IMF in Zimbabwe - Expect the Economy to Get Worse

Monday, June 27, 2005

With markets treading water there is time to fire off one more post on Zimbabwe. The International Monetary Fund (IMF) has just completed a mission to the country in turmoil and has concluded the worst is yet to come. The country whose economy shrank according to IMF data (pdf) about 30 percent between 1998 and 2003 in nominal local currency terms while inflation soared 12-fold from 40 to 470 percent in the same period will see another significant turn for the worse.

ZIM Inflation

GRAPH: Zimbabwe inflation rate 1998-2004. Data: Fed Cleveland
According to the IMF release,
"output is expected to decline sharply this year, in part due to the continued difficulties in agriculture-which have been exacerbated by drought-and the intensification of foreign exchange shortages.
The mission projects that, on the basis of present policies, the budget deficit will increase markedly in 2005, partly due to the cost of higher food imports, interest payments and higher pension costs. Together with the Reserve Bank of Zimbabwe's substantial producer and credit subsidies, these deficits would fuel a sharp increase in money supply, and hence inflation, by end-2005. The authorities indicated their desire to address these problems by taking measures to contain further increases in the budget deficit. The macroeconomic outlook is further clouded by the gravity of the food security situation and implementation of "Operation Restore Order," which threatens to worsen shortages, contribute to lower growth, and aggravate inflation pressures."
The inofficial economy that has provided employment for a good proportion of the population in a country where unemployment runs as high as 70 percent, has been demolished in the last two months. The remnants of it meanwhile provide goods and food that would otherwise be totally unavailable.
Gasoline for 18 USD Per Litre, 69 USD Per Gallon
This comes at a huge cost though. According to Zimbabwe's Daily Mirror a litre of fuel has soared to almost 8 US dollars at the official exchange rate. As the black market rate for US dollars is about double the official rate of 9,000 ZIM dollars, this results in a world record price of 18 dollars for fuel - or in one of the ten poorest countries on the world. The US dollar was revalued 45 percent only six weeks ago, see this post. Inflation has officially declined to 130 percent in 2005.
Dictator Robert Mugabe has announced that the razing of the shantytowns would be followed by a 300 million US dollar building programme. This is pure propaganda as the country is in payment arrears with South African electricity providers, gets fuel only on a COD basis and is in arrears with it's IMF payments to the tune of almost 300 million US dollars as well. In February the IMF has extended its deadline for a compulsory withdrawal until August 16. Compulsory withdrawal is the last step in a series of escalating measures that the IMF applies to members that fail to meet their obligations.
While the international community is ignoring the situation in Zimbabwe, China takes advantage of it. China buys into the country's infrastructure, it's precious metals mining operations and other business sector, paying with arms and fuel.

PHOTO: Is this Zimbabwe's outlook into the future? Courtesy of
The clean-up starts claiming more lives. ZWNews reports of six fatalities due to the cold temperatures the homeless have to endure. Temperatures approach the freezing point during the night. Those people who are sent back to their original homes in the countryside are facing famine as there is no food anywhere. Police confiscates food from individuals, claiming it is intended for the black market, opposition media on the internet report.


Wikinvest Wire