Zimbabwe
2003 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Zimbabwe

The Zimbabwean economy has deteriorated progressively over the past four years. Executive Directors expressed deep concern about this, and stressed the need to implement strong macroeconomic, monetary, fiscal, and structural policies. They urged the Reserve Bank of Zimbabwe to ensure that banks meet all prudential regulations, and are adequately capitalized. They welcomed Zimbabwe's participation in the General Data Dissemination Standards, and urged the authorities to strengthen the country's data base to improve the analytical basis for economic policy formulation and IMF surveillance.

Abstract

The Zimbabwean economy has deteriorated progressively over the past four years. Executive Directors expressed deep concern about this, and stressed the need to implement strong macroeconomic, monetary, fiscal, and structural policies. They urged the Reserve Bank of Zimbabwe to ensure that banks meet all prudential regulations, and are adequately capitalized. They welcomed Zimbabwe's participation in the General Data Dissemination Standards, and urged the authorities to strengthen the country's data base to improve the analytical basis for economic policy formulation and IMF surveillance.

I. Recent Developments

1. Zimbabwe’s economy has deteriorated sharply in recent years. Real output has declined by about one-third in the four-year period since 1999, with the pace of decline accelerating to an estimated 13 percent in 2002 and affecting all key sectors (Table 1). Per capita GDP dropped to an estimated USS640 in 2002, slightly above the average for sub-Saharan African countries.1 Inflation rose steadily to 228 percent in the year through March 2003, and prices in the parallel markets have risen even faster. Shortages of basic goods, fuel, electricity, and foreign exchange have become pervasive. There is little productive investment, and there are reports of significant capital flight, emigration of unskilled and especially skilled labor, and smuggling of price-controlled goods to neighboring countries. The balance of payments has been under severe pressure since 1999, when Zimbabwe started to accumulate external payments arrears. Severe food shortages—reflecting in part the droughts in early 2002 and early 2003—have necessitated massive food imports and donor assistance, and two-thirds of the population has required food aid (Box 1). The social consequences of the economic collapse are dire: poverty and unemployment have risen, and the HIV/AIDS pandemic (Box 2) is worsening as a vicious circle of malnourishment and disease has developed. Life expectancy has fallen to 40 years, and the child mortality rate has risen sharply.

Table 1.

Zimbabwe: Selected Economic Indicators, 1999–2003

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Sources: Zimbabwean authorities; U.S. Census Bureau; World Health Organization; and staff estimates and protections.

Foreign currency units are converted into Zimbabwe dollars at the official exchange rate. Variables in the last column thus reflect valuation adjustments.

GDP at world prices using real GDP growth and trading partner countries inflation (base year is 1996).

uA01fig01

Real Per Capita GDP

(In 1990 U.S. dollars)

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

uA01fig02

Life Expectancy and Infant Mortality

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

Food Security in Zimbabwe, 2001/02–2003/041

Zimbabwe’s population continues to face a severe food shortage as the production of food crops remains low. The production of maize, the main food staple, peaked at 2.1 million tons in 1999/2000, but then fell to an estimated 0.5 million tons in 2001/02 and 0.6–0.8 million tons in 2002/03. Overall agricultural production declined by 22 percent in 2002 and was down 31 percent from the 2000 level.

The main factors causing this decline include two years of drought, the government’s fast-track land reform program, and a lack of inputs. The drought affecting most of southern Africa in 2001/02 was among the five longest and most severe droughts since 1900.2 The 2002/03 drought was almost as severe; the moderate rainfall in the first quarter of 2003 came too late for a significant improvement in the 2003/04 season crop. The land reform program has also contributed substantially to the loss of output and exports, as large-scale commercial farming has been severely disrupted and the newly resettled farmers lack the knowledge and material support to utilize the land efficiently. The shortage of foreign exchange has exacerbated the unavailability of inputs, such as seeds, fertilizers, fuel, and farming equipment.

Some 7–8 million people (two-thirds of the population) required food aid during the 2002/03 marketing season, especially in the second half of the year. The government launched an appeal for food assistance for vulnerable communal sector populations in October 2001. In April 2002, President Mugabe declared a state of disaster in all communal lands, resettlement and urban areas. In June 2002, the United Nations launched a massive appeal for food aid for southern Africa, including Zimbabwe. Donors responded to the crisis, despite Zimbabwe’s poor relations with them, and food aid received to date amounts to over 0.3 million tons. Government imports are reported at some 0.7 million tons, but the Grain Marketing Board’s monopoly over the procurement, pricing, and distribution of maize and wheat continues to hinder the country’s ability to import sufficient quantities of grain and distribute it efficiently. Price controls in the official market have aggravated the shortages of basic commodities and driven up prices in the parallel market. Government imports, food aid from donors, and early consumption of the 2003/04 season’s crop have improved the food security situation in some areas of the country in early 2003.

