Govt under pressure

Zimbabwe: Economic Outlook

6 February 2015

John Robertson, Robertson Economic Information Services

Government initiatives that are intended to more directly address the weakening state of Zimbabwe’s economy are beginning to support hopes that improvements in the business climate will soon become the spearhead for reforms. A combination of declining tax revenues, mounting debts, poor responses to requests for Budget support from foreign governments and the need to restore the country’s eligibility for assistance from international financial institutions have at last forced government to actively respond to the pressures for meaningful reforms.

These responses have been recognised by the IMF, which, in its latest review of its Staff-Monitored Program, said, “new momentum is building up, with the Zimbabwean authorities displaying renewed interest in policy reforms, as well as a commitment to start tackling the country’s economic problems”.

Evidence of this long-delayed awakening became apparent when ruling party officials found that even the foreign governments with whom the country has the closest relations had decided that Zimbabwe’s economic problems were self-inflicted and that support would serve only to sustain the policies that had damaged the country’s productive capacity. Agreements have been reached with some of these governments on certain ring-fenced infrastructural projects, but the only offers of direct support to government are all conditional upon the passage of acceptable economic policy changes.

Hopes of debt forgiveness have been kept in check by statements such as, “The recent external debt reconciliation and assessment clearly indicated that Zimbabwe does not currently qualify for debt relief under the Highly Indebted Poor Country Initiative”. As investors are still hearing Zimbabwe ministers defending the damaging policy mix, the country has remained ineligible for direct assistance, but the hope now is that these policies will be revised.

 These hopes have been indirectly supported by significant changes that have taken place in recent months in the political arena. Among them, the choices of two new Vice-Presidents and the reshuffled cabinet are hoped to be moves that will lead directly and quickly to the creation of a more agreeable business environment.

The severity of the economic problems in need of attention suggest that decisive policy changes are inevitable, but argue that all the country’s prospects of striking out in a new direction will depend upon dramatic changes in leadership style. With the apparent intention of reinforcing these hopes, government has made a number of references to an “agreed action plan”.

 Full details of this action plan have yet to be made public, but a reference to it was carried in a Ministry of Finance observation that government is now eager to engage with investors because Zimbabwe had received the least Foreign Direct Investment in the region.

“The implementation of the agreed action plan will lead to the country catapulting its position into the top 100 in the world,” according to the head of the Ministry’s Fiscal Policy and Investment Promotion division.

Initial moves have been made to restore the appeal of the country’s investment climate by amending the way that the Indigenisation regulations will be applied. According to several government statements, the Indigenisation and Economic Empowerment (General) Regulations will continue in force, as will existing notices specifying requirements, but the ministries directly concerned with each investor’s sphere of activity will assume direct control over the indigenisation compliance procedure and will be free to make arrangements acceptable to the investors.

The changed regulations will also allow a company that has already negotiated the indigenisation process to submit new proposals to its own ministry for consideration if, in its efforts to obtain its Certificate of Compliance from the Ministry of Youth, Indigenisation and Economic Empowerment, it believes it had to concede to unreasonable demands.

In other references to proposed changes, the Minister of Finance, in his Budget speech, made detailed reference to the costs of doing business in Zimbabwe[1] and closed this section of his speech with the statement: “I am, therefore, commissioning a Study that will guide the review of all public institutions, local authorities and parastatals’ licensing and permit processes in the new year. However, there are some areas wherein the delays and high cost of doing business are primarily a result of administrative weaknesses, which can be addressed immediately.”

In the Minister of Finance’s references to Zimbabwe’s uncompetitive cost structures, he said that another comprehensive study had been done by the Ministry of Industry and Commerce. This had identified labour, power, water, finance, transport and trade logistics, tariffs, taxation and information technology among the cost drivers affecting the country’s performance. The Minister then said that Cabinet had approved a wide range of business-friendly recommendations aimed at addressing these issues in line with regional trends.[2]

On this topic, a further development was published in mid-January in a Zimbabwe Investment Authority statement that registration fees and the time taken to start a new business were both to be cut substantially.

In commentaries on these developments, observations have suggested that, while government has correctly directed its attention to getting the productive sectors producing again, none of the official statements has displayed official recognition that, even if the proposed measures are all approved, it will take many years to build up momentum in most of the sectors. 

