THE ZIMBABWEAN ECONOMY

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THE ZIMBABWEAN ECONOMY

• BY GODFREY KANYENZE (Dr.), DIRECTOR OF LEDRIZ
• CRISIS COALITION ZIMBABWE
• BRONTE HOTEL, 17 JUNE 2014

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Introduction

• Since 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).

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• 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.

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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.

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• 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.

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• 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 US14.1
  billion generated during the period 2009 to
  September 2013, US9.2 billion (65.2) emanated
  from the mining sector, with agriculture,
  horticulture and hunting weighing in with US4
  billion (28.3) and the manufacturing sector
  contributed the balance of US0.9 billion (6.4).
  
• Implies primary commodities (mining and
  agriculture) accounted for 93.5 of export
  earnings during the period 2009-13.

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Mining drives export recovery post-2009
(contribution to export growth - ) - one
cylinder is firing (mining)
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• In terms of mineral exports, the data shows a
  high concentration ratio, with the top 20
  exporters accounting for 92.7 of the sectors
  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.

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Performance of the Zimbabwe Economy, Selected
Economic Indicators, 1986-2012 (Periodical Annual
Averages)
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• 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.

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Comparative GDP Figures (Source J. Wade 2014, CZI
Breakfast Meeting)
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AGGREGATE DEMAND SLOWDOWN (From Joseph Mverecha,
2014)
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Distribution of GDP by Industry - (Periodical
Averages 1980-2012) (current prices)
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Growth in Real GDP and Employment (1980-2012)
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Sectorial Distribution of Employment, Selected
Periods, 1980-2011
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Major Capacity Constraints (CZI Surveys)
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Factor-floor productivity and unit labor costs
remain competitive, but the sector is hampered by
high cost of business (World Bank, 2012)
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Trade

• Total exports for the period January to October
  2013 stood at US2.8 billion, against US3.2
  billion realised during the same period in 2012.
• By the end of 2013, exports are projected to
  reach US4.430 billion. Projected at US5 billion
  in 2014.
• Imports continue to grow faster than exports,
  totalling US6.6 billion by October 2013, against
  US6.1 billion realised during the same period in
  2012.
• Total imports for 2013 projected at US7.682
  billion, while forecast at US8.321 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 US3.8
  billion, above the original projected deficit of
  US2.5 billion for 2013.

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• 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.

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Exports Imports Surge Post-2009
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Current Account Balance (Proj.)
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Exports by Destination
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Imports from South Africa surge
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Export portfolio is less diversified
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Zimbabwes falling diversification contrasts
starkly with other African countries
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Increasing dominance of resource-intensive exports
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Cost of Exporting Importing a Container, 2013
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Receipts from Tourism
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• Official Development Assistance (ODA) inflows for
  the period January to September 2013, amounted to
  US259.1 million against a combined annual
  projection of US642.7 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 US580.3 million in support of
  humanitarian and social programmes in
  agriculture, health, education, social protection
  and governance sectors.

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Trends in Grants-to-GDP Ratio, 1980-2013 ()
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Average Annual IMF Disbursements (USM)
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Average Annual World Bank Disbursements (USM)
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Average Annual AfDB Disbursements
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Net Capital Flows (USM)
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External Loan Inflows (USM)
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Grant Inflows
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• 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.

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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 US2 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.

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• For the whole year (2013), total revenue
  collections are now estimated at about US3.72
  billion, which is below the original budget
  estimate of US3.86 billion.
• Results in revenue projection shortfall of about
  US140 million.
• Cumulative expenditures to November 2013 amounted
  to US3.526 billion against a target of US3.396
  billion, resulting in expenditure overrun of
  US130 million.
• For the period to November 2013, employment costs
  amounted to US2.429 billion accounting for 68.9
  of total expenditure, against a target of
  US2.284 billion giving an overrun of US145
  million.
• During the period under review, operations and
  maintenance amounted to US744 million,
  accounting for 21.1 of total expenditures,
  against a target of US601 million giving an
  over-expenditure of US143 million.
• The expenditure overrun was mainly necessitated
  by the Constitutional Referendum and Harmonised
  General Elections at US178.4 million,
  outstanding obligations for the holding of the
  2012 National Census US12.4 million, and hosting
  of the UNWTO Conference, US7.6 million.

