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Picking up the pieces of Zimbabwe's economy
Hany Besada and Nicky Moyo, Centre for International Governance Innovation (CIGI)
October 01, 2008

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Introduction

Once regarded as one of the most prosperous countries in sub-Saharan Africa, today Zimbabwe finds itself in the midst of the worst economic meltdown witnessed anywhere on the continent. Poor economic policies and a corrupt government constitute the major factors behind the longest, deepest economic decline seen anywhere outside a war zone. This paper explores socio-economic trends in Zimbabwe leading up to the crisis and factors that have prevented the country from total collapse.

It also explores the contributions of foreign investors to extractive industries, which have helped to prop up government and the public sector. Further issues, such as emerging Sino-Africa relations and Zimbabwe's "Look East" policy to attract foreign direct investment and expand trade and bilateral ties with East Asia are examined, as is the use of aid instruments by multilateral and bilateral donors. The paper closes with a proposed framework for economic recovery, based on high-road and low-road scenarios and relying on cross-country studies of lessons and experience, so as to develop a "compact" for Zimbabwe's recovery by various stakeholders.

Zimbabwe's economic condition has deteriorated substantially over the last decade, with inflation skyrocketing. Since breaching the technical definition of hyperinflation when it passed 600 percent in January 2006 (Wines, 2006), the official annual inflation rate, the highest in the world, reached 1 million percent by May 2008.

Zimbabwe's high inflation rate could be blamed on an extremely large public sector and subsidized loans availed to priority sectors - agriculture, in particular. Despite relatively strong revenue collection, the fiscal deficit - including quasi-fiscal activities by the Reserve Bank of Zimbabwe to support parastatals and other strategic sectors that were showing a loss, including mining and agriculture and primarily export subsidies of cotton and tobacco - constituted more than 80 percent of gross domestic product (GDP) in 2006.With limited scope for external financing, a large part of the public sector financing needs were met via money creation, which further fuelled the rapid monetary expansion and a sharp rise in inflation. Due to persistent high inflation, the Zimbabwean dollar has continued to lose value on the parallel market - by the end of January 2008, it was trading for about Z$6 million to the US dollar, falling to Z$70 million to the US dollar by March 2008, although the official interbank rate was Z$30,000 to the US dollar (Robertson Economic Information Services, 2008).

Zimbabwe's external position has also been under considerable pressure. The current account deficit has deteriorated steadily over the past five years, primarily due to the collapse of agricultural exports. Although the mining sector, on account of higher world prices, led by platinum exports, has partly compensated for the loss of revenue, the volume of exports has actually decreased, which is largely due to smuggling and corruption. In the September 2007 supplementary budget presentation to the Zimbabwean Parliament, the minister of finance, Samuel Mbengwegwi, indicated that the country was losing at least US$50 million a week due to the smuggling of minerals (Munda, 2007). According to the World Bank, Zimbabwe's international reserves were put at US$58 million, or just over half a month of imports, in early 2007. On the other hand, the country's external debt was put at US$4.7 billion, equivalent to more than 300 percent of exports, with external arrears estimated at US$2.7 billion; about 70 percent of Zimbabwe's external debt is owed to official creditors, including multilateral creditors such as the International Monetary Fund (IMF), the African Development Bank, and the World Bank (World Bank, 2008a).

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