Improved electricity supplies will take about three years and higher bank deposits will materialise quickly only if foreign depositors can be enticed into the local market, or if foreign banks can be persuaded to offer generous lines of credit or injections of equity capital. Also, all proposals to attract investment into mining and manufacturing will be affected as much by international prices as they will be by local investment conditions.

However, within Zimbabwe, imaginative policy changes could be expected to dramatically improve the levels of optimism and confidence fairly quickly. If levels of business activity pick up on the strength of an improving outlook, this is likely to impact fairly quickly and positively on property prices. Long-delayed sales would then permit the settlement of outstanding debts and help clear non-performing loans from bank profit and loss statements. Rising activity on the market will restore the collateral value of such assets and liquidity problems will ease as they become more readily accepted as security for new bank loans.

On the Zimbabwe Stock Exchange, share prices can be expected to rise quickly for the more promising companies, but improving market liquidity might soon be expected to lead to take-overs and mergers that could reduce the number of listed companies for a time.

Before any of these possibilities start to materialise, Zimbabwe will have to become a much more attractive option for potential investors. As ministry officials pointed out, in the ten months to October 2014, the evidence shows that Zimbabwe actually became less attractive.

FDI inflows amounted to $146,6 million compared to $311,3 million in same period of 2013. The total reached $400 million for the full 2013 year, almost unchanged from 2012, but these sums have to be compared to billions that went to our neighbours.

However, statements by the recently appointed Indigenisation Minister, Christopher Mushohwe, suggest that unhelpful official interpretations of Zimbabwe’s unhelpful legislation will continue to slow the investment inflows. In his first statement after taking office, this Minister said the country’s resources were worth more than any money that investors would bring in, so “the investors should not look at us as beggars, they should not expect us to give in to their demands”.

 Arguing that government needs to make sure that “we know the value of what we have underground”, he said it was this value “which we can put on the table and say this is our resource, bring in your investment”.

But by claiming to place “on the table” nothing more than estimates of the values of yet to be reached mineral deposits, and by claiming, as it does in the regulations, that these estimates confer on government a paid-up 51% shareholding of any new mining company, the Minister can be certain only of keeping Zimbabwe isolated from inflows of mining investment funding.

A Chamber of Mines report estimates that the industry’s output contracted by 2% in 2014 as it faced “a host of challenges, not restricted to but including depressed metal prices, lower capital and FDI inflows, high cost structures, sub-optimal royalties and shortages of power”.

Lower gold and platinum prices, affected the Balance of Trade in 2014 and despite government’s acceptance of the need to reduce royalties on gold production, the output volumes were below forecasts and little changed from the 2013 level. Total export values decreased by 12,7%, from $3,5 billion in 2013 to $3 billion in 2014, affected also by lower cotton production and a fall in tobacco prices.

The total import bill fell by 17%, from $7,7 billion in 2013 to $6,37 billion in 2014, despite Zimbabwe’s continuing reliance on food imports. This reduced the deficit from $4,2 billion in 2013 to $3,3 billion in 2014.

Indications suggest that a fall in disposable income caused the decline in demand for consumer goods, and this belief is supported by the increase in non-performing loans and the claim that most of these would have been cleared if expected sales volumes and revenues had been realised.

Fuel imports accounted for $1,6 billion of the 2013 import bill, but the final imports values for 2014, yet to be released, will be lower because of falling oil prices as well as reduced import volumes. Petrol imports fell from 472,9 million litres in 2013 to 455,2 million litres in 2014 and diesel imports fell from 935,5 million litres to 910,7 million litres over that period, again indicating falling economic activity.

Suggestions that buying power has fallen are further supported by the fierce competition between retailers, the effects of which carried price levels downwards for most of the year.  This graph shows that the Consumer Price Index at the end of 2014 was lower than at the end of 2013 and also lower than at the end of 2012.

This would support the belief that consumption patterns were moving down market as families had less money to meet basic needs. As a large proportion of the population now depends upon remittances from relatives working abroad, the movements of the rand exchange rate against the US dollar had a significant impact on disposable income in 2013.

The reduced US dollar values of the rand amounts received by dependants and spent on US dollar-priced goods would have impacted on spending patterns and taken many traders by surprise. However, this exchange rate movement was less dramatic in 2014, as shown in this graph.

During 2014, the rand movements were even modestly positive some of the time, but the improved rates were temporary and indications so far this year show signs of a further weakening of the rand against the US dollar.

