________________________________________________________________________________

Country Report

Zimbabwe

Generated on December 10th 2018

Economist Intelligence Unit
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London E14 4QW
United Kingdom

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Zimbabwe 1

Zimbabwe
Summary
2 Briefing sheet

Outlook for 2019-23

4 Political stability
4 Election watch
5 International relations
5 Policy trends
6 Fiscal policy
6 Monetary policy
6 International assumptions
7 Economic growth
7 Inflation
8 Exchange rates
8 External sector
9 Forecast summary

Data and charts

10 Annual data and forecast
11 Quarterly data
11 Monthly data
12 Annual trends charts
13 Monthly trends charts
14 Comparative economic indicators

Summary
14 Basic data
16 Political structure

Recent analysis
Economy
18 Forecast updates
18 Analysis

Country Report 4th Quarter 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Zimbabwe 2

Briefing sheet
Editor: Pratibha Thaker
Forecast Closing Date: September 27, 2018

Political and economic outlook

The removal of Robert Mugabe as Zimbabwe's long-standing president has created substantial
public expectations of change, which the country's new leader, Emmerson Mnangagwa, will
find difficult to satisfy, leading to a volatile political environment.
The flawed July 2018 elections have reduced the likelihood of a speedy re-engagement with the
international community—hindering the early resumption of vital flows of aid and investment
and thereby heightening the risk of renewed public unrest.
The clearance of arrears owed to multilateral creditors, primarily the World Bank and the
African Development Bank, is one of the key conditions required for a new IMF deal. Such an
agreement is unlikely to be forthcoming until mid-2019 at the earliest.
Zimbabwe will seek to deepen its trade and financial relations with China. However, China will
remain concerned about Zimbabwe's repayment capacity and actual Chinese lending may well
fall short of the pledged commitments.
The Economist Intelligence Unit expects real GDP to grow by just 2.2% in 2019, reflecting
continuing financial constraints, before accelerating to an annual average of 4.6% in 2020­23—
on the assumption of an IMF deal and the introduction of pro-market reforms.
The fiscal deficit will decline gradually, helped by greater spending constraints. The
government will face political constraints in trying to contain the public-sector wage bill.
Inflation will average 7.3% in 2019-23, up from an estimated 3.6% in 2018. An overvalued
exchange rate and other distortions will mask the extent of underlying price pressures.
The current-account deficit will remain large in 2019-23, averaging 6% of GDP a year. It will be
financed in the near term by the continued running-up of short-term debt and arrears.
Key indicators
2018a 2019b 2020b 2021b 2022b 2023b
Real GDP growth (%) 2.0 2.2 4.8 5.0 5.3 5.5
Consumer price inflation (av; %) 3.6 8.4 10.1 6.5 5.8 5.6
Government balance (% of GDP) -12.7 -10.9 -9.4 -8.4 -7.8 -7.3
Current-account balance (% of GDP) -6.9 -6.7 -5.8 -5.8 -5.6 -6.0
Money market rate (av; %) 48.0 49.0 50.0 47.0 42.0 42.0
Exchange rate US$:US$ (av) 1.00 1.00 1.00 1.00 1.00 1.00
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Country Report 4th Quarter 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Zimbabwe 3

Key changes since July 4th

The violence that followed the July elections will impede a speedy resumption of donor
support, reducing our estimate for real GDP growth in 2018 to 2% (previously 3.4%) and our
forecast for 2019 growth to 2.2% (previously 4.3%).
Data for the first quarter of 2018 indicate a further deterioration in an already fragile fiscal
position. We expect the budget shortfall to have widened to an estimated 12.7% of GDP in 2018,
with adverse knock-on effects for our fiscal forecasts in subsequent years.
Specifically, we now expect the fiscal deficit to decline more slowly than under our previous
forecast, reflecting the difficulties that the government will face in compressing a large public-
sector wage bill.

The quarter ahead

TBC—Inflation (September): Inflation increased to 4.8% year on year in August, pressured by
higher food prices and heavy pre-election spending. We expect the upward trajectory to be
maintained in September.
TBC—New IMF programme: Preliminary contacts may be made with the IMF on a new staff-
monitored programme. However, the IMF is certain to demand tough policy measures—
including substantial cuts in public spending—making an early agreement highly unlikely.

Major risks to our forecast

Scenarios, Q2 2018 Probability Impact Intensity
Firms are hit by serious power cuts High High 16
Growth stalls again High High 16
Public expectations of change are not fulfilled, leading to violence High High 16
Corruption hampers business operations High Moderate 12
Operations suffer from a shortage of skilled labour High Moderate 12
Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential
developments that might substantially change the business operating environment over the coming two
years. Risk intensity is a product of probability and impact, on a 25-point scale.
Source: The Economist Intelligence Unit.

Country Report 4th Quarter 2018 www.eiu.com © Economist Intelligence Unit Limited 2018

Zimbabwe 4

Outlook for 2019-23

Political stability
One of the major risks to Zimbabwe's overall political stability—change at the top of the ruling
Zimbabwe African National Union­Patriotic Front (ZANU­PF)—has been addressed, since the
long-standing president, Robert Mugabe, lost power in a bloodless coup in November 2017.
However, other risk factors remain, including the influence of the military. Army personnel
continue to play a major role in the new administration, headed by Emmerson Mnangagwa—
Mr Mugabe's vice-president until he was dismissed in November 2017. The military's use of force
to crush a demonstration by opposition supporters protesting at the results of the July 2018
presidential poll—in which the soldiers fired live rounds and killed six civilians—underscores its
intolerance of dissent. Mr Mnangagwa's claims that he did not call out the military against the
demonstration have fuelled perceptions that it is the army, and specifically Constantino Chiwenga
(a retired general who is now vice-president), that is in control. There is little history of military
intervention in Zimbabwe, but having done so once—with relative success (since the key aim of
Mr Mugabe's removal was achieved, without violence and with little international comeback)—
army factions may seek to intervene again should they perceive the government to be seeking to
limit military influence.
There is also a risk that protracted economic underperformance will lead to public unrest.
Zimbabweans traditionally have extremely high tolerance levels for social and economic hardship
and political repression (as well as an understandable wariness of the likely official response to
protests), but the removal of Mr Mugabe, in power since 1980, has created substantial public
expectations of thorough political and economic change. However, the flawed July 2018 elections
have reduced the likelihood of substantial re-engagement with the international community, and
vital flows of aid and investment. Given that the new government has inherited what is basically a
failed economy, and that potentially wrenching reforms will be required at some point, a build-up
of popular anger is possible. This could lead to violent protest, and given that the ruling party will
seek to crack down strongly on anything that presents a threat to its hegemony, there is a risk
that cycles of violence will become entrenched. Against this backdrop, Zimbabwe's overall
political situation is likely to remain fragile over much of the forecast period.