Owing to the poor harvest projected for 2003/04 and low stock levels, it is estimated that continued food aid will be needed beyond March 2003. The uncovered cereal import requirement (taking into account planned imports and pledged food aid) will be between 0.8 and 1.3 million tons, equivalent to 40–60 percent of total domestic requirements.

Cereal Balance Sheet, 2002/03–2003/04

(In thousands of metric tons, unless otherwise indicated)

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1997/98–2001/02.

World Food Program, February 1, 2003.

Famine Early Warning Systems Network (FEWS NET), Zimbabwe Monthly Food Security Update, February 27, 2003.

1 April-March crop years.2 FAO/WFP, Crops and Food Supply Assessment, May 29, 2002.

HIV/AIDS Pandemic.1

Incidence. Zimbabwe has one of the highest HIV/AIDS prevalence rates in the world, currently estimated at between 26 to 30 percent of the adult population. The latest joint United Nations Program on HTV/AIDS (UNAIDS) report estimates some 2.3 million adults and children were infected including 600,000 cases of full-blown AIDS. Over 750,000 children are estimated to have been orphaned by AIDS in Zimbabwe. The infection rates recorded at antenatal clinics and hospitals indicate that prevalence rates are higher in border areas and among young women in the 15 to 19 age group. Mother-to-child transmission was largely responsible for the increase in the under-5 mortality rate from 59 to 102 per 1,000 over the 1990s. Life expectancy declined from 56 years in 1975 to 40 years at end-2000. These statistics will almost certainly worsen in the future, with infections claiming on average 2,500 lives per week in 2002, according to the Ministry of Health and Child Welfare (MOHCW).

Impact on the health sector. The annual health expenditure in Zimbabwe was 6.2 percent of GDP in 2000 (or US$127 per capita, according to Haacker (2002)) and will increase as HIV matures into full-blown AIDS for an increasing number of patients over the next few years. In addition, MOHCW estimates that the annual cost of anti-retro viral (ARV) treatment (excluding equipment and other overheads) would be approximately US$300 per patient. Zimbabwe’s health care system is severely constrained by a shortage of medical specialists, generated by loss of staff to AIDS and to emigration. The government’s inability to provide essential drugs, owing to the lack of foreign exchange is another major problem. According to UNAIDS, heavily subsidized government-run voluntary counseling and testing (VCT) centers may be shut down because of such shortages. The private cost of accessing VCTs is quite high relative to the average Zimbabwean household income, and hence, terminating subsidies would make these facilities inaccessible to most Zimbabweans.

HIV/AIDS and the food situation. Maintaining adequate nutritional standards is an important factor in mitigating some of the costs incurred by families with HIV/AIDS patients. The food shortages are therefore, likely to exacerbate the adverse economic impact of HIV/AIDS in Zimbabwe. In addition, according to UNAIDS, the land reform program has severely eroded the coping mechanisms of a significant proportion of the population.

Fiscal burden and overall macroeconomic impact. Assuming modest coverage rates of 30,20, and 10 percent of the population, respectively, for palliative care, treatment of opportunistic infections, and ARV, Haacker (2002) estimates that HIV-related public health expenditure in Zimbabwe will rise to 3.5 percent of GDP by 2010. Labor productivity and labor force size are projected to be affected adversely. A recent study (FAO, 2001) estimated that the pandemic had claimed the lives of 10 percent of Zimbabwe’s agricultural labor force by 2000, and projected that up to 23 percent of agricultural labor may be lost by 2010. The impact on economic growth could be devastating: Haacker projects a potential HIV/AIDS-induced medium-term decline in GDP per capita of up to 7 percent by 2015.

