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Dr Gideon Gono: How sanctions are ruining Zimbabwe
African Business
June 2007

http://www.africasia.com/africanbanker/afbnk.php?ID=1329

In this opinion piece, Dr Gideon Gono, governor of the Reserve Bank of Zimbabwe clearly spells out how sanctions and the suspension of international support have devastated economic and social life in his country. The heaviest blows, he argues, have fallen on the poor, the young and ill.

In response to our land reform programme, sanctions have been imposed on Zimbabwe by the multilateral financial institutions. They suspended all forms of balance of payments support, technical assistance, grants and infrastructural development flows to both government and private sectors and stopped all lending operations to the country.

It is usually the vulnerable groups of society who suffer not the political leaders and government officials. Sanctions have had adverse social and economic effects on the Zimbabwean economy's key sectors. The shortage of foreign currency resulted in the country accumulating external payment arrears.

Balance of payments

Zimbabwe's balance of payments position has deteriorated significantly since 2000 from the combined effects of inadequate export performance and reduced capital inflows. Our foreign exchange reserves declined as a result, from US 830m representing three months import cover in 1996 to less than one month's cover by 2006.

The foreign exchange shortages severely constrained the country's capacity to meet foreign payment obligations and finance critical imports such as drugs, grain, raw materials, fuel and electricity.

There has been a significant build up in external payments arrears. Total foreign payments arrears increased from US$109m at the end of 1999 to US$2.5bn by the end of 2006. The worsening of the country's creditworthiness and its risk profile has led to the drying up of sources of external finance.

The withdrawal of the multilateral financial institutions from providing balance of payments support to Zimbabwe has also had an effect on some bilateral creditors and donors who have followed suit by either scaling down or suspending disbursements on existing loans to the government and parastatal companies.

Prior to these developments, Zimbabwe had an impeccable record of prompt debt servicing and was highly rated in the international financial markets.

The capital account, traditionally a surplus account, has been in deficit since 2000. As such, international investors preferred other countries for investment, thus depriving Zimbabwe of much-needed foreign direct investment.

Sanctions have also affected the image of the country through negative perceptions by the international community. Zimbabwean companies are thus finding it extremely difficult to access lines of credit .As a result, our companies have to pay cash for imports.

Also as a result of the risk premium, the country's private companies have been securing offshore funds at prohibitive interest rates. This has had a ripple effect on employment levels and low capacity utilisation as reflected by shortages of basic goods and services.

Declining export performance has also adversely affected the standards of living for the general populace, and because of the deteriorating economic conditions, the country has experienced large scale emigration, especially of skilled labour, thus further straining the economy.

The sanctions have adversely impacted on Foreign Direct Investment (FDI) to Zimbabwe. Investors are shying away and FDI inflows have collapsed from US$444.3m in 1998 to US$50m in 2006.

In addition, Anglo-American companies have been strongly discouraged from investing in Zimbabwe by their home governments. This has adversely affected investment levels into the country, thus accentuating the foreign exchange shortages leading to further shortages of fuel and imported raw materials. The shortage of fuel has had a debilitating impact on all sectors of the economy, leading to a continuous decline in economic activity. This has generated additional inflationary pressures and speculative behaviour in the economy.

Danida supported Zimbabwe's agricultural sector programme in 1998 to the tune of US$15.4m. The Danish programme was suspended and the economy thus lost an opportunity to enhance food security.

The education sector support programme was established in 1996 and was funded to the tune of US$13.9m by the Swedish government. The project facilitated the supply of textbooks, special education needs and construction of school buildings.

The Swedish government did not fund any new programmes in the education sector after 2000 and our universities cannot access computers and related accessories from American IT companies. The sanctions imposed by the West have thus spilled over to the country's institutions of higher learning.

Transport sector

We used to have a transport sector support programme of US$48m, started in April 2000, and funded by Danida. Had this programme been undertaken to completion, it could have created employment opportunities and enhanced trade through efficient movement of commodities within the country and the region.

In addition, a labour-based roads and rehabilitation works programme, established in October 1995, and funded by the Swedish government to the tune US$15.1m was aimed at rehabilitating 116 km of roads as well as training indigenous small-scale road contractors. This was meant to enhance entrepreneurial skills and capacity building for the rural population.

However, no new programmes have been put in place because of Sweden's suspension of cooperation with Zimbabwe.

Health sector

Danida has also suspended the US$29.7m health sector support programmes established in May 2000 as a result of the land reform programme. Zimbabwe's grant application for funding for its HIV-Aids programmes to the Global Fund for Aids was also rejected on political grounds.

Three-quarters of the equipment in hospitals in the capital, Harare, are not functional and this has had serious repercussions on the ordinary people. In the backdrop of an already overburdened health delivery system, many Zimbabweans are now finding it difficult to access affordable health facilities and drugs, particularly anti-retrovirals for HIV-Aids patients.

The City of Harare's health department immensely benefited from the various joint research projects with international stakeholders. These projects have since been terminated. The department used to benefit from such projects, as after their completion, it took over the equipment used for the research projects.

The sanctions have also indirectly resulted in the relocation of the World Health Organisation's regional offices to Congo Brazzaville, accompanied by retrenchment of Zimbabweans formerly employed by the WHO.

Regional cooperation

Sanctions are affecting the smooth running of regional groupings such as SADC and Comesa. The European Union, through the European Fund compensates Comesa-member states for revenue losses suffered under the tariff phase-down exercise under specific conditions which take into account macroeconomic policies and governance issues.

Zimbabwe has not benefited from the fund and this could affect, in the long term, its tariff reduction process in line with other countries in Comesa, thereby undermining regional integration initiatives.

In 2000, the US enacted a new law called the African Growth and Opportunity Act (AGOA), which offers tangible incentives for African countries to open their economies, build free markets, and embrace political pluralism.

Those countries that adopt free market principles and are perceived to adhere to the role of law and respect human rights are, therefore, eligible under AGOA to export a wide range of goods to the US duty-free.

In a single year, AGOA led to an increase in exports from Africa to the US by more than 1,000%, generating nearly $1bn in investment and creating thousand of jobs. This increase in trade included a diverse list of products, among them apparel, cut flowers and processed agricultural goods.

Thirty-seven African countries have met the AGOA criteria and are eligible for the trade incentives. Zimbabwe does not enjoy any preferential trade under AGOA because of the sanctions imposed on it by the US.

It is, therefore, evident from the above that sanctions imposed on Zimbabwe have adversely affected vulnerable groups and the economy in general. Significant progress that the country had made in the development of infrastructure, health and social service delivery systems has been severely affected by the imposition of sanctions.

The protracted foreign currency shortages that the country has been facing since 2000 have crippled the operations of industry, which heavily rely on imported inputs for their daily operations.

Decline in the key sectors of the economy have occasioned high unemployment, an inefficient health delivery system, reduction in FDI and the drying up of balance of payments support. On the whole, sanctions are partly responsible for the decline in economic activity over the last seven years.

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