economic conditions of zimbabwe

8/9/2019 Economic Conditions of Zimbabwe

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A Report

On

Economic Conditions of

Zimbabwe

Course Title: Macro Economics

Course Code: BA - 215

Submitted to:

Mamunur Rashid

Associate Professor

Submitted by:

Rezwan Mahmood

ID # 060329

Business Administration Discipline

Khulna University, Khulna

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Mamunur Rashid

Associate Professor

Business Administration Discipline

Khulna University, Khulna

Subject: Submission of a Report

Dear Sir,

With due pleasure, I am submitting you the report on Economic Conditions of Zimbabwe.

It was a great opportunity for me to prepare this report.

I will be glad if you kindly accept this report and I am ready to explain any issue regarding

the report to you if you feel necessary.

Sincerely,

_______________

Rezwan Mahmood

ID # 060329

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Table of Contents

Page No.

Chapter 1: Country Profile 05

1.1 Overview 061.2 Historical Background 08

1.3 At a Glance 09

Chapter 2: Socioeconomic Condition 16

2.1 Rhodesia Era

2.2 1980s and 1990s 18

2.3 Political Turmoil on the Economy 18

2.4 Some Socioeconomic Issues 20

Chapter 3: Economy of Zimbabwe 23

3.1 Gross Domestic Product (GDP) 24

3.2 Inflation 25

3.3 Exchange Rates 26

3.4 Monetary Policy 27

3.5 Export and Import 29

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Chapter 1:

COUNTRY PROFILE

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ZIMBABWE

1.1 OVERVIEW

Zimbabwe is a landlocked country in the southern part of the continent of Africa, between

the Zambezi and Limpopo rivers. The name Zimbabwe derives from "Zimba Remabwe"

meaning "big house of stone" in the Shona language. Its use as the country's name is a tribute

to Great Zimbabwe, site of the capital of the Empire of Great Zimbabwe.

The first British explorers, colonists, and missionaries arrived in the 1850s, and the massive

influx of foreigners led to the establishment of the territory Rhodesia, named after Cecil

Rhodes of the British South Africa Company. In 1923, European settlers voted to become the

self-governing British colony of Southern Rhodesia. After a brief federation with Northern

Rhodesia (now Zambia) and Nyasaland (now Malawi) in the postWorld War II period,

Southern Rhodesia (also known as Rhodesia) chose to remain a colony when its two partners

voted for independence in 1963. On Nov. 11, 1965 the government unilaterally declared its

independence, but the UK did not recognize the act and demanded more complete voting

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rights for the black African majority in the country (then called Rhodesia). UN sanctions and

a guerrilla uprising finally led to free elections in 1979 and independence (as Zimbabwe) in

1980. Robert MUGABE, the nation's first prime minister, has been the country's only ruler

(as president since 1987) and has dominated the country's political system since

independence. His misguided land redistribution campaign begun in 2000 caused an exodus

of white farmers, crippled the economy, and ushered in widespread shortages of basic

commodities. Ignoring international condemnation, MUGABE rigged the 2002 presidential

election to have him reelected.

Zimbabwes economy has continued to deteriorate since 1997. Expansionary macroeconomic

policies, a breakdown in law and order, and the virtual collapse of the agricultural sector as a

result of the fast-track land reforms have reduced the potential for growth. Real GDP

declined by 6.5 percent in 2005, which was the 7th consecutive year of negative GDP growth

since 1997. Over the period 1997-05, GDP declined by more than 30 percent. Current

problems include a shortage of foreign exchange, soaring inflation, and supply shortages.

Badly needed support from the IMF has been suspended because of the country's failure to

meet budgetary goals. Inflation rose from an annual rate of 32% in 1998 to an estimated high

of 4,530%in May 2007, a state of hyperinflation. The IMF predicts a rate of 6,430% by the

end of 2008.

The economy is being steadily weakened by excessive government deficits, AIDS, and

rampant inflation. The government's land reform program, characterized by chaos and

violence, has derailed the commercial sector, the traditional source of exports and foreign

exchange and the provider of 400,000 jobs. Distribution of income is extremely unequal.

1.2 HISTORICAL BACKGROUND

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The remains of early humans, dating back 500,000 years, have been discovered in present-

day Zimbabwe. The land's earliest settlers, the Khoisan, date back to 200 B.C. After a period

of Bantu domination, the Shona people ruled, followed by the Nguni and Zulu peoples. By

the mid-19th century the descendants of the Nguni and Zulu, the Ndebele, had established a

powerful warrior kingdom.