Government strategy to combat HTV/AIDS. The government has adopted a multipronged strategy, spearheaded by a National AIDS Council (NAC), which implements programs through District AIDS Councils (DACs). The main source of funds for the NAC is the AIDS levy, a 3 percent surcharge on assessed income tax obligations. With the aim of speeding up program implementation, disbursements are currently made in proportion to the rate at which the DACs are able to spend the money on programs. However, a lack of accountability and transparency regarding the disbursement of these funds has been a serious issue since the inception of the levy in 2000, For example, the authorities reported that the first round of disbursements has yet to be accounted for by the NAC, which has led the Ministry of Finance to consider discontinuation of the levy from 2004 onward. A multiagency mission under the UN Relief and Recovery Unit visited Zimbabwe in March 2003, and in its report (UN, 2003) acknowledged that the government had successfully initiated the creation of a supportive environment for HIV/AIDS prevention, mitigation, and care. It also identified certain key areas where a more vigorous effort would bear considerable fruit, including prevention of new infections, extension of care for people living with HIV/AIDS, an increase in the responses to the needs of orphans and vulnerable children, and more operational engagement of leadership within the government. The report also stressed the importance of enhancing coordination among the various agencies working in Zimbabwe, including the government; in this context, the joint public awareness project being discussed by the NAC and UNAIDS may be a step in the right direction.

1 Sources: Markus Haacker, “The Economic Consequences of HIV/AIDS in Southern Africa,” IMF Working Paper 02/38 (Washington: IMF, 2002); FAO, “The Impact of HIV/AIDS on Food Security,” (Rome: Food and Agriculture Organization, 2001); UN, “Zimbabwe Humanitarian Situation Report,” UN Relief and Recovery Unit (March 2003).

2. Inappropriate economic policies have been at the forefront of these difficulties. The impact of loose fiscal and monetary policies, the maintenance of a fixed exchange rate, and the imposition of administrative controls have been exacerbated by the land reform program, drought, and the HIV/AIDS pandemic. Contrary to past Fund policy advice to tighten fiscal and monetary policies to contain inflation, and to correct the overvaluation of the official exchange rate and ease restrictions, the authorities have pursued policies that have led to a widening of imbalances in the economy. In particular, highly negative real interest rates have fed credit growth and inflation. Increased regulations and government intervention have driven activity underground. Investor confidence at home and abroad has been eroded by concerns over political developments (Box 3), weak governance and corruption, problems related to the implementation of the fast-track land reform program (Box 4), the push for increased indigenization of the business sector, and the selective enforcement of regulations.

3. Monetary policy has fueled inflation. Nominal interest rates were kept at artificially low levels and, with inflation rising, interest rates became increasingly negative in real terms. Broad money growth accelerated to 165 percent in 2002 from 103 percent in 2001, as effective reserve requirements were lowered by allowing banks to on-lend their required reserves at very low interest rates, resulting in a rapid expansion of credit to the private sector; these concessional facilities peaked at Z$42 billion in July 2002 before declining gradually thereafter (Table 2).2 Quasi-fiscal operations represented another important source of liquidity expansion. The Reserve Bank of Zimbabwe (RBZ) provided preferential exchange rates to tobacco and gold producers that involved a subsidy in 2002 equivalent to the level of end-2001 reserve money. In the poor economic climate, the loose monetary stance failed to generate a supply response, and virtually no productive investment took place in the economy. Instead, prices rose rapidly, causing a depreciation of the parallel market exchange rate, discouraging financial savings, and driving up prices of assets, such as real estate, stocks, and consumer durables.

Table 2.

Zimbabwe: Monetary Survey, 1999–2003

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Sources: Zimbabwean authorities; and staff estimates and projections.

Reserve Bank of Zimbabwe’s net foreign assets and net domestic assets have been adjusted for memorandum of deposits. Includes valuation effects.

At an exchange rate of Z$55 per US$1.

Calculated from the monetary control program.

Cost of providing foreign exchange to state at a rate of Z$55 per US$1, assuming the Reserve Bank of Zimbabwe provides US$0.5 billion in 2003.

uA01fig03

Broad Money, Domestic Credit, and Inflation

(In percent change, over 12 months)

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

uA01fig04

Reserve Requirements

(In percent of deposits)

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

Political Situation and Relations with Donors

Political turmoil in Zimbabwe intensified in February 2000, when a referendum on constitutional amendments proposed by the Zimbabwe African National Union-Patriotic Front (ZANU-PF) government was defeated. Rising opposition from the Movement for Democratic Change (MDC), visibly supported by white farmers, led to the adoption of the fast-track land reform program. In the June 2000 parliamentary elections, with reports of political violence and intimidation against the opposition, the MDC won 57 of the 120 seats at stake.

