that mining revenues would not be able to provide
sufficient foreign exchange flows to clear debt that currently stands in
the way of new financing.
Arrears clearance first step to opening gates to
concessional funding
Arrears clearance is one of the steps required to achieve debt relief.
Arrears were equal to 69% of the US$6.7 billion in external debt (as
per 31 December 2009). The main official creditors are the multilateral
finance organisations, which are owed 36% of the outstanding
government and parastatal long-term debt. Bilateral creditors under the
Paris Club hold a further 27% of debt, while non-traditional partners
2
hold a fairly small share, namely 5.3%. The largest bilateral creditors
are believed to include Germany, Japan, the European Commission,
France and Italy. In order to achieve arrears clearance, Zimbabwe
would need to coordinate with all institutions, ensuring that each
creditor maintains its status of most preferred creditor (implying that
Zimbabwe cannot agree on rescheduled repayment with one party
before it has outlined the plans to meet commitments to other
creditors).
World Bank The World Bank has facilities at its disposal which it could
use to provide a grant to Zimbabwe for clearance of its arrears; this
would require assistance from a donor to provide a bridge loan (Leo
and Moss, 2009). This would further require Zimbabwe to be
reclassified as a low-income country. This is necessary to grant access
to concessional loans and grants. Funds have been earmarked by the
World Bank for this purpose. The World Bank Board of Directors would
be required to provide approval for clearance operations under the
World Bank. Legislation in the United States from 2001 currently bars
the American Executive Director from providing any funding to
Zimbabwe.
8QLWHG6WDWHV¶OHJLVODWLRQRQ=LPEDEZH
7KH µ=LPEDEZH 'HPRFUDF\ DQG (FRQRPLF 5HFRYHU\ $FW RI ¶
VWLSXODWHVWKDW³WKH6HFUHWDU\RIWKH7UHDVXU\VKDOOLQVWUXFWWKH8QLWHG
States executive director to each international financial institution to
oppose and vote against ± (1) any extension by the respective
institution of any loan, credit, or guarantee to the Government of
Zimbabwe; or (2) any cancellation or reduction of indebtedness owed
by the Government of Zimbabwe to the United States or any or each
LQWHUQDWLRQDO ILQDQFLDO LQVWLWXWLRQ´ XQWLO Whe President of the United
States has certified that five conditions have been satisfied. These
conditions are (1) the restoration of the rule of law, (2) the event of
presidential elections that are widely accepted as free and fair, or
significant improvement to the pre-election environment, (3)
African Development Bank The African Development Bank (AfDB)
could utilise its Fragile States Facility (FSF) for clearance of
=LPEDEZH¶V DUUHDUV 7R TXDOLI\ IRU IXQGLQJ IURP WKLV IDFLOLW\ D VWDWH
must prove that: (1) conditions for the consolidation of peace and
security have been met; (2) significant economic damage has been
suffered as a result of the crisis; (3) the macroeconomic environment
and debt management processes have improved; (4) prudent financial
management and business climate policies are being pursued; and (5)
public finance management systems ensure transparency and
accountability. Eligibility for debt relief under the Heavily Indebted Poor
Countries (HIPC) Initiative is a prerequisite for FSF funding (Leo and
Moss, 2009). The latter requires Zimbabwe to gain track record of
sound policies and be reclassified as a low income country. The AfDB
currently does not have funds available in this facility to fund arrears
clearance.
IMF With regard to arrears to the IMF, Zimbabwe could utilise a share
of the roughly US$540 million in Special Drawing Rights (SDRs) that
were allocated in September 2009 to settle its arrears to the Poverty
Reduction and Growth Trust (PRGT). These were equal to about
US$140 million in February 2010. It is, however, believed that some of
these funds have already been drawn upon to fund shortages on the
fiscal budget; there is a risk that the remaining funds will be utilised for
the budget deficit that will emerge in the absence of the foreseen funds
under the Vote of Credit. An alternative route would entail the
application for a new loan from the PRGT. The IMF would require
reassurance that Zimbabwe would be able to repay the loan, which at
present does not seem likely given the lack of fiscal space. The IMF is
furthermore likely to require a Staff Monitored Programme, which is
viewed as a method to assist countries in achieving a performance
record of sound economic policies. Significant progress was made in
restoring cooperation between Zimbabwe and the IMF in February
 ZKHQ =LPEDEZH¶V YRWLQJ ULJKWV ZHUH UHLQVWDWHG 7KH ,0) KDV
provided technical assistance in the following areas: payment systems;
FRPPLWPHQW WR ³HTXLWDEOH OHJDO DQG WUDQVSDUHQW´ ODQG UHIRUP  lender-of-last-resort operations and banking supervision; central
³IXOILOPHQWRIWKHDJUHHPHQWending the war the Democratic Republic banking governance and accounting; and tax policy and tax
RI&RQJR´DQGILQDOO\VXERUGLQDWLRQRIPLOLWDU\DQGQDWLRQDOSROLFH administration. The arrears to the PRGT now remain the main hurdle in
to the civilian government. President Obama would therefore need to regaining access to IMF funds.
DFNQRZOHGJH WKDW WKHVH FRQGLWLRQV KDYH EHHQ PHW IRU =LPEDEZH¶V
Humanitarian aid has dominated external support
arrears to multilateral organisations (equal to US$1.4 billion at the
from donors
end of last year) to be restructured. Alternatively this piece of
legislation would need to be amended. A bill to this effect was As stated above, only US$207 million of the envisaged US$810 million
introduced to Congress by three senators in May 2010. in external credit lines emerged in the first half of 2010. While donor
support to the government budget has not occurred in significant forms
7KH µ=LPEDEZH 7UDQVLWLRQ WR 'HPRFUDF\ DQG (FRQRPLF 5HFRYHU\
in past years, support in the form of humanitarian aid increased sharply
$FW¶ ZRXOG DOORZ IRU VXSSRUW IURP WKH 8QLWHG 6WDWHV WR SURSRVDOV
in 2008 and 2009; more recently donors are moving to increase
within IFIs to be assessed on a case-by-case basis, while also
support to projects in the areas of health and education. On the basis
DOORZLQJ IRU LQFUHDVHG WHFKQLFDO DVVLVWDQFH WR ³UHIRUPLVW´ PLQLVWULHV
of data compiled by the United Nations Office for Coordination of
and parliament and for funding and assistance in the areas of health,
Humanitarian Assistance, aid in 2009 was equal to US$650.2 million,
education and agriculture. The bill has been referred to the
up from US$469.5 million in 2008 and US$337 million in 2007. Close to
Committee on Foreign Relations for consideration. A very large
half of the funds provided in the period 2007-09 were from the United
number of bills are referred to this committee on an annual basis, of
States (US). These were funds are largely directed towards health,
which only a select few make it.
sanitation, education, agriculture and social protection. The appeal for

