THE ZIMBABWEAN ECONOMY

BY GODFREY KANYENZE (Dr.), DIRECTOR OF LEDRIZ

CRISIS COALITION ZIMBABWEBRONTE HOTEL, 17 JUNE 2014

IntroductionSince independence in 1980, Zimbabwe has implemented no less than 14 economic blueprints:

Growth with Equity (1981);Transitional National Development Plan (1982-1985);First Five Year National Development Plan (1986-1990);Economic Structural Adjustment Programme (ESAP) (1991-1996);ZIMPREST (1996-2000);Millennium Economic Recovery Programme (MERP) , 2001-02; Ten Point Plan based on Agriculture (2002);National Economic Revival Programme (NERP) (2003);Macroeconomic Policy Framework (2005-2006);National Economic Development Priority Programme (NEDPP) (2007);Zimbabwe Economic Development Strategy (ZEDS) (2008)(aborted at Conception);Short Term Economic Recovery Programme (STERP I) (2009-10); Short Term Economic Recovery Programme (STERP II) (2010-12);Medium Term Plan (2011-15).

• Since ZIMPREST, the programmes became short-term as Government was grappling with an emerging crisis;

• MTP represents the return to medium term planning;

• Experience suggests that Government has been long on planning and short on implementation, with regular changes to the programmes, policy incoherence and inconsistency, and even reversals.

• With the adoption of Zim Asset after the July 2013 Harmonized Elections, the MTP has effectively been unilaterally abandoned in midstream;

• The rationale is that after the landslide victory by the ZANU PF Party in the 31st July 2013 harmonised elections, the Party was given the mandate to govern the country for a five (5) year term;

• Hence this is a party and not a national consultative position.

SOCIO-ECONOMIC OUTLOOK• Economic recovery since 2009 following a decade-long decline during 1999-

2008; a cumulative decline of at least 51%: (48% between 2000 and 2008), Zimbabwe declined from the 2nd largest economy in SADC to 11th.

• Economic stabilization and recovery anchored by the formation of the Inclusive Government in February 2009;

• The adoption of a multi-currency regime and cash budgeting, and discontinuation of the quasi-fiscal operations of the RBZ killed off hyperinflation and helped restore price stability;

• Following a cumulative decline of GDP of 46.5% between 1998-2008, GDP expanded by 25.2% during 2009-2011.

• Recovery in fiscal revenues from 3.1% of GDP in 2008 to an estimated 34% of GDP in 2012.

• Modest growth in overall investment from 2% of GDP in 2008 to 9% of GDP. Investment levels remain subdued with only few firms investing at very low levels - poor access to finance, while profitable investment is not taking place.

• Recovery anchored by mining and agriculture;

• Real average GDP growth of 8.5% during 2009-13;

• Recovery buoyed by the mineral sector, due to high global prices.

• The mining sector became the leading export sector, largely due to high mineral prices and expanded platinum, diamonds and gold output.

• Mining has surged to become the most dynamic sector, replacing the role of agriculture in the pre-crisis Zimbabwe.

• The average share of GDP of mining grew from an average 10.2% in the 1990s to an average 16.9% from 2009-2011.

• Strong external demand for primary commodities (in particular platinum and gold) supported higher production levels, which recovered the pre-2000 levels in terms of value.

• There has been a marked change in the structure of sectors.

• While in the past the mining sector was dominated by gold and small-scale production of over 40 minerals, it is now led by large platinum operations, with diamonds emerging quickly since 2010.

• Export recovery is driven by primary commodities such that of the export receipts of US$14.1 billion generated during the period 2009 to September 2013, US$9.2 billion (65.2%) emanated from the mining sector, with agriculture, horticulture and hunting weighing in with US$4 billion (28.3%) and the manufacturing sector contributed the balance of US$0.9 billion (6.4%).

• Implies primary commodities (mining and agriculture) accounted for 93.5% of export earnings during the period 2009-13.

Mining drives export recovery post-2009 (contribution to export growth - %) - one cylinder is firing (mining)

• In terms of mineral exports, the data shows a high concentration ratio, with the top 20 exporters accounting for 92.7 % of the sector’s export receipts.

• Mining exports are also concentrated on two commodities (platinum and diamonds), with the top five exporters contributing more than 60% of the export receipts (ZIMPLATS-platinum; Mimosa-diamonds; Mbada-diamonds; ZIMASCO-chrome; and Unki-diamonds), implying that the economy is more exposed to commodity cycles and is increasingly in a more capital-intensive mode.

• Potential for further output growth in gold, diamonds, nickel, ferrochrome and platinum and, and in the longer term, coal and iron ore.

• However, the economic rebound experienced since 2009 is moderating as growth declined from 11.4% in 2010 and 11.9% in 2011 to 10.6% in 2012 and a projected 3.4% in 2013 against a Medium-Term Plan (2011-15) target of 7.1%;

• Slow down in recovery due to a poor rain season, lack of capital, revenue under-performance, structural bottlenecks, including power challenges and deteriorating infrastructure, corruption and a volatile and fragile global financial environment.

Performance of the Zimbabwe Economy, Selected Economic Indicators, 1986-2012 (Periodical Annual

Averages)

Indicator 1986-90 1991-96 1997-08 2009-12 Real GDP Growth ( percent) 4.6 2.8 -4.3 7.5 Real GDP Per Capita ( percent) 1.4 -0.6 -3.6 15.7** Manufacturing/GDP ( percent) 20.6 21.1 13.5 15.7 Savings/GDP 16.5 17.8 6.3 -5.0 Investment/GDP (current prices) 16 21.7 10.6 15.8 Budget Deficit ( percent of GDP) -2.1 -5.8 -6.1 -3.9** Inflation ( percent) 11.8 26.6 19,255,755.00 0.8 BOP (US$m) - 73.5 -254.6 -1209.1 Trade balance (US$m) 267.7 75.2 25.8 -3799.2 Export Growth (%) 0.1 0.1 -4.7 26.5 Import cover (Months) 100% - 3.1 0.9 0.9 Real Wage Index –1990=100 93.5 73.5 59.7* - Formal Sector Employment 1,118,133 1,249,200 1,213,200* 1,192,900*** Employment Index – 1990=100 94.9 104.8 101.8* 100.1***

• In 2014, the economy is projected to grow by 6.1%, premised on an active Zim-Asset programme policy scenario anchored on strong recovery of agriculture and improved performance of mining and construction sectors.