Election watch
The next presidential and legislative elections are due to be held in 2023. In the most recent polls,
in July 2018, Mr Mnangagwa won 50.8% of the votes in the presidential poll—just enough to
avoid a run-off against his nearest rival, Nelson Chamisa of the main opposition Movement for
Democratic Change (MDC)—according to official results from by the Zimbabwe Electoral
Commission (ZEC). Mr Chamisa secured 44.3% of the vote, with the balance spread across the
other 21 presidential candidates, none of whom obtained more than 1% of the vote. However, the
narrowness of the margin, and delays in announcing the results, served to fuel opposition claims
that the vote was rigged, and Mr Mnangagwa was forced to postpone his inauguration after
Mr Chamisa launched a court challenge to the result. The Constitutional Court's rejection of this
challenge will do little to reassure voters or the international community about the validity of the
vote, however.
In the legislative poll, ZANU-PF narrowly secured a two-thirds parliamentary majority, with 179
out of 270 seats. Although this constitutes a loss of 17 seats from its 2013 election total, the ruling
party remains in a dominant position, not least because any group splitting from the ruling party
would lose access to the benefits of incumbency. That said, divisions within ZANU-PF cannot be
ruled out in the longer term.

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Zimbabwe 5

International relations
There is unlikely to be a substantial improvement in Zimbabwe's relations with Western donors in
the short term. Alleged irregularities during the election count and, in particular, violence
following the vote, have undermined Mr Mnangagwa's efforts to persuade donors, lenders and
investors that he won a clean election. The US authorities have already stated that they will not
lift sanctions until Mr Mnangagwa's administration establishes a track record of political reform.
This stance is potentially significant, since under the so-called Zimbabwe Democracy and
Economic Recovery Act, US representatives at multilateral institutions—including the IMF and
Paris Club—will not support efforts to address Zimbabwe's foreign debt.
Equally, the IMF has reiterated that it will lend only after the US$1.8bn in arrears owed to
multilateral creditors, primarily the World Bank and the African Development Bank (AfDB), are
cleared. The Reserve Bank of Zimbabwe (RBZ, the central bank) has pledged on a number of
occasions to pay these arrears—most recently by September 2018—but has thus far failed to
obtain the necessary bridging loan. It seems likely that arrears will be repaid during our forecast
period, probably via some sort of funding from a regional institution such as the African Export-
Import Bank (Afreximbank). However, even in the best-case scenario, in which US and other
international concerns are rapidly addressed, any rescue package and IMF agreement is unlikely
before mid-2019. In the meantime, Zimbabwe will seek to deepen its trade and financial relations
with China. Mr Mnangagwa is seeking multibillion-dollar loans from China, and some high-profile
deals are likely. However, as with other African states, China will remain concerned about
Zimbabwe's repayment capacity, and actual Chinese lending may well fall short of the pledged
commitments.

Policy trends
Signalling a sharp break from Zimbabwe's recent past, Mr Mnangagwa has pledged to implement
an ambitious economic reform programme that aims to promote and protect private enterprise,
lower the cost of doing business and encourage foreign direct investment. The president has
already signed legislation modifying the country's controversial 2007 indigenisation law, which
restricted foreign corporate ownership to 49%. According to this, majority ownership (by state-
owned entities) will be mandatory only for diamond and platinum companies. The president has
also vowed to launch a wide-ranging privatisation programme and to modify the current rules
governing the leasing of land in order to bolster the security of property rights (a crucial reform
given Zimbabwe's history of land expropriation without compensation). In his state of the nation
address to parliament in mid-September, Mr Mnangagwa also promised to streamline the process
for registering companies, together with the establishment of a "one-stop" investment agency.
These are all potentially positive signs. Nonetheless, even assuming full implementation of the
promised measures—which is far from assured—it will take many years to address the various
constraints in Zimbabwe's operating environment. In the meantime, substantial currency risks,
stemming from the uncertainties surrounding fiscal management, will continue to weigh on
investor confidence.
The government has suggested that it will eventually revert to a domestic currency. However,
government officials also concede that the necessary preconditions—including a substantial
recovery in foreign­currency reserves—will take many years to be achieved. In the interim, the use
of so-called bond notes as a quasi-currency will continue, as will the risk that the government will
revert to printing money to fund the fiscal deficit (a policy that contributed to hyperinflation in the
2000s).

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Zimbabwe 6

Fiscal policy
Data published by the RBZ indicate that the budget deficit increased to US$225m in the first three
months of 2018—nearly one­quarter higher than in the corresponding period of 2017. With
spending pressures in an election year reinforcing the deterioration in the fiscal position, we
estimate that the budget deficit will have widened to 12.7% of GDP in 2018 as a whole. We expect
the deficit to ease to 10.9% of GDP in 2019, as the authorities are obliged to adopt a more prudent
stance in an effort to secure IMF support. A shift to greater expenditure restraint is also likely
over the medium term, while revenue will grow on the back of improved tax collection.
Nonetheless, the fiscal deficit will remain elevated, given the need for substantial infrastructure
repair work. The government will also face substantial political constraints in attempting to
contain the large public-sector wage bill. As a result, we expect the deficit to end the forecast
period at a still-sizable 7.3% of GDP.
The budget deficit is currently being financed largely through domestic borrowing. Greater access
to external credit—and reduced reliance on domestic sources—will only arise if Zimbabwe
successfully implements reforms and clears arrears to international institutions. We have not yet
included IMF financing in our forecast as it is not guaranteed, but we do expect some multilateral
and bilateral funding to be agreed. That said, the extent of off-budget expenditure is difficult to
quantify, and the quality of data relating to government spending and debt levels is highly
doubtful. Consequently, our forecasts continue to be subject to potentially substantial revisions.

Monetary policy
The government's expansionary fiscal stance is causing a severe crowding-out of the private
sector. The introduction in late 2016 of local bond notes—that in theory trade at parity with the
US dollar but are in reality heavily discounted—represents an attempt by the central bank to
alleviate the liquidity squeeze. Nonetheless, the availability of credit (for both individuals and
companies) remains extremely limited. Meanwhile, the government's financing options remain
narrow. The limited capacity of the domestic banking system to meet public-sector financing
needs has inevitably reinforced concerns about a return to previous monetary policies, such as
printing money to fund deficits. The probability of such an outcome will rise if the government is
unable to gain access to increased external support.