The UK annexed Southern Rhodesia from the [British] South Africa Company in 1923. A

1961 constitution was formulated that favored whites in power. In 1965 the government

unilaterally declared its independence, but the UK did not recognize the act and demanded

more complete voting rights for the black African majority in the country (then called

Rhodesia). UN sanctions and a guerrilla uprising finally led to free elections in 1979 and

independence (as Zimbabwe) in 1980. Robert MUGABE, the nation's first prime minister,

has been the country's only ruler (as president since 1987) and has dominated the country's

political system since independence. His chaotic land redistribution campaign, which began

in 2000, caused an exodus of white farmers, crippled the economy, and ushered in

widespread shortages of basic commodities. Ignoring international condemnation, MUGABE

rigged the 2002 presidential election to ensure his reelection. The ruling ZANU-PF party

used fraud and intimidation to win a two-thirds majority in the March 2005 parliamentary

election, allowing it to amend the constitution at will and recreate the Senate, which had been

abolished in the late 1980s. In April 2005, Harare embarked on Operation Restore Order,

ostensibly an urban rationalization program, which resulted in the destruction of the homes or

businesses of 700,000 mostly poor supporters of the opposition, according to UN estimates.

President MUGABE in June 2007 instituted price controls on all basic commodities causing

panic buying and leaving store shelves empty for months. In October 2007, Constitutional

Amendment 18 came into effect allowing for harmonized presidential and parliamentary

elections, shortening the length of the presidential term to five years, and moving up the date

for parliamentary elections. General elections were expected in March 2008.

1.3 AT A GLANCE

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Official Name :Republic of Zimbabwe

Capital :Harare

Other large cities :Bulawayo, Chitungwiza

Situated : Africa

Region : South-central Africa

Become Independent :18 April 1980 (from UK)

Geography

Location : Southern Africa, between South Africa and Zambia

Geographic

coordinates

: 20 00 S, 30 00 E

Area : Total: 390,580 sq km

Land: 386,670 sq km

Water: 3,910 sq km

Land boundaries : Total: 3,066 km

Border countries:

Botswana on the west 813 km

Zambia on the north 797 km

Mozambique on the east 1,231 km

South Africa on the south 225 km

Climate : Tropical; moderated by altitude; rainy season

Terrain : Mostly high plateau with higher central plateau mountains in

east

Natural resources : Coal, Chromium Ore, Asbestos, Gold, Nickel, Copper, Iron

Ore, Vanadium, Lithium, Tin, Platinum group metals

Irrigated land : 1,740 sq km (2003)

Natural hazards : Recurring droughts; floods and severe storms are rare

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Population

Population : 12,382,920 (July 2008 est.)

Population

growth rate

: 0.568% (2008 est.)

Birth rate : 27.38 births/1,000 population (2008 est.)

Death rate : 21.70 deaths/1,000 population (2008 est.)

Net migration

rate

: 0 migrant(s)/1,000 population

Note: there is an increasing flow of Zimbabweans into South

Africa and Botswana in search of better economic opportunities

(2008 est.)

Sex ratio : 1.01 male(s)/female (2008 est.)

Infant mortality

rate

: 50.58 deaths/1,000 live births

Life expectancy at

birth

: Total population: 39.73 years

Male: 40.87 years

Female: 38.55 years (2008 est.)

Total fertility rate : 3.03 children born/woman (2008 est.)

Nationality : Zimbabwean

Ethnic groups : African 98% (Shona 82%, Ndebele 14%, other 2%), mixed and

Asian 1%, white less than 1%

Religions : Syncretic (part Christian, part indigenous beliefs) 50%,

Christian 25%, indigenous beliefs 24%, Muslim and other 1%

Languages : English (official), Shona, Sindebele (the language of the

Ndebele, sometimes called Ndebele), numerous but minor tribal

dialects

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Literacy : Total population: 90.7%

Government & Politics

Country name : Conventional long form: Republic of Zimbabwe

Conventional short form: Zimbabwe

Government type : Parliamentary democracy

Administrative

divisions

: 8 provinces and 2 cities with provincial status

Constitution : 21 December 1979

Legal system : Mixture of Roman-Dutch and English common law

Suffrage : 18 years of age; universal

Judicial branch

Political parties

and leaders

Political pressuregroups andleaders

Flag description

: Supreme Court; High Court

: African National Party or ANP [Egypt

DZINEMUNHENZVA]; Movement for Democratic Change

or MDC [Morgan TSVANGIRAI, anti-Senate faction;