• In 2014, agriculture is projected to grow by 9%, mainly driven by growth in maize (62.8%), cotton (27.8%), soya beans (26.7%), and groundnuts (56.8%), among other crops.

• The improved state of preparedness, sustainable planned financing arrangements and inputs availability, among others, will support the above anticipated growth.

• These growth projections are not in sync with global commodity trends and do not logically derive from the current situation analysis.

• In 2014, the mining sector is projected to grow by 11.4%, on the back of planned investments and largely driven by strong performance in gold, diamonds, nickel and coal.

• Again, projections are not in sync with projected commodity price trends.

Comparative GDP Figures (Source J. Wade 2014, CZI Breakfast Meeting)

ZEPARU 2014 15

South Africa393

Nigeria304

Egypt269

Angola135

Kenya52.2

Mozamb.17.2

Zimbabwe14.1Botswana

19.2Tanzania

34.9Zambia24.6

0

1

2

3

4

5

6

7

8

9

10

1 2 3 4 5 6 7 8

GD

P G

row

th

2014

(%

)

AvgGDP Growth 2011-13 (%)

AGGREGATE DEMAND SLOWDOWN (From Joseph Mverecha, 2014)

22

VAT1,437

Cus. & Exc.999

PAYE910.8

Co. Tax718

Non-Tax513.9

Mining387.9

Other 284.3

Zambia:

Total Revenue$5.24bnForeign$1,245m

VAT1,109

Cust. & Ex.880

PAYE765

Co. Tax382

Non-Tax296.0

Mining206.5

Other481.8

Zimbabwe:

Total Revenue$4.12bnForeign$0

Plus

1980-89 1990-99 2000-2008 2009-2013Personal 24.5 27.7 33.5 18.8Corporate 17.1 14.3 18.4 9.9VAT 17.1 17.8 22.6 33.2Excise 10.8 4.9 4.0 10.0Customs 13.3 17.9 8.8 13.7

Distribution of GDP by Industry - % (Periodical Averages: 1980-2012) (current prices)

Industry 1980-

90 1991-

96 1997-2008 2009 2010 2011

2012

Agriculture, Hunting and Fishing and Forestry 14.0 14.1 20.6 16.9 15.6 13.8 14.0

Mining and Quarrying 4.8 3.4 5.8 7.7 9.6 10.4 10.7

Manufacturing 21.4 21.1 13.5 15.5 15.7 15.9 15.6

Electricity and Water 2.2 2.8 3.4 4.5 4.8 4.9 4.7

Construction 3.1 2.5 1.6 0.5 0.8 0.8 0.8

Finance and Insurance 5.7 7.4 8.0 3.6 3.2 5.4 5.4

Real Estate 1.7 2.1 1.3 1.8 1.7 2.2 2.2

Distribution, Hotels, and Restaurants 14.2 16.6 16.6 10.0 9.9 8.5 8.4

Transport and Communication 6.1 5.4 6.7 13.9 12.2 12.2 12.4 Public Administration 6.3 4.6 4.3 3.0 3.9 3.6 3.6 Education 5.8 5.7 5.0 3.4 4.1 4.8 4.6

Health 1.6 1.4 2.0 1.4 1.4 1.5 1.5

Domestic Services 1.5 1.1 1.3 0.6 0.5 0.4 0.4

Other Services 4.6 3.7 4.6 4.8 4.7 4.4 4.4

Growth in Real GDP and Employment (1980-2012)

Sectorial Distribution of Employment, Selected Periods, 1980-2011

Sector/Year 1980 1985 1990 1995 2000 2004 2010 2011 Agriculture 32.4 26.3 24.3 26.9 26.3 19.3 32.2 28.9 Mining 6.6 5.2 4.3 4.8 3.6 3.5 3.3 3.8 Manufacturing 15.8 16.1 16.5 15 14.7 14.5 12.1 11.6 Electricity & Water 0.7 0.7 0.7 0.8 0.9 1.2 1.4 1.4 Construction 4.2 4.3 6.4 5.8 4.3 4.2 1.7 1.8 Financial Services & Real Estate 1.2 1.5 1.5 1.7 2.8 3.1 5.7 6.1 Distribution 7.0 7.4 8.1 8.1 8.4 12.3 6.7 6.2 Transport & Communication 4.5 4.8 4.5 4.1 3.5 4.5 2.7 2.6 Public Administration 7.0 8.6 7.8 6.2 4.7 7.6 7.9 8.7 Education 4.1 8.5 9.1 9.3 11.3 10.0 10.1 11.7 Health 1.5 1.9 2.1 2.1 2.3 2.5 3.9 4.3 Private Domestic Services 10.7 9.4 8.6 8.2 8.3 9.6 8.1 7.8 Other 4.3 5.5 6.2 6.9 9.0 7.6 4.2 5.0 Total 100 100 100 100 100 100 100 100

Major Capacity Constraints (CZI Surveys)

Factor-floor productivity and unit labor costs remain competitive, but the sector is hampered by high cost of business (World Bank, 2012)

Trade

• Total exports for the period January to October 2013 stood at US$2.8 billion, against US$3.2 billion realised during the same period in 2012.

• By the end of 2013, exports are projected to reach US$4.430 billion. Projected at US$5 billion in 2014.

• Imports continue to grow faster than exports, totalling US$6.6 billion by October 2013, against US$6.1 billion realised during the same period in 2012.

• Total imports for 2013 projected at US$7.682 billion, while forecast at US$8.321 billion in 2014.

• As a result of the fast growth in imports against the sluggish growth in exports, the current account deficit continues to widen to US$3.8 billion, above the original projected deficit of US$2.5 billion for 2013.

• A competitiveness gap is emerging: - Appreciation of the real exchange rate suggests that the price structure of the economy has shifted against tradable products.

• The distribution sector has filled the gap , supplying imported goods, keeping prices of tradables at low levels and contributing to a current account deficit.

• Contributing to the continued de-industrialisation in the economy.