International assumptions
2018 2019 2020 2021 2022 2023
Economic growth (%)
US GDP 2.8 2.2 1.3 1.7 1.9 1.9
OECD GDP 2.3 2.1 1.5 1.8 1.9 1.9
World GDP 3.0 2.8 2.4 2.7 2.8 2.7
World trade 4.0 3.7 3.0 4.0 3.7 3.9
Inflation indicators (% unless otherwise indicated)
US CPI 2.5 2.4 1.6 1.8 1.9 1.8
OECD CPI 2.3 2.3 2.0 2.0 2.1 2.0
Manufactures (measured in US$) 6.8 3.5 3.0 2.4 4.0 3.0
Oil (Brent; US$/b) 73.2 72.3 70.0 74.8 77.4 79.5
Non-oil commodities (measured in US$) 3.3 0.2 1.7 1.3 1.3 0.9
Financial variables
US$ 3-month commercial paper rate (av; %) 2.1 2.9 2.5 2.6 2.9 3.1
US$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24
¥:US$ (av) 109.6 109.9 104.1 100.0 98.3 97.5

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Zimbabwe 7

Economic growth
Although its importance has declined in recent decades, agriculture remains a key driver of overall
economic performance, contributing over 10% of GDP. However, the sector's output is subject to
significant weather-related fluctuations; according to the latest estimates from the UN's Food and
Agriculture Organisation (FAO), cereal production is likely to have declined by around 24% in
2018, reflecting inadequate rainfall in the early part of the growing season. Meanwhile, although
pre-election "giveaways" (such as public-sector wage rises) have provided support to private
consumption, businesses are continuing to face severe liquidity shortages—negating hopes of a
rapid improvement in financial conditions in the wake of the elections. We therefore expect the
pace of real GDP growth to have slowed to an estimated 2% in 2018, significantly below the
government's projection of a 4.5% expansion.
The continued weakness of tobacco prices is likely to affect investment in that sector over the
medium term, while international interest in the gold sector will be constrained by a difficult
operating environment. However, we expect the authorities to make a more concerted attempt to
tackle structural bottlenecks and the poor business climate—including revision of the
indigenisation legislation that has acted as a substantial deterrent to investors. We thus expect
growth in 2019-23 to accelerate to an average of 4.6%as donor support resumes and the pace of
reform momentum increases. However, this forecast is subject to a significant margin of error; the
maintenance of current policies and increased use of bond notes, could lead to persistently weak
growth rates, whereas a fully fledged reform programme could help pave the way to double-digit
growth rates.
Economic growth
% 2018a 2019b 2020b 2021b 2022b 2023b
GDP 2.0 2.2 4.8 5.0 5.3 5.5
Private consumption 2.3 2.3 3.6 5.1 4.8 5.9
Government consumption 2.0 2.8 3.2 3.4 4.2 4.0
Gross fixed investment 1.2 1.9 3.1 4.5 4.7 4.6
Exports of goods & services 3.8 3.6 9.6 8.0 9.9 7.8
Imports of goods & services 3.2 3.5 4.3 5.7 6.7 6.2
Domestic demand 2.0 2.4 3.4 4.5 4.6 5.1
Agriculture -3.5 3.3 3.9 3.4 3.7 3.7
Industry 2.7 3.6 5.1 5.7 5.5 5.5
Services 2.7 1.5 4.8 5.0 5.5 5.9
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Inflation
Marking an intensification of inflationary pressures, consumer prices rose by 4.8% year on year in
August, according to the official index published by Zimstat. The recent pick-up in inflation
comes on the back of an expansionary fiscal policy, including a 15% pay increase granted to civil
servants ahead of the election in July. Higher local food prices, as well as an increase in global
energy costs, have also helped to push up inflation. We expect consumer prices to rise by an
average of 9.3% in 2019­20—up from an estimated 3.6% in 2018—as faster currency depreciation
(either de facto or official) leads to a rise in imported inflation. Inflation will then moderate to an
average of 6% in 2021-23 as confidence is gradually rebuilt and monetary and fiscal policy become
less expansionary. However, there is a substantial downside risk to these forecasts. The current
overvaluation of the currency, as measured by the so-called Old Mutual Implied Rate (reflecting
the gap between the Harare and Johannesburg or London prices for Old Mutual shares), also
points to a substantial degree of repressed inflation. In addition, if the government reverts to the
disastrous policies used previously, and prints large amounts of bond notes to finance deficits, a
return to hyperinflation could ensue.

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Zimbabwe 8

Exchange rates
The authorities concede that a move to a new currency (replacing the current multi-currency
regime and bond notes) will not be possible until two key conditions have been met: a reduction
of the budget deficit and the build-up of foreign reserves to three months' import cover (from less
than one month at present). The government also faces a major dilemma: these fundamental
conditions have to be attained before a new currency is launched, but they cannot be achieved
without substantial official devaluation. A large funding injection from donors and lenders will
therefore be required in order to back a new currency, together with a credible de-dollarisation
strategy. We do not expect the adoption of a new currency to occur within the timespan of our
forecast period; this is in line with comments from the RBZ governor, John Mangudya, who
recently noted that it could take around five years before Zimbabwe will be able to re-introduce its
own currency.

External sector
Ferro-alloys, platinum, gold and tobacco will continue to dominate export earnings, although
diamonds are an increasingly important source of export revenue. Tobacco farmers are expected to
seek to boost output over the forecast period, but the long-term price outlook is not positive.
After rising in 2018, metals prices are expected to be broadly flat over the remainder of the forecast
period, thereby acting as a constraint on export earnings. That said, assuming a gradual shift
towards a more business-friendly approach, improved power supplies and a reduction in
infrastructure bottlenecks over the medium term, export volumes should rise, meaning that exports
will increase from an estimated US$5bn in 2018 to US$7.9bn in 2023. However, rising demand for
imports, in order to support infrastructure development, will also push up the import bill. As a
result, the trade deficit will remain sizeable, averaging 8.6% of GDP in 2019-23.
The services account will remain in deficit in 2019-23, despite a gradual recovery in tourism
receipts. The income account is also set to remain in deficit, driven by profit remittances by mining
companies. Only the current transfers account will be in surplus, owing to continued remittances
by the 3.5m-plus Zimbabweans living abroad. The current-account deficit will average 6% a year
in 2019-23, representing a modest reduction compared with the estimated shortfall of around 7% of
GDP in 2018. Our forecast is based on the assumption that the government will succeed in
securing increased official support, together with a recovery in foreign direct investment flows. If
this fails to materialise, the shortfall on the external account will be correspondingly lower (owing
to reduced expenditure on imports) but the likely consequence will be continued economic
stagnation.