3
humanitarian aid in 2010 has been smaller than that of last year, with two years. This is partially due to the move to create a programmatic
commitments up to 25 August 2010 amounting to US$259.1 million, of Multi Donor Trust Fund (MDTF) by the AfDB that aims to foster
which US$80 million was provided by the US (down from US$191 coordination between donors in supporting the rehabilitation of key
million in 2008). Foreign assistance, excluding food aid and disaster infrastructure. A number of donors, including Norway and Denmark,
assistance, from the US will reach an estimated US$89 million in 2010, are reported to have made commitments to the amount of US$9 million
from US$130 million in 2009. to this fund, with support from Australia and Germany reported to
follow.
Figure 2: Official development assistance to Zimbabwe (USD
millions) Norway reported that it is currently providing NOK100 million (about
US$15.9 million) in support of development projects in Zimbabwe, in
600
addition to its humanitarian support of NOK30 million (about
500 US$4.8 million). Denmark announced a transitional support
programme worth US$15 million in 2009, which will focus on
400
reconstruction within health care, education, water and sanitation. The
300 allocation to the MDTF (of US$3.5 million) is likely to have been part of
this programme. Germany has announced its intention to support the
200
fund: German Chancellor 0HUNHODQQRXQFHGDSOHGJHRI¼PLOOLRQLQ
100 support to this fund in June 2009. This is, however, to be considered
by parliament before it can become a firm commitment.
0
2001 2002 2003 2004 2005 2006 2007 2008 The allocation of aid to Zimbabwe from the second-largest donor to
United  States United  Kingdom Netherlands
Sweden Germany Canada Zimbabwe, the UK, is set to decline in fiscal year 2010/11 to £57
Norway Australia Denmark million from £60.7 million in 2009/10 and £50.7 million in 2008/09. The
Other
8.¶V,QWHUQDWLRQDO 'HYHORSPHQW6HFUHWDU\ DQQRXQFHG D UHYLHZ of the