The presidential election of March 2002 was viewed by many observers as neither free nor fair, and involved violence and voter intimidation. The official tally gave President Mugabe 56 percent of the votes. After the election, the MDC filed suit to overturn the result, but the case has not yet been heard. Various mediators have tried to encourage reconciliation between the two political parties, but these efforts have not been successful.

Legislative and procedural changes have had the effect of disenfranchising opposition voters.1 Political violence and intimidation has reportedly continued, and the government has won virtually all parliamentary by-elections, although the MDC won two seats in Harare in March 2003. The opposition and labor unions organized general strikes in March and in April, respectively, which brought activity in urban areas to a halt. Further mass action has been threatened.

The international community has expressed grave concern over Zimbabwe’s lack of respect for basic human rights, democratic principles, good governance, and the rule of law. Virtually all aid to Zimbabwe, other than humanitarian assistance, has been halted. In the context of the 2002 presidential election, and after a prolonged effort to engage Zimbabwe to address these issues under the provisions of the Cotonou agreement, the European Union in February 2002 imposed targeted sanctions, including a travel ban for a number of senior officials, while freezing the assets of key Zimbabweans considered responsible for human rights violations. The United States followed suit with similar measures. Zimbabwe has been suspended from the Commonwealth until end-2003. A Southern African Development Committee (SADC) Ministers’ meeting in early April agreed that a SADC mission should visit Zimbabwe later that month and invite “all different stakeholders to voice their opinions about the current situation in the country.” In late April the head of the SADC taskforce visited Zimbabwe to prepare the taskforce visit. The Presidents of South Africa, Nigeria, and Malawi visited Harare in early May in an attempt to restart discussions between the government and the MDC.

1 These include the Public Order and Security Act (POSA) of 2002, which has been used to break up political gatherings. Changes in voter registration and citizenship laws also appear to have made it difficult for many to cast their ballots.

Recent Developments in Land Reform1

Land reform has been a contentious issue since independence in 1980. Prime farm land was mainly owned by about 4,000 white commercial farmers (about 11 million hectares), while the majority of the indigenous population engaged in subsistence farming on poor soils (about 16 million hectares). Commercial farms also accounted for the lion’s share of export earnings, besides being the main source of rural formal employment. By the late 1990s, the government had purchased or otherwise acquired about 3.5 million hectares. The listing of 1,471 commercial farms for acquisition in 1997 marked the beginning of a more active approach by the government in subsequent years. A donor-government conference in 1998 reached general agreement on a phased acquisition of 5 million hectares with donor support, but no disbursements were made in the absence of subsequent agreement on detailed modalities and the government’s push ahead in ways inconsistent with the agreed principles, UNDP proposals of December 2000, and agreements in September 2001 at Commonwealth and Southern African Development Community (SADC) meetings in Harare, Consequently, international donors have progressively withdrawn their involvement in and support for this process.

The fast-track land reform program was launched in 2000 and expanded to 8.3 million hectares in July 2001. In December 2001, the government introduced a limit on farm size of 250–2,000 hectares, depending on the location (some farms had been as large as 90,000 hectares). By late 2002, almost all white-owned farms had been designated for acquisition by the state. Although the government has stated that it would compensate farmers for capital improvements, but not for the land itself, it has not done so on a significant scale, in part owing to budget constraints.

The government has used legislative powers to validate its program. In November 2001, President Mugabe used presidential powers to amend the Land Acquisition Act, giving the government rights to take immediate ownership of targeted farms and thereby undermining due process. Parliament approved these amendments on May 8, 2002. Based on this, the government announced that work on these farms should be suspended immediately and issued eviction orders that gave the owners three months to vacate their properties, setting August 8,2002 as a deadline for compulsory acquisition.

Several court rulings tested the legality of the government’s program. In December 2000, the Supreme Court declared the program to be unconstitutional and inconsistent with the government’s own policies; it also asked the government to remove illegal occupants and restore the rule of law on the farms. After several judges were replaced, the Supreme Court overturned the ruling in December 2001 and stated that the process was consistent with the current laws. In August 2002, a High Court judge ruled that eviction orders issued by the government were invalid because banks holding mortgage titles to farms were not notified by the government. The government then amended the Land Acquisition Act and obtained parliamentary approval in September 2002 to validate the eviction orders, and substantially increased the penalties for noncompliance.