• Short-term protectionist measures could lead to short-term gains at the expense of medium-term recovery.

• Measures aimed at reducing costs of business (including reducing the country risk premium to facilitate access to finance), and supporting public services (energy, water, transportation) are more likely to be effective in the medium-term.

• Stronger policies in mining and agricultural sectors would also stimulate international demand for manufactured goods and the establishment of new horizontal and vertical linkages with the manufacturing sector.

Exports & Imports Surge Post-2009

Current Account Balance (Proj.)

Exports by Destination

Imports from South Africa surge

Export portfolio is less diversified

Zimbabwe’s falling diversification contrasts starkly with other African countries

Increasing dominance of resource-intensive exports

Cost of Exporting & Importing a Container, 2013

Receipts from Tourism

• Official Development Assistance (ODA) inflows for the period January to September 2013, amounted to US$259.1 million against a combined annual projection of US$642.7 million.

• In 2013, support under ODA was largely channeled towards humanitarian and social programmes in agriculture, health, education, social protection, and governance sectors.

• The disbursement rate as at end June 2013 was 26.9% – a significant decrease from the 2012 disbursement rate of 52% for the period under review.

• Official Development Assistance for 2014 is projected at US$580.3 million in support of humanitarian and social programmes in agriculture, health, education, social protection and governance sectors.

Trends in Grants-to-GDP Ratio, 1980-2013 (%)

Average Annual IMF Disbursements (US$M)

Average Annual World Bank Disbursements (US$M)

0

20

40

60

80

100

120

1984-1989 1990-1999 2000-2006

US

$ M

Average Annual AfDB Disbursements

0

10

20

30

40

50

60

70

1984-1989 1990-1999 2000-2006

US

$ M

Net Capital Flows (US$M)

-200

-100

0

100

200

300

400

1970-1979 1980-1989 1990-1999 2000-2006

Ba

lan

ce

s (

US

$ M

illi

on

s)

Year

External Loan Inflows (US$M)

0

50

100

150

200

250

300

350

400

450

500

1980s 1990s 2000-2006

US

$ M

illio

ns

Grant Inflows

0

20

40

60

80

100

120

140

1980s 1990s 2000-2006

US

$ M

illio

ns

Negligible reserves heighten vulnerabilities. •Low external reserves and lack of a lender-of-last-resort mean Zimbabwe faces downside risks with minimal buffers.

•With usable international reserves covering only 6 days of imports by end of December 2013, the country has no cushion against external shocks.

•At least three months of imports in reserve coverage is deemed necessary.

Unsustainable expenditure mix• Unbudgeted for adjustments of January and July 2011 saw the employment costs

rise from 45% of the budget in 2009 and 2010 to unsustainable levels of 63% in 2011 and 69% in 2013, crowding out public investment and service delivery.

• Implies 69% of the national budget and taxes is used to engage civil servants which account for less than 3% of the population.

• The Wage Bill at 75% of the 2013 Budget continues to account for a disproportionate share of overall budget expenditures.

• The disproportionate share of the wage bill in the total Budget implies that we are only living under 25% of Budget resources for both Operations and the Capital Budget.

• Yet the Medium Term Plan (2011-15) (MTP) singled out infrastructure rehabilitation and expansion as the foundation for economic growth and development.

• Resource envelop of US$2 billion a year over a 5-year period is required.

• A cash deficit emerged since 2010 financed mainly by SDR sales and non-concessional loans.

• For the whole year (2013), total revenue collections are now estimated at about US$3.72 billion, which is below the original budget estimate of US$3.86 billion.

• Results in revenue projection shortfall of about US$140 million.

• Cumulative expenditures to November 2013 amounted to US$3.526 billion against a target of US$3.396 billion, resulting in expenditure overrun of US$130 million.

• For the period to November 2013, employment costs amounted to US$2.429 billion accounting for 68.9% of total expenditure, against a target of US$2.284 billion giving an overrun of US$145 million.

• During the period under review, operations and maintenance amounted to US$744 million, accounting for 21.1% of total expenditures, against a target of US$601 million giving an over-expenditure of US$143 million.

• The expenditure overrun was mainly necessitated by the Constitutional Referendum and Harmonised General Elections at US$178.4 million, outstanding obligations for the holding of the 2012 National Census US$12.4 million, and hosting of the UNWTO Conference, US$7.6 million.

• Investment is hampered by a poor business climate, uncertainties over the implementation of the indigenization policy, and political uncertainty, while domestic investors may face difficulties accessing long-term credit.

• At US$10.7 billion (77% of which are arrears), Zimbabwe’s external public debt is unsustainable;

• In fact, Zimbabwe is in debt distress with debt accounting for 88% of GDP at end-2012- is likely to worsen further as resolving external payments arrears through a comprehensive arrears clearance framework underpinned by strong macroeconomic framework is likely to be a protracted process;

• Non-concessional borrowing could complicate future external arrears clearance;

• Debt overhang remains a serious impediment to macroeconomic stability, sustainable growth and development;

• Zimbabwe faces these risks with thin buffers – foreign exchange reserves are very low at 0.3 months of imports at end-2011 against a minimum level of 3 months;

• Based on rebound effects and in the absence of strong policies to promote growth, recovery is therefore fragile.

FDI Inflows

FDI Inflows

Foreign Direct Investment Inflows (US$M)

0

10

20

30

40

50

60

70

80

90

100

1980s 1990s 2000-2006

US

$ M

illio

ns

Inward FDI Flows into SADC Countries, US$m2009 2010 2011 2012

Botswana 128.8 -6.1 413.6 292.5Lesotho 99.9 113.7 132.1 172.3Malawi 49.1 97 128.8 129.5Mozambique 892.5 1017.9 2662.8 5218.1Namibia 522.1 793 816 357.5South Africa 5365.4 1228.3 6004.3 4572.5Swaziland 65.7 135.6 93.2 89.6Zambia 694.8 1729.3 1108 1066Zimbabwe 105 165.9 387 399.5Source: UNCTAD 2013 Investment Report.