Source: Organisation of Economic Cooperation and Development '),'¶V ELODWHUDO DLG SURJUDPPH ZKLFK DLPV WR QDUURZ WKH Qumber of
(OECD) Development Assistance Committee Statistics countries which receive aid from the UK and increase the impact of the
Overall receipts of official development assistance (ODA), which SURJUDPPH RQ WKH ZRUOG¶V SRRUHVW HFRQRPLHV The outcome of this
includes humanitarian aid, were equal to US$611 million in 2008, review is likely to shed light on the future of aid to Zimbabwe, one of
mainly on the back of increased allocations from the US, which WKHZRUOG¶VSRRUHVWHFRQRPLHVKLVWRULFDlly important to the UK.
remains the largest donor (36.5% of total ODA). Aid allocations from
While indications are there that there is an increased willingness to
the remaining smaller donors also increased on the back of the
support the transitional government of Zimbabwe, unlocking access to
emerging humanitarian crisis in Zimbabwe (with exception of the UK,
funding from development finance institutions such as the AfDB and
whose absolute contribution in dollar terms declined in 2008 on the
the World Bank is critical to allow for the large-scale investments in
back of a weakening of the pound). In 2009, overall ODA receipts are
energy and transport infrastructure as well as the public utilities which
estimated to have surpassed US$700 million. The decline in
serve the population¶s basic needs. As outlined above, the bilateral
humanitarian assistance from the US will reduce overall aid receipts in
GRQRUV¶ UROH FRXOG Ee critical in this process in, for example, the
2010. Indications are that the amount in resources for purposes other
replenishment of funds at the FSF and in the provision of bridge
than food aid and disaster assistance has increased in the past year
financing. Support from these institutions will in turn hinge on a credible
owing to increased commitments from donors to predominantly health
commitment to sound economic policies.
and education.

Support for rehabilitation of critical infrastructure set to rise

Monetary policy framework to provide strong
anchor until 2012
As announced in a statement by development partners of Zimbabwe,
Through the introduction of the multi-currency system in February 2009
NQRZQ DV WKH µ)ULHQGV RI =LPEDEZH¶ 1, in June 2010, assistance to
and the subsequent announcement that the exchange for the local
Zimbabwe in 2010 and 2011 will continue to be channelled outside of
FXUUHQF\ZRXOGFHDVHWRRSHUDWHLQ0DUFK=LPEDEZH¶Vcurrency
the government budget. The implementation of the GPA is regarded as
arrangement de facto has become one in which a foreign currency
WKH ³EDVLV IRU UH-HQJDJHPHQW LQ =LPEDEZH´ 7KHUH KDV QHYHUWKHOHVV
serves as the exchange rate anchor for the monetary policy framework,
been an increase in aid commitments from a number of donors that will
while there is no separate legal tender (i.e. no domestic legal tender).
partially offset the decline in the value of aid that was directed at
The adoption of this arrangement implies the surrender of the
predominantly food assistance and disaster management in the past
monetary authorities¶ control over domestic monetary policy. Other

1
economies with a similar arrangement include Ecuador, El Salvador,
The Friends of Zimbabwe Group includes Australia, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Spain, Sweden, Palau and Panama.
Switzerland, the UK, the European Commission, the European Union Council
Secretariat, the IMF, World Bank, AfDB and the UN.