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Zimbabwe 9

Forecast summary
Forecast summary
(% unless otherwise indicated)
2018a 2019b 2020b 2021b 2022b 2023b
Real GDP growth 2.0 2.2 4.8 5.0 5.3 5.5
Industrial production growth 2.7 3.6 4.1 4.9 4.7 4.6
Gross agricultural production growth -3.5 3.3 3.9 3.4 3.7 3.7
Consumer price inflation (av) 3.6 8.4 10.1 6.5 5.8 5.6
Consumer price inflation (end-period) 6.0 9.2 8.3 6.1 5.7 5.6
Lending interest rate 19.0 20.0 21.0 18.0 15.5 15.5
Government balance (% of GDP) -12.7 -10.9 -9.4 -8.4 -7.8 -7.3
Exports of goods fob (US$ bn) 5.0 5.4 6.0 6.5 7.4 7.9
Imports of goods fob (US$ bn) 6.9 7.3 8.0 8.7 9.7 10.6
Current-account balance (US$ bn) -1.3 -1.4 -1.3 -1.5 -1.6 -1.8
Current-account balance (% of GDP) -6.9 -6.7 -5.8 -5.8 -5.6 -6.0
External debt (end-period; US$ bn) 10.3 11.3 12.4 13.4 14.4 15.2
Exchange rate Z$:US$ (av) 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate Z$:US$ (end-period) 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate Z$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24
Exchange rate Z$:€ (end­period) 1.16 1.22 1.20 1.23 1.24 1.25
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

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Zimbabwe 10

Data and charts

Annual data and forecast
2014a 2015a 2016a 2017b 2018b 2019c 2020c
GDP
Nominal GDP (US$ bn) 15.9 16.3 16.6 17.8a 19.5 21.1 23.3
Real GDP growth (%) 2.1 1.7 0.6 3.4a 2.0 2.2 4.8
Expenditure on GDP (% real change)
Private consumption -5.7 7.7 -12.5 -17.6a 2.3 2.3 3.6
Government consumption 19.6 13.1 11.4 28.2a 2.0 2.8 3.2
Gross fixed investment 12.7 5.6 0.5 52.8a 1.2 1.9 3.1
Exports of goods & services -2.6 -3.9 8.8 5.5a 3.8 3.6 9.6
Imports of goods & services -5.8 16.9 -13.0 -1.0a 3.2 3.5 4.3
Origin of GDP (% real change)
Agriculture 23.0 -5.2 -3.6 14.6a -3.5 3.3 3.9
Industry -2.0 0.0 -0.8 5.0a 2.7 3.6 5.1
Services 0.3 2.0 4.7 0.8a 2.7 1.5 4.8
Population and income
Population (m) 15.4 15.8 16.2 16.5 16.9 17.3 17.7
GDP per head (US$ at PPP) 2,028 2,036 2,027 2,086 2,116 2,157 2,227
Fiscal indicators (% of GDP)
Public-sector revenue 23.7 22.9 21.1 21.7a 22.0 22.4 22.6
Public-sector expenditure 25.3 25.5 29.6 31.9a 34.7 33.3 32.0
Public-sector balance -1.6 -2.6 -8.5 -10.2a -12.7 -10.9 -9.4
Prices and financial indicators
Exchange rate US$:US$ (end-period) 1.00 1.00 1.00 1.00a 1.00 1.00 1.00
Consumer prices (end-period; %) -0.8 -2.1 -0.3 2.3a 6.0 9.2 8.3
Producer prices (av; %) 1.3 1.3b 1.3b 1.3 1.3 1.5 1.6
Stock of money M1 (% change) 9.9 12.3b 34.2b 7.8 9.3 8.6 10.5
Stock of money M2 (% change) 11.9 10.2b 18.8b 18.6 9.3 8.6 10.4
Money market interest rate (av; %) 54.0b 50.0b 45.0b 47.0 48.0 49.0 50.0
Current account (US$ m)
Trade balance -2,736 -2,448 -1,535 -1,119 -1,864 -1,947 -1,959
Goods: exports fob 3,570 3,614 3,701 4,353 5,008 5,394 5,994
Goods: imports fob -6,306 -6,062 -5,236 -5,472 -6,872 -7,341 -7,954
Services balance -962 -950b -934b -954 -984 -961 -993
Primary income balance -686 -745b -818b -956 -989 -1,034 -1,071
Secondary income balance 2,361 2,622b 2,695b 2,410 2,495 2,537 2,682
Current-account balance -2,026 -1,519 -591b -618 -1,342 -1,406 -1,341
External debt (US$ m)
Debt stock 8,039 8,738 8,898 9,284 10,272 11,269 12,422
Debt service paid 467 564 997 659 706 839 879
Principal repayments 325 360 902 539 574 682 717
Interest 142 204 118 121 132 157 162
Debt service due 560 564 1,241 852 867 917 1,006
International reserves (US$ m)
Total international reserves 364 434 407 432 460 630 852
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
Source: IMF, International Financial Statistics.

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Zimbabwe 11

Quarterly data
2016 2017 2018
2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr
Prices
Consumer prices (% change, year on year) -1.5 -1.5 -1.0 -0.2 0.5 0.3 2.9 3.1
Financial indicators
Exchange rate Z$:US$ (av) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate Z$:US$ (end-period) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Foreign trade and payments (US$ m)
Exports fob 667 329 445 335 315 401 450 569
Imports fob 1,076 1,165 1,245 1,035 1,203 1,167 1,254 1,249
Trade balance -409 -836 -800 -700 -888 -766 -804 -680
a Provisional data for 2006. b DOTS estimates.
Sources: IMF, International Financial Statistics; Direction of Trade Statistics (DOTS); Reserve Bank of Zimbabwe; Central
Statistical Office.