FDI By Country………Brazil & India

Competitiveness, Ease of Doing Business etc…World Economic Forum (WEF) Global Competitiveness Rankings

World Bank (WB) Ease of Doing Business Rankings

World Economic Forum (WEF) Global Enabling Trade Rankings

Heritage Foundation Index of Economic Freedom

Transparency International Corruption Perception Index

2007/08 129 / 131 154 / 183 150 / 179

2008/09 118 / 121 160 / 183 112 / 118 145 / 147 166 / 180

2009/10 132 / 134 156 / 183 118 / 121 175 / 179 146 / 180

2010/11 136 / 139 157 / 183 122 / 125 178 / 179 134 / 178

2011/12 132 / 142 170 / 183 - 175/177 154/183

2012/13 132/144 172/185 129//132 175/184 163/176

2013/14 131/148 170/189 176/178 (repressed since 1995)

157/177

Deteriorating international competitiveness with a ranking of 132 out of 144 countries on the Global Competitiveness Index (2012/13).

Strength in terms of ‘soft factors’ such as female participation in labour force, reliance on professional management, quality of education system, low inflation, protection of minority shareholders and taxation, that however have low weighting in enhancing competitiveness (ranked 61st).

Low ranking in ‘hard factors’ such as national savings, breadth of value chains, property rights observance, venture capital availability, quality of electricity supply, number of days to start a business and soundness of banks whose presence or lack thereof determines the level of an economy’s competitiveness (rank ranged from 135 to 143).

The Global Competitiveness Report (2012/13) survey also came up with six most challenging factors for doing business in Zimbabwe.

As with the 2012 CZI Manufacturing Survey, the factors undermining doing business in Zimbabwe were policy instability, lack of funding, corruption, inefficient government bureaucracy and inadequate infrastructure.

“Surprises, however, arise not from the rankings, but rather from the policy disconnect; specifically the unwillingness of policymakers to tackle the challenges identified, opting rather to focus on soft factors which do not necessarily add value in lifting competitiveness rankings.”

Zimbabwe’s competitiveness — Action points - Message from Davos 2013

• Austerity measures with regard to the Zimbabwean case relate mainly to management of the wage bill and allocation of resources focusing on capital formation.

• Policymakers may also work on innovation and technological advancement rankings, especially in upgrading industry equipment as Zimbabwe declined from 119 in 2011 to 128 in 2012.

• The direction of the movement is worrisome with de-industrialisation of the economy, implying a slipping backwards in structural terms.

Topic Rankings DB 2014 Rank DB 2013 RankDB 2012

Rank

Change in Rank (2014 v

2013)

Starting a Business 150 143 145 -7

Dealing with Construction Permits

170 170 169 0

Getting Electricity 157 157 165 0

Registering Property 93 85 84 -8

Getting Credit 109 129 127 +20

Protecting Investors 128 128 124 0

Paying Taxes 142 134 127 -8

Trading Across Borders 167 167 172 0

Enforcing Contracts 118 111 112 -7

Resolving Insolvency 156 169 155 +13

Zimbabwe’s Services Policy Among the Restrictive (Services Trade Restrictiveness Index)

Price of mobile call per minute (Average/Mean, US$, 2011

Average price of 1 MB of 3G broadband, 2011

External Debt• Resolution of Zimbabwe’s debt overhang is key to normalising our relations with

the international financial institutions and bilateral creditors. Somalia, Sudan and Zimbabwe are the only three African countries with arrears to the international financial community. Zimbabwe is regarded as a fragile state.

• One of the serious impediments to the country’s developmental agenda.

• Continued accumulation of external debt payment arrears is seriously undermining the country’s creditworthiness, and severely compromising the country’s ability to secure new financing from both bilateral and multilateral sources.

• In November 2010 Government approved the Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy (ZAADDS), as a basis for negotiating the clearance of arrears and debt relief for the country.

• The key tenets of ZAADDS are as follows: (i) the establishment and operationalisation of a Debt Management Office in the Ministry of Finance; (ii) undertaking a validation and reconciliation exercise of Zimbabwe’s public and publicly guaranteed external debt database with all creditors; (iii) negotiating with creditors and the Development Partners for arrears clearance, debt relief and new financing; and (iv) leveraging Zimbabwe’s natural resources in pursuit of debt relief.

• The Zimbabwe Aid and Debt Management Office (ZADMO) was established in December 2010, in the Ministry of Finance.

• The validation and reconciliation exercise of the external debt data base which commenced in 2011 has now been completed.

• Total external public and publicly guaranteed debt (excluding Reserve Bank and private sector external debt) as at 31 December 2012, stood at US$6.077 billion, (49% of GDP).

• The stock of accumulated arrears accounted for US$4.72 billion (78 per cent of total debt stock).

• Total multilateral debt stock as at 31 December 2012, stood at US$2.49 billion (41% of total debt), of which arrears amounted to US$1.96 billion.

• The breakdown of the arrears is as follows: World Bank, US$1.4 billion; African Development Bank, US$632 million; European Investment Bank, US$302 million; International Monetary Fund, US$125 million; and Other multilateral creditors, US$117 million.

• Total external debt to bilateral creditors stood at US$3.59 billion (59% of total debt), of which the stock of arrears amounted to US$2.75 billion or 77%.

• Of the total bilateral debt, as at 31 December 2012, US$3.02 billion is owed to the Bilateral Paris Club creditors, and US$572 million to the Non-Paris Club creditors which include China.

• Of the total external debt amounting to US$6.077 billion, penalty charges accounted for US$1.026 billion (17% of total external debt).

Structural Changes in the Economy• Informalisation of the economy and, the structural change in

agriculture in view of land reform. The reallocation of jobs across sectors is central to the process of structural change and productivity upgrading.

• Growth in labour productivity arises either from changes in labour productivity within sectors – for instance through the implementation of new machines and innovative technologies that allow more output with the same amount of labour input – or from the reallocation of jobs across sectors (“structural change”) when workers move from low- to high-productivity sectors (e.g. from agriculture to industry or services);

• At the same time, structural change is central and necessary to increase living standards durably and equitably by allowing ever more people to benefit from higher productivity levels in more advanced parts of the economy.

• Structural change is the most effective driver of growth to bring down rates of vulnerable employment in developing economies, both in the short and in the long run.

• It is the across-sector labour productivity component of growth that is associated strongest with the speed at which vulnerable employment decreases, compared with other growth components.

