Growth and Diversity in the Zimbabwe Economy

Introduction

The economy of Zimbabwe has historically rested on three pillars – agriculture, mining and industry. The original white settlers came to the country in search of gold and settled to establish farms. Industry developed in support of the mining and agricultural activities in the country. A thriving engineering industry in particular developed, particularly in Zimbabwe’s second city, Bulawayo, between the First and Second World War, to support the mining sector and also to provide services to the national railways. Later, during the UDI period of 1965 – 1980 and the imposition of international sanctions, strong import-substitution programmes were implemented by the government of the time, resulting in a further expansion of domestic industry.

During the economic turmoil of 1997 – 2008, the national economy of Zimbabwe is estimated to have shrunk by approximately 50% in GDP terms. In addition the fast-track land reform programme that commenced in 2000 has resulted in a total change in the agricultural sector. Large-scale commercial agriculture, which was primarily in the hands of some 4 000 white farmers, has largely disappeared to be replaced by a new agricultural sector based on small-scale farming, with over 60 000 small-scale farmers now involved in the production of tobacco alone. Cotton and maize are also grown by small-scale farmers on a commercial basis.

During the period of economic decline businesses in Zimbabwe had one focus – survival. Strategies for business growth became irrelevant and those businesses which survived have been stunted. In line with the economy many businesses are today smaller than they were 10 or 15 years ago.

The result of this history is that Zimbabwe has a diversified economy and a business sector typified by businesses which are small by regional and international standards.

Another significant feature of the new Zimbabwe economy is the increasing importance of the mining sector and the potential economic contribution of two mineral resources in particular – platinum and diamonds.

Economic Overview

The period 1997 – 2008 was one of economic turmoil, disruption and eventual virtual collapse for Zimbabwe. The period March 2007 to November 2008 was marked by hyper-inflation, which eventually reached an annualized rate in November 2008 calculated by one economic expert (Prof Steve Hanke of the Cato Institute) to be 89,7 sextillion (89 700 000 000 000 000 000 000) percent. At this point the currency collapsed. By early 2009 the country had adopted a currency regime whereby several foreign currencies, the principal one being the US dollar, circulated freely in the country as legal tender.

One of the legacies of the 1997 – 2008 period has been continuing difficulty in obtaining accurate information about the Zimbabwean economy. Numerous estimates and suggestions have been made over the past two years regarding GDP. The most reliable figures are probably those given by the IMF in its Article IV Consultation Report on Zimbabwe issued in June 2011. The IMF estimates nominal GDP as follows:

2009 US$ 5 836 million
2010 US$ 7 474 million
2011 (projected) US$ 8 916 million

Real GDP growth for 2010 is given as 9,0% and projected growth for 2011 is estimated to be 5,5%. This is lower than projections made by the Government of Zimbabwe.

Per capita income is also hard to estimate as there is no reliable estimate of the current resident population in Zimbabwe. Estimates range from 8,5 million to 13 million. Many Zimbabweans left the country during the 1997 – 2008 period, particularly to live and work in South Africa. A Working Paper entitled The Potential Contribution of the Zimbabwe Diaspora to Economic Recovery published by the UNDP in 2010 estimated that over 3 million Zimbabweans were living outside the country, of whom over 2 million were in South Africa. This figure will not have changed substantially during the past year.

Current per capita income is therefore somewhere in the range US$ 700 – US$ 1 000.

Zimbabwe’s external trade figures (estimated by the IMF) are as follows:

Merchandise Exports Merchandise Imports Current Account Balance

2009 US$ 1 616 million US$ 3 213 million US$ -1 426 million
2010 US$ 3 382 million US$ 5 162 million US$ -1 735 million
2011 (projected) US$ 4 346 million US$ 5 882 million US$ -1 203 million

Export performance has therefore been good over the past two years, helped undoubtedly by high commodity prices on international markets. The current account balance remains strongly negative, but it has declined from a level of 24,4% of GDP in 2009 to 13,5% of GDP in 2011.

