Recent Economic Developments

This paper describes economic developments in Zimbabwe during the 1990s. The paper highlights that the path of the economy since 1990 has been dominated by the impact of the severe drought in 1992. Value added in the agricultural sector declined by 24 percent in 1992, but the impact of the drought reached much further into the economy. The recovery from the drought was led by a sharp rebound in agricultural production in 1993, which grew by 48.5 percent, boosted by an above-average harvest for maize and a recovery in tobacco production.


This paper describes economic developments in Zimbabwe during the 1990s. The paper highlights that the path of the economy since 1990 has been dominated by the impact of the severe drought in 1992. Value added in the agricultural sector declined by 24 percent in 1992, but the impact of the drought reached much further into the economy. The recovery from the drought was led by a sharp rebound in agricultural production in 1993, which grew by 48.5 percent, boosted by an above-average harvest for maize and a recovery in tobacco production.

I. Real Sector

1. Introduction

Prior to the 1965 Unilateral Declaration of Independence (UDI), Southern Rhodesia operated what might be called an open economy. It had experienced overall high growth, a strong performance by exports, massive government investment in infrastructure, and large infusion of foreign capital. The manufacturing sector had already become diversified and accounted for almost 40 percent of total exports by 1965.

The Unilateral Declaration of Independence by the Rhodesian Front Government in 1965 provoked international sanctions and switched the Government's economic policy to one of import-substituting industrialization (ISI). Extensive protectionism, mainly in the form of quotas, and a widespread system of controls (on prices, investment, foreign exchange), were constructed to protect the domestic market and local industry in particular. At the same time, agricultural marketing boards were empowered to raise prices to stimulate production for the local market. After a relative boom period between 1967-74, the contradictions and shortcomings of the ISI policy caused economic growth to collapse.

In 1980, Zimbabwe achieved independence with majority rule under the leadership of the Zimbabwe African National Union (Patriotic Front)—ZANU (PF). With international sanctions removed, the external sector became more open, and a substantial expansion of government current expenditure was initiated, particularly on health and education services. The result was a greatly expanded government budget deficit, and a sharp jump in inflation during the first half of the 1980s to an average rate of 15 percent compared to about 6 percent during the previous decade. The policy response was the widespread use of wage and price controls, and foreign exchange rationing. By the late 1980s pressures had grown substantially for liberalization of the economy. Between 1980 and 1990, economic growth averaged some 3.2 percent per annum—not much different from the rate of population growth—and only about half of the growth rate before UDI.

At the end of the 1980s, there was a growing consensus among government and industry that liberalization was necessary. In 1991, the Government launched a comprehensive Economic and Structural Adjustment Program (ESAP) to address the need to generate accelerated economic and employment growth. The focus of the program was to establish a market-oriented policy environment, liberalizing the economy from the system of controls that had been pervasive during the 1980s, and to undertake a comprehensive public sector reform. In the first phase of the economic reform program, ending in 1995, significant progress has been made to deregulate the product, labor, and foreign exchange markets, as well as foreign investment in the economy. 1/ More limited progress has been made to lower the government deficit and to reform public enterprises. The Government is currently in the process of preparing for a successor program—ESAP II—which is expected to be launched in 1996.

Since independence in 1980, Zimbabwe has placed great emphasis on human resource development, which has resulted in a rapid improvement in key social indicators. By 1990, many of the leading indicators were significantly above average for developing countries: for example, the infant mortality rate had declined to 49 (per 1,000 births), adult literacy had risen to 67 percent, and primary school enrollment was in excess of 100 percent (Basic Data). The improvement in social indicators has not, however, been matched by a parallel performance of the economy: economic growth between 1980 and 1994 averaged about 2.8 percent per annum, slightly below the rate of population growth; over the same period formal employment expanded by only 1.5 percent per annum, a rate inadequate to absorb the growing number of new entrants into the labor market. About a fourth of the working population is estimated to be employed in the formal sector. The flow of school leavers entering the labor market is estimated to be some 200,000 per annum, whereas the net expansion in formal employment was only about 20,000 per annum between 1990 and 1994.

2. Gross domestic product

Analysis of developments in the economy during the first phase of ESAP is circumscribed by a lack of timely national income accounts (NIA) data. Currently, official NIA data are only available through 1990, and provisional estimates of GDP at constant 1980 prices by sector are available through 1993 (Tables 1 and 2). 2/

The path of the economy since 1990 has been dominated by the impact of the severe drought in 1992. Value added in the agricultural sector declined by 24 percent in 1992, but the impact of the drought reached much further into the economy. The sensitivity of the economy to droughts, despite the fact that the agricultural sector accounts for only 16 percent of GDP, stems in part from the historically inward orientation of the industrial sector, and the consequent dependence on domestic demand conditions. About 70 percent of the population in Zimbabwe live in rural areas; consequently, a sharp contraction in agricultural output, and therefore rural sector incomes, has tended to affect both rural and urban consumption demand, the latter most immediately because of increased flows of remittances from urban to rural areas. In addition to being sensitive to drought-induced domestic demand shocks, the industrial sector has also been vulnerable to shocks arising from disruptions in the supply of agricultural raw materials, the processing of which constitutes an important component of the economy's industrial base. Finally, water and electricity rationing—37 percent of power generation in Zimbabwe is from hydroelectric sources—tended to further disrupt industrial production. The widespread impact of the drought was compounded by a deterioration in the external terms of trade, resulting from a sharp decline in international prices for key agricultural and mineral commodities. As a result of all these factors, the economy went into a severe recession in 1992. In addition to the decline in output in the agricultural sector, output in the manufacturing sector declined by 9.5 percent, and in mining, by 5.5 percent. Overall, GDP fell by 6.8 percent.

The recovery from the drought was led by a sharp rebound in agricultural production in 1993, which grew by 48.5 percent, boosted by an above-average harvest for maize and a recovery in tobacco production. The recession in the industrial sector, however, continued through late 1993. At its low point in mid-1993, manufacturing production is estimated to have declined by about 25 percent from its pre-recession peak in early 1992 (Chart 1). Despite some recovery in the second half of 1993, growth in the manufacturing sector for the year as a whole was negative, at -8.2 percent (Table 3). Mineral production was relatively flat in 1993, despite an upturn in gold and nickel production, largely because of a sharp decline in chrome production, which was adversely affected by depressed international demand. Overall, GDP grew by 4.2 percent in 1993, representing only a partial recovery from the 1992 recession.



(12-month average; 1980 = 100)

Citation: IMF Staff Country Reports 1996, 033; 10.5089/9781451841398.002.A001

Sources: Data provided by the Zimbabwe on authorities; and staff estimates.

The recovery in economic activity continued in 1994. Economic growth in 1994 is estimated at 5.2 percent, largely reflecting very buoyant mining sector activity combined with the recovery of the manufacturing sector from the 1992-93 recession. Mining sector growth is estimated at 9.5 percent, boosted by a rebound in chrome production, and the strong performance of most of the major minerals—gold production increased by 10 percent, and nickel by 14 percent. Of the major minerals, only asbestos recorded a decline in production. Growth in the manufacturing sector is estimated at close to 10 percent in 1994, but this reflects largely the recovery from the 1992-93 recession, which started in the second half of 1993 and ran its course by the middle of 1994. Indeed, the path of the index of manufacturing production was almost flat from the second quarter of 1994 onward, suggesting that the recovery had come to an end, some 9 percent below pre-recession levels. In the agriculture sector, growth of some 3 percent is estimated for 1994, reflecting mainly a substantial rebound in sugar cane production. Production of most other major crops declined from 1993 levels, with maize production down by 10 percent, tobacco production by 14 percent, cotton by 15 percent, and wheat, damaged by early rains in October, down by 27 percent.

Economic growth is estimated to have declined by about 1 percent in 1995, based on available information. The impact of the drought is thought to have reduced agricultural production by an estimated 12 percent in 1995, with most major crops, except tobacco, registering significant declines. Manufacturing, facing difficulties in some of its leading sectors and an adverse macroeconomic and external trading environment, is likely to have declined by 2 percent in 1995, but, given the depth of the downturn in the first half of the year, the drop could well have been greater. The poor performance in the agricultural and manufacturing sectors was partly offset by a buoyant mining sector, where growth may have been around 10 percent in 1995.

3. Manufacturing sector

The manufacturing sector is relatively large and broad based in Zimbabwe, accounting for about one fourth of GDP. The largest subsectors in the manufacturing sector are the metals/metal products sector, the food sector, the textiles and clothing sectors, and the chemical products sector (Table 3). These sectors account for about 80 percent of the gross output of the manufacturing sector. 1/

As noted, the recent performance of the manufacturing sector has been dominated by the recovery from the 1992-93 recession, which started in late 1993. The textile, paper, and furniture sectors were in the vanguard of the recovery (Chart 1); however, some sectors, notably the key food and metal sectors, did not start to recover until early 1994. The food sector was affected by a shift in the structure of production toward small-scale producers that was not captured by the index, 2/ and the metal sector was affected adversely by low international demand for chrome, as well as difficulties at the steel plant (ZISCO). 3/ Furthermore, the textile and clothing sectors, after having made a strong initial recovery from the recession, ran into severe difficulties toward the end of 1994 and into 1995. 1/ The 9.6 percent growth in manufacturing production in 1994 largely reflected the depth of the recession in 1992-93. Moreover, it is clear from Chart 1 that the momentum of recovery in the manufacturing sector waned considerably in the second half of 1994, with the index of manufacturing production still some 9 percent below its pre-recession level in 1991, and that the recovery suffered a significant reversal in the first half of 1995. The data available for the first five months of 1995 suggest a sharp drop in industrial production.

Enhancing the performance of the manufacturing sector has been an integral part of the structural adjustment program in Zimbabwe. The economic growth targets of the program were based on the assumption that buoyant industrial growth would lead the economy during the adjustment period. Implicit in this analysis has been the assumption that in the transition from a relatively closed economy to a more open one, growth of nontraditional exports, in particular manufacturing exports, would lead to contraction of sectors that were not competitive in the new, liberalized environment. A critical assumption behind the liberalization program was that macroeconomic stability would be re-established in tandem with the liberalizing effort. However, public sector finances have not evolved in a manner to permit this. Hence, real interest rates have remained high and credibility in the sustainability of fiscal policy has been eroding. Industrial performance was subject to significant downside risks on account of: (i) the fact that the manufacturing sector was relatively large at the start of the adjustment process for an economy that was predominantly inward oriented with a small domestic market; (ii) the fear that exposure to external competition would have a significant detrimental impact on local industry, even though a number of studies during the 1980s appeared to indicate that the industrial sector was reasonably competitive despite the long period of self reliance and protectionist policies; and (iii) the political failure to sustain the reform effort at the macroeconomic and structural levels at a pace that would allow the realization of an adequate supply response.