4
7KH 0LQLVWHU RI )LQDQFH FRQILUPHG WKH JRYHUQPHQW¶V FRPPLWPHQW WR
the multi-currency system until 2012 in his mid-term budget review,
presented in July 2010. The government has indicated that it is
considering the appropriate currency regime to be adopted beyond
2012.
Alternative monetary policy regimes
Alternative monetary regimes include full official dollarisation (with
either the dollar or rand as sole legal tender: the latter can be under
participation in the common monetary area (CMA), which South Africa,
Namibia, Lesotho and Swaziland are currently party to); participation in
the CMA while allowing a local currency to circulate (as is the case in
Namibia, Swaziland and Lesotho); adoption of a currency board
arrangement (with a peg to the dollar or the rand); implementation of a
conventional or crawling peg or band; and, finally, a managed or free
floating exchange rate regime (Kramarenko et al., 2010).
Departure from the current hard peg, or a variation thereof, is believed
to be advisable only once macroeconomic stability has been
maintained and the credibility of government policies has been re-
established. Even under such circumstances, experience shows that
the reintroduction of a separate legal arrangement, under a soft peg or
floating arrangement, is a protracted process (Kokenyne et al., 2010).
Economic agents might resist the reversal of financial dollarisation
(which entails the conversion of household, bank and public sector
assets and liabilities into foreign currency) as they have now become
accustomed to using foreign currency in domestic transactions.
Establishing monetary credibility in itself will take a considerable
amount of time and will require the rising vulnerabilities in the banking
sector and persisting governance issues at the central bank to be
addressed.
The Reserve Bank Amendment Bill was enacted in November 2009.
The amendments to the Act allowed for the establishment of a Board of
Directors and an Audit and Oversight Committee within the Board that
ZLOO VXSHUYLVH WKH RSHUDWLRQV RI WKH PRQHWDU\ DXWKRULW\ 7KH ,0)¶V
recommendation that the chair of the Board should be an independent
party was not followed: under the bill the Governor becomes the chair
RI WKH %RDUG 7KH DPHQGPHQWV IXUWKHU FXUWDLOHG WKH FHQWUDO EDQN¶V
ERUURZLQJ SRZHUV UHPRYLQJ WKH EDQN¶V DYHQXHV IRU RSHQLQJ FUHGLWV
and issuing guarantees. Monetary policy decisions will henceforth be
taken by a monetary policy committee rather than the Board.
During consultations with the IMF in March 2010, Zimbabwean
authorities did indicate that the options beyond 2012 are likely to
include some form of dollarisation. In the event that the government
should aim to achieve some level of de-dollarisation, the experience of
Argentina and Pakistan of forcing de-dollarisation in the context of a
currency and banking offers compelling evidence of its pitfalls and thus
why this measure should be avoided by Zimbabwe.
The suspension of access to foreign currency deposits led to the loss
in confidence in the banking sector, which in turn led to
disintermediation and capital flight (Kokenyne et al., 2010). Overall,
5
Kokenyne et al. emphasise the need to achieve a credible long-term
reduction and stabilisation of inflation as a first step towards de-
dollarisation, as this reduces the need to hold foreign currency as a
hedge against inflation. Achieving macroeconomic stability under a
less flexible exchange rate regime requires credibility of the peg, as the
threat of devaluation will lead to an increase in foreign currency
deposits. The declining credibility of the Argentinean currency board
arrangement in the late nineties resulted in rapid dollarisation in this
period.
Benign inflationary outlook
The adoption of this monetary regime provides Zimbabwe with a solid
external nominal anchor for monetary policy, which has been effective
in eliminating hyperinflation and containing inflation to below 6.5%, with
inflation currently at 4.15% (July 2010). A new series of inflation data
based on dollar-denominated prices was launched by the Central
Statistics Office in the course of 2009. This series shows that month-
on-month inflation remained negative for the first five months of 2009,
fluctuating within the range of -3.13% and 1.12% in the year thereafter.
Figure 3: Inflation, year-on-year (%)
10
5
0
-­‐5
-­‐10
-­‐15
-­‐20
Dec-­‐09 Jan-­‐10 Feb-­‐10 Mar-­‐10 Apr-­‐10 May-­‐10 Jun-­‐10 Jul-­‐10
All  items
Food  and  non  alcoholic  beverages
Non  food
Source: Central Statistics Office
While inflation increased in the period December 2009 to May 2010,
the price level remained lower than that of the base period (December
2008), with the consumer price index equal to 95.10 in July 2010.
Rising food prices are the largest contributor to inflation, with inflation
in this category equal to 7.1% in July 2010 (weight in the consumer
price index (CPI) basket of 31.3%). The prices of meat, fruit and
vegetables increased the most, with the cost of basic foods in the
bread and cereals category remaining contained. The price of meat is
expected to receive some relief from the removal of the suspension of
importation of animals and animal products in August 2010. This
measure had been in place since March 2010, exerting upward
pressure on prices due to limited domestic supply. Inflation in the
utilities sub-sector of the CPI is the second-largest contributor at 8.8%
(and has a weight of 16.23%). While costs of rent and materials for
maintenance are declining, it is the exorbitant increase in the rates for
municipal and utility services which is causing inflation in this category.
Inflation is expected to continue to remain low under the current
monetary policy framework, with increased food supply and support to
the agriculture sector containing the rise in food prices. Local
producers face stiff competition from foreign producers (mainly in
South Africa), giving them limited space to increase prices. Margins are
more likely to bear the brunt of pressure, which is also true for wage
demands. The risks to the inflationary outlook are presented by the
(administered) price of non-tradable products and services as well as
the threat of shocks to the supply side of the economy. Exchange rate
movements of the dollar against the rand have furthermore impacted
on the price of imported goods, with the appreciation of the rand
The central bank has furthermore urged banking institutions to
concentrate their lending to agriculture, with 30% of the lending
portfolio to be in this sector. The agriculture sector is believed to be
highly vulnerable owing to its dependency on rain-fed irrigation and
outstanding issues of land tenure. Adverse weather conditions or other
shocks to the agriculture sector could have far reaching ramifications
for the banking sector as they could lead to a sharp rise in non-
performing loans.
Figure 4: Banking sector deposits, loans and advances (USD
million)
2,000 70%
1,800 65%

believed to add to cost of transactions in dollars. Standard Bank 1,600 60%

maintains the view that there will be depreciation pressure on the rand
1,400 55%
from the third quarter of 2010 and beyond (from the current levels of,
1,200 50%
on average, ZAR7.29/USD in August 2010 (Bloomberg)). This will
further reduce inflationary pressure from goods imported from South 1,000 45%
$IULFD=LPEDEZH¶VODUJHVWWUDGLQJSDUWQHU
800 40%
Financial system remains vulnerable 600 35%