Arthur MUTAMBARA, pro-Senate faction]; Peace Action

is Freedom for All or PAFA; United Parties [Abel

MUZOREWA]; United People's Party or UPP [Daniel

SHUMBA]; Zimbabwe African National Union-Ndonga or

ZANU-Ndonga [Wilson KUMBULA]; Zimbabwe African

National Union-Patriotic Front or ZANU-PF [Robert

Gabriel MUGABE]; Zimbabwe African Peoples Union or

ZAPU [Agrippa MADLELA]; Zimbabwe Youth in Alliance

: Crisis in Zimbabwe Coalition [Xolani ZITHA]; National

Constitutional Assembly or NCA [Lovemore MADHUKU];

Women of Zimbabwe Arise or WOZA [Jenny WILLIAMS];

Zimbabwe Congress of Trade Unions or ZCTU

: Seven equal horizontal bands of green, yellow, red, black,

red, yellow, and green with a white isosceles triangle edged

in black with its base on the hoist side; a yellow Zimbabwe

bird representing the long history of the country issuperimposed on a red five-pointed star in the center of the

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Agriculture

products

: Corn, cotton, tobacco, wheat, coffee, sugarcane, peanuts;

sheep, goats, pigs.

Industries : Mining (coal, gold, platinum, copper, nickel, tin, clay,

numerous metallic and nonmetallic ores), steel; wood products,cement, chemicals, fertilizer, clothing and footwear, foodstuffs,

beverages

Industrial

production growth

rate

: 0.2% (2007 est.)

Current account

balance

: -$264.6 million (2006 est.)

Exports : $1.52 billion f.o.b. (2007 est.)

Exports

commodities

: Cotton, tobacco, gold, ferroalloys, textiles/clothing

Imports : $2.183 billion f.o.b. (2007 est.)

Imports commodities

: Machinery and transport equipment, other manufactures,chemicals, fuels

Reserves of

foreign exchange

and gold

: $120 million (31 December 2007 est.)

Debt external : $5.155 billion (31 December 2007 est.)

Economic aid recipient

: $367.7 million (2005 est.)

Currency : Zimbabwean dollar

Currency code : ZWD

Exchange rates : Zimbabwean dollars per US dollar - 30,000 (2007), 162.07

(2006), 77.965 (2005), 5.729 (2004), 0.824 (2003)

note: these are official exchange rates; non-official rates vary

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significantly

Telephones -main lines in use

: 331,700 (2006)

Telephones -mobile cellular

: 832,500 (2006)

Radio broadcaststations

: AM 7, FM 20 (plus 17 repeater stations), shortwave 1(1998)

Televisionbroadcast stations

: 16 (1997)

Internet countrycode

: .zw

Internet hosts : 15,507 (2007)

Internet users : 1.22 million (2006)

Airports : 341 (2007)

Pipelines : Refined products 270 km (2007)

Railways :Total 3,077 km

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Fiscal year : Calendar year

Transportation & Communications


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Roadways : Total: 97,440 km,paved: 18,514 km, unpaved: 78,926 km

Waterways : on Lake Kariba (2005)

Ports andterminals

Military

Military branches

Military serviceage andobligation

Manpoweravailable formilitary service

Manpower fit formilitary service

: Binga, Kariba

: Zimbabwe Defense Forces (ZDF): Zimbabwe National Army,Air Force of Zimbabwe (AFZ), Zimbabwe Republic Police

: 18-24 years of age for compulsory military service; women

are eligible to serve (2007)

: Males age 16-49: 3,264,258Females age 16-49: 3,048,049 (2008 est.)

: Males age 16-49: 1,643,036Females age 16-49: 1,404,663 (2008 est.)

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Chapter 2:

Socioeconomic Condition

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Primarily of the Bantu group of south and central Africa, the black Zimbabweans are dividedinto two major language groups, which are subdivided into several ethnic groups. TheMashona (Shona speakers), who constitute about 75% of the population, have lived in thearea the longest and are the majority language group. The Matabele (Sindebele speakers),

representing about 20% of the population and centered in the southwest around Bulawayo,arrived within the last 150 years. An offshoot of the South African Zulu group, theymaintained control over the Mashona until the white occupation of Rhodesia in 1890.

More than half of white Zimbabweans, primarily of English origin, arrived in Zimbabwe afterWorld War II. Afrikaners from South Africa and other European minorities, includingPortuguese from Mozambique, also are present. Until the mid-1970s, there were about 1,000white immigrants per year, but from 1976 to 1985 a steady emigration resulted in a loss ofmore than 150,000, leaving about 100,000 in 1992. Renewed white emigration in the late1990s and early 2000s reduced the white population to less than 50,000. English, the officiallanguage, is spoken by the white population and understood, if not always used, by more than

half of the black population.