It is not clear how well the manufacturing sector has survived this period; many firms have adapted well to the new environment and emerged stronger. Nevertheless there remains little evidence, as yet, that the balance has shifted decisively in favor of a dynamic export-oriented manufacturing sector. The situation is complicated by: (i) the impact of another drought in 1995; (ii) the current difficulties in lead sectors such as textiles (see footnote on earlier page); (iii) the present stance, and uncertain future, of South Africa's trade policy vis-à-vis Zimbabwe and the region; and (iv) the continuing uncertainty among industrialists who fear that the economic climate in Zimbabwe will be adversely affected by the problems of the public sector deficit.

4. Agricultural sector

The potential for intensive agricultural production in Zimbabwe is limited by relatively poor water resources—annual average rainfall is low (and highly variable), there are no natural lakes and few perennial rivers—and a shortage of fertile land. 1/ The land in Zimbabwe is subdivided into five natural regions (Table 4). Natural Region (NR) I, found in the east, covers 0.7 million hectares and has a relatively high rainfall at a fairly high altitude, which avails itself to specialized crops such as tea and coffee. Natural Region 11, covering an area of about 5.9 million hectares, primarily in the north, has land with the greatest agricultural potential, with water and soil resources capable of supporting intensive crop production. Natural Region III, covering 7.3 million hectares, is located primarily in the midlands and has intermediate agricultural potential, with land capable of supporting some perennial and/or drought-tolerant crops. In Natural Regions IV and V, some 25 million hectares in the northwest and far south, the rainfall is low and erratic, and soil fertility is poor; accordingly, reliable crop production is not feasible, but livestock production and wildlife enterprises are viable.

The Zimbabwean agricultural sector is frequently divided into two sectors, each of which contains two subsectors. In the commercial farm sector, there are the large-scale commercial farmers (LSCF) 2/ and small-scale commercial farmers (SSCF). In the communal sector, there are the communal area farms (CA) and the resettlement area farms (RA).

The commercial farm sector is dominated by the 4,800 large-scale commercial farms, which together cover approximately 10.7 million hectares. LSCFs farm predominant in NR I-III, operating on 64 percent of the land in NR II, and 35 percent of the land in NR I and NR III. 3/ The commercial farm sector accounts for over 70 percent of agricultural production, almost 90 percent of total marketed crop production, and about 85 percent of commercial livestock production (Table 5). Tobacco is the single most important crop in the commercial farm sector, accounting for about a third of the value of output in the sector; however, maize, wheat, sugar, cotton, and soybeans are also important crops, with commercial livestock production widespread. Production of horticultural crops has become an increasingly important activity in the LSCFs.

The commercial farm sector has been relatively buoyant for much of the 1990s, the 1991/92 drought notwithstanding (Table 6). Output in this sector has been on an upward trend, driven largely by a rapid expansion in tobacco and horticultural production. Tobacco production increased by 31 percent in volume terms between 1990 and 1994 and is estimated to have increased by a further 17 percent in 1995. Horticulture production is reported to have more than doubled over the period. In 1995, maize production is likely to have declined by 50 percent, but tobacco production is estimated to have increased, as is coffee production, while the declines in cotton and sugar production were expected to be relatively modest. The drought is also thought to have had a relatively limited impact on nontraditional sectors such as horticulture this past year. With prices of most of the major export crops currently quite favorable, the large-scale commercial farm sector is expected to survive the recent drought relatively unscathed. However, small-scale commercial agriculture has been more or less stagnant over the past few years and the sector remains highly vulnerable to the impact of droughts.

A number of factors appear to have contributed to the relatively healthy state of the large-scale commercial farm sector. Substantial investment is reported to have taken place in drought-resistant technologies (for example, irrigation), not only improving growth in output but also reducing the vulnerability of the sector to the effects of drought conditions. International commodity prices have been favorable, especially for tobacco. In respect of economic policy, there has been a positive response to the agricultural market liberalization and to the liberalized exchange and payments regime—the latter has provided the opportunity not only for enhanced access to foreign exchange but also for improved access to short-term external capital. The Government's maize policy has also provided significant public transfers to low cost maize farmers—usually commercial farmers—as a result of both above-market producer prices for maize and interest subsidies on commercial farm loans during the period 1992-94.

The communal farm sector covers approximately two thirds of available land, but almost 75 percent of that land is in the semi-arid NRs IV and V. The average size of farms in the communal areas is less than one hundredth the size of those in the commercial sector, and they are aggravated by being located mostly in the areas of poor quality land. Moreover, population densities are high in the more productive regions of communal farms, where population pressure has led to more intensified cropping as well as increased use of marginal land. As a result, farming practices in some areas have become environmentally unsustainable.

Maize is the dominant crop in the communal farm areas, although production of cotton and other crops such as groundnuts, mhunga, rapoko, sunflower seeds, and sorghum is also significant. Livestock production is also an important feature of communal farm activity, with animals being used extensively as a factor of production, as a source of food, and as a store of wealth. Generally, marketed production is a relatively small proportion of total output in the communal farm sector, accounting for only about 20 percent of the value of gross output.

The relatively precarious state of the communal farm sector has been attributed to a number of factors, the most important of which are a decline in soil fertility and a growing incidence (and severity) of soil erosion, resulting primarily from increased population pressures on land—much of which is already of marginal quality—for intensive agricultural production. In addition, widespread mono-cropping of maize without proper crop rotation has resulted in increased disease and pest problems. The subsector has also suffered from reduced public sector extension services, particularly in the areas of credit facilities, fertilizer, and other agricultural inputs.

5. Mining sector

The mining sector in Zimbabwe accounts for approximately 6 percent of GDP, but for no less than 60 percent of merchandise exports. Gold production represents the largest share of mineral production—almost 38 percent by value. Other major minerals include nickel, coal, asbestos, copper, chrome, and iron ore (Table 7). The mining sector is currently undergoing an exploration boom. The number of applications for Exclusive Prospecting Orders (EPOs) has grown from about 50 in 1990 to just under 170 by 1994; in the first two months of 1995, more than 50 EPOs were granted. It is estimated that EPOs cover around a third of the country. Around two thirds of the EPOs are for diamond prospecting, with the remainder largely for gold. The prospecting boom appears to have been prompted primarily by new data from an aerial geological survey carried out by the Canadians in 1992, and the impact of the structural adjustment program which has significantly lowered the barriers to foreign investment and external borrowing, resulting in a substantial inflow of foreign capital into the sector.

Gold production has been particularly buoyant. The volume of production increased by 21 percent between 1990 and 1994 and is projected to increase by a further 10-12 percent in 1995. The increase in gold production is attributable, in part, to the increased exploration activity noted above, but also: (i) to the further development of existing mines; and (ii) to the use of new extraction technology, which has enhanced the viability of mining low grade ores.

Both the nickel and chrome sectors were adversely affected between 1990 and 1993 by the flood of mineral exports from the Commonwealth of Independent States (CIS) onto the international market; the unit value of nickel production declined by over 40 percent, and the unit value of chrome production by around a quarter. Prices of both minerals have improved significantly in 1994. Nickel production has recovered from its low point in 1992, partly because of the rebuilding of a furnace, and the completion of repairs at a mine shaft at Bindura mine. Fears that nickel production would be scaled back in the face of low international prices were eased by the firming of nickel prices during 1994. There was a sharp contraction in chrome production in 1993 associated primarily with the slump in international demand, which forced a number of companies to cut production. Stronger chrome prices in the second half of 1994 have resulted in a recovery in production.

Zimbabwe produces relatively high grade coal (but not anthracite) and is reported to have considerable underground reserves. Demand for coal production in Zimbabwe is divided about evenly between local thermal power stations and local industry. Coal production in 1994 was adversely affected by the problems at the Zimbabwe Iron and Steel Company (ZISCO) where smelting of iron came to a halt at the beginning of 1994. Longer-term demand for coal from thermal power generation will be the dominant factor governing the level of coal production.

Iron ore production is also directly dependent upon conditions at ZISCO, the main steel producer. Production resumed in 1995 to supply the requirements of blast furnace number 3, which is operational again, although at reduced capacity, and would only require a partial resumption of iron ore production.

Despite the fact that Zimbabwe produces white asbestos 1/, the prospects of the industry have been constrained by the imposition of environmental standards in the US and Western Europe that have effectively prohibited the use of any asbestos products in construction. The drop in asbestos production in 1994 has been largely attributed to weak demand conditions in both the domestic and international markets, which resulted in a substantial buildup of domestic stock of asbestos. However, with increased international demand toward the end of 1994, influenced in particular by the Kobe earthquake in Japan, the prospects for the sector have brightened considerably—the stockpile has been cleared and production has increased sharply.

Copper production has been in decline for a considerable period of time: since 1985 production fell by 50 percent and since the mid-1970s by 80 percent. An improvement in international prices during 1994 has allowed a slight increase in production, but the prospects for the industry do not look particularly healthy, especially with the single mining company operating significantly below capacity and reported to be deeply in debt. Under-capitalization, obsolete equipment, and depletion of ore reserves are all contributing factors to the industry's woes.

The Hartley mining project, the largest single mining investment in the country for over a decade, is being spearheaded by two Australian firms: Broken Hill Properties and Delta Gold. Total capital investment in the project is estimated to be in the region of US$230 - US$240 million most of which will be foreign financed, using 30 percent equity and 70 percent debt. Production is expected to commence toward the end of 1996, and the mine is expected to be fully operational by 1997. At full capacity, the Hartley mine is expected to have an annual production of around 150,000 fine ounces of platinum, 110,000 fine ounces of rhodium, 23,000 fine ounces of gold, 3,200 tons of nickel, 23,000 tons of copper, and 30 tons of cobalt. Annual exports from the mine, at current international prices, are projected to be in the region of US$140 million.

6. Prices

Little progress was made to reduce inflationary pressures in the economy during 1994 (Table 8). Maintenance of an artificially high price of maize in the aftermath of the 1992 drought combined with a rapid increase in money supply in the middle of 1994 (reaching a year-over-year growth of 54 percent in June) undermined the Government's anti-inflation strategy. A substantial increase in administered prices, 1/ combined with rapid growth in some food prices were additional complicating factors during 1994.