In Zimbabwe, reduced retail sales volumes were also caused by job losses that followed upon company closures and reduced wage payments for companies forced to adopt shorter working weeks. Many employers, including government, began to pay wages and salaries later than usual and some went several months into arrears. Together with the lower value of the flow of rand from the large proportion of the Diaspora working in South Africa, these amounted to significant reductions of buying power and it has to be argued that none of the components of this problem have yet shown signs of easing in 2015.

Government tax revenue became just one of the casualties of the trends during the year and this table shows the original 2014 Budget’s main revenue estimates and the actual amounts collected. Value Added Tax figures give the clearest indication of business activity and the revenue of $990 million from this source was 19,8% below the original estimate of $1,23 billion.

Although some of the other revenue estimates were exceeded, such as taxes on individuals and withholding tax on tenders, these appear to reflect improved recovery rates rather than improvements in employment or that higher numbers of contracts were being awarded. As the totals show, the revenue actually collected in 2014, at $3,84 billion, was $280 million or 6,8% below the $4,12 billion originally forecast.

For 2015, the original Budget forecast was that $3,99 billion would be collected and another $588,4 million in loans would take total spending to $4 578 million However, a subsequent Ministry of Finance announcement in the Government Gazette on January 16 2015 states that total spending must not exceed $3 551 469 000.

No information was offered to suggest which ministries were to have their Vote Appropriations cut, but from the 2015 Budget presented last November, it was already evident that substantial cuts had been made if they are compared to the amounts allocated in 2014. The position before the Government Gazette announcement had apparently already placed a cap on total spending. The Budget figures show that 22 out of the 29 ministries had their Vote Appropriations reduced and the overall effect was a $556,7 million cut. If the Government Gazette statement requires that another $500 million should be removed from these Appropriations, hopes have been expressed that lower costs would have been incurred by these 22 ministries because of successful measures to downsize the establishment numbers.

Under revenue constraints, the number on the payroll outside the teaching profession has been considered well in excess of needs for some time, but labour laws, particularly compensation package regulations, have affected government’s ability to retrench civil servants who have become surplus to requirements. Government has made assurances that changes will soon affect labour laws and drastically reduce retrenchment costs, but these have yet to be translated even into drafts of amendment proposals.

The Budget revenue, Balance of Trade figures and fuel consumption in 2014 again call into question the frequently repeated claims that Zimbabwe’s Gross Domestic Product increased by more than three percent during the year. The increased volume of tobacco sold was one of the few statistics that countered the mounting evidence of shrinkage, but even these tobacco figures are likely to be revised downwards to adjust for double-counting that occurred when contract buyers re-sold unwanted leaf on the auctions. Indications suggest that GDP in 2014 experienced negative growth of perhaps five percent. This figure is reflected in the 2014 column in the table on Page 8.

If this situation is to be reversed in 2015, or come anywhere close to the Finance Minister’s forecast growth rate of 3,2%, almost all the money needed to support even that modest growth rate would have to come from somewhere else.

Whether Zimbabwe can offer sufficient encouragement to either investors or lenders within the next few months will depend upon, not only the dramatic improvements that need to take effect in investment policies, but on the developers, contractors, NGOs, traders and even the speculators being able to assemble enough local skills or find enough foreign personnel to make the needed impact.  

Given the time Zimbabwe has taken to make progress on projects started many years ago, such as the Tokwe-Mukorsi Dam or the Gwayi-Shangani Dam, Zisco or even the road to Harare Airport, it is hard to believe that new ventures started this year will make much difference to GDP this year.

However, a start could be made to restoring growth prospects for 2016 by placing the emphasis on food self-sufficiency and by overcoming the need to spend hundreds of millions a year importing foods and other goods that can be made locally. It is already too late for this year’s output, but agricultural production next year could again become the foundation for many forms of investment needed to add value to basic crops. However, dependable structures would have to be in place to ensure the crop deliveries before anyone will commit investment funds into the needed value-adding capacity.

Unfortunately, political policy statements affecting the prospects that large-scale farmers might one day restore a degree of certainty to agricultural have recently contradicted each other. Provincial Affairs Minister Matiza, who is a Minister in he President’s Office, said a few weeks ago that all remaining white commercial farmers are to be dispossessed and government had ruled out agricultural joint ventures involving whites. However, at the end of January, the Minister of Lands and Rural Resettlement, Minister Douglas Mombeshora, said that Zimbabwe's white farmers can avoid eviction by formally registering their farms and reducing plot sizes.