=LPEDEZH¶V EDQNLQJ V\VWHP FXUUHQWO\ FRQVLVWV RI  EDQNLQJ
institutions, 16 asset management companies and 95 microfinance
institutions. Deposits with the commercial banks were equal to
US$1.8 billion on 18 June 2010, an increase from an estimated US$0.3
billion at the onset of last year. The banking system remains weakly
capitalised, with 17 of 24 banking institutions in compliance with the
minimum capital requirement of US$12.5 million for commercial banks
and US$10 million for merchant banks and building societies. These
banks have been called upon to raise capital from existing
shareholders or find new equity partners. The low level of capitalisation
inhibits the capacity of banks to deal with unexpected losses.
Table 1: Banking sector (number of institutions)
31-­‐Dec 29-­‐Jan 26-­‐Feb 26-­‐Mar 23-­‐Apr 21-­‐May 18-­‐Jun
Total  Deposits Total  Loans  and  Advances
Loans/Deposit  ratio  (rhs)
Source: RBZ
Services dominate the real economy of Zimbabwe
The structure of the supply side of the Zimbabwean economy has
declined in size and in composition over the past decade. As
agricultural and industrial output has declined, the relative share of
services in the national product has increased to above 60%, a large
share of which is attributable to activities of the public sector (i.e.
public administration, defence and education). Private sector output in
the wholesale and retail trade sub-sector as well as the hospitality

Commercial  Banks   15   industry has declined substantially, with the contribution of these sub-
sectors to GDP halving in the past decade. The contribution of mining
Merchant  Banks   5  
and quarrying to GDP was 4% in 2004; however, this is believed to
Building  Societies   4  
have declined on the back of reduced output volumes in the past
Savings  Banks     1  
years (with the exception of platinum).
Microfinance  Banks     1  
Total  Banks   26   The contribution of the manufacturing industry, which has very strong
linkages with agriculture, to GDP is believed to have declined from
Asset  Management  Companies   16  
over 23% between 1980 and 1989 to 15.2% in 2008 (UNDP, 2010).
Microfinance  Institutions   95  
Source: Reserve Bank of Zimbabwe (RBZ) While metals and products thereof are believed to form the largest
sub-sector in manufacturing, its output share has fallen since 1980.
The outstanding loans and advances increased from an estimated
Its contribution was 22% in 2006, compared to 29% in 1994. The
US$0.08 billion in January 2009 to US$1.1 billion on 18 June 2010,
contribution of beverages and tobacco has, on the other hand,
with the loan-to-deposit ratio reaching 61.6% on this date.
increased substantially to close to one-fifth of manufacturing output in
Vulnerabilities are emerging as a result of the lack of a lender of last
2006 from approximately one-tenth in 1994. Foodstuffs, chemicals
resort or a functioning interbank market. The rapid credit growth in the
and textiles form the next three most important sub-categories of
banking sector and the high loan to deposit ratios at a number of banks
manufacturing.
has increased the risk of liquidity problems.

6
The stabilisation of macroeconomic conditions allowed positive
growth to return to most sectors in 2009, albeit from a low base. On
the basis of figures from the Ministry of Agriculture, improvements in
agricultural production have mainly been the result of increased
maize output, which is believed to have more than doubled in 2009 to
1 240 metric tonnes (MT); gains in 2010 are, however, expected to be
marginal. Growth in 2010 is expected to stem mainly from increased
tobacco production: 93 MT compared to 55 MT in 2009. The output of
most important commodities such as cotton and sugar is expected to
decline in 2010, depressing further improvements in this sector.
Figure 5: GDP at current prices by industry (% of total)
the output volume of beverages by Delta Corporation in the year
ending in March 2010 (FY2010) was 99.7% when compared to the
previous year and 18% when compared to the year ending in March
2008. The utilisation level of the 7.75 million hector-litre production
capacity was 65% in March 2010. The increased production levels
were enabled through a large capital expenditure programme with a
value of US$47.6 million. Delta Corporation further intends to invest
an additional US$112.8 million in the coming two years. Despite
estimations of an unemployment rate of 80% in 2010 and 2011, Delta
Corporation envisages consumption per capita to increase by 18.1%
in this period.