• Zimbabwe is experiencing a structural regression: increasing dependence on natural resources, de-industrialisation; informalisation (84% of employment; 85% of MSMEs).

• The Finscope Survey Report of 2011 revealed that 40% of the population is financially excluded and that only 24% is banked.

• In addition, only 13% of the population uses savings products - in excess of US$2 billion circulating outside the formal banking system.

• The share of the manufacturing sector in GDP peaked at 26.9 per cent in 1992 before collapsing to 7.2 per cent by 2002 and 10.8 per cent by 2003, 15.5 per cent by 2009, 15.9 per cent (2011) and 15.6 per cent by 2012.

• Industrial capacity utilization declined sharply from 35.8% in 2005 to only 18.9% by 2007, and below 10% by 2008, before improving to 33% in 2009, 43.7% in 2010, 57.2% in 2011, and climbing down to 44.2% in 2012 and 39.6% in 2013.

Inequality and Poverty

• High levels of unemployment and decent work deficits: 72% of the population below the poverty line by 2003, up from 55% in 1995;

• The Poverty, Income, Consumption and Expenditure Survey (PICES) 2011/12 Report suggests that 62.6% of Zimbabwean households are poor whilst 16.2% are in extreme poverty (76% of rural households are poor compared to 38.2% in urban areas), up from 42% of households in 1995 and the same level of 63% of 2003;

• 77% of the employed persons in Zimbabwe earn gross monthly primary incomes of less than US$350 compared to the Poverty Datum Line (PDL) of US$514.24 for a family of five in 2011, resulting in households selling financial assets more than they were buying them (dissaving) to fund current expenditures since incomes fell short of current consumption expenditures.

• Per capita GDP declined from US$720 during 1997-2002 to US$265 by 2008, rising to US$370 by 2012;

• Growing informalization as reflected by the increase in informal employment from 80% in 2004 to 84% in 2011;

• Inequality worsened: the gini-coefficient increased from 0.53 in 1995 to 0.61 in 2003;

• The disappearance of a middle class: the ‘missing middle’;

• The results of the 2011 FinScope Survey launched in May 2012 revealed that only 38% of Zimbabweans are served by formal financial institutions; and that 40% of the population is financially excluded from both the formal and informal financial products/services;

• HIV and AIDS (adult prevalence rate of 15.9%) & the re-emergence of diseases that had been controlled (malaria, TB, cholera).

Poverty Situation in Zimbabwe, 1995, 2003 and 2011: PASS I & II, and PICES (2011/12).

Persons living below the: 1995 2003

2011

Food Poverty Line 29 % of Population 58% of Population

20% of Households 48% of Households 16.2% of households

Total Consumption Poverty Line

55% of Population 72% of Population

42% of Households 63% of Households 62.6% of households

Indicator 1990 2000 2006-08 2011

Human Development Index (Rank)

121 128 151 173

Human Poverty Index (Rank) 60 91

Net Primary School Enrolment (%)

99 82

Adult Literacy 67 89 89 92

Infant Mortality (per 1 000) 61 73 81 90

Maternal Mortality Rate (per 100 000 births)

330 700 880 960

Life Expectancy (Years) 63 43 41 51.4

Population Using Improved Water (%)

78 85 81 75.8

GDP per Capita US$644

US$338 376

Poverty Rate 42% Over 70%

72

Brain Drain Over 3m

Zimbabwe’s HDI trends based on consistent time series data

Life expectancy at birth

Expected years of schooling

Mean years of schooling

GNI per capita (2005 PPP$) HDI value

1980 59.2 6.5 3.2 0,585 0.367 1985 61.5 11.4 4 0,593 0.426 1990 60.6 10.1 4.5 0,622 0.427 1995 53.1 10.1 5.5 0,582 0.408 2000 44.7 10.1 5.9 0,604 0.376 2005 44 10.1 6.7 0,412 0.352 2010 50 10.1 7.2 0,373 0.374 2011 51.4 10.1 7.2 0,404 0.387 2012 52.7 10.1 7.2 0,424 0.397

Budgetary Allocations for Health, Education, Defense and Social Protection, 1980-2013 (Percentage of Total

Expenditures)

Key Economic Challenges (2014 Budget Statement)

• High consumption, leading to negative domestic savings and, hence, exposing the country to rely on external savings;

• Liquidity constraint reflected in declining money supply growth, low financial intermediation and resulting in weak aggregate demand;

• High debt overhang resulting in limited and highly priced lines of credit;

• Limited external inflows in the form of foreign direct investment, lines of credit and grants linked to high country risk premium resulting in low confidence by investors;

• Food insecurity owing to low productivity, low investment, as well as climate change induced droughts and erratic rainfall distribution pattern;

• Lack of industry competiveness due to obsolete equipment and out-dated technology as well as dumping and smuggling imposing unfair playing field with external competitors;

• Infrastructure deficits, in particular transport, energy and water, resulting in high cost of doing business and, hence, lack of competitiveness;

• Financial sector vulnerabilities stemming from weak governance, low interbank market activity, high non-performing loans (15.9% on average), low capitalisation and poor asset quality in several banks;

• Lack of transparency and accountability in the exploitation of our mineral resources;

• Widening current account deficit due to faster growth of imports than exports leading to haemorrhaging of the economy.

Way Forward: Unchanged Policies (Business as usual) Scenario

• The economic rebound is projected to moderate up to 2017;

• Compared to other African countries, the Zimbabwean economy remains highly differentiated, with a broad-based potential for recovery in all sectors, from mining to agriculture, manufacturing and services.

• In this current phase of recovery, the mining sector is emerging as the main sector capable of autonomous growth.

• The restructured agricultural sector also has potential of supply-response to improved conditions, as well as tourism.

• However, growth in the manufacturing sector appears more dependent on the internal demand generated by the two main driving sectors (agriculture and mining).

• Hence, the quality of policy in the mining and agricultural sector will in the main be the major determinants of the rate of growth of the economy.

Schematic illustration of linkages in the post-crisis Zimbabwean economy (World Bank, 2012)

• The externally driven recovery of mining growth, based on the intensity of external demand, is evident from the dynamics of the recovery, which started around 2005 with the development of big operations in platinum, while the economy was still in the midst of economic turmoil.

