Zimbabwe's crazy economy

JUST HOW DRASTIC Zimbabwe's economic decline has become is impossible to quantify. The official numbers are running further and further behind events. Firms are reluctant to discuss the severity of the crisis, since going public about possible redundancies or even closure is to invite the government - or even worse, the war vets - to intervene. But there is plenty of anecdotal evidence, bolstered by some official surveys and corporate announcements. All of them point in the same direction: an economy sliding deeper into crisis by the week.

And yet the stock market has never been higher. In just a week at the end of April share prices of industrial companies surged 17 per cent to a new record high. In the last year, industrials have risen 135 per cent, gaining over 90 per cent in the first four months of 2001 alone.
How can this be? How can share prices rack up such handsome gains at a time of declining output and employment, falling demand and sagging corporate profitability? Not only that, but the lawlessness that took over the rural areas as the war veterans went on the rampage last year, has now moved to towns, factories, banks, shops and even donor agencies. In the week that over 200 firms were invaded, the stock market index touched four new record highs. Zimbabwe's stock exchange price bubble is bound to burst.

"Irrational exuberance" is the term brokers use to explain what they cannot understand. Yet it is not difficult really. The real economy - output, employment and exports - is declining. Simultaneously, the monetary economy is surging on the back of the government's lunatic interest rate policy. In January, money market interest rates collapsed from over 60 per cent to around 10 per cent. The authorities claimed this was being done to kickstart the economy. The truth was that the government wanted to finance its debt-service costs by borrowing at hugely negative real interest rates, some 40 to 50 percentage points below inflation. This undeclared "inflation tax" appears to be working. It is helping the government to get its budget deficit down, but in the process it is killing off savings, the pension funds and the insurance sector. With interest rates so low investors have piled into shares as a way of owning real assets. The widening chasm between the two economies is measured by the inflation rate on the one hand and the collapsing value of the Zimbabwe dollar, at home and abroad, on the other.

In all this, fiction mingles with fact. The official exchange rate is Z$55 to the US dollar. The effective rate is closer to Z$120. President Mugabe's ministers claim that 70,000 families have been resettled on 2.8 million hectares of farmland. Farmers say this is simply untrue. " If there were 350,000 to 400,000 extra people living in commercial farming areas, we would notice it. They just aren't there," commented one farmer.

Similarly, the authorities claim that land resettlement will mean increased, not reduced, output. But its own crop forecasts tell a very different story. In the maize sector the official forecasts show average yields in the large-scale commercial farming at five times those in the small-scale and communal farming areas. Very roughly this means that the five million hectares to be resettled by small-scale black farmers will produce no more than one million hectares farmed by large-scale commercial producers.

There will be no shortage of maize and wheat, agriculture minister Joseph Made insists, but just about everyone in the industry warns that there will. The maize crisis will peak in the first quarter of 2002, just ahead of the presidential election due to be held in March-April. The wheat crisis could arrive sooner; there could be a temporary shortage in August this year before the winter wheat crop is harvested.
Whatever happens to supply, prices are going one way. The price of a loaf of bread will rise from Z$25 (about R3.50) - to Z$40 (about R5.70) by August says one baker. This highlights another fiction - that inflation in Zimbabwe averaged 56 per cent in the first quarter of 2001. To arrive at this conclusion the measurement of inflation must be extraordinarily narrow. Asset price inflation - the 135 per cent surge in share prices over the last year - is not included. Also ignored is the fact that, on current trends, the money supply is growing at an annualised rate of around 100 per cent. Indeed, even the official inflation numbers for the first quarter, when annualised, come out very close to 100 per cent. In other words, "we ain't seen nothing yet."

Despite all this, the phlegmatic Zimbabwe public go about their business as if nothing had happened. The captains of industry concern themselves with esoteric papers on how to manipulate the exchange rate using a "US-dollar derivative interest rate". There is no point in telling businessmen that Zimbabwe's crisis is political and social in origin, not economic; that it cannot and will not be solved by fiddling with interest rates or the exchange rate, or seeking to raise a new short-term offshore loan to finance fuel supplies. Business executives are concerned to keep their heads down at any cost. They are in no mood to be confused by the facts.

According to the official figures industrial output fell just 4.5 per cent in the first nine months last year. As Focus went to press, there were still no figures available for the end of 2000. The Confederation of Zimbabwe Industries, which, remarkably, believes that massively negative real interest rates will save the economy, estimates that 400 industrial businesses closed their doors last year - most of them small and medium-scale operations. Industrial output today is lower than it was at independence in 1980 and some of the damage being done is permanent.

Mining production fell 8 per cent in volume last year to its lowest point since 1993. The greatest impact was felt in the gold sector, hit by escalating costs at home, especially electricity, and a weak bullion price. The volume of gold output peaked in 1999 at 872,000 ozs, slumping 19 per cent in 2000 to just over 700,000 ozs. In the first quarter of 2001 gold production is estimated to have fallen a further 80,000 ozs.

The worst may now be past. In mid-April the government announced a US$55 million gold subsidy package which guaranteed gold producers an effective price of US$326 an ounce. This was a clear $63 an ounce above the world market price, though the government budget does not provide for the Z$3 billion that will be needed.
Gold miners say the subsidy will prevent any further closures but it is unlikely to encourage closed mines to re-open. Falcon Gold, which announced the closure of three mines in March, has decided to keep all of them open, despite the fact that its Venice mine will continue to make losses even with the subsidy. To what extent threats of invasion by the war vets and President Mugabe's statement that no viable firms would be "allowed" to close influenced Falcon is not known.