Mining and telecommunications are two sectors

100% benefiting from improved economic conditions
90%
Mining
80%
:KLOH WKH PLQLQJ VHFWRU¶V FRQWULEXWLRQ WR *'3 LV UHODWLYHO\ VPDOO LWV
70%
relevance to the external sector is highly significant. In 2009, mineral
60% export shipments were reported to have reached US$647.44 million, or
50% 52% of total exports. This increased to 69% in the first half of 2010 as
40% exports of mining products almost tripled from US$207.6 million in H1

30% 2009 to US$600 million, while exports of other goods increased by a

far smaller amount or even declined. Exports of tobacco (16.4% of total
20%
exports in H1 2010) and manufacturing goods (8.9%) increased by
10%
16.7% and 17.5%, respectively, relative to the same period of 2009,
0%
while the export of general agricultural goods (4.7% of total exports in
1999 2005 2008
H1 2010) declined by 30%. Exports in minerals were predominantly in
Other  services  
the form of platinum (37% of total mineral exports in H1 2010),
Agriculture
Manufacturing ferrochrome (26%) and gold (21%).
Transport,  storage  &  communication
Figure 6: Value of exports (USD millions)
Wholesale,  retail  trade,  rest  &  hotels  
Mining  &  utilities
Construction 140

120
Source: United Nations Statistics Division
100
The manufacturing sector showed positive momentum in 2009, with
80
levels of capacity utilisation reported to have tripled relative to those
of 2008. Growth in 2010 is expected to remain limited as operations 60
battle to raise utilisation levels to above 35-40%, whilst continuing to 40
suffer from unreliable power supply and high operating costs. The
20
Ministry of Finance reports that the food and beverages segment of
0
manufacturing has been the notable exception to this, with producers
Mining

Other

Mining

Other

Mining

Other

Mining

Other

Mining

Other

Mining

Other

reportedly benefitting from stabilisation of prices, improved household

consumption as well as strong consumer preference for locally
produced goods and increased supply of inputs (e.g. domestically Jan Feb Mar Apr May Jun
grown maize, but also imported inputs which they have been able to
2008 2009 2010
purchase owing to increased liquidity).

Company results from Delta Corporation (the largest beverages Source: RBZ
producer in Zimbabwe with shareholding by SABMiller and Old
Significant power disruptions have continued to undermine the mining
Mutual) for financial year (FY) 2010 seem to confirm that
potential at various mining houses in 2010. The liberalisation of trade in
improvements in the operating and consumer market have strongly
various minerals and metals as well as enabling traders to retain
benefitted the beverage manufacturing and distribution industry. After
foreign exchange earnings has allowed for improvements to the
at least five years of consecutive declines in output, the increase in