The end period rate of inflation, 2/ which had declined to just under 19 percent by the end of 1993, rose to 23-24 percent by the middle of 1994 before declining to around 21 percent by the end of the year. The food price index rose by 25.7 percent by end-1994, with much of the increase in food prices concentrated in the fruit and vegetables and the meat subgroups. 3/ The price increase in the bread and cereals subgroup rose very little, but had the Grain Marketing Board not pursued a policy of maintaining a floor price for maize substantially above market-clearing prices, the index for this subgroup could have declined substantially in absolute terms. As this subgroup has a weight of 8.3 percent in the CPI, a more flexible maize pricing policy—combined with a more appropriate monetary stance—might have had a significant beneficial impact on the path of inflation and inflation expectations in the economy.

The annual inflation rate remained at around 20 percent during the first half of 1995 owing to food prices that had risen 26 percent over the previous 12 months and to nonfood prices that had risen almost 17 percent, partly due to the impact of the increases in sales and excise taxes in the first quarter of 1995. The food price index had risen sharply by 9.8 percent in the first quarter, influenced by rising expectations of a new drought in 1995, with particularly marked increases in the bread and cereals subsector. and the fruit and vegetable subsector. The nonfood price index rose by 8.3 percent in the first quarter, of which approximately 2.5-3 percentage points can be attributed to the impact of the increase in indirect taxes in February 1995. 1/ Seasonality may also have contributed about 1.5-2 percentage points to the increase in prices in the first quarter. The rate of inflation moderated somewhat in the second quarter of 1995.

A number of developments in the second half of 1995 caused the rate of inflation to rise to an estimated 26 percent end-period rate. Food prices rose to an estimated annual rate of 36 percent in response to the drought and GMB's announced maize price increases. 2/ Moreover, indirect tax increases announced in the 1995/96 budget and afterward contributed to the estimated 22 percent rise in nonfat prices by year end.

7. Labor market 3/

The World Bank estimates that the working age population in Zimbabwe (those between the ages of 15 and 64) is approximately 5.7 million people, and is growing at a rate of around 2.8 percent per annum. As the level of formal employment has been essentially flat since 1991, the proportion of the working age population in formal employment by 1994 is estimated to have declined to around 22 percent compared with 29 percent at independence.

The employment trend over 1992-94 was heavily influenced by the recession in the economy in 1992 (Table 9). The level of formal employment declined from an average of 1.244 million in 1991 to a low of 1.232 million by March 1993 (Chart 2). 4/ The majority of the jobs lost were in the private sector, although employment in the public sector 5/ also contracted by some 4,000. Employment in the manufacturing sector was especially hard hit, declining by some 13,000, with the textile and clothing sector affected most. Since March 1993, there has been a recovery in employment, led initially by the agricultural sector. The recovery in employment in many other sectors, especially in manufacturing, was delayed until the end of 1993, and did not begin taking hold until the first half of 1994. By September 1994, total formal employment had risen to 1.278 million, but had not kept up with the labor force growth (of about 2.8 percent per annum) since 1991. Concurrently, employment in the public sector remained on a downward trend throughout the period, declining by some 10,000 since 1991.



(12-month average; in thousands)

Citation: IMF Staff Country Reports 1996, 033; 10.5089/9781451841398.002.A001

Sources: Data provided by the Zimbabwean authorities; and staff estimates.

Real wages, as measured by real per capita earnings in the formal sector, have been on a downward trend since 1990 (Table 9). Between 1990 and 1993, the latest year for which data are available, real per capita earnings in the formal sector declined by some 32 percent, with declines of 40 percent in the agricultural sector and 37 percent in the government sector. In most sectors the decline exceeded 25 percent.

8. Tourism

Tourism in Zimbabwe is still in its infancy but has become a significant contributor to the national economy. Over the past five years, the growth in visitors has increased IS percent per annum on average, while tourist receipts have been growing at an average rate of 50 percent (in Zimbabwe dollars), 1/ and employment in the tourist industry has increased an estimated 50 percent over this period. Tourism has boomed following the end of the civil war in Mozambique and the end of apartheid in South Africa, whose visitors generally account for 45 to 50 percent of total arrivals. In 1995 there were some 1.2 million visitors to Zimbabwe, up 15 percent over the previous year, and they spent an estimated Z$1.2 billion, equal to 2.1 percent of GDP. After taking into account passenger fares, domestic tourism, and multiplier effects, the tourist industry could contribute close to 5 percent of GDP.

II. Public Finance

1. Institutional background

The government sector comprises the Central Government and local authorities. The Central Government includes 20 ministries, which receive their budgetary allocations as “votes,” and a number of entities (such as the Presidency and Parliament) that receive budgetary allocations as “constitutional and statutory appropriations.” The local authorities include 17 urban councils, 48 rural councils, and 55 district councils. The urban and rural councils derive their resources from central government transfers, property levies, land taxes, and various fees. Except for the two largest municipalities, Harare and Bulawayo, the local authorities are not permitted to borrow from sources other than the Central Government. Very little expenditure occurs outside the Central Government; for example, all outlays on health and education (except for the construction of primary education facilities), as well as the police, are part of the central government budget.

Nearly all recurrent central government transactions pass through the Consolidated Revenue Fund. Revenues and expenditures are recorded on a cash basis. In the past, accounting problems have arisen owing to the failure to record certain foreign-financed project expenditures, especially those involving the direct payment of project-related expenditures by donors. This problem, as well as other problems related to expenditure control and management, are being addressed during fiscal year 1995/96, guided by the recommendations made in a June 1995 technical assistance report by the Fund's Fiscal Affairs Department.

2. Fiscal developments during 1990/91-1993/94

The fiscal situation during 1990/91-1993/94 showed some signs of improvement with the implementation of a number of revenue and expenditure measures. However, poor expenditure management, combined with the 1991/92 drought and subsequent recession, resulted in significant slippages in current expenditure over the period.

Fiscal developments from 1990/91 through 1992/93 reflected both the nascent reform efforts under the Government's ESAP and the measures taken to address the drought (Chart 3). The budget deficit fell from 9.3 percent of GDP in 1990/91 to 8.5 percent, rising again to 11.5 percent of GDP in 1992/93 (Table 10). The revenue-to-GDP ratio, after having risen temporarily in 1991/92 on account of temporary surcharges on imports, fell to 31.3 percent of GDP in 1992/93, owing to the failure to adjust specific excise rates in the face of high inflation and a fall in the effective customs tariff rate by 10 percentage points (Table 11). While expenditures on wages and salaries fell as a share of GDP by 2.3 percentage points during this period, other categories of expenditure were higher on average during 1991/92-1992/93 than in 1990/91, owing in part to drought-related outlays (Table 12).



(In percent of GDP)

Citation: IMF Staff Country Reports 1996, 033; 10.5089/9781451841398.002.A001

Source: Data provided by the Zimbabwean autherities.1/ The 1995/96 figures refer to official budget.2/ Based on end-of-period stock of debt. The 1994/95 figures include Z$3.6 billion of public enterprise debt assumed by the Government, and Z$1.4 billion of forward cover losses by the RBZ.3/ Includes a small share of other taxes in property and miscellaneous other taxes.

The budget deficit declined to 7.8 percent of GDP in 1993/94, reflecting a further reduction in the expenditure-to-GDP ratio of 4.4 percentage points (Table 10). This was due almost entirely to a decline in drought-related outlays of 4.3 percent of GDP. Despite the lower deficit, the domestic financing requirement stayed largely the same as a share of GDP, owing to a drop in foreign financing.

A number of important new tax measures were introduced in 1993/94, including, inter alia, a reduction of the import surtax from 20 percent to 15 percent, effective January 1994; the inclusion of services in the sales tax base (at the then-standard tax rate of 10 percent); and for the tax year starting April 1, 1994, a reduction in the top marginal individual income tax rate from 50 percent to 45 percent, and the top corporate tax rate from 42.5 percent to 40 percent.

The 1993/94 budget provided an initial allocation for current expenditure of Z$11.6 billion, relative to the actual outturn of Z$13.0 billion. Significant overruns were experienced in a number of areas, especially nonwage goods and services, interest (reflecting the higher-than-expected domestic financing requirement), and wages. Many of these overruns reflected fundamental problems in expenditure management and control, including budget preparation without due consideration of macroeconomic constraints, ineffective cash limits, and inadequate compliance with given regulations. Nonetheless, total expenditure fell from 42.8 percent of GDP in 1992/93 to 38.4 percent.

3. Fiscal developments in 1994/95

The original 1994/95 budget aimed at achieving a deficit of Z$2,409 million (4.7 percent of GDP), with a domestic financing requirement of 2.2 percent of GDP. This was to be achieved by a decline in expenditures from 38.4 percent of GDP in 1993/94 to 32.7 percent of GDP, more than offsetting a projected decline in revenues of 2.6 percent of GDP. (These budget targets were subsequently revised, as explained below).

A number of new tax initiatives were announced in the 1994/95 budget. These included (i) a cut in the import surtax rate from 15 percent to 10 percent, effective August 1, 1994; (ii) the elimination of customs duties on capital goods; (iii) an increase in the excise duty on opaque beer from 15 cents per liter to 20 cents per liter, and an increase in the rate applied to carbonated beverages from 11.5 percent to 15 percent; (iv) an expansion of the tax base in services subject to sales tax through the replacement of the positive list (which defined the sectors included) by a shortened negative list (which excluded only a small number of selected service activities), effective January 1, 1995; (v) an increase in the threshold above which personal income taxes become payable, from Z$6,000 to Z$9,000 per annum, along with other upward adjustments in tax brackets and a reduction in the top marginal tax rate from 45 percent to 40 percent, with effect from April 1, 1995; (vi) a cut in the corporate income tax rate from 40 percent to 37.5 percent, for the tax year starting April 1, 1995; and (vii) the introduction of income tax withholding on government contracts, effective April 1, 1995, whereby 10 percent of the value of government contracts is withheld for companies that do not provide evidence of a legitimate income tax return.

Fiscal developments during the first two quarters of the year indicated that, without corrective action, the budget target for the fiscal year was likely to be missed by a wide margin. By the end of December, the cumulative budget deficit equaled Z$3.3 billion, some 6.3 percent of GDP. While revenues were in line with expectations, expenditures were much higher than projected, especially for nonwage goods and services. The resulting fiscal imbalance was also aggravated by the slow receipt of recorded foreign financing, leading to a concomitantly higher domestic financing requirement and interest bill.

