Uncertainty threatens Zimbabwe’s recovery

Political uncertainty, disputes within the ruling coalition and a liquidity squeeze together threaten to bring Zimbabwe’s fragile economic recovery to a halt after two years of rapid expansion.

Since the opposition Movement for Democratic Change (MDC) joined a coalition with President Robert Mugabe’s Zanu-PF party after disputed and violent 2008 elections, relative stability has helped the country become one of Africa’s fastest-growing nations.

A move to dollarisation in February 2009 also spurred the recovery, ending a disastrous period of hyperinflation during which banknotes in denominations as high as Z$100,000bn lost their value almost as soon as they left the printing presses.

The government maintains an optimistic growth forecast of 9.3 per cent this year, similar to 2010. But against a backdrop of volatile politics and a concerted effort by Zanu-PF to hold on to the economic levers of patronage, the International Monetary Fund has warned that growth could decelerate to 5.5 per cent.

Uncertainty has been exacerbated by calls by Mr Mugabe for early elections this year, concerns about the health of the 87-year-old president, and a looming succession struggle rendered yet more unpredictable by the death in a fire this week of General Solomon Mujuru, the leading kingmaker in Zanu-PF.

Officials from both the MDC and Zanu-PF say trying to work together has been like mixing oil and water. One of the most public recent disputes has been over Zanu-PF’s demands for public sector pay rises – a campaign tailored seemingly with elections in mind but which economists warn will drain state funds away from productive investments.

Tendai Biti, the feisty finance minister and senior MDC official resisted, arguing that the government could not afford the rise. But he was forced to cave in after bearing the brunt of vitriolic attacks in parliament. As the arguments raged, Mr Biti’s offices were targeted by protesting war veterans and his home compound was struck by a mysterious night-time bomb attack.

“We are in a ‘trilemma’”, he told the Financial Times. “That of huge demands, huge expectations, yet the absence of fiscal space.”

The pay increases will raise the public sector wage bill from $120m to $160m a month, he said, while the government collects only $200m in monthly revenue. The country is saddled with a fiscal deficit of about $500m and has outstanding external debts of about $9bn, about 110 per cent of gross domestic product.

Another bone of contention is revenue from diamonds mined in the Marange region, where some fields are allegedly controlled by the military.

The finance ministry received $174m from the diamonds in 2010. But Mr Biti, whose powers – with those of his MDC party – are limited, has battled unsuccessfully for increased transparency in the management of the revenues, which became a prime source of Zanu-PF patronage as other sectors of the economy collapsed in the aftermath of a violent land reform programme and steadily worsening mismanagement of state finances before the formation of the coalition.

“We have provided leadership in the economy – but that doesn’t mean we win all the battles.There’s so much politics in Zimbabwe and the management of public finances has also been largely politicised,” Mr Biti says. “It explains much of the onslaught against me.”

A controversial indigenisation programme has also deterred fresh investment in the country, with Zanu-PF pushing for majority local ownership in mining and other sectors. Critics of the programme say it is an attempt by Zanu-PF to enrich politically connected individuals.

Outside government, a liquidity crunch in the banking sector has exposed the fragility of the recovery. Bankers and businessmen warn that there is not enough cash in the system to support the next stage of expansion.

Like businesses, banks began the era of dollarisation from zero with little more than physical assets. It is estimated that the total deposits in a country of 10m people amounted to about $300m, as dollars that had traded on the black market were pulled from beneath mattresses.

Deposits have since grown to about $2.8bn and banks have rapidly rebuilt their loan books, predominantly by means of loans of 30 to 90 days with interest rates in the high teens or above. The result was loan-to-deposit ratios soaring to about 70 per cent to 80 per cent in local banks.

The lending has helped companies raise production levels from about 5 per cent of capacity to 40 per cent, bankers say, but most banks have now reached a ceiling. The challenge for them now is that there are negligible sources of credit, no inter-bank market and no lender of last resort. The central bank, which was accounting for about a third of gross domestic product and was seen as the cash machine of the Zanu-PF regime, is in effect bankrupt, with about $1.2bn of debt.

Without a clearer picture of where Zimbabwe is headed politically, the problems will continue to fester, bankers warn.

“Our headquarters say they want to be supportive – but they need some clear economic fundamentals and a clear political framework,” said an executive at a foreign bank in Harare.