7
conducting of business. Mining houses have increased their capital
expenditure with the assistance of credit lines or participation of foreign
investors or existing parent companies. Refurbishment of mining
equipment and generators to mitigate the effects of unpredictable
power interruptions promise to allow for further improvements to mining
output in the second half of 2010 and beyond.
Production volumes of platinum and gold improved in 2009, increasing
to 6 849 kilograms (kg) and 4 857 kg from 5 495 kg and 3 579 kg in
2008, respectively. This remains far below the peaks in output of gold,
once at 25 000 kg per annum. The policy steps that contributed to
improved outputs were the liberalisation of gold sales (the Reserve
Bank of Zimbabwe no longer had the role of the sole mandatory agent)
and maintenance of 100% of foreign currency earnings. The output of
gold has improved further in 2010, with production in the first half of
this year equal to 2 779 kg, which is close to four times that produced
in the same period a year ago. The Zimbabwean Chamber of Mines
estimates that gold production may exceed 8 000 kg this year.
Figure 7: Production volumes of gold and platinum (thousands)
24   AngloPlatinum), is commissioned by the last quarter of this year. This
20  
16  
12   less than 73 thousand tonnes from 145 thousand tonnes in 2008 on
8  
4   The largest ferrochrome producer in Zimbabwe, Zimasco (which is
-­‐
2001 2002 2003 2004 2005 2006 2007 2008 2009 Jan  -­‐
Jul   expressed its intention to increase the installed capacity of Zimasco by
2010
Gold  (kilograms) Platinum  (tonnes)
Source: Zimbabwe Chamber of Mines
BIPPA to come into force, giving mining operations access to
finance from the IDC
The increase in production of gold was partially the result of the return
to commercial production of the Freda Rebecca Gold Mine (owned by
Mwana Africa) in October 2009. The refurbishment of the mine allowed
for production of 11 997 ounces (373.1 kg) of gold in the period up to
June 2010 against an annual target of 30 000 ounces (oz). The
Industrial Development Corporation (IDC) of South Africa has
approved a US$10 million debt facility for the second phase of the
refurbishment of this operation: the availability of this facility was
dependent on the ratification of the Bilateral Investment Promotion and
Protection Agreement (BIPPA) between South Africa and Zimbabwe by
both parties. The latter is required to obtain political risk insurance from
the Export Credit Insurance Corporation of South Africa (ECIC), a
prerequisite for the drawdown of the IDC facility. The Agreement will
enter into force on 16 September 2010 as per Article 14(1) of the
BIPPA, which states that "the Parties shall notify each other when their
8
respective constitutional requirements for entry into force of this
Agreement have been fulfilled. The Agreement shall enter into force
thirty days after the receipt of last notification." The second phase of
refurbishment aims to allow for production to rise to 50 000 oz per
annum.
Platinum is one of the metals that has witnessed continued increases
in production levels in the past decade, with production reaching 6 849
WRQQHV LQ  ZKLFK ZDV  KLJKHU WKDQ LQ  =LPEDEZH¶V
largest platinum (Zimplats) mine Ngezi, 87% owned by the South
African company, Impala Platinum, is currently under expansion (Ngezi
Phase One) that will see the annual production increase to 180 000 oz
(from 96 000 oz, or 2 986 kg, in financial year 2009). Production of
platinum (in matte) in the first half of 2010 was equal to 81 600 oz
(2 538 kg). A second platinum mine, Mimosa (a joint venture between
Implats and Aquarius Platinum), produced the remainder of the output
of platinum with a third mine. Its production (of platinum in concentrate)
was equal to 51 100 oz in the first half of 2010, compared to 91 500 oz
in 2009, supporting higher levels of output this year. Production of
platinum will rise further as a third platinum mine, Unki (owned by
mine is ultimately to produce over 65 000 oz per year.
According to data produced by the Zimbabwean Chamber of Mines,
production of high carbon ferrochrome declined drastically in 2009 to
the back of reduced mining output of chrome, declining international
prices of ferrochrome, operational difficulties and restrictions on trade.
92% owned by Sinosteel Corp), has an annual production capacity of
210 thousand tonnes. Sinosteel has, according to media reports,
30% to at least 500 thousand tonnes. A second large producer of
ferrochrome, Zimbabwe Alloys, sold 40% of the issued share capital of
its chrome business to the South African company, Metmar, for an
amount of US$51.3 million in March 2010. Metmar has announced that
it will refurbish the capital equipment at Zimbabwe Alloys Chrome
operations to allow for production to resume at this plant. Production of
high carbon ferrochrome in 2010 has reached an average of
11 865 tonnes per month from 6 019 per month in 2009.
The output of chrome has increased substantially in 2010 from on
average 16 thousand tonnes per month in 2009 to 43 thousand tonnes
per month in the period January to July of this year. The government
lifted the ban on export of chrome ore and fines for a period of 18
months to allow for mines to raise funds through the sale of materials.
The exportation of un-beneficiated chrome ore and semi-processed
chrome concentrates does, however, face an export tax of 20% (which
was increased from 15% from 1 August 2010).
Table 2: Mineral reserves and production levels Figure 8: Total exports and imports (USD millions)

Estimated Production 2.0

Production 2010*
reserves
2009 (tonnes) 1.8
(tonnes)
1.6
Gold (kg) 13 millon 4 966 8 340 1.4
1.2
Platinum (t) 2.8 billion 6 849 8 704
1.0
Chromite 930 million (193 674) (519 519) 0.8
(Chrome (t)) 0.6
Nickel (t) 4.5 million 4 858 6 183 0.4
0.2
Coal (t) 26 million 1 667 346 1 950 385
0.0
Diamonds 16.5 million - - 2005 2006 2007 2008 2009 H1  2009 H1  2010
(carats) Imports Exports
Iron ore (t) 30 billion 28 -
Source: RBZ
Copper (t) 5.2 million 3 571 4 663
Telecommunications
*Note: based on average monthly production in the period January to
July 2010 The telecommunications sector of Zimbabwe has demonstrated
phenomenal growth in the past year, with mobile operators making
Sources: Reserve Bank of Zimbabwe, Zimbabwe Chamber of Mines
significant investments in their networks and the number of
Increased production volumes of the three principal mineral export subscribers growing exponentially. Penetration levels are still very low
products as well as increased levels of capital expenditure and a compared to the region, with an estimated 21.8% of the population
bullish outlook for international prices of gold and platinum imply that believed to access mobile services: this is the lowest in the southern
the mining sector will offer some support to GDP performance as well African region. The penetration of fixed lines is on the other hand
as the external and fiscal sectors. In the past 18 months, government relatively high (2.6 lines per 100 inhabitants, compared to for example
increased tax rates for mining companies. The corporate tax rates for 0.7 and 0.3 in Zambia and Mozambique). The fixed-line incumbent,
mining companies were increased from 15% to 25%, while royalties of TelOne is state-owned and is in much need of rehabilitation. The
3% were introduced on gold. These were subsequently raised to 3.5%, absence of capital expenditure is believed to have opened a window
effective 1 January 2010, and will be raised to 4%, effective 1 October of opportunity for mobile operators since the stabilisation of
2010. macroeconomic conditions. The mobile market is estimated to have
nearly doubled in size in the third quarter of 2009 following the launch
Export earnings from mineral exports are expected to continue to
of a 3G network by Econet Wireless. With four million subscribers as
increase on the back of increased production levels and higher
of 31 March 2010, this operator is the largest provider in Zimbabwe.
commodity prices. According to Bloomberg, the consensus view
reveals that the price of gold is expected to peak at US$1 300/oz in the Figure 9: Mobile phone subscriber (millions)
first quarter of 2011 before declining to on average US$1 247 in that
10
\HDU 6WDQGDUG %DQN¶V YLHZ LV IDLUO\ FORVH WR FRQVHQVXV DOWKRXJK WKH
9
belief is that the peak could occur in the fourth quarter of 2010. The
8
price of platinum is expected to peak in the fourth quarter of 2011 at on 7
average US$1 705/oz, with the average reaching US$1 680/oz in 6
2011. 5
4
The increase in exports of mining products is positively contributing to
3
the decline in the current account deficit, which can assist in reducing 2
external vulnerabilities. As can be seen below, the trade deficit 1
declined from US$169 million in the first half of 2009 to US$75 million 0
in the first half of 2010. Official private current transfers have 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f
furthermore contributed to the decline in the current account deficit,
with average monthly remittance receipts increasing from Sources: Business Monitor International Research, International
US$13.5 million in the first half of 2009 to US$18.7 million in the first Telecommunications Union
half of this year.
(FRQHW¶V DQQXDO UHSRUW UHYHDOV WKDW 86 PLOOLRQ ZDV LQYHVWHG LQ
capital equipment in 2009 (partially funded by a facility from Econet