Zimbabwe boasts one of Africa's highest literacy rates. Primary and secondary schools weresegregated until 1979. In the first decade after independence in 1980, the educational systemwas systematically enlarged by the Zimbabwean Government, which was committed to

providing free public education to all citizens on an equal basis. Though in the late 1970sonly 50% of the black children (5-19 years old) were listed officially as attending ruralschools, today most children attend primary school despite the fact that school fees are nowcharged for all schools at all levels. Primary through post-secondary enrollment has expandedfrom 1 million to about 2.9 million since independence. There is an impressive network ofindependent private schools and church-run mission schools that have significantly moreresources and thus significantly higher school fees than government-run schools. Highereducation is offered at seven state-run universities, the most prominent being the Universityof Zimbabwe in Harare and the National University of Science and Technology in Bulawayo,and three private church-run universities, Africa University (Methodist), Catholic University,and Solusi University (Seventh Day Adventist). There is also a large network of teacher-training, nursing, and polytechnic colleges.

The total history related to its economy can be divided into three important parts. Those are:

2 Rhodesia era

3 1980s and 1990s4 Political turmoil on the economy (2000 - 2007)

2.1 RHODESIA ERA

The Rhodesian economy experienced a modest boom in the early 1970s. Real per capitaearnings for blacks and whites reached record highs, although the disparity in incomes

between blacks and whites remained, with blacks earning only about one-tenth as much as

whites. After 1975, however, Rhodesia's economy was undermined by the cumulative effectsof sanctions, declining earnings from commodity exports, worsening guerilla conflict, and

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increasing white emigration. When Mozambique severed economic ties, the Ian Smith regimewas forced to depend on South Africa for access to the outside world. Real gross domestic

product (GDP) declined between 1974 and 1979, before full independence in 1980. Anincreasing proportion of the national budget (an estimated 30%-40% per year) was allocatedto defense, and a large budget deficit raised the public debt burden substantially.

The manufacturing sector, already well-developed before the Unilateral Declaration ofIndependence (UDI) in 1965, was given a major stimulus by the imposition of United

Nations sanctions. The sanctions obliged Rhodesian industry to diversify and create manyimport-substitution undertakings to compensate for loss of traditional sources of imports.Rhodesian processing of local raw materials also grew rapidly. Major growth industriesincluded steel and steel products, heavy equipment, transportation equipment, ferrochrome,textiles, and food processing.

2.2 1980S AND 1990S

Following the Lancaster House Agreement in December 1979, the transition to majority rulein early 1980, and the lifting of sanctions, Zimbabwe enjoyed a brisk economic recovery.Real growth for 1980-1981 exceeded 20%. However, depressed foreign demand for thecountry's mineral exports and the onset of a drought cut sharply into the growth rate in 1982,1983, and 1984. In 1985, the economy rebounded strongly due to a 30% jump in agricultural

production. However it slumped in 1986 to a zero growth rate and registered negative ofabout minus 3% in 1987 due primarily to drought and foreign exchange crisis faced by thecountry. Growth in 1988-1990 averaged about 4.5%.

In 1990s there was no major turn on Zimbabwean economy. In that time, because of theeffect of last decade the economy was vulnerable and was struggling to survive from beingshrink.

2.3 POLITICAL TURMOIL ON THE ECONOMY

In recent years, poor management of the economy and political turmoil has led toconsiderable economic hardship. The Government of Zimbabwes chaotic land reform

program, recurrent interference with, and intimidation of, the judiciary, as well asmaintenance of unrealistic price controls and exchange rates has led to a sharp drop ininvestor confidence.

On 1 November 1989 a former government minister in Rhodesia, Denis Walker, produced apaper in London for the Conservative Monday Club's Foreign Affairs Committee on Land Reform in Zimbabwe. In his last paragraph he stated that "once the land has beenredistributed, the commercial farms will be broken up, the remaining white farmers reduced

by exile or imprisonment; Zimbabwe's government, already morally bankrupt, will declinetowards economic collapse."

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Between 2000 and 2007, the national economy contracted by as much as 40%; inflationvaulted to over 2200%, and there were persistent shortages of foreign exchange, localcurrency, fuel, and food.