This leads on to an area which requires some explanation. The current account balance has been negative, there have been no significant inflows into the country of foreign investment or other forms of international capital, and the country uses the US dollar as its prime currency, so it has no ability to print money. Despite this deposits in the banking system in Zimbabwe have risen from US$ 315 million in early 2009 to US$ 3,1 billion at the end of July 2011. One explanation for this would seem to be cash inflows into the country from Zimbabweans living outside the country – the Zimbabwean Diaspora.

The World Bank has estimated inflows from the Diaspora to total US$ 400 – 500 million per year. However there is clear evidence that the figure is significantly higher. The UNDP paper on the Zimbabwe Diaspora referred to above estimated that, at the end of 2009, annual remittances from the Diaspora back to Zimbabwe that year totalled nearly US$ 1,4 billion. With economic recovery in Zimbabwe and economic difficulties elsewhere, this figure has probably declined over the past two years.

Another major feature of the Zimbabwean economy is the country’s high level of external debt. Debt figures given by the IMF are as follows:

Total External Debt % of GDP Total External Arrears % of GDP

2009 US$ 7 595 million 130,1% US$ 5 289 million 90,6%
2010 US$ 8 823 million 118,0% US$ 5 950 million 79,6%
2011 (projected) US$ 9 624 million 107,9% US$ 6 452 million 72,4%

The level of outstanding arrears in particular has prevented Zimbabwe from obtaining further loans from international financial institutions and has had a clear effect on Zimbabwe’s ability to attract international finance for the business sector. The Government of Zimbabwe has been unable to date to develop a clear strategy for resolving the debt situation.

The real size of the Zimbabwe economy is another area of speculation. Had the Zimbabwe economy grown during the period 1997 – 2008 at a rate comparable with other countries in the region, its GDP today would be in the region of US$ 35 billion rather than US$ 9 billion. The dramatic decline in the country’s GDP in that period does not represent a complete cessation of economic activity. Much economic activity will, rather, have moved from the formal to the informal sector. An estimate made in late 2010 suggested that 57% of Zimbabwe’s total economy lay in the informal sector – in other words the informal sector is larger in terms of overall economic contribution than the formal sector. There are other indicators that also suggest that the size of the Zimbabwe economy is under-estimated – relative consumption figures for example for consumer goods, compared to figures in neighbouring countries.

The Zimbabwe economy has shown great resilience in its recovery since early 2009. This reflects the diversification of the economy and the under-lying strength of its key sectors. There are still difficulties ahead, but what has become clear is that the recovering economy is going to be very different in many ways to the old, pre-1997 economy.

The Mining Sector in Zimbabwe

Zimbabwe has highly diversified mineral resources. The three major minerals today are gold, platinum and diamonds, but the country also has abundant resources of coal, nickel, chrome, iron ore and a range of lesser minerals. Production figures for various minerals for 2010 were, according to the Chamber of Mines, as follows:

Volume Value

Chrome 517 000 tonnes US$ 57 million
Coal 2,67 million tonnes US$ 97 million
Copper 4 600 tonnes US$ 28,5 million
Gold 9 600 kg US$ 380 million
High Carbon Ferrochrome 154 000 tonnes US$ 135 million
Nickel 6 000 tonnes US$ 111 million
Palladium 6 900 kg US$ 100 million
Platinum 8 600 kg US$ 409 million

According to a Monetary Policy Statement issued by the Reserve Bank of Zimbabwe in July 2011, which included an overall review of the economy, production of diamonds in 2010 totalled 8 435 000 carats.

Gold production has declined from a peak of over 28 tonnes at the end of the 1990s, due to the economic circumstances in the country. It is again increasing. Production for the six months from January to June 2011 fell slightly short of 5 tonnes and is forecast to reach 13 tonnes by the end of the year.

90% of the world’s known platinum reserves are in South Africa and Zimbabwe, and the cost of production is substantially lower in Zimbabwe than it is in South Africa. Zimbabwe therefore has the potential to be the world’s most profitable platinum producer. Impala Platinum Holdings Ltd of South Africa is the largest investor in platinum mining in Zimbabwe and the CEO of that company recently announced that Impala has plans to invest US$ 10 billion in further development of its Zimbabwe Platinum Mines subsidiary. This investment is, of course, totally dependent on the resolution of current political uncertainties, revolving around policies of indigenization and economic empowerment of the local population, that are affecting the operations and development of the mining sector.