9
Wireless Global), with an additional US$300 million in capital
expenditure planned for the following financial year. A US$60 million
credit package provided by the Swedish Export Credits Guarantee
Board (EKN) will be utilised for the purchase of equipment from the
Swedish company, Ericsson. The second and third operators, Telecel
(60% owned by the Egyptian company, Orascom) and NetOne (state
Sources
Kokenyne, A., Ley, J. & Veyrune, R. (2010) Dedollarization, Working
Paper WP/10/188, Washington, D.C.: International Monetary Fund.
Kramarenko, V. et al. (2010) Zimbabwe: challenges and policy options
after hyperinflation. Washington, D.C.: International Monetary Fund.
owned), are believed to hold 16% and 7% of the market share,
respectively. NetOne requires urgent expansion of its network if it is to
be able to provide capacity for additional customers. This is likely to be
executed with assistance from the Export Import Bank of China and
Huawei Technologies. A Memorandum of Understanding between
/HR %  0RVV 7  0RYLQJ 0XJDEH¶V 0RXQWDLQ =LPEDEZH¶V
Path to Arrears Clearance and Debt Relief. Center for Global
Development (CGD) Working Paper 190. Washington, D.C.: Center for
Global Development.
UNDP (2010) Manufacturing Industry, Economic Recovery and Poverty
Reduction in Zimbabwe. Comprehensive Economic Recovery in
Zimbabwe Working Paper Series WP 10.

Zimbabwe and China was signed encompassing this project and the
deployment of a national fibre backbone between the Zimbabwean
government and Huawei in April 2010. The costs are estimated at
US$30 million and US$48 million, respectively.

Conclusion
The improvement of the macroeconomic environment of Zimbabwe
has allowed organic growth in output to occur across most sectors.
Macroeconomic stability will continue to hinge on continued fiscal
prudence and the credibility of the monetary policy framework in the
medium term. External financing for the rehabilitation of essential
infrastructure (predominantly water supply and electricity generation) is
necessary because of the low capacity to increase domestic revenue
collections or raise capital from mineral wealth. This will require
agreement on a comprehensive arrears clearance and debt relief
strategy. The debt relief process under the IFIs will require a track
record of sounds economic policies and the reclassification of
Zimbabwe as a low-income country.

The resumption of activities in most sectors in 2009 is believed to have

contributed to growth in 2009, which implies that the growth number of
2010 will not benefit from the low base effect. Private sector growth is
believed to be concentrated in select sectors. The mining and
telecommunications sector as well as select manufacturing firms have
revealed strong performance in the past year, with further investments
believed to support growth in the coming year. Increased government
expenditure has provided support for consumption in 2010, with the
government forming the largest employer in the economy.

The inflationary environment is believed to remain benign under the

current monetary policy regime, supported by liberalisation in the trade
of livestock and products thereof and the prospect of the South African
rand depreciating.

10
Group Economics
Goolam Ballim ± Group Economist
+27-11-636-2910 goolam.ballim@standardbank.co.za  

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11