Direct foreign investment has all but evaporated. Billions were spent in the country's

involvement in the war in the Democratic Republic of the Congo. Price controls have beenimposed on a wide range of products including food (maize, bread, steak), fuel, medicines,soap, electrical appliances, yarn, window frames, building sand, agricultural machinery,fertilizers and school textbooks.

As of February 2004, Zimbabwe's foreign debt repayments ceased, resulting in compulsorysuspension from the International Monetary Fund (IMF). This, and the United Nations WorldFood Program stopping its food aid due to insufficient donations from the world community,has forced the government into borrowing from local sources.

Starting in 2000, Zimbabwe experienced severe foreign exchange shortages, exacerbated by

the difference between the official rate and the black market rate. In 2004 a system ofauctioning scarce foreign currency for importers was introduced, which temporarily led to aslight reduction in the foreign currency crisis, but by mid 2005 foreign currency shortageswere once again chronic. The currency was devalued by the central bank twice, first to 9,000to the US$, and then to 17,500 to the US$ on 20 July, 2005, but at that date it was reportedthat that was only half the rate available on the black market.

In July 2005 Zimbabwe was reported to be appealing to the South African government forUS$ 1 billion of emergency loans, but despite regular rumors that the idea was beingdiscussed no financial support has been obtained from South Africa.

The official Zimbabwean dollar exchange rate had been frozen at Z$101,196 per U.S. dollarsince early 2006, but as of 27 July 2006 the parallel (black market) rate has reachedZ$550,000 per U.S. dollar. By comparison, 10 years earlier, the rate of exchange was onlyZ$9.13 per USD.

In August 2006, The RBZ revalued the Zimbabwean Dollar by 1000 ZWD to 1 (revalued)Dollar. At the same time, Zimbabwe devalued the Z$ by 60% against the US Dollar. Newofficial exchange rate revalued ZWD 250 per USD. The parallel market rate was aboutrevalued ZWD 1,200 to 1,500 per USD (28 Sept 2006).

In November 2006, it was announced that sometime around December 01, there would be afurther devaluation and that the official exchange rate would change to revalued ZWD 750

per USD. This never did materialize. However the parallel market immediately reacted to thisnews, with the parallel rate falling to ZWD 2,000 per USD (18 Nov 2006) and by year end ithad fallen to ZWD 3,000 per USD.

On Apr 1, 2007, it was reported that the parallel market was asking ZWD 30,000 for $1 USD.By May the rate had receded to about ZWD 20,000

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2.4 SOME SOCIOECONOMIC ISSUES

Zimbabwes living standards and social indicators, which for a long time had been

among the best in Africa, have deteriorated rapidly over the last few years.

Theestimated proportion of the population living below the official poverty line has more

than doubled since mid-1990s due to decreasing real incomes and rising unemployment.Poverty has been on the rise in both urban and rural areas, as manifested in a growingnumber of street children, homeless people, and those in need of food aid. In the past coupleof years the government redesigned its safety net programs. The Rural and Urban PublicWorks Program(PWP) and the Basic Education Assistance Module were put in place to helpthose in need. The PWP is designed to be scaled up when increased assistance is needed.However, the ability of the authorities to increase spending on social safety net programs inreal terms islimited by the continuous economic decline and the resulting rise in the demandfor social assistance. The adequacy of pensions has also been adversely affected by highinflation andsavings schemes for the aged do not exist.

The plight of the poor has been further worsened by food insecurity . There was asubstantial shortfall in food production during the 2003/04 and 2004/05 agricultural seasonson account of the overall contraction in agricultural production, which resulted in part fromdrought. About 40 percent of the population is expected to continue to be food insecure forthe period April 2005 to March 2006 due to reduced food availability and decreased

purchasing power.

The economic crisis in Zimbabwe has led to a sharp deterioration of the medical

infrastructure and shortages of essential drugs and equipment, particularly in publichospitals. The health sector is characterized by poor working conditions for staff asremuneration is inadequate and protective working materials are lacking. Staff attrition ishigh as health professionals seek better opportunities abroad or succumb to HIV/AIDS, thusexacerbating the already existing deficit in personnel. For instance, the public sector has adeficit of 843 medical doctors from an established complement of 1,530, and a deficit of4,700 nurses from an established complement of 11,640. The high attrition, compounded bythe lack of adequate resources to run health facilities, has greatly reduced the capacity of thesector to deliver services. The high prevalence of HIV/AIDS has also placed a huge strain onthe health delivery system, asAIDS patients occupy between 50 percent and 70 percent of allhospital beds.

Price of daily necessities goes to sky because of unimaginable high inflation. Every day

price goes up and up.