By early 2003, the majority of farmers had complied with the eviction orders; there were some violent incidents of eviction by armed militias and the government had stepped up its efforts to enforce the eviction orders in September 2002. The resettled farmers’ lack of seed stock, fertilizers, and know-how and the displacement of an estimated 1–2 million farm workers and their families further disrupted planting activity in late 2002. Combined with delayed rains, these developments are expected to result in a further decline in agricultural output, activity in processing sectors, and exports in.2003. The government has allocated Z$29 billion for agricultural support in the 2003 budget.

In light of reports (some official) about irregularities in the implementation of the fast-track land reform, the government initiated in April 2003 a new audit of the land reform. The audit is to determine whether people who have been allocated land have actually taken up their plots, whether the land is actually being farmed, and what would be required to make the land more productive. In March 2003, the UNDP proposed a joint government-UN comprehensive agricultural survey as a first, step toward identifying long-term strategies for raising Zimbabwe’s agricultural production, but the government has not accepted the proposal.

1 See Box 4 of SM/01/356 (11/30/01) for background on land reform in Zimbabwe.

4. Prudential indicators mask an increase in the underlying risks to the soundness of the banking sector. Reported capital adequacy ratios at end-2002 exceeded prudential requirements, which are in accordance with Basel Core Principles. However, their effectiveness has been sharply reduced by underprovisioning and erosion of minimum capital requirements by inflation. Nonperforming asset ratios are generally low (7 percent in 2002), largely reflecting sharply negative real interest rates. Higher interest rates could quickly weaken loan performance and require recapitalization.3 The land reform had little impact on banks’ balance sheets as banks had scaled down their exposure to the farm sector for some time and many farmers repaid loans in order to retain sole title to the land.

5. In an attempt to contain the rise in basic goods prices, the government imposed and widened price controls. In October 2001, price controls were introduced on selected food items; these were broadened in scope and expanded to a six-month price freeze in mid-November 2002 (Box 5). The controlled prices were often below production costs. While some businesses found innovative ways to circumvent the price controls, a number of companies were forced to close, and this contributed to a decline in employment in the formal sector.4 Predictably, the main impact of the price controls was to drive up prices in the informal markets. The Grain Marketing Board (GMB), which in 2001 was given a monopoly on grain marketing and imports, incurred large losses as its selling prices for wheat and maize were set well below its operating costs; the losses were mostly financed with government-guaranteed bank loans

Price Controls1

In order to rein in high inflation, especially in the prices of food and other basic consumption items, the government in 2001 established a Price Surveillance and Monitoring Unit. The unit comprises representatives of government, labor, and business; its tasks are to closely monitor prices of basic consumption items, recommend reasonable increases, and identify businesses that deviate from these prices. As prices continued to rise, the government introduced direct price controls in October 2001 on a number of items, such as bread, maize meal, sugar, cooking oil, margarine, salt, washing powder, bar soap, fresh milk, meat, and generic drugs.2

As inflation continued to accelerate, the government announced in November 2002 a temporary price freeze that (i) fixed the prices of commodities subject to the October 2001 order for a period of six months; (ii) extended the coverage of the price freeze to a large number of other items, including some beverages, all household utensils and equipment, new cars, and entertainment services; and (iii) prohibited both the rebranding and repackaging of items to avoid price controls.3 With the introduction of these new controls, close to 70 percent of items in the consumer price index (CPI) basket became subject to administered pricing.

The authorities issued a Prices and Incomes Stabilization Protocol in January 2003. Under the protocol, prices were to be negotiated within the context of the Tripartite Negotiating Forum (TNF); the items covered included mealie meal, cooking oil, salt, milk, sugar, bread, flour, beef, paraffin, sanitary pads, water charges, rentals and rates, and transport fares. Prices would then be pegged at negotiated levels until June 30, 2003. The protocol also provided a one-month window for negotiation of wage increases via collective bargaining agreements, following which negotiated wages would also be pegged through June 30.

The devaluation at end-February 2003 has necessitated a corresponding pass-through in domestic prices. Fuel prices were doubled in March and again in April, although these were not sufficient to cover costs. The government is considering further increases in fuel and other controlled prices; it has stated its intention of ultimately moving toward price liberalization for all goods except for a small group of basic consumer items, which will remain subject to administered pricing.