• In spite of the strong recovery, the mining sector has not yet recovered the pre-crisis peak-volumes due to unfavorable legal and taxation regimes that stunt levels of investment.

• Thus, the baseline scenario (unchanged policies) estimates that level of exports in the mining sector will reach US$ 5 billion in 2018, below the potential of existing projects.

• Stronger policies in the mining and agricultural sector will ultimately have positive downstream effects on the manufacturing sector, and on services.

• Furthermore, development of mining’s potential requires transfer of technology and FDI, both in the medium-term, and the longer-term (to support the process of discovery).

• Without stronger policies, recovery of the mining sector may remain stunted and limited to a temporary rebound due to stronger external demand, with limited permanent downstream effects on the rest of the economy.

• Besides, an approach seized with short-term maximization of rents-extraction from temporary favorable external conditions may present adverse effects on the country’s overall competitiveness and lead to worsening of economic governance.

• Hence Zimbabwe is at risk of sliding into the resource curse.

• Zimbabwe’s manufacturing sector remains one of the most diversified in Sub-Saharan African, albeit with very limited entry of new firms following the 2009 stabilization.

• The remaining large firms in the sector, the ‘survivors,’ rely on imported inputs that used to be sourced mostly locally.

• Their current stress levels are extremely high and are suffering more from supply-side than demand-side constraints to capacity utilization.

• Lack of competitiveness stems mainly from the consequence of the decade-long crisis, and hyperinflation - Firms are operating obsolete machinery, there is limited availability and high cost finance, power outages, higher input costs due to loss of domestic linkages, lack of access to exports markets due to unreliable supply-chain, and overall uncertainty.

• A sustained supply-response requires development of infrastructure, in particular energy sources and a sound management of water.

• In the absence of policy reforms, fiscal revenue growth will stagnate; and expenditure will be heavily tilted towards employment costs;

• The resulting cash balance will fail to provide appropriate buffers against external shocks; and

• Despite the stabilization of the current account, external debt will remain unsustainable.

Sustaining Pro-poor Growth, Restoring Sustainability: Active Policies Scenario

Sustaining growth requires a commitment to reform: ‘business-as-usual’ will not work.

Active policies (reforms) are needed to raise competitiveness, underpin confidence, reduce vulnerabilities, and unleash pro-poor and inclusive growth, especially targeting agriculture.

This entails dealing with the most binding constraints to growth (doing business reforms) and rebuilding and strengthening commodity value chains and cluster initiatives to facilitate pro-poor and inclusive growth.

• Stronger policies can turn the mining sector into the turnkey for longer-term sustainable development.

• Mineral windfalls can mitigate external vulnerability, facilitate infrastructure investment, higher domestic saving, reduced banking sector vulnerability, and lower cost of capital for investment in the manufacturing and agricultural sectors.

• According to a World Bank study (McMahon et. Al, 2012), under improved business conditions where all major bottlenecks, including infrastructural, are removed by 2018, existing mining projects could absorb up to US$12 billion of investment by 2018, with an export potential of more than US$11 billion per year.

• Development of the agricultural sector is critical to achieving long-term broad-based growth.

• Hence higher productivity in agriculture can leverage a broad-based process of economic transformation and long-term growth with agriculture resuming its role as a supplier of savings, labour, and inputs to other sectors, and contributing to food security and exports.

• In the context of dollarization, liberalization and high international prices of commodities, the new agricultural structure with many smaller farms presents a high potential for long-term growth and employment creation

• Apart from favorable incentives, the supply response needs to be supported by agricultural services and technical change.

• In addition to maintaining the strong improvement of incentives since 2009, policy-makers should also pay attention to improving competition in input and output markets, contract farming, rehabilitation of infrastructure and agro-processing facilities, resolution of remaining uncertainties regarding land tenure and resolution of conflict on land rights.

Strengthening the macroeconomic framework, start rebuilding reserves, and implement key structural reforms.

Regulation and supervision of the banking system to deal with financial sector vulnerabilities is necessary.

Finalization of RBZ restructuring is critical as well as restoring the lender-of-last resort function as highlighted in the 2014 budget.

Strengthening fiscal management and improving the expenditure mix: Better planning and control of spending and more transparency on diamond revenues to avoid slippages that necessitate large mid-term budget reviews.

The spending mix is unsustainable, with employment costs taking up a very large share of government resources. Over the medium term, containing wage bill growth would create fiscal space to improve public services, raise infrastructure investment, and build buffers.

Improve public financial management (PFM). The government should reinforce expenditure control, and strengthen the human resources and payroll management system to help contain the wage bill.

Other key reforms to restore fiscal sustainability include improving financial monitoring and oversight, strengthening the governance of public enterprises, and developing a medium-term expenditure framework.

Addressing structural bottlenecks such as the rehabilitation and expansion of power stations, rehabilitation and construction of road networks, and upgrades to water and sewer infrastructure.

Restructuring of Public Enterprises: Issue has been on the policy agenda since ESAP.

The 2013 restructuring programme focused on 18 public enterprises identified by Cabinet which are also in the Mid-Term Plan. No progress recorded.

The public enterprise and parastatal reforms also target the implementation of Results-Based Management (RBM) which entails concluding performance agreements between the responsible Minister and the parastatal Boards, who in turn will establish performance contracts with Chief Executive Officers of public enterprises.

Zimbabwe’s debt overhang remains an impediment to medium-term fiscal and external sustainability.A debt-resolution strategy is therefore critical to resolving external payment arrears and re-engaging the international community to unlock international credit lines.

Addressing this issue will require a comprehensive arrears clearance framework underpinned by a strong macro policy framework.

DEBT RELIEF through the Zimbabwe Accelerated Arrears Clearance Debt Development Strategy (ZAADS) of March 2012 to deepen engagement with both creditors and development partners;

Being implemented through the Zimbabwe Accelerated Re-engagement Economic Programme (ZAREP) which will contain detailed policy measures to be agreed with the multi-lateral institutions based on:•The establishment of a good track record of implementing sound macro-economic policies (Staff Monitored Programme), giving scope for unlocking new financing;•Containing and managing the public sector wage bill to sustainable levels; and•Securing strong support from development partners for arrears clearance and debt relief, including closing the financing gap in support of sustained and inclusive economic growth.