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• 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 US10.7 billion (77 of which are arrears),
  Zimbabwes 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.

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FDI Inflows
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FDI Inflows
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Foreign Direct Investment Inflows (USM)
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FDI By CountryBrazil India
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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
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• 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 economys
  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.

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Zimbabwes 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.

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Topic Rankings DB 2014 Rank DB 2013 Rank DB 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
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Zimbabwes Services Policy Among the Restrictive
(Services Trade Restrictiveness Index)
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Price of mobile call per minute (Average/Mean,
US, 2011
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Average price of 1 MB of 3G broadband, 2011
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External Debt

• Resolution of Zimbabwes 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 countrys
  developmental agenda.
• Continued accumulation of external debt payment
  arrears is seriously undermining the countrys
  creditworthiness, and severely compromising the
  countrys 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 Zimbabwes 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 Zimbabwes natural resources in
  pursuit of debt relief.

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• 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
  US6.077 billion, (49 of GDP).
• The stock of accumulated arrears accounted for
  US4.72 billion (78 per cent of total debt
  stock).
• Total multilateral debt stock as at 31 December
  2012, stood at US2.49 billion (41 of total
  debt), of which arrears amounted to US1.96
  billion.
• The breakdown of the arrears is as follows World
  Bank, US1.4 billion African Development Bank,
  US632 million European Investment Bank, US302
  million International Monetary Fund, US125
  million and Other multilateral creditors, US117
  million.

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• Total external debt to bilateral creditors stood
  at US3.59 billion (59 of total debt), of which
  the stock of arrears amounted to US2.75 billion
  or 77.
• Of the total bilateral debt, as at 31 December
  2012, US3.02 billion is owed to the Bilateral
  Paris Club creditors, and US572 million to the
  Non-Paris Club creditors which include China.
• Of the total external debt amounting to US6.077
  billion, penalty charges accounted for US1.026
  billion (17 of total external debt).

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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.

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• 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 US2 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.

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• 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 US350
  compared to the Poverty Datum Line (PDL) of
  US514.24 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 US720 during
  1997-2002 to US265 by 2008, rising to US370 by
  2012

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• 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).

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Poverty Situation in Zimbabwe, 1995, 2003 and
2011 PASS I II, and PICES (2011/12).
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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 US644 US338 376
Poverty Rate 42 Over 70 72
Brain Drain Over 3m
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Zimbabwes HDI trends based on consistent time
series data
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Budgetary Allocations for Health, Education,
Defense and Social Protection, 1980-2013
(Percentage of Total Expenditures)
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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

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• 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.

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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.

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Schematic illustration of linkages in the
post-crisis Zimbabwean economy (World Bank, 2012)
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• 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 minings potential
  requires transfer of technology and FDI, both in
  the medium-term, and the longer-term (to support
  the process of discovery).

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• 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 countrys overall competitiveness
  and lead to worsening of economic governance.
• Hence Zimbabwe is at risk of sliding into the
  resource curse.
• Zimbabwes 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.

105

• 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.

106
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.

107

• 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 US12 billion of investment by
  2018, with an export potential of more than US11
  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.

108

• 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.

109

• 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.

110

• 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.

111

• Zimbabwes 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.

112

• 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.

113

• 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.

114

• 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)

115

• 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 US100 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 US100 per
  carat to US60 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 US4 per carat.
• Production is expected to peak at 12 million
  carats over the next few years, and an investment
  of US150 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.

116

• 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
  US12 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.

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118

• Most of Zimbabwes 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.

119

• 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 US4
  billion.
• The main new investments would be railway of
  approximately 250 km from the Sengwa coal field,
  at a cost of approximately US750 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 regions 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 US2.2 billion and
  another US2.1 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.

120

• Mining Sector Policies and Fiscal Regime
• Economic and political instability aside, the
  policy aspects of Zimbabwes 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.

121

• 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.

122

• 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.

123

• 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
  industriese.g. geologists, surveying, mineral
  analysismore 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).

124

• 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 US150 million and projected an
  increase to US300 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
  governments 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.

125

• 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.

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• THANK YOU!