Given the threats by the war vets to invade white-owned mines, it is little short of astonishing that the South African-backed Zimbabwe Platinum Mines should claim that the Zimbabwe government is fully supportive of new mining investment and expansion in the country. Zimplats is opening a new platinum property at Ngezi, with substantial South African backing from Impala Platinum and Absa bank. These two companies are already tied into a joint venture with the Zimbabwe government bank, CBZ, which likes to be known as Jewel Bank. More reputable mining companies - Anglo America and Rio Tinto - both of which have attractive investment opportunities in Zimbabwe, have moved much more cautiously than the brash Zimplats/Impala/Absa alliance. The latter have clearly pinned their colours to the Zanu-PF mast, a decision that they could yet come to regret.

The Zimplats project is symptomatic of some disturbing trends in contemporary Zimbabwe business. One is the growth of crony capitalism. Not that one should be at all surprised given the closeness of Mugabe and his party to Malaysia, a world leader in crony capitalism, not to mention the less-sophisticated Democratic Republic of Congo, where several Zanu-PF owned businesses are very active.
The second is the sight of "carpetbaggers" from South Africa waiting to pounce on cheap assets in Zimbabwe. Tongaat-Hulett and Illovo are reportedly interested in Hippo Valley sugar estates, which Anglo is selling. Pretoria Portland Cement is favoured to take over Portland Holdings, also from Anglo, while Shoprite is seen as the frontrunner to take over the retail operations of conglomerate Delta Corporation that is unbundling. It is not just private businesses that are driving north through Zimbabwe, buying up companies for a song, but also parastatals. Eskom is looking at taking over parts of the ailing state-owned Zimbabwe Electricity Supply Authority's (Zesa) operations. Spoornet has its eye on what is left of Zimbabwe National Railways.

Most of these deals, if they come to anything, may well strengthen management and performance in the Zimbabwe economy. The worry is that some of the sales will not be conducted in a transparent fashion. Clearly, if Zesa is to privatise it should do so openly with a World Bank supervised tender operation, rather than through a backdoor deal with Eskom. But this is unlikely to happen. Instead Eskom could find itself with debt-equity conversion rights on terms that could favour Eskom rather than Zimbabwe.

No one knows how much agricultural output is falling. It is virtually impossible to get a handle on what is happening in areas of small-scale farming. Cotton production is down about a third at 300,000 tonnes, though this mainly due to excessive rainfall rather than land resettlement. Tobacco production has fallen some 20 per cent but it could have been much worse. A year ago industry experts were warning of a crop of 150 million kilograms or less. In the event the crop is about 190 million kgs, quality is excellent and prices so far are 40 per cent higher than last year. Despite all the pressures the tobacco growers have endured, they will earn the country an extra US$25 million - about 7 per cent more - in foreign exchange this year than last.

Small thanks they will get. The subsidy paid to gold producers has not been offered to tobacco. Tobacco farmers get the official exchange rate for 80 per cent of their crop, though they are allowed to use the other 20 per cent in the parallel market to finance essential imports.
In the Alice in Wonderland world of the Zimbabwe economy there are at least six exchange rates - probably more. The official rate of Z$55 to the US dollar is largely a government fiction since it applies to only about a quarter of total transactions, chiefly fuel and electricity. Tobacco growers get a rate of Z$65, gold producers around Z$80, the airlines charge Z$85, the free market rate is Z$120 and there is a stock market rate on Old Mutual shares of Z$150. This situation is tailormade for the arbitrageurs to buy in one market and sell in another, an invitation to corruption and inefficiency. It is also part of the price that the ruling Zanu-PF is forcing Zimbabweans to pay as it pulls out all the stops in an attempt to hold on to power at any cost.

Can it work? Almost certainly not. For it to work there will have to be a dramatic reversal on the part of the international community, which has been outraged by recent threats against diplomatic missions, businesses and even donor agencies. Harare still hopes that South Africa will come riding to its rescue, but this seems increasingly unlikely. Pretoria was among the first to complain publicly when the war veterans invaded its businesses in Zimbabwe.

South Africa's terms for helping Zimbabwe - abandonment of the fast-track land resettlement programme, a return to the rule of law and a commitment to free and fair elections - have been rejected by the Mugabe government. In this situation it can have little influence unless it is prepared to pull the plug on Zimbabwe's fuel and electricity supply, something President Mbeki has always ruled out.

No one knows what it will cost eventually to revive the economy. Commercial farming is the backbone of the economy. The chaotic transformation of a vibrant commercial farming sector into a small-scale sector capable of producing low-technology products, dependent on government funding and extension services and with a low propensity to invest will prove to be a major setback.

Finance minister Simba Makoni's reckless monetary policy will lead to sharply higher inflation before the year is out, along with a substantial devaluation of the currency. On top of that, there will be the long-term costs to the economy of the loss of skills, destruction of savings and the threat to the financial sector as a whole, but especially the institutional investors. It will be a long haul to restore what the Mugabe government has destroyed.

Tony Hawkins is professor of business studies at the University of Zimbabwe.