In 2010 the mining sector, according to the World Bank, accounted for 46% of total exports from Zimbabwe. Of total exports, platinum group metals contributed 20,7% of total value in 2010, gold contributed 9,9% and diamonds contributed 10,2%.

Of Zimbabwe’s mineral resources diamonds are the most controversial. Alluvial diamonds in the east of the country have been the source of political and financial controversy, resulting in continued efforts by some members of the Kimberly Process Certification Scheme, which governs the international diamond trade, to restrict the export of rough diamonds from Zimbabwe. There are a number of issues that require resolution, including alleged human rights abuses in the diamond fields, claims to ownership of the mineral rights and transparency in shipments and payments. There are two other sources of diamonds in Zimbabwe – Murowa Diamonds, operated by a subsidiary of Rio Tinto plc, and River Ranch, which is majority owned by a Bahrain-based investor.

Industry in Zimbabwe

Zimbabwe has experienced a process of de-industrialisation since 1990. At that time the country was the most industrialized in sub-Saharan Africa, relative to per capita GDP. However, by 2008 manufacturing’s share of GDP, which had stood at 23% in 1980, had declined to 10%. Even in 2001 the United Nations Industrial Development Organisation (UNIDO) classified Zimbabwe as an over-industrialised country – a situation in which actual manufacturing value added (MVA) is greater than MVA predicted on the basis of growth in GDP and population. Today Zimbabwe is under-industrialised.

The manufacturing sector in Zimbabwe has been very tightly linked with agriculture. Foodstuffs, beverages and tobacco made up one-third of the manufacturing sector in 2006.

The manufacturing sector has failed to respond to the economic recovery of the past two and a half years. Manufacturing continues to be constrained by a number of factors, including unreliable electricity supplies, high labour costs, competition from imports and, possibly most important, lack of access to capital. Despite the continuing increase in the level of banking deposits in Zimbabwe, available finance remains very short-term and the cost of capital is relatively high. Much of the manufacturing sector needs to replace or upgrade plant and equipment and the capital to do so remains elusive.

In response to the difficulties faced by the manufacturing sector, the Government of Zimbabwe has published a draft Industrial Development Policy, covering the period 2011 – 2015. The Government has identified four priority sectors for the Policy – agro-processing (food and beverages, clothing and textiles, wood and furniture), the fertilizer industry, pharmaceuticals and metals and electricals. These are seen as sectors which can be developed without the need for large amounts of capital resources but which can be at least partially re-capitalised from the country’s own resources.

Agro-industry contributes approximately 60% to manufacturing value added and about 30% to employment in the country. The textile and clothing sector is seen as a sector that offers a quick turnaround from investment to production. This sector has been severely affected by competition from cheap imports, particularly from the Far East. However it is seen as a sector that continues to be viable, given the necessary investment. There are companies in this sector in Zimbabwe who continue to export to international markets. As and when Zimbabwe obtains access to trade benefits under the US African Growth and Opportunity Act (AGOA), there will be further opportunities for growth in this sector. Wood and furniture is another sector within agro-industry with growth potential. Zimbabwe has a wide variety of both exotic and indigenous hardwoods and softwoods and the capability to produce high quality timber products that meet international standards. Furniture made in Zimbabwe is exported throughout the region and as far afield as the USA.

The pharmaceutical sector in Zimbabwe is second to South Africa in the region in both size and development. It produces more than 65% of the pharmaceuticals on the Essential Drugs List of Zimbabwe and about 15% of those on the Special Essential Drugs List of Zimbabwe. The sector has a highly trained and capable labour pool and produces high quality pharmaceuticals which are competitive in export markets. There are investment opportunities in the production of medicinal, veterinary and skin care products.

The metals sector provides strong backward and forward linkages to sectors such as mining, construction, agriculture, machinery and transport. This sector is in particular need of recapitalization.