Price of bread: up 375% last month to $7,000, virtually unobtainableCarton of milk: Z$48,000Price of liter of petrol: Z$19,000 but almost unobtainable.Price of bus tickets: up 350% last month.The Consumer Council of Zimbabwe estimates that a family of six needs Z$35 million amonth to survive. Six years ago Z$1 million dollars would have bought a whole block ofluxury apartments.

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Poverty and Unemployment are both endemic in Zimbabwe, driven by the shrinking

economy and hyper-inflation. Both unemployment and poverty rates run near 80%. As ofJanuary 2006, the poverty line was ZWD 17,200 per month. As of May 2007, this had risento ZWD 1.715 million per month (US $86.00).As of May 2007, the average farm workers wage was under ZWD 100,000 per month (US

$5.00) and the MAXIMUM monthly salary for nurses was ZWD 800,000 (US 40.00)The lowest 10% of Zimbabwe's population consume only 1.97% of the economy while thehighest 10% consume 40.42%. The current account balance is negative. (US $-517 million)

Productions of agriculture are dropping because of lack of resources and government

subsidy:Under Mugabe's reforms, land was forcibly taken from white commercial farmersand redistributed to landless blacks in the hope that they would begin an agricultural andsocial revolution. Peasant subsistence farmers settled by the government on the land have

been unable to produce crops because the government has failed to provide themwith irrigation equipment and other inputs such as fertilizer, necessary for

minimal agricultural production because of economic collapse faced by government.

Economic instability increases the rate of unemployment

Economy of Zimbabwe has gone to be ruined day by day. Agriculture which provides thelargest scope of employment (about 80%) has also struggle to survive since government tookland reform program. Now four out of every five people are unemployed.

Zimbabwe is among the hardest hit of the HIV/AIDS epidemic countries. The prevalencerate among the adult population is estimated at 24.6 percent. The devastating impact of theHIV/AIDS epidemic has led to marked worsening of the quality of life with increasedmorbidity, mortality and orphan-headed households. Life expectancy at birth declined fromits peak of 62 years to 39 years. The deteriorating economic conditions and their impact onthe population, represents a serious constraint on reducing the incidence of infection. Therecent Zimbabwe Human Development Report (ZHDR) reveals that economic hardshipsexpose poor people to high risk of HIV infection through risky sexual behavior, including sexin exchange for cash, food, tillage and agricultural inputs, jobs and other basic necessities.

With regard to education, escalating tuition and related costs coupled with increased

economic hardship has resulted in increased school drop out rates.Theprimary school enrolment rates over the last five years dropped substantially for both

boysand girls.State schoolfees have recently risen by 1,000 per cent. Many households aretoo poor to afford the state school fees. Drop-out rates have also increased because of thehigher rates of teenage pregnanciesand increased death rates of parents and guardians fromHIV/AIDS.

The standard of education has fallen significantly due to staff attrition and the resulting

increase in pupil/teacher ratios.As more qualified teachers opt for moreaccessible schools and HIV infected teachers seek

transfers to areas where they can havebetter access to health services, the balance of demandfor and supply of education in thecountry has been radically transformed. The increasingly

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unattractive working conditions,which include low salaries, heavy workloads and inadequatebasic teaching materials have lowered the morale of teachers and resulted in a considerablenumber of teachers leaving the teaching profession or the country altogether to seek betteropportunities elsewhere.Furthermore, the teaching profession has not been spared from thehigh mortality andmorbidity rates due to HIV/AIDS, which has further reduced the capacity

of teachers interms of numbers and performance.

The increasing number of professionals leaving the civil service undermines the

capacity to deliver quality public services.The major reason for the exodus ofprofessionals from the public sector has been inadequateremuneration. Real wages of publicservants declined substantially over the last five years aswage indexation lagged behind highinflation. As the Government attempted to address risingfiscal pressures, public sector wageearners effectively became captive taxpayers who sawtheir tax payments increase due toinflation in the absence of full, systematic inflation-basedadjustment of tax brackets. To stop the outflow of labor from the public sector, the

government substantially increasedwages in 2005 budget. However, as a result, the publicsector wage bill increased from some 9 percent of GDP in 2003 to about 18 percent in2005, creating substantial fiscal pressures.