In reality, Zimbabwe’s best hopes lie in the adoption of policies that not only permit, but also encourage the engagement of competent people in every field of endeavour, and competence rather than race should be the criterion. The continuing defence of policies that can be shown to have damaged the interests of millions, and have destroyed hopes of formal employment for millions more, is preventing the recovery that is desired by all, even those whose misdirected energies are keeping the country’s handicaps in place.

Until the costs of doing business are reduced by improved bank liquidity, lower interest rates, efficient utility service deliveries, improved rail, air and municipal services and reduced bureaucracy, Zimbabwe will have to continue trying to function under the very severe constraints that are still in place.

At the end of 2014, these constraints made up a formidable list:

  • Insufficient revenues from taxes, which caused the inadequate funding of ministries, the deterioration of State-run infrastructure and services, unpaid debts to private sector suppliers, delayed salary payments to government employees, unpaid debts to foreign creditors & suppliers and a Budget deficit that cannot be financed.
  • A trade deficit in excess of $3 billion, which appears to be funded mostly from remittances to local dependants of the Zimbabweans working abroad. The funds are used to pay mainly for imported goods because the local production of such goods has become too uncompetitive and too difficult to finance.
  • A shrinking formal sector labour force, as more manufacturers are forced to close because high costs and low efficiency levels make their products uncompetitive with lower-cost imports.
  • Job protection and labour laws, new fees, levies, duties, tolls and other charges, plus government policies that set crop prices at figures up to double those in neighbouring countries.
  • Wage levels that are out of line with productivity and the cost-effects of low efficiency. These are caused by, among other issues, frequent power cuts, erratic water supplies and the inability to raise longer-term finance to replace obsolete or worn-out machinery.
  • Those who cannot borrow also find they are unable to raise equity capital because of perceived uncertainties and risks, low levels of domestic liquidity and because potential foreign investors will remain discouraged by indigenisation demands while the legislation remains in the Statute Books.

Government makes frequent references to Zimbabwe Agenda for Sustainable Socio-Economic Transformation, or ZIMASSET, claiming it to be the blueprint for overcoming all such problems. Regrettably, it appears that the business sectors’ inability to discover substantive guidance from it has led to their dismissing it without comment, and diplomatic commentators have been too diplomatic to comment critically on the document.

However, an understanding of its underlying purpose is needed by diplomats as well as business people because the document reflects more than the unrealistic hope that, having clearly identified the country’s needs, the government will quickly persuade international development agencies and foreign investors to eagerly finance the projects.

Less obviously, the document also reveals, in the ZIMASSET “matrix” statement, that government intends to regulate, manage and control the activities of every investor by imposing what will amount to Central Planning.

With the backing of the indigenisation policy, the underlying message to investors could be expressed: “You have to put up the money, establish the business, install the plant, take all the risks and generate the desired output, but as you progress through the stages, you must seek and obtain approvals, licences, permits and clearances for every stage. Then, when the business is running profitably, the investors must relinquish 51% of the shares. Throughout the process, you must remain keenly aware that government intends to remain directly in charge of your project and your activities”.

It is this message that has been picked up by investors. With too few exceptions, they have rejected ZIMASSET and Zimbabwe as an option.

In the above table, the forecasts of GDP growth by sector carried in the Budget Speech have been copied into the 2015 forecast column. In describing these forecasts in his Budget Speech, the Minister accepted that foreign capital inflows remained subdued due to the “perceived country risk”. However, he projected the FDI to increase by 69 percent in 2015 on the back of continued implementation of reforms and the re-engagement process.

The Minister’s modest growth rates forecasts together with his strong FDI growth expectations might suggest his appreciation that time will be needed for investments to become productive. However, official GDP growth predictions still claim that the economy will expand by more than 3% in 2015. Regrettably, it has to be stated that the investment needed to generate this growth is not yet in place.

To speed up the arrival of the needed investment, the private sector should be making the most of every opportunity to argue for much more penetrating changes to laws and regulations that have permitted, even “legalised” contraventions of security of ownership rights over land, assets and company shareholdings.

Without adopting international standards on these issues, Zimbabwe will be unable to reclaim its right to be taken seriously in the international market place and will continue to struggle for investors.



John Robertson

Robertson Economic Information Services

Tel:  +263 4 740 205

Cell: +263 772 224 755



[1] Paragraphs 995 to 1026, The 2015 National Budget Statement

[2] Ibid, Paragraphs 989 to 992