In response to these developments, the Government introduced a number of measures in January 1995 aimed at strengthening fiscal performance. The measures were designed to help achieve a revised budget deficit for fiscal year 1994/95 of 6.4 percent of GDP, with revenues of 29.3 percent of GDP and expenditures of 35.7 percent of GDP (Table 10). On the revenue side, these measures included (i) an increase in the standard sales tax rate from 10 percent to 12.5 percent, and an increase in the sales tax rate charged on automobiles from 15 percent to 20 percent; (ii) an increase of 50 percent in the excise rate (and the customs rate for competing products) for beer, tobacco, vine and spirits, and carbonated beverages; (iii) a drought levy of 5 percent on personal and corporate income tax obligations due during the period April 1995-March 1996; (iv) a more vigorous collection of dividends from public enterprises; and (v) the implementation of the road user fee announced in the budget, through the imposition of an additional 5 cents per liter duty on imported gasoline and 18 cents per liter on diesel.

On the expenditure side, in view of the planned takeover of the debt of selected public enterprises and other reforms, budgeted subsidies were reduced to the Grain Marketing Board (GMB), Cotton Marketing Board (CMB), and Cold Storage Commission (CSC). Additional savings were also planned by trimming the wage bill through the reduction in civil service posts to 162,263 by end-June 1995. Nonwage goods and services were to be controlled strictly, and capital and net lending expenditure outlays were cut sharply relative to their initial budgetary allocations.

In the event, budgetary performance during 1994/95 was much weaker than expected. The deficit grew to 11.6 percent of GDP, with revenues some 1.0 percent of GDP below the revised budget target, and expenditures overshooting their target by 4.1 percent of GDP. Domestic financing rose to 8.8 percent of GDP, up sharply from 4.7 percent in 1993/94.

The lower-than-expected outturn for revenues was in part due to a slowdown in the growth of customs duties, as well as a further weakening of corporate income tax receipts. The poor performance of company income tax receipts may reflect the carry-forward of losses suffered during the drought of 1992, although the lack of detailed data on tax receipts by sector makes it difficult to confirm the validity of this hypothesis. 1/ Excise duties also yielded less than projected, owing to a sharp decline in volumes. These shortfalls were partially offset by the strong performance of the sales tax (Table 11).

Expenditures exceeded their budgetary allocations for a number of items in 1994/95. The wage bill was marginally higher than expected (Table 12), owing in part to the pace of civil service retrenchment going slower than originally envisaged; total civil service posts declined by 7,660 to 163,853 by end-June 1995, in contrast with the authorities' target of 162,263 (Table 13). The wage bill rose from 11.3 percent of GDP in 1993/94 to 11.8 percent in 1994/95, reversing the trend of a declining wage bill/GDP ratio witnessed in earlier years. The fact that the decline in the size of the civil service (which excludes defense personnel, the national police force, and prison service) did not result in greater budgetary savings can be linked to the fact that most of the eliminated posts were vacant. This has been the case during most years of the civil service retrenchment program. From 1991/92 through 1994/95, 20,889 posts were abolished, while only 7,632 persons were retrenched, and 1,412 new posts were created.

Expenditure on nonwage goods and services exceeded the revised budgetary target by 1.1 percent of GDP, reflecting chronic problems in expenditure management and control. Defense expenditure climbed from 4.2 percent of GDP in 1993/94 to 4.5 percent of GDP, exceeding the revised budgetary target by 1.0 percent of GDP; this overrun was due partly to higher-than-budgeted outlays for aircraft procurement. The interest bill rose to 8.8 percent of GDP, reflecting a higher domestic financing requirement, high real interest rates on government debt, the payment of interest on Z$3,974 million of public enterprise debt assumed by the Government, and interest on Z$1,377 million of forward cover losses assumed by the Ministry of Finance from the Reserve Bank of Zimbabwe.

Subsidy payments fell sharply as a share of GDP after 1992/93 (Table 14), although public enterprise losses in 1993/94 and 1994/95—most notably those of GMB—showed no sign of improvement (Table 18), implying that those losses were partly being covered by loans (with government guarantees), arrears (particularly to Government), and other means. 1/ Transfer payments exceeded the revised budget target by a large margin, in part because of an overrun in pensions payments (inclusive of retrenchment benefits). One-time retrenchment benefits for 2,256 workers actually leaving the civil service came to Z$236 million. The high cost per employee of retrenchment (Z$104,000) in 1994/95 is linked to the heavy reliance on a voluntary retrenchment scheme based on the commutation of pension benefits, and the fact that participants in the retrenchment scheme came primarily from the upper ranks of the civil service. 1/

Combined expenditures for capital and net lending exceeded the budgetary target by 1.4 percent of GDP, owing to substantial overruns in foreign-financed expenditures. These expenditures had been recorded off-budget as increases in “debtor balances” throughout the fiscal year, until a supplemental appropriation in June 1995 brought the debtor balances onto the budget. The supplementary appropriation covered debtor balances accumulated up to end-March 1995 (Z$2,996 million), which also included balances accumulated before the start of 1994/95. 2/ Total debtor balances accumulated through end-June 1995 were Z$3,374 million, of which Z$378 million was accumulated after the supplementary appropriation. Of the total debtor balances (Z$3,374 million), Z$1,683 million (3.2 percent of GDP) was accumulated during 1994/95, with Z$357 million for other goods and services (including Z$186 million for defense), Z$143 million for transfers, Z$554 million for capital, and Z$629 million for gross lending. These debtor balances were financed through Z$327 million of foreign grants, Z$1,259 million of foreign loans, and Z$98 million of domestic financing.

Privatization proceeds (treated as negative net lending in 1994/95) equalled Z$500 million, with the lion's share of receipts coming during the second quarter of 1995. Loan recoveries, at Z$201 million, were Z$99 million below the original budgetary target, reflecting continuing problems in collecting debt obligations from the parastatals.

4. The 1995/96 budget

The 1995/96 original government budget aimed at a deficit (excluding grants) of Z$7,435 million (11.8 percent of GDP) and a primary balance deficit of Z$935 million (1.5 percent of GDP). Revenues are expected to rise from 28.3 percent of GDP in 1994/95 to 28.6 percent, while expenditures are envisaged to rise from 39.8 percent of GDP in 1994/95 to 40.4 percent.

Among the most important new tax measures introduced in the budget are an increase in the basic sales tax rate from 12.5 percent to 15 percent, effective August 1, 1995; the application of a 5 percent sales tax to electricity as a final tax for both commercial and residential users, effective October 1, 1995; an increase in petroleum taxes, with the specific tax on gasoline rising from 67.5 cents per liter to 75 cents, and that on diesel from 11.8 cents a liter to 20 cents, effective July 28, 1995; an increase in customs duties of 10 percentage points on automobiles, with the maximum rate now reaching 85 percent; an increase in the customs duty rate on textiles from 30 percent to 45 percent or US$75 per kilo, whichever is greater; and a reduction in excise duties on clear beer from 85 percent to 77.5 percent and on carbonated beverages from 25 percent to 22.5 percent.

Total expenditures in the budget are projected at Z$25.5 billion, or 40.4 percent of GDP. The wage bill is budgeted at Z$7.2 billion, a 17 percent increase over the 1994/95 outturn. Expenditures on other goods and services (excluding drought relief) are slated to increase by 6 percent, an 11 percent decline in real terms. Defense outlays are projected to fall sharply to 3.4 percent of GDP, aided by continued reductions in defense posts. Transfers are budgeted to fall by Z$84 million, implying a substantial cut in real outlays, while subsidies will rise slightly to Z$260 million. Combined capital outlays and net lending (excluding privatization proceeds realized in 1994/95) will rise from Z$3.6 billion in 1994/95 to Z$3.9 billion in 1995/96, with outlays for domestically-financed capital and net lending limited to ongoing projects and the payment of called-up government loan guarantees (Z$400 million).

Drought relief outlays will add substantially to central government expenditure during 1995/96. The original budget allocation for drought relief amounted to Z$890 million, of which Z$50 million is for capital projects. The total cost of drought relief—including outlays that could be provided through nongovernment channels but excluding large dams—is estimated by the Government at Z$1.5 billion, with about Z$0.9 billion to be raised from foreign donors (Table 15). 1/ Most of these expenditures are recurrent outlays for food relief; the cost of these programs (the grain loan, free food, child supplemental feeding, and food crop programs) is expected to rise from Z$152 million in 1994/95 to Z$1,103 million. 2/

In an effort to reduce the fiscal deficit and domestic financing needs to sustainable levels, the Government decided to introduce new revenue and expenditure measures, expected to yield budgetary gains of 0.6 percent and -0.5 percent of GDP respectively, in 1995/96. While most measures were planned to be implemented after January 1, 1996, an increase in the sales tax for luxury goods, from 20 to 25 percent, is already in place. The effect of theses measures would be to reduce the budget deficit (excluding grants) to about 10.5 percent of GDP.

Expenditures during 1995/96 are expected to be constrained within budgetary limits by the introduction of a stop-payments facility at the Central Payments Office, based on cumulative monthly cash limits. In addition, ministries have been called upon to reprioritize their activities in an effort to stay within their budgetary allocations.

5. Developments in central government debt

Combined domestic and foreign debt averaged 68 percent of GDP between 1988/89 and 1993/94 (Table 16). During this time period, the share of domestic debt in total debt declined steadily, while the foreign share increased, reflecting in part the 75 percent exchange rate depreciation over this period. The interest bill rose from 5.9 percent of GDP in 1990/91 to 7.2 percent of GDP in 1992/93 and 1993/94.

A large increase in the domestic financing requirement, as well as the takeover of public enterprise debt and forward cover losses, boosted the debt-to-GDP ratio to 78 percent by the end of 1994/95. As part of its package of reform for parastatals, the Government assumed Z$4 billion of public enterprise debt during 1994/95. In addition, forward cover losses of the Reserve Bank of Zimbabwe of Z$1,204 million were assumed in November 1994, as well as an additional Z$173 million during February 1995. 1/ In light of these considerations, the sharp increase in the central government debt/GDP ratio during the single fiscal year of 1994/95 is overstated, as some of the increase reflects the assumption, by the Central Government, of public enterprise and central bank losses accumulated in earlier periods.

