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Zimbabwe's economy spirals downward

By Tony Hawkins in Harare
Published: April 7 2006 03:00 | Last updated: April 7 2006 03:00

The warning by Christopher Dell, US ambassador to Harare, last week that Zimbabwe has "passed the point of no return" and will need substantial international assistance to achieve a recovery, echoes what Zimbabwean businesspeople are saying privately.

Some industrialists say their volumes have fallen by as much as 30 per cent in the first quarter of 2006 - and this after a five-year period in which industrial production has halved nationally. The Zimbabwe Tobacco Association estimates that production of tobacco, once Zimbabwe's chief export, will fall to 50m kilogrammes this year from a peak of more than 230m kgs in 2000.

Although this year's rains have been excellent, a number of quasi-official harvest forecasts suggest that the maize harvest will be no more than 700,000 tonnes, possibly less, against annual consumption of 1.8m tonnes.

In a remarkable climbdown from its previous "We can go it alone" stance, President Robert Mugabe's government has launched a $277m (€185m, £129.7m) appeal for humanitarian assistance. Food supplies worth $111m top the bill followed by requests for assistance for shelter, drugs and agriculture. The appeal estimates that at least 3m people, or a quarter of the population, will need food aid this year, but donor agencies say the figure is closer to 4m.

The business community is reluctant to speak out about Zimbabwe's worsening economic prospects and its political crisis. But privately its members say that there has been a strong fall in output in recent months that is not yet reflected in published statistics.

The business mood has been further soured by the government's threat to nationalise 51 per cent of foreign-owned mining companies. In response, mining groups and the Chamber of Mines, which represents the industry, have warned that the consequences would be "catastrophic" especially as the plan is to take 25 per cent of the companies' shares as "free carry", paying only for the balance of 26 per cent over the next seven years.

Fearing that such a move would put an end to any chances of attracting foreign investment in the industry, the government is seeking a compromise that would give it a 30 per cent stake, most of which it would pay for.

This week the government sought to mollify some of its mining industry critics by doubling the Zimbabwe dollar price it pays for gold - now the country's largest export. While this is tantamount to a 40 per cent devaluation of the official exchange rate (Z$99,200 to the US dollar), it is unlikely to have much impact on parallel market gold sales by small-scale producers, who are able to sell their bullion illegally to the black market at vastly preferable exchange rates.

The gold price move has led to calls from other exporters for similar treatment. They say that the pegging of the exchange rate for the last two months is eroding their profitability at a time when inflation is 782 per cent and forecast to reach 1,100 per cent by mid-year. In a belated effort to curb inflation, the central bank has tightened monetary policy and raised interest rates in recent weeks, but in so doing it has created a potential crisis in the banking sector.

Money market dealers are warning that if the daily "shortage" in the market gets to Z$10 trillion there could be casualties. "If the Reserve Bank goes on like this, you are going to see bank casualties," one dealer warns.

According to the International Monetary Fund, Zimbabwe is likely to run a public sector (budget) deficit of close to 50 per cent of its GDP this year. Financing this, economists say, at a time of sliding output, stagnant exports, increased food imports and maturing short-term offshore loans, will be hugely inflationary.

There are as yet few signs of any change of heart on the part of Mr Mugabe and his top advisers. "They are," says one businessman, "in bunker mode, convinced that someone or something is coming to rescue."