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Chapter 3:

Economy of Zimbabwe

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The government of Zimbabwe faces a wide variety of difficult economic problems as it

struggles with an unsustainable fiscal deficit, an overvalued official exchange rate,

hyperinflation, and bare store shelves. Its 1998-2002 involvement in the war in the

Democratic Republic of the Congo drained hundreds of millions of dollars from the

economy. The government's land reform program, characterized by chaos and violence, hasbadly damaged the commercial farming sector, the traditional source of exports and foreign

exchange and the provider of 400,000 jobs, turning Zimbabwe into a net importer of food

products. The EU and the US provide food aid on humanitarian grounds. Badly needed

support from the IMF has been suspended because of the government's arrears on past loans

and the government's unwillingness to enact reforms that would stabilize the economy. The

Reserve Bank of Zimbabwe routinely prints money to fund the budget deficit, causing the

official annual inflation rate to rise from 32% in 1998, to 133% in 2004, 585% in 2005,

passed 1000% in 2006, and 26000% in November 2007. Private sector estimates of inflation

in 2007 are well above 100,000%. Meanwhile, the official exchange rate fell from

approximately 1 (revalued) Zimbabwean dollar per US dollar in 2003 to 30,000 per US dollar

in 2007. Zimbabwes economy has continued to deteriorate since 1997. Expansionary

macroeconomic policies, a breakdown in law and order, and the virtual collapse of the

agricultural sector as a result of the fast-track land reforms have reduced the potential for

growth.

3.1 GROSS DOMESTIC PROUCT (GDP)

A region's gross domestic product, orGDP, is one of the ways for measuring the size of its

economy. The GDP of a country is defined as the market value of all final goods and services

produced within a country in a given period of time. It is also considered the sum of value

added at every stage of production of all final goods and services produced within a country

in a given period of time.

Zimbabwes macroeconomic environment has deteriorated sharply over the past six years.

Real GDP fell by an average of more than 6 per cent in 2000-01 and by more than 30 per cent

in 2002-03. Inflationary pressures worsened in 2003 and the lack of anchors further reduced

economic activity and the competitiveness of exports. The economy also suffered from

continued uncertainty over the land reform program, declining productivity on resettled farms

and shortages of foreign exchange.

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Table 1: Recent economic indicators

*PPP is purchasing power parity

Table 2: GDP purchasing power parity & GDP per capita

Year Population( in

million)

GDP purchasing power

parity( in billion)

GDP per

capita

2002 12.8 $17.7 $1380

2004 12.9 $27.32 $1900

2005

2007

13

12.38

$30.58

$2.211

$2100

$200

3.2 INFALTION

Causes behind inflation are:

The massive combined fiscal deficit led to sharp growth of money supply fueling

inflation.

The policies, corruption and repressive governance of President Robert Mugabe and

his ruling ZANU-PF party are directly responsible for the severe economic slide.

In April 2006, inflation officially topped 1,000 per cent, helped by the decision to

print $230 million worth of Zimbabwean currency to pay international debts and

sustain operations.

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An International Monetary Fund working paper just released says the Reserve Bankof Zimbabwe contributed significantly to soaring inflation in 2006 by pumping hugesums into the economy to fund the operations of the government and state-ownedfirms.

Table 3: Inflation

Year All Items CPI Year On Year Price Increases

1990 29.6 15.5

1991 36.8 24.3

1992 52.3 42.1

1993 66.7 27.5

1994 81.6 22.3

1995 100.0 22.5

1996 121.4 21.7

1997 144.3 18.9

1998 190.1 31.7

1999 301.3 58.5

2000 469.6 55.9

2001 100.0 71.9

2002 233.2 133.2

2003 1084.5 365.0

2004 4880.3 350.0

2005 16486.4 237.8

2006 184101.1 1016.7

3.3 EXCHANGE RATE

The official Zimbabwean dollarexchange rate had been frozen at Z$101,196 per U.S. dollarsince early 2006, but as of 27 July 2006 the parallel (black market) rate has reached

Z$550,000 per U.S. dollar. By comparison, 10 years earlier, the rate of exchange was onlyZ$9.13 per USD.

In August 2006, The RBZ revalued the Zimbabwean Dollar by 1000 ZWD to 1 (revalued)Dollar. At the same time, Zimbabwe devalued the Z$ by 60% against the US Dollar. Newofficial exchange rate revalued ZWD 250 per USD. The parallel market rate was aboutrevalued ZWD 1,200 to 1,500 per USD (28 Sept 2006).

In November 2006, it was announced that sometime around December 01, there would be afurther devaluation and that the official exchange rate would change to revalued ZWD 750

per USD. This never did materialize. However the parallel market immediately reacted to thisnews, with the parallel rate falling to ZWD 2,000 per USD (18 Nov 2006) and by year end ithad fallen to ZWD 3,000 per USD.