Commendable progress has been made in operationalizing the Debt Management Office (DMO), which has been reconciling and validating debt data with creditors with the assistance of UNCTAD and MEFMI.

Need for a Social Contract & Implementation of Agreed Positions:

In view of the trade-offs in policies (e.g. containment and reduction of the share of revenues taken up by employment costs), there is need for Zimbabwe to negotiate and implement a Social Contract.

A Social Contract helps restore good faith (trust) amongst the social partners; make them accountable to each other; help parties subordinate sectarian interests to national interests; develop and share a common vision; and inculcate a smart-partnership win-win mind-set.

Furthermore, there is an urgent need to implement the agreed TNF protocols such as the Kadoma Declaration, the Principles of the TNF and the National Productivity Institute launched in February 2003 to spearhead the promotion of a culture of productivity.

According to the IMF, if corrective measures are implemented, given the same trajectories for commodity prices, ...•the economy is projected to grow faster, driven by higher FDIs and a better business environment;

•Fiscal revenues will strengthen and a more balanced expenditure mix will be achieved;

•The positive cash balance will provide a greater reserve buffer against external shocks; and

•The economy will have a smaller debt stock.

•CASE STUDY OF THE MINING SECTOR DRAWN FROM: ZIMBABWE: From Economic Rebound to Sustained Growth•GROWTH RECOVERY NOTES•NOTE IV: ZIMBABWE CURRENT POTENTIAL FOR MINING GROWTH•December 2012•Gary McMahon (World Bank); Rene Hochreiter and Robinn Yale Kearney (Allan Hochreiter) and Brandon Tracy (World Bank)

• Forecast 2018 production of gold in the current policy framework is 957,000 ounces; but could rise be 2,648,000 ounces with more investment stability.

• Employment in the gold sector is estimated at 8,600; but could rise to 15,200 in 2018 in the current policy framework or 27,600 in the more investor friendly framework.

• With respect to the kimberlite diamond mine at Murowa, production in 2011 was 367,000 carats and expected production in 2012 is 565,000 carats. With no major investment, production is expected to remain at the level of 565,000 carats by 2018. In more favorable policy conditions, an investment of US$100 million could result in production of 1 million carats per year. Employment would then increase from 433 to 800 persons. Investment in the sector is expected to reduce operating costs from about US$100 per carat to US$60 per carat.

• From the four ZMDC controlled mines in Marange, production in 2011 was 9 million carats and expected production in 2012 is 11 million carats. [The value of these alluvial diamonds is much less on average than in the kimberlite pipes, averaging about 25 percent of the value per carat. However, operating costs are also very low at about US$4 per carat.]

• Production is expected to peak at 12 million carats over the next few years, and an investment of US$150 million could increase production to 15.2 million carats per year by 2018.

• Employment in the Marange area is about 1,000 persons and expected to remain at that level.

• In the optimistic case where policies are more investor friendly and there are significant infrastructure improvements, using average 2011 prices, by 2018 gross revenues and fiscal revenues of the mining sector increase by 309% and 344%, respectively, compared to 2011.

• The increase in gross and fiscal revenues compared to the base case projections for 2018 are 119% and 112%, respectively.

• There are increases across the board, with the most important new developments being the large expansions in gold and coal mining and the opening of the iron ore mine.

• The gold sector is projected to provide almost half of fiscal revenues from the mining sector.

• Projected employment is 56,200, excluding artisanal miners. • Projected investment over the period is nearly US$12 billion,

dominated by coal.• Once what is in the ground is known, three main factors can

enhance or constrain the development of a mine: (i) availability of transport infrastructure, (ii) access to power, and (iii) the policy and fiscal regime impacting the mining sector.

• Most of Zimbabwe’s mineral output is of the high value per volume type and hence is not greatly affected by the general lack of or poorly maintained transport infrastructure, particularly rail and access to adequate port facilities.

• Diamonds, gold, platinum, and ferro-chrome can all easily be flown out or taken by road at low costs relative to value. The only bulk commodity being produced is coal, most of which is consumed locally.

• While historically human capital has not been a major constraint, as missing skills could be imported, given the global mining boom, there are severe shortages developing around the globe and Zimbabwe could be

• Affected if its mining sector had a major boom beyond rehabilitating what currently exists.

• A recent survey placed the global mining skills shortage second after resource nationalism as major constraints facing the mining industry.

• If the coal and iron ore mines are producing in 2018, as in the optimistic scenario, the situation will change radically: there will be a need for both rail links and access to ports and a satisfactory road network.

Transport Infrastructure•The quality and capacity of infrastructure has declined tremendously in Zimbabwe since 1995 due to low levels of maintenance and little investment in new infrastructure. •It is estimated that to rehabilitate the existing road and rail network would require about US$4 billion.•The main new investments would be railway of approximately 250 km from the Sengwa coal field, at a cost of approximately US$750 million, and smaller lines linking the Lubimbi coal field and the iron ore deposits in the east to existing lines.Access to Power•According to the African Development Bank (2011) report, the situation in the power sector may be even more dire than in transport infrastructure.•The Chamber of Mines of Zimbabwe reports that average power prices from the grid recently became the region’s highest tariffs at 10.6 cents/kWh, almost double the average of its neighbours.•Mining operations are paying on average 17 cents/kWh.•Full rehabilitation of the public system from 2011-2020 would cost about US$2.2 billion and another US$2.1 billion of private investment in the power sector would be needed in order to provide the country adequate power by the end of the decade. •These estimates do not include a large expansion in mining operations, as projected in the optimistic scenario.

Mining Sector Policies and Fiscal Regime•Economic and political instability aside, the policy aspects of Zimbabwe’s mining sector, including taxes, were considered favorable by international standards.

•The present Mines and Mineral Act is considered satisfactory by mining operators as was the fiscal regime.

•A new draft Act has been produced, which is also considered satisfactory but it has not been tabled, leading to uncertainty in the sector.

•However, royalties have been increased substantially recently as well as various fees associated with exploration and exploitation.

•While most of these fees are bearable for an operating mine, they are not for exploration companies where no income is forthcoming.