Monthly data
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Exchange rate Z$:US$ (av)
2013 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
2014 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
2015 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate Z$:US$ (end-period)
2013 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
2014 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
2015 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
M1 (% change, year on year)
2013 8.5 -1.7 2.0 8.5 8.3 1.9 2.6 4.0 4.6 3.3 1.8 -6.2
2014 2.2 2.2 5.6 4.8 8.4 8.7 0.8 5.4 3.3 5.7 11.3 10.1
2015 -3.3 -0.7 2.3 -6.0 -5.9 0.9 1.9 5.5 n/a n/a n/a n/a
M2 (% change, year on year)
2013 11.7 5.4 12.5 15.4 9.4 2.2 7.5 3.8 6.3 0.3 1.1 -3.4
2014 0.9 0.5 4.1 2.7 8.6 9.9 -0.9 6.5 5.0 7.6 10.2 11.0
2015 4.5 4.2 2.2 -2.3 -2.0 2.3 3.1 0.0 n/a n/a n/a n/a
Deposit rate (av; %)
2005 56.5 46.5 44.4 44.0 54.0 81.5 79.0 126.0 126.0 130.5 130.5 174.0
2006 169.0 164.0 229.0 254.0 254.0 229.0 284.0 179.0 179.0 166.5 166.5 166.5
2007 129.0 124.0 154.0 154.0 154.0 129.0 129.0 129.0 94.0 104.0 79.0 79.0
Lending rate (av; %)
2005 168.0 155.0 155.6 150.0 165.0 200.0 207.5 262.0 275.0 360.0 315.0 415.0
2006 415.0 455.0 595.0 682.5 682.5 632.5 632.5 312.5 350.0 350.0 350.0 500.0
2007 512.5 537.5 537.5 537.5 537.5 537.5 572.5 600.0 600.0 600.0 600.0 775.0
Sources: IMF, International Financial Statistics; Haver Analytics.

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Zimbabwe 12

Annual trends charts

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Zimbabwe 13

Monthly trends charts

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Zimbabwe 14

Comparative economic indicators

Basic data
Land area
390,580 sq km

Population
16.2m (2016, World Bank)

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Zimbabwe 15

Main towns
Population in '000, 2013 (World Gazetteer estimates)
Harare (capital): 1,702
Bulawayo: 755
Chitungwiza (a): 369
Gweru: 147
(a)Harare's former township

Climate
Subtropical

Weather in Harare (altitude 1,472 metres)

Hottest months, October and November, 16­27°C; coldest months, June and July, 7­21°C (average
daily minimum and maximum); driest month, July, 1 mm average rainfall; wettest month, January,
196 mm average rainfall

Languages
English (official), Shona, Ndebele and local dialects

Measures
Metric system

Currency
Following a period of rampant inflation the government moved to a multi-currency system, using
nine currencies, including the US dollar and the South African rand, in preference to the
Zimbabwe dollar (Z$1 = 100 cents); the Zimbabwe dollar has in effect been demonetised, although
the introduction of "bond notes" has sparked concern that the authorities are planning a return to
the Zimbabwe dollar

Time
2 hours ahead of GMT

Public holidays
January 1st (New Year's Day), Good Friday, Easter Monday, April 18th (Independence Day), May
1st (Workers' Day), May 25th (Africa Day), August 11th (Heroes' Day), August 12th (Defence
Forces' National Day), December 22nd (Unity Day), December 25th and 26th (Christmas Day and
Boxing Day); many firms close for a summer break of one to two weeks over the Christmas and
New Year period

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Zimbabwe 16

Political structure
Official name
Republic of Zimbabwe

Form of state
Unitary republic

Legal system
Based on Roman-Dutch law and the 1979 constitution

National legislature
House of Assembly with 270 members, 210 of whom are directly elected; under the revised 2013
constitution 60 seats are reserved for women; a Senate of 78 members, 60 directly elected, 16
traditional chiefs and two elected to represent people with disabilities

National elections
July 30th 2018 (presidential, legislative and Senate); next elections due in July 2023

Head of state
President, elected by universal suffrage; under the constitution adopted in 2013 can serve a
maximum of two terms, but this does not apply retrospectively. Robert Mugabe, in power since
1980, was removed in a bloodless coup in November 2017; the new head of state is the former
vice-president, Emmerson Mnangagwa

National government
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Zimbabwe 17
The president and his appointed cabinet; the post of prime minister was abolished in 2013 under
the revised constitution

Main political parties

Zimbabwe African National Union-Patriotic Front (ZANU-PF), the ruling party since 1980;
Movement for Democratic Change (MDC), formed by the trade union movement in September
1999; breakaway MDC movements including the MDC-N and MDC-Renewal; Zimbabwe People
First was formed by a former ZANU-PF vice-president, Joice Mujuru, in 2015; a number of smaller
parties and independent candidates also contest elections

Key ministers
President: Emmerson Mnangagwa
Defence, security & war veterans: Oppah Muchinguri-Kashiri
Education (primary & secondary): Paul Mavhima
Education (tertiary): Amon Murwira
Energy & power development: Joram Gumbo
Environment, tourism & hospitality: Priscah Mupfumira
Finance: Thuli Ncube
Foreign affairs: Sibusiso Busi Moyo
Health: Obadiah Moyo
Home affairs & culture: Cain Matema
Industry & commerce: Mhangaliso Ndlovu
Information, publicity & broadcasting: Monica Mutsvangwa
Information and communications technology: Kazembe Kazembe
Justice, legal & parliamentary affairs: Ziyambi Ziyambi
Labour & social welfare: Sekesai Nzenza
Lands, agriculture & rural resettlement: Perence Shiri
Local government & public works: July Moyo
Mines & mining development: Winston Chitando
Transport & infrastructural development: Joel Matiza
Women affairs, community & SME development: Sithembiso Nyoni
Youth, sports, arts & recreation: Kirsty Coventry

Central bank governor

John Mangudya

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Zimbabwe 18

Recent analysis
Generated on December 10th 2018

The following articles have been written in response to events occurring since our most recent forecast was
released, and indicate how we expect these events to affect our next forecast.

Economy
Forecast updates
AU parliament pushes for speedy ratification of AfCFTA
October 30, 2018: External sector

Event
At the first ordinary session of the fifth Pan-African Parliament the chairperson of the African
Union (AU) and Rwanda's president, Paul Kagame, urged AU legislators to expedite the
ratification of the African Continental Free-Trade Area (AfCFTA) agreement.