The large increase in government indebtedness in 1994/95 is reflected in a sharp rise in the stock of treasury bills, with more modest increases in long-term bonds (including “stocks”) and a decrease in the net overdraft account. The rise in the stock of treasury bills, as opposed to other debt instruments reflects in part their use by the RBZ to sterilize certain inflows of foreign exchange. The proceeds of these “special treasury bills,” as they are called when used for sterilization purposes, are held as government deposits at the RBZ, thus diminishing the net overdraft position of the Central Government. Because of the heavy issue of these special treasury bills, the government net overdraft position declined from Z$577 million in June 1994 to a balanced position in June 1995, despite the assumption of Z$1,377 million of forward cover losses that were initially added to the Central Government's overdraft account. 1/

The large increase in the stock of debt at the end of 1994/95 portends a much higher interest burden for 1995/96, which is reflected in the interest bill projections in the 1995/96 budget. Interest costs are projected to rise to 10.3 percent of GDP, an increase of 1.5 percentage points of GDP relative to the 1994/95 outturn.

III. Public Enterprise Reform

1. Background

Historically, the Zimbabwean Government has had considerable involvement in domestic economic activity. Government involvement included ownership of a large number of companies listed under the Companies Act with full or partial ownership of a number of commercial holding companies and financial institutions. In addition, the Government controls some 31 designated public enterprises (PEs), of which 22 have commercial activities, including at least 7 with some monopoly rights (Table 17). The public enterprise sector in Zimbabwe has been suffering from overstaffing, managerial and financial weakness, and often benefitting from monopoly privileges. In the past, the PEs have incurred substantial losses—reaching 4.4 percent of GDP at the end of the 1980s—that have been covered by government subsidies and loan guarantees. 2/ To reduce this strain on public finances and to stimulate domestic production and development of efficient internal markets, the reform of public enterprises was identified as an important goal under the Government's ESAP.

Under the ESAP, the Government developed a strategy to address the problems of the PE sector with policies that included (i) enhancing the managerial autonomy and accountability of enterprises; (ii) allowing pricing flexibility to enable recovery of operating costs and the elimination of operating losses; (iii) removing the automatic recourse to budget support, which took the form of both direct subsidies and transfers, and indirect subsidies such as exemption from import duties and other taxes; (iv) recapitalizing and restructuring certain PEs to put them on a self-sustaining footing; and (v) privatizing some PEs, as well as bringing in private sector resources to improve operating efficiency in others. The introduction of these policies has been uneven and has suffered considerable delays but began picking up some momentum during 1995.

Among the public enterprises, nine major ones have been responsible for a majority of the group's losses. For this reason, the reform program has tended to focus on this group, which comprises the Grain Marketing Board (GMB), Dairy Marketing Board (DMB), Cotton Marketing Board (CMB), Cold Storage Commission (CSC), and Agricultural Finance Corporation (AFC) in the agricultural sector; the National Railways of Zimbabwe (NRZ) and Air Zimbabwe Corporation (AZC) in the transportation sector; and Zimbabwe Iron and Steel Company (ZISCO) and National Oil Company of Zimbabwe (NOCZIM) in the industrial sector. Among these, the GMB and ZISCO have been the main focus of attention, owing to their size, problems, and impact on their respective markets. By 1994/95, five of the nine enterprises had been restored to positive operating balances, leaving the GMB and ZISCO as the major loss makers (Table 18).

2. Institutional arrangements for public enterprise monitoring

Currently, the responsibility for monitoring and controlling the activities of PEs lies with six government bodies: (i) the Parastatals Unit (PU) in the Accountant General's office; (ii) the Public Enterprise Section (PES) in the Monitoring and Implementation Unit (MIU) of the Ministry of Finance; (iii) the parent ministries; (iv) the PE Monitoring Unit (PEMU) in the Office of the President; (v) the National Economic Planning Commission (NEPC); and (vi) the Public Expenditure Division (PED) in the Ministry of Finance. The PED is responsible for approving the overall level of the capital budgets of PEs, while NEPC approves all PE capital projects. With a staff of six, including the unit head, the PU is responsible for monitoring the financial accounts of PEs and liaising between the Ministry of Finance and PEs; it reports to the Minister of Finance through the MIU. The PES—consisting of two economists and the section head—is a policy advisory body on PEs and reports to the Deputy Director, MIU. The PEMU in the Office of the President has the overall responsibility for monitoring the performance of the PEs and for signing performance contracts with selected PEs. The parent ministries approve the current budgets of PEs and are also responsible for their operations and administration.

In practice, the respective ministries become more involved in monitoring where the institutional framework is unclear or where the other monitoring bodies have insufficient resources, and this tends to lead to conflicts with the authority of the boards. The authority of PE managers is often not fully clear either. In principle, performance related pay was introduced in 1993/94, but in practice performance contracts have often not been signed or observed. PE managers may be reluctant to be judged on their performance where they feel they do not have control over key decisions, for example, timing of price increases and investment decisions. Thus, PE autonomy has been limited, and the progress that has occurred has been de facto rather than de jure.

The existing government bodies' roles in monitoring the performance of PEs has been largely passive. There is a lack of standardization in report procedures and also a lack of appraisal, timely monitoring, and follow-up procedures in relation to both capital and operating budgets. As of June 1995, progress on the commercialization strategy had not brought about a comprehensive and sustainable improvement in the combined financial deficit of the nine monitored PEs, although limited progress had been made.

3. Recent developments

The 1994/95 reform program for PEs aimed at ending the interventionist pricing and marketing policies of the PEs and at reducing their dependency on the government budget. To this end, the CHB, DMB, CSCs and AZC were transferred from individual statutory bodies to commercial companies (100 percent government-owned) under the Companies Act. 1/ Under this measure, the prices and markets of these enterprises were fully decontrolled and the enterprises are now subject to private sector competition. Based on their business plans, all are expected to be profitable in 1995/96. In other cases, revisions have been made to the statutory corporations act of the NRZ and Zimbabwe Electricity Supply Authority (ZESA) to increase enterprise autonomy and to clarify enterprise mandates. Other measures are also being introduced to ensure greater autonomy for boards and management and to improve internal efficiency by discouraging parastatals from cost-plus pricing.

In a major financial restructuring of agricultural PEs, Parliament enacted the Agricultural Corporation (Debt Assumption) Bill in June 1995. Under this bill, the Government took over Z$3,974 million of their debt—comprising Z$3,432 million of the GMB; Z$243 million of the debt of the CMB; and Z$298 million of the debt of the CSC. 2/ Afterwards, the GMB was still left with about Z$0.5 billion of debt to service out of its own resources. In principle, the agricultural PEs will abstain from the use of government or government-guaranteed loans in the future.

In order to reinvigorate the commercialization and privatization strategy, the Cabinet issued a directive in mid-1995 to the National Economic Planning Commission (NEPC)—assisted by a working group consisting of permanent secretaries of the economic ministries—to prepare a “Privatization and Commercialization Policy and Strategy Paper,” which covers 28 targeted PEs. Under this initiative, the Planning Commissioner in the President's Office was put in charge of the commercialization and privatization of parastatals; and a cabinet committee chaired by him will approve a course of action for each PE, with the options encompassing outright closure, partial or full-privatization, and—in some cases of strategic importance—continued parastatal status but operating on a commercial basis. The new privatization strategy, currently under discussion, will become effective in early 1996.

Based on the increased pressures on PEs in 1995/96 to operate profitably, seven of the nine enterprises are expected to be profitable, with only ZISCO and NRZ showing continued losses. The Government has also indicated its intention to withdraw automatic loan guarantees, to demand increased dividends, and to eliminate the profuse granting of tax exemptions. The public enterprise unit in the Ministry of Finance will also be strengthened by putting in place measures to retain competent and committed professionals and to upgrade the management information system for monitoring the PEs.

In view of the importance of the GMB and ZISCO within the public enterprise sector and the economy at large, some further background and financial updates on them are provided below.

a. Grain Marketing Board

In the years up to 1991, maize marketing in Zimbabwe was characterized by a controlled system of purchase and sale of maize and centralized storage and milling facilities. In practice, the GMB served as a procurement agent for the four private industrial milling firms. This system was originally designed to ensure a consistent flow of maize meal to urban consumers at prices that were controlled (and sometimes subsidized) by the Government. The ability to manage the pricing system required controls on private grain movement. These controls basically divided the country into two zones: (i) the smallholder areas and (ii) the commercial farming areas, with restrictions on movement across zones. The result was to force the bulk of marketed output in the surplus regions into the GMB system, where it was stored and milled. Prior to 1988, the major source of maize supply was the large-scale or commercial farming sector, but over the 1980s the balance of supply slowly shifted in favor of the smallholder sector. Because Zimbabwe is landlocked, there has always been an enormous spread between the cost of imports (including transportation cost) and the price of exports (excluding transport cost), which allowed domestic maize production to be profitable. Although the GMB incurred losses on domestic maize sales, they were modest and seen as an income transfer; its losses on exports of surpluses, however, were large.

In the first wave of reforms after 1991, maize and wheat became regulated, rather than controlled, and the movement restrictions were lifted; many private traders entered the grain market, operating on margins between the GMB's buying and selling price spread. The GMB remained a residual buyer for all white maize with its mandated floor price. Since this wave of reforms, the GMB is no longer the major source of supply of maize for domestic consumers. Nor is the GMB the major purchaser of a number of other grain and oilseed crops for which, prior to 1991, it had been the sole marketing channel.

Thus the role of the GMB has changed substantially; it is now concerned with (i) the maintenance of the strategic reserve of up to 936,000 tons of maize; (ii) the function of residual buyer for all crops, but particularly maize, where it was formerly the only marketing channel; and (iii) the import and the export of maize, as GMB still retains its position as sole exporter, which is usually loss-making (except for sales within the region).

Since 1994/95, the GMB has been undergoing a new wave of reforms designed to leave it as a parastatal but to separate its commercial from noncommercial functions, give it a flexible pricing policy in commercial markets, and further liberalize the grain markets in which it operates. These measures, together with the debt relief (mentioned above), were intended to put the GMB on a sound commercial basis, which would reduce its drain on the government budget. All of GMB's noncommercial operations—for example, maintaining the Strategic Grain Reserve for the Government and serving as buyer of the last resort—were to be explicitly funded by the Government. Starting with the April 1995 crop season, the GMB was allowed to implement a new market-based pricing policy for maize, which allowed seasonal variations in pricing. Maize sales prices were raised in early 1995 from Z$1,050 to Z$1,220/ton and later to Z$1,680/ton in August. As a result of this pricing increase, the GMB now expects to make a small profit in 1995/96. As part of its new market orientation, the GMB has developed a business plan to guide its purpose and profitability, which it will enforce by taking necessary cost-cutting measures in addition to its pricing flexibility.