•What little exploration that is taking place will mostly be scared off if these fees, which are likely the highest in the world, are not reduced. Newcomers are unlikely to come in.

• The biggest uncertainty concerns the policy of indigenization, where foreigners must cede at least 51% of a mining operation to indigenous persons.

• While for existing operations, the owners have been making different deals with the Government as how to make the transfer, very little of this 51% is going to be paid for with cash upfront.

• Except for very lucrative known deposits, it is unlikely that new greenfield investments or major expansions are likely will take place.

• In the base case scenario, the expansion is mainly due to revitalization of many gold operations in response to the continued very high prices, the recapitalization of Hwange, the reopening of the nickel mine, and the increase in diamond production at Marange.

• The policy uncertainty and political instability are freezing-out on new exploration with the exception of diamonds and some known deposits.

• In the 2011-12 Fraser Institute survey of mining companies, Zimbabwe was ranked 73 out of 93 jurisdictions with respect to policy attractiveness for exploration; before the indigenization policy was implemented.

• When prices remained at very high levels and tax receipts often did not follow suit, this has witnessed increased resource nationalism in which ‘softer’ countries are demanding revised contracts with higher tax rates and ‘harder’ countries are demanding partial ownership of operations, or some combination of both.

Mining Linkages•There are three main forms of linkages from the mining industry: backward, forward, and horizontal (or sideways).•For low and low-middle income countries, the third linkage has the potential to be the most important. •While there are opportunities in surveying and related fields for backward linkages, the main activities and expenditure are on sophisticated large equipment and plant installations. •There are also some forward linkages through refining and beneficiation in general, but again the main activities are the manufactured goods that use steel, aluminum, nickel, etc., dominated by sophisticated and/or low cost economies.•Most of these opportunities are not be taken advantage of in a low-income or low middleincome country without an active effort by the government, the mining companies, and the local business community. •Industrial mining operations tend to rely heavily on long-established contacts abroad and buy in bulk, particularly those with operations in several countries. •Domestic businesses are often not capable of providing the quality that these operations need.•The level of employment created through domestic procurement is often far higher than employment in the mines themselves: a study of the Newmont gold mine at Ahafo in Ghana found 2.8 direct supplier jobs for each mining job.

• McMahon and Tracy (2012) estimate that the Kansanshi copper mine in Zambia creates about 3.5 jobs in mine supplier companies for every job in the mine.

• These figures do not include employment in ‘supplier of suppliers’ or standard multiplier impacts of the expenditures of the employees or owners of these firms.

• Countries (such as Chile), that has increased domestic procurement by mining companies across the board, have made directed efforts to increase the capacity of domestic firms to meet the high standards demanded by mining companies, introduced training programs to increase the relevant skills of the labour force, and built adequate infrastructure so local companies can be competitive.

• Zimbabwe has put considerable emphasis on increasing the downstream value added of its mineral production, although outside of platinum, ferrochrome, and tolling of nickel from Botswana, beneficiation has been rather limited.

• Processing of gold and diamonds into jewelry is not taking place in the country to any significant extent.

• While historically, Zimbabwe had very strong institutions in developing the human capital for some of the ‘capital light’ upstream industries—e.g. geologists, surveying, mineral analysis—more and more the country is relying on external agents for such activities given the drain of human capital in the industry and the almost total deterioration of tertiary level schooling in the area.

• The geology department at the University of Zimbabwe, for example, currently has one permanent member of staff and one contract staff member versus the 24 staff that the curricula calls for (Chamber of Mines, 2012).

• While information is limited, it seems likely that historically Zimbabwe fared better with respect to domestic procurement of the mining industry than most Sub-Saharan African countries other than the Republic of South Africa due to its stronger industrial base and better infrastructure.

• In 2009 the Chamber of Mines estimated that local procurement was US$150 million and projected an increase to US$300 million in 2010.

• Zimplats and Mimosa, who combined were likely the largest input purchasers in the Zimbabwean mining industry in 2011, reported an increase in local procurement from 20% of the total to 40% from 2010 to 2011 (Implats 2012).

• The strategy followed by these two companies includes:• -- “Toll manufacturing of products such as protective clothing, roof ‐

support and bulk bags;• -- Encouraging local suppliers to partner with foreign OEMs who offer ‐

specialized backup service;• -- Outsourcing of non-core business activities to local suppliers;‐• -- Working as guarantor for credible local suppliers to bankers; and‐• -- Working with suppliers to support the government’s look east policy.”‐• Ian Saunders of New Dawn, one of the larger gold mines, notes that while

most of their every day consumables are procured locally, he estimates that about 5% are actually produced locally.

• The issue of horizontal linkages or domestic procurement is likely to be a key issue in Zimbabwe in the near future as it is in most mining countries.

• Once the worst aspects of the economic crisis in Zimbabwe had passed, the mining sector quickly moved to its historic position of a leading producer and generator of foreign exchange and fiscal revenues in Zimbabwe.

• Due to the economic and political instability, the country was not able to take anywhere near full advantage of the global boom in mining prices.

• However, while prices are moving lower (excluding gold and diamonds), they are still well above historic trends for most commodities, so there is still an opportunity to significantly expand the sector.

• With a relatively investment friendly mining policy, taxes and fees set at average global levels, and improvements of transport and power infrastructure, there could be very large increases in production and value added, more than double the projected increase in the status quo (base) case.

• The value of production would increase by 293% by 2018, exports by 287% and fiscal revenues by 344% in this optimistic scenario.

• Until the policy and fiscal changes of the last two years, mine operators were reasonably satisfied with the sector specific policies, laws, and taxes.

• The two biggest impediments to new investment and exploration are the indigenous ownership requirements and the very large application and registration fees for prospecting and exploration.

• While a return to the former mining sector legislation is unlikely, a situation somewhere in the middle that is internationally competitive could greatly help the sector move closer to the optimistic scenario described above (fees have been revised downwards).

• Policy reforms that address the difficulties of legitimate exploration companies in obtaining access to claims of adequate size for adequate lengths of time, also provide security with respect to the rewards for new discoveries, could go a long way to building up the pipeline of new projects in the medium-term.

THANK YOU!