Analysis
At end-October 49 of the 55 AU member states had signed the AfCFTA, but the internal
ratification process remains slow. At least 22 countries must ratify the deal for it to come into
effect, but only seven AU member states (Rwanda, Niger, Kenya, Ghana, Swaziland, Chad and
Guinea) have so far done so. The AfCFTA has the potential to unlock significant economic
dividends for the region (around US$16bn per year according to the AU) by eliminating
prohibitive tariffs in the world's largest single market (1.2bn consumers and workers). As such, the
AU is pushing for speedy ratification by member states and is seeking to facilitate greater
participation by the private sector. For this purpose, the AU Commission has established a Pan-
African Private-Sector Trade and Investment Committee (PAFTRAC), an advocacy body that will
help mobilise private-sector participation in policy-making and AfCFTA trade negotiations.
The establishment of PAFTRAC is a positive for the trade deal, and could open up new markets
for African businesses under the continental free-trade area. However, in our view the main hold-
up stems from political considerations of member states, and a private-sector advocacy body is
unlikely to be able to address those concerns. Although in practice the trade deal is likely to
benefit larger economies that possess the requisite resources and infrastructure to scale up and
meet regional demand, this economic rationale does not always align with politics, as seen in
protectionist Nigeria (the region's largest economy). Elsewhere on the continent some African
leaders espouse the virtues of free trade on a regional stage, but economic policy retains a
protectionist slant (such as Tanzania).
Political worries aside, operational difficulties also remain a major foreseeable concern given the
sheer size of the integration (with the involvement of 55 countries if all AU members sign up) in a
region that already has several smaller sub-regional trade blocs. Nevertheless, sentiment around
the deal is broadly positive, as evidenced by the high number of signatories, and we expect it to
remain high on the agenda in the coming years.

Impact on the forecast

Amid slow progress on ratification, our forecasts of low intra-Africa trade in most countries in
2019-23 remains unchanged.

Analysis
Diamonds remain mixed blessing for southern Africa
October 1, 2018

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Zimbabwe 19
Ever since the Kimberly Process (KP) was created in 2003 to stem the flow of so-called "conflict
diamonds", which funded African civil wars in the 1990s, critics have argued that it has failed to
stem the sale of diamonds to fund wars by state actors, or other forms of corruption. As a result,
the KP has lost many of the non-governmental organisations (NGOs) that originally backed it,
amid growing pressure to break the enduring links between diamond mining, violence and theft.
Meanwhile, the industry has developed in different ways across the region, with some countries
faring better than others at spending their mineral wealth in an efficient and transparent
manner.

Poles apart
Diamond-rich Botswana and Zimbabwe exemplify two distinct outcomes that have followed the
discovery of precious gems in southern Africa. Botswana's industry is by far the longer
established of the two, having transformed the country's economic fortunes since independence
in 1967. In late 2017 it passed its third KP inspection and pledged to continue its membership of
the agreement, which limits members to trading with one another. Botswana's problems with
diamonds stem mainly from how economic overreliance on one luxury export locks it into mirroring
global economic cycles of boom and bust. Despite attempts to diversify, diamond mining still
accounts for roughly 25% of GDP, approximately 85% of export earnings, and about one-third of
government revenue. While Botswana remains heavily dependent on the industry however,
diamonds have helped turn it into a middle-income country, with a GDP of around US$18,000 per
head in 2017. Moreover, it is well-protected from economic shocks by its sovereign wealth fund,
the Pula Fund, whose funds amounted to US$5.8bn in July.

Zimbabwe's development of the diamond industry happened several decades after Botswana's, in
part due to its more complex post-colonial history. This saw a white minority regime unilaterally
declare independence from the UK, followed by a civil war that eventually brought former leader
Robert Mugabe to power in 1980. Under his decades-long rule, the diamond-rich Marange area
was first explored by gemstone giant De Beers in the 1990s. However the company did not renew
its Exclusive Prospecting Order for Marange and left in 2006. Afterwards, the ruling Zimbabwe
African National Union-Patriotic Front (ZANU-PF) opened up the Marange diamond fields to
locals, and a rush began. Members of Zimbabwe's ruling party and its security services later
entered the sector, and an escalation of violence, forced labour and smuggling occurred.
According to a 2017 report from anti­corruption NGO Global Witness—which earlier quit the KP
over its endorsement of unlimited diamond exports from Zimbabwe's Marange region—the
country has officially exported diamonds worth over US$2.5bn since 2010, but only US$300m can
be "clearly" identified in public accounts. Moreover, as yet no members of Zimbabwe's powerful
security forces have been held to account for the hundreds of estimated deaths that occurred
during the state's takeover of the diamond fields.
On September 20th however, the new government led by Emmerson Mnangagwa announced that
a long-awaited legislative framework, to replace the previous 51-49% "indigenisation" policy
(which required that black Zimbabwean citizens hold a majority stake in any diamond or platinum

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Zimbabwe 20
mining operation), was imminent. The country announced that its latest diamond sale, conducted
between August 28th and September 12th, had earned it US$28m from a sale of 426,000 carats.
However, diamond sales have not transformed Zimbabwe's general economic situation in the way
they did in Botswana. GDP per head there came to just US$2,140 in 2018, and public debt is
equivalent to 75.3% of national GDP. Zimbabwe owes the World Bank US$1.15bn, the African
Development Bank US$601m, and Paris Club countries US$3bn, in part a legacy of the decades of
poor governance that the country has experienced since its de facto independence in 1965,
especially when compared with its western neighbour.

Diamonds and development?

Reducing Zimbabwe's accumulated debts is seen as the fastest way for the new administration
there to begin accessing fresh public- and private-sector credit, and securing the foreign direct
investment (FDI) that Zimbabwe's diamond industry needs. However, outsiders will be slow to
invest until concerns about the country's economic and political stability are calmed. But other
developing countries in the region are not so badly off, and can theoretically follow the trail
blazed by Botswana, of concentrating all its gem sales in the capital Gaborone. Today, De Beers
has based its final diamond assortment team there, and a jointly owned trading company,
Diamond Trading Company Botswana, handles all sales to approved clients.
One country seeking to copy Botswana's approach is the landlocked state of Lesotho, whose
government is also hoping to raise more revenue from increased capacity in the diamond sector.
Last August, Lesotho's mining minister, Leketse Sello, visited Gaborone, saying his aim was to
benchmark Lesotho's diamond industry against Botswana's approach, and ensure that all
domestic diamonds are sold locally so the stones are value-added before export.
Lesotho is in the process of setting up the Lesotho Diamond Centre (LDC), copying Botswana's
in-country model. The LDC's proposed mandate is ambitious, including powers to value diamonds
for determining applicable taxes and levies, to collect royalties on behalf of the government, to
facilitate diamond exports and imports, to provide a platform for the purchase and sale of
gemstones, and to issue cutting and polishing licences. A Botswana team is due to make a return
visit to Lesotho to complete benchmarking discussions.
Compared with Botswana however, Lesotho has a fractious, inefficient and opaque political
scene. This is partly why the government actually under-collected royalties it was owed from its
famous Letseng diamond mine between 2009-12. According to a later audit report into the issue,
the mine had paid royalties at a rate of 8%, instead of the 10% demanded by law. A clause in the
original 1999 mining lease for Letseng, which is 70% owned by UK-based Gem Diamonds and 30%
controlled by the government, had stipulated a 7% diamond sales tax rate and exempted this rate
from future legal changes. Therefore, while Lesotho's government has expressed an interest in
tapping the sector for more revenue, doubts remain about its capacity to achieve the goals that it
has set itself. It remains frustratingly difficult, even for ethical governments, to spend the extra
revenue earned in ways that bring enduring change to a majority of the population, or to move

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Zimbabwe 21
their countries up the industry's value chain.

