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Q&A: Zimbabwe's economy
BBC News
July 31, 2007

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http://news.bbc.co.uk/2/hi/business/6922441.stm

Zimbabwe has just about the worst-performing economy in the world. Some say the economic problems could soon bring down the government of President Robert Mugabe, although that has been predicted many times before.

People are struggling with soaring inflation, widespread joblessness and the exodus of millions of Zimbabweans, both to neighbouring countries and to Europe and the US.

What's going on with Zimbabwe's economy?

By any measure, Zimbabwe is in deep financial trouble.

In many stores, the shelves are nearly empty much of the time, and prices are skyrocketing for what goods remain as hyperinflation sets in.

About four out of five people are estimated to be out of work - at least as far as the official economy is concerned.

The situation is so bad that about 3,000 people a day are thought to be crossing Zimbabwe's borders into neighbouring countries.

And increasingly, many Zimbabweans are dependent on support from relatives and friends abroad to keep food on the table and roofs over their heads.

Hyperinflation - what's that?

This is what happens when the value of money plummets.

In Zimbabwe's case, the near-5,000% annual rate of inflation means that a loaf of bread bought today is about 50 times more expensive - in cash terms - than it was a year ago.

And prices are continuing to accelerate, in some cases doubling in weeks - or even, on occasion, days.

Wages, on the other hand, are nowhere near keeping up.

One correspondent recently told the BBC News website that one candle can cost twice the official government wage for a farm worker, while the price tag for a single banana is 15 times what she paid seven years ago for a four-bedroom house.

Another effect is that people simply do not hang onto money. As soon as it is earned, it must be spent - because prices will have risen sharply even by the following day.

How do people cope?

Barter is increasingly common.

So, too, is a reliance on remittances from abroad - in money but increasingly in goods. Several shopping websites now allow expatriate Zimbabweans to order food supplies to be paid for in foreign currencies and delivered to relatives at home.

Similarly, with petrol shortages endemic and prices spiralling - not to mention power cuts, often for 20 hours in the day - one enterprising firm now allows vouchers to be sent as text messages, to pay for fuel in US dollars.
Wherever possible, people exporting and importing goods do so on the black market, since a sizable slice of foreign currency exchanged at the official rate has to be kept in accounts which the government can use to feed its need for foreign exchange.

In any case, exchange rates on the unofficial or "parallel market" can be 20 times more generous than the official one of Z$15,000 to the US dollar.

How did it get to be like this?

For many people, the key cause of the current problems is Zimbabwe's land reform programme.

Most of the country's most productive farmland remained in white hands after independence in 1979, and through the 1990s the government of President Robert Mugabe worked to shift ownership.

By 1999, however, with little movement, the government unveiled plans to seize land without compensation - a process which started in earnest the following year.

As hundreds of farms were taken over - sometimes by local people, often by senior government officials - production, and export, of grain and tobacco collapsed.

Huge spending on involvement in the conflict in the Democratic Republic of Congo was also a drain on the public purse.

The result was a food crisis, and a battering for the economy as foreign exchange earnings slumped - both from farming and from tourism, amid violence surrounding the land reform programme.

What is the government saying - and doing?

As far as President Mugabe and his ministers are concerned, land reform has nothing to do with the country's economic travails.

Instead, sabotage by the West in general, and the UK - the former colonial power - in particular, is responsible.

They point to sanctions imposed against the country - although these are aimed at leaders, rather than at the economy as a whole.

And the government has also taken a string of measures intended to stem the country's decline.

Among them have been limits on foreign currency movements, a revaluation of the Zimbabwe dollar, the introduction of vouchers instead of banknotes, and - most recently - the imposition of stringent price controls.

Cuts of as much as 50% on many commodities are now required by law, and thousands of businesspeople have been arrested for pricing goods at levels it sees as amounting to profiteering.

Meanwhile, the government is planning to "indigenise" foreign-owned businesses by making sure black Zimbabweans have majority control.

And Mr Mugabe is also promising to print even more money, should government projects require it.

Is any of this working?

No.

The hyperinflation affects raw materials and wages as well as retail prices, after all.

So businesses argue that at the prices the government demands, they simply cannot afford to make or buy the goods in the first place.

The result, Zimbabweans report, is hoarding of what goods remain; stampedes whenever a shop acquires a much-needed staple like cooking oil or maize meal; and further hardship.

And the import restrictions may make things worse, since the collapse of domestic output means goods brought across the border are often the only thing on the shelves.

Printing even more money, meanwhile, will simply add to the hyperinflation.

Some analysts say the situation will lead to a complete collapse of the economy and the government by the end of the year but each time people have said in the past that things couldn't get any worse, they have.

So is anyone gaining from this?

A few businesses are making huge profits from the black market - for example those with good connections who can buy hard currency at the official rate and sell it to those who need it at a far higher price.

The Zimbabwe Stock Exchange has also been roaring ahead - it has been one of the best-performing in the world in recent years.

As the government prints money, and interest rates have failed to keep up with the rampant inflation, assets such as stocks have been one of the few places where Zimbabweans have been able to put their money so as to retain its value.

The result: share prices increasing even faster than retail price inflation.

Meanwhile, many South African shops are experiencing their own mini-boom.

As goods become ever scarcer, Zimbabweans are flocking across the frontier to stock up - and not only to stores in towns near the border.

And many of the million or more Zimbabweans already in South Africa are similarly buying up staples to send home.

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