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On Apr 1, 2007, it was reported that the parallel market was asking ZWD 30,000 for $1 USD.By May the rate had receded to about ZWD 20,000

Table 4: Exchange rate

Year Official exchange rate Parallel exchange rate

2000 38 56 - 70

2001 55 70 - 340

2002 55 380 - 1740

2003 55 - 824 1400 - 6000

2004 824 - 5730 5500 - 6000

2005 5,730 - 26,003 6,400 - 100,000

2006 85,158 - 101,196(250 revalued dollars)

100,000 - 550,000(550 - 3,000 revalued dollars)

2007250 revalued dollars

15,000 revalued dollars (special rate)3,000 - 30,000 revalued dollars

Note: Official rates quoted are Government set exchange rates. Parallel (Black market) rates differ significantly.

3.4 MONETARY POLICY

Zimbabwe monetary policy is directed by the central bank of Zimbabwe named.... As regards

monetary policy, the RBZ introduced a dual interest rate system in November 2002. Lending

for productive and export sectors was set at concessional rates of 30, 10 and 5 per cent while

rates for consumption borrowing were left market-determined. Lack of buyers for T-bills

forced the bank to raise interest rates on longer-dated T-bills to around 100 per cent in April

2003. Although lending rates by commercial banks had risen to between 220 per cent and 600

per cent by the first week of January 2004, real interest rates remain negative and thus

discourage saving.

For three years, the Zimbabwe dollar was pegged at an overvalued Z$55 per US dollar. In

March 2003, the rate for most official market transactions by non-state entities was set at

Z$824, still well below its market clearing value, estimated at around Z$5 000 in January

2004. Despite increased controls on commercial banks and the closure of bureaux de change

in November 2002, rates on the parallel market continued to rise, reaching around Z$3 000-3

500 at the end of July 2003 and Z$6 000-6 500 at the end of the year.

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In December 2003, the monetary authorities said they would adopt an auction system from 12

January 2004, obliging exporters to sell a quarter of their hard currency earnings at the fixed

rate of Z$824 and another 25 per cent at the auction rate. They can keep the remaining half in

their foreign currency accounts (FCA) for use within 21 days, after which they must offload

the remainder in the market at the auction rate.

An acute shortage of Z$ banknotes, due to lack of hard currency to import paper and ink,

developed during the first nine months of 2003 and threatened public order in August. The

central bank eased the situation by printing bearer cheques in denominations of 5 000, 10 000

and 20 000, which are circulating as cash.

A new RBZ governor was appointed in November 2003 and the 2004 monetary policy

announced on 18December is expected to focus on inflation control, financial sector stability

and foreign exchange generation. The dual interest rate system has been maintained, though

the subsidized funding rate for targeted productive sectors has been set at 30 per cent2. As in

the past, there is a risk that concessional funds may be diverted into non-productive and

speculative uses, thus generating more inflation in the economy. Furthermore, the piecemeal

measures envisaged by authorities cannot provide a lasting solution to the crisis. Without

tight monetary policies and appropriate exchange-rate realignment, macroeconomic

imbalances are unlikely to diminish and inflation in 2004 is expected to average 456 per cent,

compared to an average rate of 377 per cent in 2003.

To curb speculative trading by the financial system, the new Reserve Bank governor

tightened the central banks accommodation of banks. This sparked a huge liquidity crisis in

the last two weeks of 2003 and into January 2004, causing the collapse of Century Discount

House on 3 January. At least eight banks were out of clearing in early January for failure to

fund their batches under the new real time gross settlement (RTGS) arrangement,

significantly dampening market confidence in the financial system. A major goal of monetary

policy must be to restore this confidence.

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3.5 EXPORT & IMPORT

Import item:Major importable items of the country are machinery and transportationequipment, manufacturing goods, chemicals and the fuels.

Total Imports: $2.183 billion f.o.b. (2007 est.)

Import partners: The imports partners in the country are UK, Zambia and South

Africa.

Table 5: Zimbabwes Principle Import Sources

1 South Africa 40.8%

2 Zambia 29.6%

3 US 4.9%

Export item: The important exportable items of the country are platinum, cotton,

tobacco, gold, ferroalloys and clothing.

Total Exports:$1.52 billion f.o.b. (2007 est.)

Export partners: The exports partners of the country are UK, South Africa,

Switzerland, Germany and China.

Table 6: Zimbabwes Principle Export Destinations

1 South Africa 24.8%

2 Democratic Republic of the Congo 17.6%

3 Botswana 15.7%

4 US 10.4%

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economic conditions of zimbabwe

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