Africa's diamond industry prospers quietly

October 16, 2018
According to the Kimberly Process, in 2017 Sub-Saharan Africa's top six producers of
diamonds (by volume of carats) were Botswana, the Democratic Republic of Congo (DRC), South
Africa, Angola, Zimbabwe and Namibia. Diamonds are a good industry to be in, now and in the
future, with global demand for rough diamonds set to grow robustly over the next
decade. Meanwhile, global diamond production is expected to peak in 2019, before beginning a
gradual decline. We therefore expect the leading African diamond producers to try to diversify
their economies away from diamond production over the same period.
Africa's top diamond producers are in different stages of economic development, and find
themselves in very different political situations. This affects their decision-making drastically
when it is time to invest. Some do this transparently, efficiently and in ways that help their
economies to develop in the long term, and some do not (because of corruption, political
instability or conflict, for example). Even when countries spend diamond earnings on economic
development, the expenditure does not always bring enduring change to a majority of the
population nor move their countries up the industry's value chain. Some countries have several
overlapping issues preventing their diamond wealth from being used efficiently.
For example, the Democratic Republic of Congo (DRC) and Angola have less developed
economies and troubled political pasts that hinder their present industrial development. The DRC
has been locked in a struggle to decide who will succeed its long-time president, Joseph Kabila,
who failed to stand down when his term officially ended in 2016. These political uncertainties are
combined with a difficult business environment, in which armed groups and corruption are both
present, plus a frequently changing mining law, compliance with which raises operational
expenses. As a result, investors' confidence is kept low, which acts as a deterrent to future
investment and a drag on the industry's development.

Different development paths

The industry has also developed in different ways across the region owing to the different
geographical situations facing each of Africa's top diamond producers. Namibia, for example, has
nearly exhausted its main diamond deposits on land, near the town of Oranjemund, but is unique
in also mining diamonds offshore at some 120-140 metres below sea level, using a fleet of
production vessels. Meanwhile, South Africa still has lucrative diamond deposits on land, with
over 60% of its diamonds coming from just two big mines in 2017; De Beer's Venetia Mine in
Limpopo Province (South Africa's largest producer of diamonds) and the Finsch Mine in the
Northern Cape.
The importance of the diamond industry to different countries' economies varies widely too, as do

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Zimbabwe 22
the economies of extraction facing mining companies. South Africa and Namibia (which was
occupied by its giant neighbour for three-quarters of a century) have both emerged since the
1990s from a history of colonialism and conflict. Both are now independent, sovereign democratic
countries with the rule of law, and both boast strong mining sectors, including in diamonds. Yet in
many ways, they are very different. In Namibia, diamond mining is a major contributor to the
economy, not least because it still produces the highest-quality rough diamonds of any major
producing country. Because of this, Namibia produces US$1bn of diamonds compared to South
Africa's US$1.3bn, with an average worth of US$518.74 per carat compared with South Africa's
US$134.66. Therefore, even though South Africa's production by volume is much higher than
Namibia's, the Namibian government is more influential within the sector than the gap in economic
development between the two countries might lead one to expect.

Treading a fine line

Today, following moves to make the industry more transparent since the 1990s, popular pressure
has arisen to ensure the sums earned from diamonds are spent more wisely and more fairly than in
the immediate post-war decades of the Cold War. Nonetheless, even in South Africa, which is
arguably the African country that has done the most to share the social benefits of its mining
sector with workers, local communities and other citizens though legal black-empowerment
measures such as its mining charters, social conflict has continued over whether or not mining
companies (including the diamond sector) have been generous enough with the proceeds of their
activities. This is neatly illustrated in the long-running South African negotiations over the
sector's much-adapted mining charter. The Mining Charter 2018 was reopened for revision earlier
this year after South Africa's president, Cyril Ramaphosa, delayed the implementation of an earlier
version. Both documents contain measures designed to redress imbalances left over from the
apartheid era.
But in the second draft (which the South African government aims to consolidate into law by
November) some of earlier provisions had been watered down, reflecting the need to strike a
balance between social justice, investors' rights and the financial needs of the mining sector as a
whole. One rule that made it into both was that after the Mining Charter 2018 comes into effect,
new rights-holding companies must have a minimum baseline of 30% Broad-Based Black
Economic Empowerment (BBBEE) shareholding. Other African diamond producers may end up
following similar models to ensure their citizens share in the wealth their countries' mines produce.
However, owing to high wage costs, labour volatility and low global commodity demand, South
Africa's mining industry is currently facing a wave of job losses. Governments therefore need to
tread a fine line between the needs of investors and the local population. Policy uncertainties risk
impeding diamond-mining investment and adding to difficulties already facing the global industry
as a whole, including high wages, labour unrest and subdued global demand for commodities.

Thinking ahead
The troubles afflicting the wider mining industry in Africa's most industrialised economy do not
necessarily reflect the circumstances of other African diamond-producing countries. Overall,
Africa's diamond producers will do well in the next few years as demand continues to grow in the
US, and in emerging markets such as India and China. Indeed, according to the Global Diamond
Industry 2017 report from a US-based consultancy, Bain & Company, global demand for rough
diamonds will grow by approximately 1-4% per year until 2030. However, harnessing the benefits
(such as increased economic activity, higher public revenue and better export earnings) of the
industry will differ from one country to the other depending on how diversified its economy is,
how transparently and responsibly its government acts, and how strong its civil society and other
non-state actors are.

Impact of US BUILD Act on Sub-Saharan Africa

November 23, 2018
On October 5th 2018 the US Senate passed the Better Utilization of Investments Leading to
Development (BUILD) bill, which aims to facilitate private-sector capital investment in
developing countries. Once signed by the president, Donald Trump, the act will create a
development agency, the International Development Finance Corporation (USIDFC), which will
have an investment cap of US$60bn. The USIDFC will be able to provide loans, equity, insurance,
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Zimbabwe 23
grants and technical assistance to private-sector entities investing in developing countries
around the world. Additional financing will be welcome in Africa, where inadequate
infrastructure remains a major obstacles to faster economic growth. The African Development
Bank estimates that the continent's funding gap for infrastructure is as much as US$87m to
US$112m annually.
The USIDFC will be an integrated one-stop shop for private-sector investment, by combining
various existing development finance entities, such as the Overseas Private Investment
Corporation (OPIC) and the private capital functions of USAID. The US government has in effect
doubled the size of its investment from OPIC's current US$29bn investment cap to US$60bn. The
USIDFC will also have new development finance capabilities, with the ability to make equity
investments and to take risks in low- and middle-income economies. It can now attract potential
investors by lowering investment risks through financial instruments such as first loss guarantees
and small grants. It will also be able to provide loans and guarantees in local currency to protect
investors from currency exchange risk. The USIDFC will consequently be able to crowd-in private
investment and help to support low- and middle-income economies in Sub-Saharan Africa in their
gradual transition towards market economies.