With regard to the noncommercial aspects of the GMB's business that it undertakes on behalf of the Government, these will continue under contract but will be subject to market-related charges. The Government will create a self-financing Strategic Grain Reserve Fund in 1996 to cover an important part of these operations.

b. Zimbabwe Steel Company

ZISCO has been the sole producer of steel products in Zimbabwe, with the Government's holding now at 93 percent of the share capital. 1/ For most of the past 20 years, ZISCO has been unable to generate earnings sufficient to sustain its operations and has depended on the Government for direct financial support and the granting of loan guarantees. The company has generally been substantially overmanned, been operated well below capacity, and has suffered considerable lack of confidence. Part of its poor performance is due to low steel output, which stems from the closure of blast furnace number 4, which theoretically accounts for 70 percent of ZISCO's production, while the only functioning furnace is also undergoing rehabilitation, which has hindered its performance.

In March 1995, a team of management consultants from British Steel were appointed to manage ZISCO and prepare a diagnostic study of the company. The initial study was completed in July 1995 but was subsequently revised, at the request of ZISCO management, to incorporate further analysis of the market opportunities in the Southern African region. The report was resubmitted in November and is under consideration by the authorities. Among the more controversial issues to address was the precise timing of the rebuilding of blast furnace A. The timing is affected by the large capital requirements combined with an assessment of how quickly ZISCO can improve quality and compete with the Republic of South Africa.

The next step for ZISCO will be the development of a medium-term business plan, which will outline the timetable to modernize its rolling mills and casting process. The goal of the turnaround strategy under preparation will be to ultimately privatize ZISCO.

IV. Money and Credit

1. Institutional overview

The financial system of Zimbabwe consists of the Reserve Bank (RBZ) and three other types of institutions: (i) deposit money banks (DMBs); (ii) other banking institutions; and (iii) other financial institutions. DMBs include five commercial banks, eight merchant banks, and five discount houses. Other banking institutions consist of four building societies, four finance houses, and the Post Office Savings Bank (POSB). Insurance companies, pension funds, development finance institutions, and foreign exchange bureaus are important other financial institutions in Zimbabwe. After the authorities began liberalizing the financial system in 1991, new entry has been encouraged. Since the second half of 1993, new licenses have been granted to four merchant banks, two discount houses, and one building society.

During the past year, the authorities have begun to revise Zimbabwe's financial legislation. The Reserve Bank Act is being revised with a view to strengthening financial regulations and place bank supervision functions, currently handled by both the RBZ and the Ministry of Finance, under the exclusive authority of the RBZ. The Banking Act and the Building Societies Act are also being amended to enhance competition and reduce market segmentation between commercial banks and building societies. Furthermore, the authorities are drafting a new Unit Trusts Act with a view to increasing participation of small investors in the stock market. Although all of this legislation has been delayed, these Acts are expected to be passed by Parliament by the end of FY 1996.

In September 1995, the RBZ initiated a practice of issuing semiannual monetary policy statements to inform the public of current monetary policy objectives and prospects. In its first statement, the RBZ announced that it had introduced guidelines on the risk-asset-based measurement of capital adequacy for banking institutions along the lines of the Basle standards, and that all banks were expected to comply with a minimum capital adequacy ratio of 8 percent by June 1997. It was also announced that guidelines for bad debt provisioning by banks would be issued and implemented by the end of 1995.

Recently, the RBZ also revised its data reporting forms from financial institutions and constructed an improved monetary survey, with the revisions carried back to December 1993 (Tables 19-21). 1/ As the present analysis is based on data from the revised monetary survey, comparison with previous reports is impaired.

2. Instruments of monetary policy

The monetary policy instruments of the RBZ comprise: legal reserve requirements, a liquid asset ratio, Reserve Bank bills, rediscount facilities, overnight loans, and special treasury bills. As interest rates and restrictions on foreign exchange were progressively liberalized, the RBZ has increasingly depended on indirect monetary policy instruments, particularly special treasury bills, to manage liquidity conditions in the financial system.

Legal reserve requirements are applied to DMBs and finance houses, and are not remunerated. They are calculated on the basis of total domestic currency deposits plus 20 percent of foreign currency accounts (FCAs) at the beginning and the middle of each month. 1/ The required reserve ratio for DMBs was increased in two steps, totaling 4 percentage points, in March and June 1994 and has since remained unchanged at 17.5 percent. The required reserve ratio for finance houses has remained fixed at 4 percent since 1981 (Table 22).

The liquid asset ratio applies to DMBs, finance houses, and building societies, and is calculated with respect to total liabilities to the public. In the 1980s, the RBZ had changed this ratio frequently according to liquidity conditions in the market; however, since 1991 the ratio has been constant at 10 percent.

From time to time, the RBZ also uses Reserve Bank bills as a short-term monetary control instrument. Since the first issue in the 1980s, the RBZ has fixed the Reserve Bank bill rate to its rediscount rate, and required that commercial banks and discount houses take up all new bills in proportion to their market shares. Following a large issue of Reserve Bank bills in the first half of 1994, the outstanding amount was kept constant at Z$2,050 million. In January 1995, the maturity of Reserve Bank bills was changed from 7 days to 91 days, and commercial banks and discount houses were allowed to sell the bills in a secondary market.

The rediscount facilities at the RBZ are open only to discount houses, which act as intermediaries between other financial institutions and the RBZ. Paper eligible for rediscounting includes treasury bills with less than 7 days to maturity, tobacco bills of up to 180 days to maturity, and export-related bankers' acceptances. The RBZ also provides overnight loans to DMBs, mainly to discount houses. At present, the overnight and rediscount rates are set at the same level, each consisting of a normal and a penal rate. 2/ While access to these facilities at the penal rate is not limited, the RBZ limits access to the normal rate based on its daily assessment of liquidity conditions. The normal rate was reduced from 30 percent to 29.5 percent in December 1994 and, since then, has been constant. The penal rate is currently fixed at 35 percent.

In February 1994, the Treasury permitted the RBZ to issue 91-day treasury bills to supplement the Reserve Bank bills for short-term liquidity management. These special treasury bills are issued at the discretion of the RBZ for monetary policy purposes and are in addition to the Treasury's own demand for fiscal financing. Proceeds from selling these special treasury bills have to be maintained in a Government deposit account; otherwise, these bills are no different from normal treasury bills. By subtracting the amount held in government deposits from total loans and advances to the Government, the RBZ calculates the Government's net overdraft position and, hence, the Government's interest obligations to the RBZ. 1/ The RBZ conducts a weekly tender for treasury bills, each week for the same amount (presently at Z$55 million). The interest rate established at this tender is used as a benchmark to determine the rates for treasury bills sold to mop up excess liquidity later in the week. The amount of treasury bills sold at each weekly tender is often far exceeded by the amount of treasury bills sold later in the week. In recent months, the RBZ occasionally issued 7- and 14-day special treasury bills in order to increase the flexibility of its liquidity management.

During the second half of 1994 and the first half of 1995, the RBZ relied on overnight loans and special treasury bills as its main instruments of monetary policy. In particular, between September 1994 and April 1995, the RBZ sold large amounts of special treasury bills in the market in order to achieve a targeted level of liquidity shortage, which was based on the demand for overnight loans by discount houses. For the market to clear, the RBZ usually accommodated this demand for overnight loans, either at the normal or at the penal rate. 2/

Although the RBZ continued to use special treasury bills as its main instrument of monetary policy, it relaxed its tight stance in May and June 1995 in anticipation of a possible liquidity shortage in the system at the end of June, when large amounts of bills issued by agricultural public enterprises became due. During this period, the RBZ allowed the market to settle by itself, and absorbed any remaining excess liquidity by selling very short-term special treasury bills. Because of the monetary easing, and in the wake of a sharp surge in capital inflows during the period, overnight loans to discount houses declined substantially and the treasury bill rate fell below the normal rediscount rate for the first time since June 1994 (Chart 4). Throughout this period, the RBZ continued to tender a small amount of treasury bills each week in order to establish a benchmark rate for treasury bills sold later in the week.



Citation: IMF Staff Country Reports 1996, 033; 10.5089/9781451841398.002.A001

Source: Reserve Bank of Zimbabwe.1/ From December 1994, based on revised monetary survey.

3. Developments in reserve money and broad money

Between January 1994 and June 1995, developments in reserve money and broad money in Zimbabwe can be divided into three subperiods: (i) January-April 1994, when money growth was high but stable; (ii) May-August 1994, when money growth accelerated rapidly; and (iii) September 1994-June 1995, when money growth declined (Chart 4).

In the first period, broad money grew by some 40 percent, year-on-year. Although the economy experienced sharp fluctuations in capital flows during this period, caused by an earlier expectation of depreciation at end-1993 and then by the exchange reform in January 1994, the RBZ fully sterilized the effects of its intervention in the foreign exchange market. Despite the acceleration in inflation, owing in part to the lagged effects of monetary expansion in the second half of 1993, interest rates remained relatively stable during the period.

In the second period, May-August 1994, the economy continued to experience capital inflows, and the RBZ intervened heavily in the foreign exchange market. However, the intervention was not fully sterilized. Combined with the high costs of the RBZ's quasi-fiscal operations—in particular its loss-making forward foreign exchange contracts—the unsterilized effects of foreign exchange intervention resulted in an acceleration of the annual growth of both reserve money and broad money to about 60 percent (Chart 4 and Table 19). 1/ In order to limit the inflationary impact of this rapid money growth, the RBZ undertook a number of measures to tighten the stance of monetary policy: the rediscount rate was raised from 28.5 percent to 30 percent; the rediscount window was closed to commercial banks (remaining open only to discount houses); and the legal reserve requirement ratio was increased from 13.5 percent to 17.5 percent. Furthermore, the RBZ issued an additional Z$1 billion of Reserve Bank bills, bringing the total amount outstanding to just over Z$2 billion. These measures resulted in higher interest rates, and inflation started to decline.

