In addition to the new power-sharing government arrangement which took effect earlier this year,the ruling Zimbabwean African National Union-Patriotic Front (ZANU-PF) party is showing somesigns that it is ready to acknowledge some of its economic policies are not working. Most notably,the country has formally recognised the use of foreign currency as legal tender in Zimbabwe, andpresented its budgets in US, as well as Zimbawean, dollars for the first time since independencein 1980. This should help end the scourge of hyperinflation, at least in foreign currency terms.That said, any economic recovery will remain almost impossible in our view so long as ReserveBank of Zimbabwe governor Gideon Gono and President Robert Mugabe remain in power. Assuch, we see a return to economic growth only in 2010, in a best-case scenario.
Following months of political stalemate and tough negotiations, the opposition Movement for DemocraticChange (MDC) and Robert Mugabe’s ZANU-PF finally formed a new coalition governmentin the middle of February. While a positive development in itself, the list of challenges that thenew unity government faces is long, and a renewed breakdown can by no means be discountedover the coming months, with the most potent threat coming from the military. Manifold hurdles lieahead: the real and difficult work of agreeing, legislating, and implementing the policies neededto initiate national recovery has hardly begun.
Meanwhile, the economy has essentially hit bottom, with unemployment estimated at 90% andthe harvest forecast to be the worst in generations. As such, with almost no economic activity leftto shed, we see growth holding flat in 2009, rather than contracting. While the dollarisation of theeconomy will help end hyperinflation and implicitly recognises the unsustainable nature of seigniorage,the policy has been implemented with little planning, and we do not believe the country hasenough foreign currency to sustain its needs and grow. At this point, only international assistancecan get the economy back on track, and this remains dependent on an acceptable resolution tothe country’s political problems.
The business environment remains extremely inhospitable. Firms frequently find themselveswithout water or electricity, while the search for fuel for transport is constant. Lately, the fixed linetelephone network has been operating only intermittingly and hardly at all outside cities. Forexcan now be used legally throughout the economy, but dollarisation is no panacea and risks exacerbatingincome inequalities. Nonetheless, the domestic markets have reacted positively. Thenew finance minister, Tendai Biti, is highly respected, and has said that he is determined to wrestback effective control of the fiscal finances from the profligate central bank.
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