US opens its chequebook

The BUILD Act is part of the strategy of Mr Trump's administration to counter China's influence
in Africa and Asia, including China's Belt and Road Initiative. By allowing the USIDFC to provide
equity financing instead of debt and thereby ensuring that the agency shares risk with the private
companies it invests in, the act should increase the accountability of the USIDFC. Mr Trump's
administration hopes that such a financing model will offer an alternative to Chinese investment,
which is primarily funded by debt, historically a problem for Sub-Saharan African countries, which
have sometimes optimistically over-borrowed to fund investment. The Economist Intelligence Unit
doubts that Sub-Saharan African countries will find that the USIDFC will match Chinese levels of
investment, but simply its existence as an alternative to Chinese funding will strengthen African
states in their negotiations with China.

Infrastructure investment needs: a SADC perspective

The Southern Africa Development Community (SADC) argues that, as with most of Sub-Saharan
Africa, regional development in infrastructure is crucial to sustaining its members' economic
development and improving trade and investment opportunities. According to SADC's Regional
Infrastructure Development Master Plan (RIDMP), energy, transport, telecommunications, water,
and tourism are all crucial areas for investment in the region. The plan sets out how the countries
in Southern Africa can transition from commodity-driven growth to growth fuelled by value
addition and industrialisation. In this vision, the private sector plays a crucial role in filling the
plan's financing gap, and it is this need for greater regional investment that the USIDFC could in
theory meet. The infrastructure projects covered in the RIDMP, approved by SADC finance
ministers in 2012, call for capital of US$500bn. Out of this, an estimated US$100bn is to come from
the private sector; having the USIDFC as a partner could make it a lot easier to persuade private
companies to take the risk of investing in the SADC region.
Southern Africa lags behind other areas in Africa, particularly in infrastructure. Yet there is great
potential for investment in crossborder infrastructure, where rudimentary plans have already taken
shape in electricity infrastructure. Currently, nine SADC countries have connected their power
grids, creating a competitive energy market. However, in the Southern Africa Power Pool, only
24% of residents have access to electricity, compared with 36% in the Eastern Africa Power Pool
and 44% in the Western Africa Power Pool (although access to electricity remains an issue across
all of Sub-Saharan Africa's regions). Furthermore, in southern Africa, only 5% of rural areas have
access to electricity. The US economic regional portfolio in the SADC region currently spans
several different initiatives such as Power and Trade Africa (PATA), the African Growth and
Opportunity Act (AGOA) and clean energy programmes. This emerging southern Africa energy
infrastructure has already produced benefits, with increased access to markets, and it provides
some scope for initial USIDFC investment in the region's infrastructure as outlined in SADC's
strategy for regional growth.

Downside risks in SADC countries

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Zimbabwe 24
Southern African governments recognise the importance of private-sector investment in their
infrastructure. However, such investment is impeded by a number of obstacles. These broadly
include significant tariff barriers, poor project preparation and unstable regulatory frameworks.
The USIDFC and other, private-sector entities will, however, sustain investment only if the risks
associated with these problems are addressed by the region's governments. The twin challenges
that SADC countries face are securing investments in the first place and then providing the
conditions to ensure that these investments are managed efficiently.
In the region, inefficiencies in infrastructure markets emanate primarily from state-owned
enterprises (SOEs). These SOEs are often poorly managed, with a substantial portion of
government budgets directed towards subsidies for them. As a result, expenditures such as the
maintenance costs of infrastructure projects are often neglected. Governments also tend to
intervene in utility markets through discretionary pricing policies. For example, Malawi, a member
of SADC, was not selected by the US-funded Millennium Challenge Corporation (MCC) for a
second compact programme, as its government delayed increasing electricity tariffs for many
years, tariffs that were necessary for the financial health of the state utility under the MCC's initial
US$350m compact programme. This past track record affects potential investments, not only in
Malawi, but also in neighbouring countries through the SADC power pool. Without
improvements, such markets will continue to be high-risk investments for private-sector investors,
and will attract little interest or overseas capital.

Africa overall
Despite some encouraging local progress in the telecommunications sector over the past two
decades, Africa as a whole still lags behind other parts of the world in terms of new infrastructure.
In some countries, such as Rwanda and Ethiopia, which have strong governments that inspired
confidence among global investors, private-sector investment in infrastructure has increased over
the past few years. But across Africa, further reforms will need to be undertaken to improve the
investment climate for infrastructure development. All African governments ought to seek to
promote investment by continuing to reform their SOEs so that they can be privatised, or to
collaborate with potential investors to secure long-term investment. In the meantime, development
finance institutions like the USIDFC should step in to provide funding and direction for regional
development.
However, US aid will be spread across the whole continent (and elsewhere) during the course of
the USIDFC's 20-year mandate (which will end in 2038), so it is important to realise that the
USIDFC will not by itself be sufficient to enable Sub-Saharan African governments to close the
infrastructure gap that has opened up between themselves and other parts of the world. The
BUILD Act is also a direct response to China's Belt and Road Initiative, so its funds may be
targeted at those countries that are most geopolitically important to the US and China (such as
Djibouti and Ethiopia), rather than where the money is needed most. However, China is also
present in many African countries, from Botswana to Eritrea, and this will encourage the US to
expand its aid development presence in those countries too.
Concerns over Chinese influence also spurred the European Commission to launch its own
version of the BUILD Act on September 19th, the so-called Connectivity Strategy. This will aim to
give developing countries a "credible and sustainable alternative offer for connectivity financing"
to candidate countries that emphasize sustainable development and labour rights. The growth of
"aid competition" between the great powers will not resolve all of Sub-Saharan Africa's
development issues over the next two decades, but we expect that it will make it easier for them to
grow their economies until they become attractive destinations for foreign direct investment in
their own right.

Country Report 4th Quarter 2018 www.eiu.com © Economist Intelligence Unit Limited 2018