In the third period, September 1994-June 1995, the RBZ maintained a tight monetary policy stance, bringing about an important decline in monetary expansion until mid-1995. Although the RBZ continued to intervene in the foreign exchange market to dampen sharp fluctuations in foreign capital flows, the effect of its intervention was generally sterilized, and the level of reserve money remained relatively stable. To further reduce uncertainties in the targeting of reserve money, public enterprise deposits were transferred from the RBZ to the commercial banks around the end of 1994. Reserve money growth declined at end-June 1995 because one commercial bank was given a temporary exemption from the legal reserve requirement. The deceleration in broad money growth also reflected intense competition for deposits from building societies, which are not part of the monetary survey. As a consequence of the tighter monetary stance, interest rates increased in the first quarter of 1995. However, in the third quarter of 1995, reserve money was allowed to temporarily expand—largely because of a sharp jump in net foreign assets of the banking system.

For 1995/96, the RBZ announced in its policy statement that it is committed to a tight stance of monetary policy with a primary objective of maintaining price stability. In order to bring inflation down from 20 percent in June 1995, and an expected 25 percent later in the year, to its targeted level of 16-18 percent in June 1996, the RBZ intends to limit broad money growth to 18-20 percent on an annual basis.

4. Developments in credit to the private sector

During 1994 and the first half of 1995, credit to the private sector was crowded out through high interest rates caused by excessive demand for credit from the public sector and the tight stance of monetary policy. Over this period, the year-on-year growth of credit to the private sector remained below domestic inflation (Chart 5). It is also probable that even this modest growth in private sector credit reflects some capitalization of interest for loans granted to farmers, whose ability to service their debt was impaired by the 1995 drought.



Citation: IMF Staff Country Reports 1996, 033; 10.5089/9781451841398.002.A001

Sources: Reserve Bank of Zimbabwe; and IMF, International Financial Statistics.1/ Until December 1994, change in credit as defined in old format of the monetary survey.

During the past year, the private sector depended increasingly on offshore sources for credit. After domestic lending rates started to rise in the second quarter of 1994, the ratio of offshore loans to total private sector credit rose from some 25 percent in early 1994 to about 30 percent later in the year and into 1995 (Chart 5 and Table 21). In order to encourage the use of low-interest offshore loans for small exporters, the RBZ issued a recommendation to commercial banks in December 1994 to source abroad at least 70 percent of working capital loans for exporters. However, access to offshore loans for small- and medium-scale firms remained limited because banks usually required high collateral in addition to a confirmed export order.

Zimbabwe is one of the few African economies to have a stock market, which offers an additional means of financing investment. At end-1994, average industrial share prices had risen 36 percent over the previous year on about double the average volume of the previous year, while mining shares rose 102 percent on even higher volume growth. The first half of 1995 saw share prices rise a further 15 percent on average, slightly more than inflation. Thus performance was aided by the exchange rate liberalization and the relaxation in foreign ownership regulations. 1/

5. Interest rate developments

Interest rate developments in Zimbabwe can also be divided into three subperiods between January 1994 and June 1995, following the developments in reserve money and broad money. In all subperiods, interest rates were positive in real terms and exhibited an inverse yield curve for deposit rates (Chart 4 and Table 23). Over this time period, the spreads between deposit and lending rates at commercial banks contracted slightly.

In the beginning of the first period, January-April 1994, longer-term deposit rates remained at a substantial discount to short-term rates, reflecting the declining trend in inflation. Most interest rates stayed relatively constant as the rediscount rate remained unchanged and the RBZ relied on the rediscount window as its main instrument of monetary policy. Over this period, rates declined in real terms as inflation moved up sharply.

In the second period, May-August 1994, higher inflation was recognized and the RBZ took measures to tighten the stance of monetary policy, especially through an increase in the rediscount rate, and nominal interest rates rose in response. As the RBZ changed its monetary management from direct instruments to reliance on the sale of treasury bills, the treasury bill rate established at the weekly tender increased rapidly. This move made interest rates more responsive to changes in liquidity conditions in the market, and the treasury bill rate became a benchmark for other interest rates in the economy, particularly the rate for negotiable certificates of deposit (NCD).

In the third period, September 1994-June 1995, short and long rates converged on a basically flat yield curve, while the treasury bill rate established at the weekly tender continued to serve as the benchmark for other rates in the economy. During the fourth quarter of 1994 and the first quarter of 1995, most interest rates remained high despite the slight decline (0.5 percentage points) in the RBZ rediscount rate, resulting in a decline in broad money and reserve money growth. In May 1995, when the RBZ stopped targeting a liquidity shortage in the system, money market rates eased. The RBZ also announced in its policy statement that it is committed to maintaining positive real interest rates throughout 1995/96.

6. Contribution of the nonbank sector to financing the budget deficit

The RBZ was able to limit broad money growth during 1994/95 because the Z$5 billion net domestic financing requirement of the budget was met largely by the sale of government securities (Z$3.4 billion) to the nonbank sector (Table 24).

Within the nonbank sector, the major part of the deficit was financed by insurance companies and pension funds. Recent estimates suggest that holdings of government bonds by insurance companies and pension funds increased by Z$1.8 billion during the fiscal year from Z$5.1 billion at end-June 1994. Moreover, these institutions also have invested substantial amounts in treasury bills. It was estimated that total holdings of government bonds and treasury bills by insurance companies, pension funds, nonfinancial corporations, and individuals increased by approximately Z$2.9 billion during the fiscal year. The remaining Z$570 million financed by the nonbank sector was taken up by other financial institutions (Z$440 million) and the National Social Security Authority (NSSA) (Z$130 million).

Among other financial institutions, building societies played a growing role in financing the budget deficit, while the financing role of the POSB diminished during the fiscal year (Table 25). Because of rapid growth in the building societies' deposit base—it almost doubled between June 1994 and June 1995—and a shift in their investment strategy toward short-term treasury bills, their claims on Government increased by around Z$750 million. By contrast, net financing from the POSB was negative (-Z$375 million), as the POSB shifted its investment strategy toward interbank call money and NCDs. Furthermore, the POSB experienced a decline in the growth of its deposit base, owing to aggressive competition from building societies and the adverse impact of the drought on small depositors during the first half of 1995.

V. External Sector

1. Balance of payments

a. Current account

Zimbabwe's current account deficit, which deteriorated substantially in 1992 because of the severe drought, improved by 1994 to 4.5 percent of GDP (Table 26). Most of the advance was registered in the trade account where expansion in agricultural and mining exports, and lower drought-related food imports combined to return the trade balance to its normal surplus position. The terms of trade, which had declined substantially in 1992 and 1993, fell by only 1.5 percent in 1994 (Table 27). Preliminary data indicate that the current account improved further in the first half of 1995, as the terms of trade improved slightly and import demand slacked off, owing to the effects of the renewed drought on economic activity.

b. Merchandise trade

The export sector in Zimbabwe is relatively well spread between agriculture (38 percent in 1994), mining (24 percent), and manufacturing (38 percent), although more than 70 percent of exports are directly subject to changes in world commodity prices (Table 28). All three sectors grew rapidly in 1994, as domestic production recovered from the 1992-93 drought, the Zimbabwe dollar remained competitive following the 17 percent depreciation in early 1994, and key international commodity prices improved. The key export products are not directly drought sensitive, so strong growth in exports continued through the first half of 1995. The volume of high quality tobacco, the most important agricultural export, grew to record levels, while prices firmed from glut-induced 1993 lows. Cotton, sugar, and maize exports all bounced back in 1994 because of favorable rains, and the coffee sector benefitted from higher world prices. In mining, an increase in the gold price and rising nickel demand were important factors. A boom in mining investment took place during 1994 and 1995, and it is expected that Zimbabwe will become a significant exporter of platinum within two years. There has also been increased activity in diamond exploration. Manufacturing exports grew by 9 percent in volume, spurred by the depreciation of the Zimbabwe dollar in January 1994 and lower labor costs than those of its principal competitors in Southern Africa. High interest rates raised the cost of capital for some manufacturers, although some were able to secure new financing from abroad. Ferro-alloy exports, based on domestically mined chrome inputs, were weak in 1994 as dumping by countries of the former Soviet Union raised worldwide supply and depressed prices. By early 1995, world prices and demand had rebounded. South Africa remained the key export market (14 percent of total) with significant shares going to other countries in the region, the United Kingdom and the United States (Table 29). South Africa's high tariff barriers on textiles and other products are thought to have affected Zimbabwe's exports to that country and other neighboring countries in 1994.

Import volumes grew in 1994 by 7 percent from the low base of 1993, as the recovery in economic activity increased demand, and further liberalization of the exchange regime took place (Table 27). The growth rate of non-drought-related imports was above 20 percent. However, import demand is estimated to have declined in the first part of 1995, as the drought reduced GDP and confidence. Most imports are for machinery, transport equipment, and other manufactured goods, as Zimbabwe is basically self-sufficient in food except during droughts (Table 30). The share of imports of goods from South Africa, Zimbabwe's largest trading partner, grew rapidly in 1993, and this trend is thought to have continued in 1994, partly as a result of export subsidies granted by that country (Table 31).

c. Services

Zimbabwe tends to run a deficit in nonfactor services owing to its landlocked location and the corresponding cost of transport services related to its imports. Rising imports in 1994 had a similar effect on transport payments. Partly offsetting these payments, tourist receipts grew rapidly in 1994 and early 1995, following the trend of recent years as more emphasis has been given to developing Zimbabwe's tourism potential. Travel payments have likely been underreported because of the earlier tight limits on foreign exchange for business and personal travel, which have since been relaxed (see below). Net interest payments have declined slightly since 1993, as greater use of bilateral and multilateral concessional debt offset the increase in the overall debt stock. Other investment income payments rose somewhat in 1994, with the further relaxation of controls on dividend and profit remittances.

e. Capital account

The capital account surplus remained steady in 1994, although the composition changed as inflows of private short-term capital replaced declining official long-term borrowing. Much of the private capital inflow was in the form of export pre-financing, particularly of tobacco, although the positive errors and omissions item might also indicate an inflow of other short-term capital responding to positive interest differentials and greater stability of the Zimbabwe dollar. Together with the normal reversal of cyclical financing, speculative outflows of private capital occurred late in 1994, as investors feared another end-of-year depreciation, which did not occur, and inflows re-emerged in the first half of 1995.

Long-term official borrowing fell in 1994 and remained low in the first half of 1995, owing in large part to continuing difficulties in disbursement procedures on already-committed loans, as well as to delays in agreeing on policy-related lending. Project lending continued to represent the majority of disbursements, although disbursements by IDA of over US$60 million were made in support of the structural adjustment program during 1994. Official grants remained steady in 1994, as donors continued to support the liberalization of the exchange system, as well as projects.