The Financial Sector in Zimbabwe

Zimbabwe has a relatively sophisticated and diversified financial sector by regional standards. There are a total of 26 banks in the country, of which there are 17 commercial banks, 4 merchant banks, 4 building societies (suppliers of mortgage finance) and 1 savings bank. Of the commercial banks, Barclays Bank and Standard Chartered Bank are part of major international banking groups. Stanbic Bank is part of the Standard Bank of South Africa group and MBCA Bank, a smaller bank, is a subsidiary of Nedbank in South Africa. The West African banking group, Ecobank, is also represented in Zimbabwe.

In addition to the banks there are 16 asset management companies and 132 micro-finance institutions.

There are 76 companies listed on the Zimbabwe Stock Exchange, making it the fourth-largest exchange in Africa. Foreign investors may participate on the bourse provided they bring in their capital through normal banking channels. No prior exchange control approval is required for a foreign investor to participate in the ZSE. There is a withholding tax of 15% at source on dividends, but repatriation of income and capital is free.

In 2010 the Minings Index rose from 185,50 at the beginning of the year to 200,40 at year end, a gain of 8,03%. The Industrial Index lost 0,47%, dropping from 151,99 to 151,27. The value traded during the year was US$ 391 million, of which 46,5% was foreign buying. Market capitalization at the end of the year was US$ 3 875 million.

Deposits in the banking sector rose to US$ 3,1 billion at the end of July 2011. The sector is over-crowded, with the largest bank in terms of market share, CBZ bank, having US$ 52 million in capital. CBZ Bank has 26% market share, followed by Barclays Bank with 11%, Stanbic Bank with 10% and Standard Chartered Bank with 8%.

Bank deposits are transitory, averaging between 1 and 30 days. This is a legacy of the years of economic turmoil which has left a deep distrust among Zimbabweans of the banking system in Zimbabwe. Clearly this constrains long-term lending, which has been the cause of the difficulty in obtaining access to finance by the manufacturing sector. Medium to long-term lines of credit are needed by the banking sector in Zimbabwe.

The Bankers’ Association of Zimbabwe estimates that the demand for bank finance in the country exceeds US$ 10 billion. A minimum of US$ 5 billion is required purely for the purpose of working capital for businesses. This high level of demand, combined with the short-term nature of deposits, makes capital expensive. The banking sector is also constrained by the lack of a money market in the country and the absence of a lender of last resort, a role that should be filled by the Reserve Bank of Zimbabwe.

At the present time the overall loan-to-deposit ratio in the banking sector is just over 70%. The level of non-performing loans is relatively low, at 3,1% at the end of 2010.

Tourism

While Zimbabwe is not a mass market for tourism, this is a significant sector of the economy. According to Government statistics tourist arrivals in 2010 exceeded 2,5 million, although many of these were undoubtedly short-term visitors and visitors from the Zimbabwean Diaspora in South Africa. A better indicator would be the value of tourism receipts, which came to approximately US$ 770 million in 2010.

The major tourist attraction and tourist destination in Zimbabwe is Victoria Falls, which is accessible by direct international flights from Johannesburg in South Africa. There are plans to expand the airport at Victoria Falls to allow access by direct flights from outside Africa.

In addition to Victoria Falls there are other tourist attractions, centred primarily on wild life but including Lake Kariba, a large man-made lake that was created in the late 1950s as part of a hydro-electric scheme, and Great Zimbabwe, an ancient city that was once the centre of a major indigenous culture.

Tourism in Zimbabwe is projected to grow by an average of 6 – 7% per year over the next five years. The Government’s Medium Term Plan for the period 2011 – 2015 envisages the number of hotel rooms in the country increasing from 6 248 in 2010 to 15 000 in 2015, and the number of hotel beds from 12 000 in 2010 to 18 000 in 2015.

The Government has made a commitment to invest around Victoria Falls to make it one of the prime tourism destinations in Africa.

Conclusion

The Zimbabwe economy offers many opportunities to the discerning and careful investor. Despite poor international perceptions of the country, some of which are a hangover from the days of hyper-inflation and economic insanity and some of which are constantly fuelled by rash and inflammatory statements made by Government ministers, the Zimbabwe economy is growing, from a low base admittedly, and developing new features and new directions.

To the potential investor, the message from Zimbabwe is, come and see for yourself.