IRIN Focus on a grim economic outlook

As Zimbabwe’s foreign payment arrears climb to an estimated US $400 million, economists told IRIN on Wednesday the economic outlook for the country remained poor in coming months. Meanwhile, the Bankers Association of Zimbabwe met on Wednesday to find a way to enable an “unofficial” devaluation of the Zimbabwe dollar so that growers of tobacco, the country’s key foreign exchange earner, will be able to make some profits. Although they declined immediate comment on the outcome of the meeting, commercial bankers have said they realised that tobacco profitability had been seriously affected by the pegged rate of 38 Zimbabwe dollars to the American dollar. Zimbabwe is the world’s third largest producer of tobacco An easing of the exchange rate for tobacco When the annual tobacco auctions opened last week, farm occupations, political violence and the exchange rate saw volumes of tobacco delivered for sale drop by over 60 percent, according to the Zimbabwe Tobacco Association (ZTA). “This is also an issue which was discussed at yesterday’s cabinet meeting on the current political situation,” said Eric Bloch, a leading economist in Zimbabwe. “My view is that they want to get the tobacco floors to pay the farmers at the parallel rate of roughly 46 to 48 Zimbabwe dollars to the American dollar, so that the profit will go to the growers.” The official pegged rate, in force for 15 months, has been a source of complaint in all sectors of the economy, while bankers have said that they have been powerless to go against the wishes of the government. Debt default Bankers and economists have warned that the foreign payment arrears raises the prospect of Zimbabwe defaulting on its external debt of approximately US $4 billion. “Although our import bill has been held back quite a bit in the last four or five months,” said another Zimbabwe-based economist, John Robertson, “we might have to default. A devaluation is very necessary and it will cause inflation, now close to 60 percent, to rise.” He said the official exchange rate had also had a negative impact on other key foreign exchange earners such as gold and ferro-chrome. The danger of rising unemployment “Zimbabwe is facing a very, very serious economic situation,” he said. Robertson said the impact of the economic crisis on the industrial sector was bound to push up unemployment, currently at 55 percent, quite soon. “At this level it is dangerous and unemployment levels will become more dangerous if we allow this to continue. This is a very anxious time indeed.” The economists also cited concern that Zimbabwe could find itself unable to finance fuel imports agreed last month. In March, the state-owned national oil company of Zimbabwe owed foreign suppliers US $60 million, South Africa said its national electricity utility, Eskom was owed US $16 million. Economic crisis likely to worsen in coming months Bloch said the economic situation was likely to grow worse over the next three months until after the parliamentary elections when a new government, whether or not Mugabe’s ruling ZANU-PF maintains its 20-year grip on power, will follow a more pragmatic programme. “Instead of talking about recovery, a new government will have to concentrate on implementing an economic rescue package. That is what I hear lately from politicians of all shades, both in ZANU-PF and the opposition Movement for Democratic Change (MDC),” he said. A road to recovery They believed, he said, the road to economic recovery lay firstly in an end to Zimbabwe’s expensive military intervention in the Democratic Republic of Congo (DRC); a cut in government spending by at least 25 percent; the privatisation of parastatal companies; incentives for expatriate business; investment incentives and a relaxation of expatriate employment rights, and an end to tight exchange rate controls. “We would then see IMF payment support, a lifting of the World Bank’s suspensions, as well as an end to the Danish and Dutch freeze on aid programmes,” Bloch said. “Gradually lines of foreign credit could be renewed so that eventually we can get out of the foreign exchange trap we are in. Only then, after at least 18 months, will the international community begin to consider debt relief.”