Portfolio and direct investment by the private sector grew substantially during 1994, following an easing of restrictions on such flows in 1993. In June 1993, the Government raised the limit on foreign ownership to 25 percent of the equity in companies listed on the Zimbabwe Stock Exchange, and such purchases increased from nil in 1992 to US$65 million in 1994. The Zimbabwe Investment Center, a one-stop investment promotion agency established in 1989, reported increased direct investment in such sectors as mining and tourism. Substantial portfolio inflows took place during the first half of 1995 as foreign investors bought a large part of the Z$500 million in shares sold by the Government. Foreign direct investment for the Hartley platinum project contributed US$55 million of inflows in the first half of 1995.

f. International reserves

Total gross official reserves fell slightly during 1994, but remained equivalent to 3.5 months of imports by end-year (Table 32). Indeed, gross reserves had reached US$715 million at end-September 1994, but the RBZ intervened to sell foreign exchange in the fourth quarter, dampening the seasonal and speculative pressures noted above. The Reserve Bank resumed buying foreign exchange early in 1995, and reserves reached US$660 million by end-June (4.3 months of imports). The RBZ has aimed at maintaining gross reserves at a level equivalent to at least four months of merchandise import cover. As confidence grew in the liberalized import regime, the RBZ undertook to decrease its short-term borrowing, more than offsetting disbursements from the Fund of US$74 million. Thus, net international reserves increased only slightly in 1994.

2. External debt

A rapid increase in external borrowing took place in the early 1990s to ease the transition to a liberal import regime, and by end-1993 long-term public borrowing and guarantees had reached a peak of 70 percent of GDP (Table 33). In relation to GDP, the stock of debt fell slightly in 1994, with most of net new lending being extended by the Fund and World Bank. A shift toward bilateral and multilateral concessional borrowing continued, and debt service remained manageable at 26 percent of exports of goods and nonfactor services. Zimbabwe has never found it necessary to request a rescheduling of official debt.

3. Exchange regime

Throughout the 1980s, Zimbabwe maintained an exchange regime based on tight controls and a fixed official exchange rate. 1/ In 1991, the Government began pursuing an economic and structural adjustment program designed to liberalize the economy and allow market forces to exert their influence. A five-year plan to liberalize the exchange regime by 1995 was largely achieved and culminated on February 3, 1995, with the acceptance of the obligations of the Fund's Article VIII, Sections 2, 3, and 4, which recognizes the liberalization of all payments for current transactions. The efficiency of the exchange market has improved during the course of liberalization, but bid-ask spreads remained relatively high, at about 2.5 percent in mid-1995. In an effort to further improve competition and public service, the RBZ announced on September 5, 1995 that it would begin to authorize foreign exchange brokers.

The authorities took several decisive steps in 1994. The export retention scheme was liberalized to reduce surrender requirements to 40 percent in January, and exporters were permitted to hold the remaining portion in foreign currency accounts for up to 90 days. On July 3, 1994, export surrender requirements and the 90-day limit were abolished, and the official exchange rate was eliminated, thereby unifying the exchange rates at the market rate, which was allowed to float. All nongovernment foreign exchange needs were required to be met from the market, while the Government could purchase foreign exchange from the RBZ only at market rates. The holiday travel allowance was increased to US$5,000 per annum per person, although bona fide requests for amounts in excess of this would be approved by the RBZ. In early 1995, the Government completed liberalizing current payments by establishing a timetable for the liquidation of blocked profits and dividends accrued on investments made prior to May 1993. Also in early 1995, the RBZ discontinued offering forward foreign exchange contracts, which had been concluded at below market rates with maturities up to seven years in an effort to stimulate investment in exporting industries.

Zimbabwe has liberalized a number of capital account transactions, although certain limitations remain in place, including limits on repatriation of capital abroad for investments made before September 1, 1979, and the need for approval from the RBZ for all capital payments abroad and investment in foreign assets. Foreign borrowing in excess of US$5 million is subject to the approval of the External Loans Coordinating Committee. Foreign investors also face certain restrictions on capital movements into Zimbabwe, although the limit on the share of foreign investment in primary issues of stocks and bonds was raised from 15 percent to 25 percent as of September 5, 1995.

4. The exchange rate

The official exchange rate of the Zimbabwe dollar was devalued by 17 percent in January 1994 in an attempt to narrow the gap between the official rate and that prevailing in the market (Chart 6). Tight monetary policy and positive real interest rates caused appreciation of the market exchange rate, and the official and market rates were unified in July 1994 without the need for further devaluation. Since July, the exchange rate has floated, although the RBZ has intervened to limit short-term fluctuations that it considered inconsistent with market fundamentals and to protect competitiveness. In the period end-June 1994 through September 1995, the Zimbabwe dollar depreciated gradually in nominal terms—by 8 percent against the U.S. dollar—and stood at Z$8.80/US$1 at end-September 1995, although the real exchange rate appreciated slightly over the period.



(Index 1980=100)

Citation: IMF Staff Country Reports 1996, 033; 10.5089/9781451841398.002.A001

Source: Information Notice System.

5. Trade policy

a. Situation in 1995

Zimbabwe maintains nontariff barriers, including a negative list for imports, export licenses, and monopolies on imports of certain commodities. The import negative list includes only textiles and clothing, as alcoholic beverages, beverages in cans, nonmonetary gold, pearls, precious and semiprecious stones, and some jewelry items were removed during the past year. Export licenses are required for a range of goods considered to be of strategic or of policy concern (e.g., security, environment): metals, petroleum products, jute, wild animals and products, certain wood products, ammonium nitrate, and weapons. Export permits are required for basic agricultural commodities, including, importantly, maize.

Progress in the reform of the tariff regime has not proceeded as rapidly as in other areas. Zimbabwe maintains a highly complex tariff schedule, with 5 different tariff regimes, 1/ 23 ad valorem rates under the general regime, 35 specific rates, and a number of exemptions which have been granted in an ad hoc manner. The tariff rates vary between zero and 100 percent. The (additional) import surtax was reduced from 20 to 15 percent in January 1994 and to 10 percent in August 1994. Effective rates of protection were not high, however, by developing country standards, since there is often less differentiation between the rates applying to finished goods and inputs.

Zimbabwe has continued its support of the Initiative for Promoting Cross-Border Trade, Investment, and Payments in Eastern and Southern Africa (CBI). The CBI provides for uniform tariff preferences (i.e. reductions) within the group of 70 percent by October 1995, and for zero tariffs within CBI members and a common external tariff by 1998. Zimbabwe was drafting its letter of CBI policy during 1995.

b. The Uruguay Round

The Uruguay Round Agreement is expected to have very little impact on Zimbabwe's tariff structure. Relatively few industrial tariff lines are bound, and the ceiling rates under the World Trade Organization (WTO) agreements are well above the rates being applied. Nearly all agricultural tariffs are bound and are presently at the ceiling level. Zimbabwe has notified the WTO Council of its intention to remove the import negative list in 1995, and to convert this into tariff rates which will be bound at a ceiling of 65 percent.

Zimbabwe is subject to quotas on beef and sugar exports to the European Union, and sugar exports to the United States. Tariff rate and quota negotiations for tobacco exports to the United States are under negotiation. All other products exported to the EU subject to the safeguard clause under the common agricultural policy enter at very low, or in most cases, zero rates of duty. Australia, Austria, Hungary, Japan, Switzerland, and the United States offer Generalized System of Preferences schemes for other major export products except tobacco. Zimbabwe has requested technical assistance from the World Trade Organization and United Nations Conference on Trade and Development to assess the impact of the erosion of the margin of preferences. At the same time, Zimbabwe could gain to the extent that the Uruguay Round leads to lower tariffs on tobacco, mining, and grain exports, and also as competing producers of grains, horticulture, and tobacco reduce export subsidies.

Zimbabwe is likely to benefit from ongoing discussions to liberalize regional trading in line with the Uruguay Round. In addition, Zimbabwe is a relatively efficient producer of many agricultural products, and exports of food to regional markets are likely to benefit from the higher world prices expected to result from the Uruguay Round.


Zimbabwe: Summary of Tax System, August 1995

(All amounts IP Zimbabwe dollars

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Source: Data provided by the Zimbabwean authorities.


Table 1.

Zimbabwe: Expenditure on GDP, 1989-94

(In millions of zimbabwe dollars)

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Source Central Statistics Office; and staff estimates.

Staff estimates.

Included in consumption for calculation of savings.

Includes official grants.

Table 2.

Zimbabwe: Cross Domestic Product, 1988–94

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Sources: Central Statistics Office: and staff estimates.

Staff estimate of conversion from 1980 prices to 1990 prices.

Figures for 1991 through 1993 are preliminary.

Staff estimates.

Table 3.

Zimbabwe: Volume of Manufacturing Output, 1989–95

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Source: Central Statistics Office.

Provisional, June 1994 to May 1995; percentage change is not comparable to previous periods.

Table 4.

Zimbabwe: Agricultural Land and Population (1995)

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Sources: Agriculture Sector of Zimbabwe Statistical Bulletin of 1995; World Bank Country Economic Memorandum, Volume II (1995).

NR refers to the Natural Region classification of land, see Chapter 1, Section 4.

Table 5.

Zimbabwe: Value of Agricultural Production, 1990

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Source: Central Statistics Office.

Communal lands and resettlement areas.

Large–and small–scale commercial farms.

Table 6.

Zimbabwe: Agricultural Crop Production, 1990–95

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Source: Central Statistics Office.

Crop season ending in year indicated.

Large- and small-scale commercial farms.

Large-scale commercial farms only—production on large scale commercial farms exceeds 95 percent of total production.

Includes Deltapane and Delmac cotton.

Communal lands and resettlement areas.

Includes livestock production, etc.

Table 7.

Zimbabwe: Mineral Production, 1989–94

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Sources: Central Statistics Office; IFS (exchange rate); Ministry of Finance (EPO).

Includes diamonds, other precious stones, phosphate, tantalite, magnesite, limestone, and lithium.

Table 8.

Zimbabwe: Consumer Price Index,1/ 1992–95

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Source: Central Statistics Office.

New (1990) overall index for all income; end period.

Table 9.

Zimbabwe: Employment 1989–94

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Source: Central Statistics Office.

October 1993 to September 1994.

Public administration, health, and education.

Total earnings deflated by CPI divided by average employment.