On May 6, the government announced further price adjustments and an easing of price controls:

  • prices for subsidized commodities (maize, maize meal, wheat, flour and bread) continue to be controlled;

  • monitored prices were introduced for essential goods (agricultural chemicals and implements, seeds, beef, coal, cement, cooking oil, drugs, fertilizers, milk, packaging, stockfeeds, sugar, salt and tires). Producers have to make their case for price increases to the Ministry of Industry and International Trade (MIIT) with profit margins not exceeding 20 percent; and

  • all other prices were decontrolled, but made subject to MIIT surveillance and (unspecified) “corrective measures to prevent profiteering.”

1 See SM/01/356 (11/30/01), p. 9, para. 14 for background on price controls in Zimbabwe.2 Statutory Instrument No. 334 of October 2001. Other items, such as fuel (petrol, diesel, paraffin, and A1 jet fuel), education, and medical fees, are also subject to administered pricing, and the government periodically adjusts these prices.3 Statutory Instrument No. 302 of 2002.

6. Fiscal policy was expansionary in 2002, mainly reflecting the cost of quasi-fiscal operations rather than the government budget outturn. The budget recorded an overall deficit of 4¾ percent of GDP in 2002, compared with 10½ percent in 2001 (Table 3), This resulted from higher-than-budgeted revenues, which, in turn, were due to significantly higher-than-expected inflation, and a real compression in government expenditure, notably on wages and foreign exchange payments. Moreover, low interest rates kept down debt-service costs and helped lower domestic debt from 52 percent of GDP at end-2000 to 36 percent at end-2002. Quasi-fiscal operations, however, relating to foreign exchange transactions of the RBZ, amounted to 5 percent of GDP.

Table 3.

Zimbabwe: Central Government Operations, 1999–2003

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Sources: Zimbabwean authorities; and staff estimates and projections.

The large discrepancy between actual and budgeted interest expenditure during 2001–3 reflects overestimation of these outlays in the budget.

Commitments with respect to foreign interest payments.

Gross proceeds from privatization that do not take into account possible debt-equity swaps and debt takeovers.

As percent of current expenditure.

Excluding grants (commitment based). “Quasi-fiscal operations” refer to the support schemes provided by the Reserve Bank of Zimbabwe to tobacco and gold during 2001-2 and the utilization of foreign exchange surrender at the rate of Z$55 per US$1.

uA01fig05

Government Finances

(In percent of GDP, excluding grants)

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

uA01fig06

Domestic Government Debt and Treasury Bill Rate

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

uA01fig07

Unit Wage of the Public Sector

(In thousands of Zimbabwe dollars per employee)

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

uA01fig08

Social Expenditure 1/

Citation: IMF Staff Country Reports 2003, 224; 10.5089/9781451841442.002.A001

1/ Data prior to 1999 refers to fiscal years.

7. The main parastatals together posted a net profit of 0.7 percent of GDP in 2002, the same as in 2001. The financial situation of several of these enterprises is poor, however, as they mostly operate below capacity, undertaking few productive investments for years and accumulating substantial debts (Table 4).

Table 4.

Zimbabwe: Financial Position of the Major Parastatals, 1999–2002

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Sources: Ministry of Finance; and staff estimates.

1999 debt figures do not include GMB.

Valued at the official exchange rate.

8. Zimbabwe’s external position has become acutely difficult. A grossly overvalued exchange rate and pervasive shortages of foreign exchange in the official market—reflecting in part a decline in exports of 35 percent in 2002 from a peak in 2000—resulted in a compression of nonfood imports of 15 percent in this period (Table 5). Foreign exchange inflows into the RBZ have been rationed; a joint RBZ/Ministry of Finance committee has been allocating official foreign exchange largely for “critical” imports, such as grain and fuel. In the process, Zimbabwe has accumulated external payments arrears to all creditors, including the Fund. At end-2002, gross usable reserves stood at US$ 15 million, equivalent to only three days of imports, while arrears (on both public and private sector debt) amounted to US$ 1.5 billion, or 29 percent of total external debt (Table 6). At the same time, the exchange rate premium on the parallel market reached as high as 2,900 percent (Box 6). The government responded to these pressures in November 2002 by further tightening exchange controls, increasing surrender requirements, and closing foreign exchange bureaus. As a result, the inflow of foreign exchange to the RBZ slowed as most transactions moved to the parallel market, where the exchange rate appreciated.