1. The Macroeconomic Outlook for 2012

In a fi rst for Zimbabwe, and underscoring improved economic governance, the Ministry of Finance, as part of the consultative process for the forthcoming 2012 Budget, published a Budget Strategy Paper (BSP) in August 2011. The BSP identifi es issues to be addressed in the 2012 National Budget, derived from previous budget consultations, the Government’s own work programme, as well as the Medium Term Plan (MTP).

The 2012 macroeconomic outlook, as contained in the BSP, is outlined in Table 1. The highlights include the following:

Projected Real GDP growth for 2011 remains unchanged at 9.3 percent, underpinned by strong growth of agriculture and mining sectors. Real GDP growth is projected in the range of 7.8-9.0 percent for 2012.

Infl ation is projected to increase to an average of 5 percent in 2012.

Total Government revenue as a percent of GDP is projected to increase signifi cantly from $2.74 billion (30 percent of GDP) in 2011 to $3.4 billion (34 percent of GDP) by 2012 on account of ongoing tax reforms.

Total Expenditures for 2012 are projected at US$3.4 billion, of which some $2 billion is (60 percent of total expenditure and 20.5 percent of GDP) is budgeted towards wages while US$850 million (25 percent of total expenditure) is budgeted towards capital expenditure.

The BSP projects an improvement in the balance of payments position from a defi cit of US$789.7 million in 2011 to a defi cit of US$ 438.2 million in 2012 on account of export growth and a slowdown in the growth of imports. Food imports are expected to decline by 31.1 percent.

Capital infl ows (foreign direct and portfolio investments) are projected to increase from US$205 million to US$288 million.

Government would continue its efforts to obtain debt relief on the basis of the Cabinet approved Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS).

Issue No. 5. October 2011

ZIMBABWE MONTHLY ECONOMIC REVIEWZIMBABWE MONTHLY ECONOMIC REVIEW

TABLE OF CONTENTS

1. The Macroeconomic Outlook for 2012

2. Macroeconomic Developments for the Month of September 2011.

3. Stock Market And Banking Sector Developments

A publicationproduced by the

African Development Bank

Zimbabwe Field Offi ce

2 Zimbabwe Monthly Economic Review October 2011

2009 2010Est 2011Proj. 2012Proj

Nominal GDP (US$m) 5,623 6,716 8,998 9,959Real GDP growth (percent) 5.4 8.1 9.3 7.8Annual Inflation (avg percent) -7.7 3.0 4.5 5.0

Total Revenue and Grants 974.4 2,339.1 2,744.9 3,400 Revenue 933.1 2339.1 2,744.9 3,400 Budget Grants 41.3 0.0 0.0 0.0 Off Budget Grants 93.0 500.0 500.0 500.0Total Expenditure 920.9 2,106.9 2,744.9 3,400 Current Expenditure 804.0 1,603.3 2,140.2 2,495.5 OW: Employment Costs 550.3 1,098.5 1,800 2,040 Other recurrent Expenditures 182.0 504.8 340.2 340.2Capital expenditure 45.2 415.3 550.0 850.0

Exports (fob) 1,613.3 3,380.1 4,143.1 4,604.1Imports (fob) 3,213.1 5,161.8 5,599.6 5,731.5Current Account Balance -1,140.3 -1,852.5 -1,565.0 -1,247.0Capital Account -656.5 617.5 775.4 809.5Overall Balance of Payments -1867.0 -412.1 -789.7 -438.2

Revenues 16.6 34.8 30.5 34.0Expenditure and Net Lending 16.4 31.4 30.5 34.1 Current Expenditure 14.3 23.9 23.8 25.1 OW: Employment Costs 9.8 16.4 20.0 20.5 Other recurrent expenditures 3.2 7.5 3.8 3.4 Capital expenditure 0.8 6.2 6.1 8.5

Current expenditure 87.3 76.1 78.0 73.4 OW: Employment Costs 59.8 52.1 65.6 60.0 Other recurrent expenditure 19.8 24.0 12.4 10.0 Capital expenditure 4.9 19.7 20.0 25.0

Exports (fob) 28.7 50.3 26.1 46.2Imports (fob) 57.1 76.9 62.2 57.6

Table 1. The Macroeconomic Framework (2009-2012)

Source: 2012 Budget Strategy Paper, Ministry of Finance

External Sector

As percent of Total Expenditure

Memorandum Items (percent of GDP)

External Sector (US$m)

Central Government (US$m)

Real Sector and Inflation

In the context of the cash-budgeting framework, the 2012 budget outcome will very much be dependent on how realistic the projected increase in government revenue (an increase of 4 percent of GDP in a single year) is as well as the impact of the wage bill. The asymmetry in the expenditure and revenue projections is underpinned by the fact that while a significant portion of projected expenditure (the wage bill of at least 60 percent of projected revenues) would definitely materialize, the revenue projections may not, especially given time lags between tax reforms and the realization

of revenues. Should only a fraction of the projected revenue increase for 2012 materialize, the wage bill could consume over 70 percent of government revenue. Ultimately, as the BSP notes, it is critical that measures aimed at making the wage bill sustainable are adopted, including the implementation of the results of the Payroll and Skills Audit. Sustainability of the wage bill also requires a major increase in real GDP growth. In this regard, the BSP also recognizes the important role of addressing Zimbabwe’s critical infrastructure requirements in areas such as energy, water,

October 2011 Zimbabwe Monthly Economic Review 3

transport and ICT. The quantum of investments required to address the infrastructure bottlenecks will however depend on addressing the issues of external debt arrears and uncertainty relating to the investment climate.

2. Macroeconomic Developments for the Month of September 2011

Real Sector

2.1 Mining Sector Developments

Over the period January to September 2011, gold deliveries amounted to 8,047.4 kgs. Primary and small-scale producers contributed 81 percent and 19 percent, respectively to total output.

2.2 Inflation Developments

Annual inflation increased from 3.5 percent in August 2011 to 4.3 percent in September 2011 (figure 2) reflecting a steady upward increase in inflation since its low of 2.5 percent in May 2011, and against the Government target of 4.5 percent by end 2011. Annual food and non-food inflation stood at 4.0 percent and 4.4 percent, respectively. Communication, transport, housing, water, electricity, gas and other fuels were some of the main drivers of annual price increases. Month-to-month inflation also increased from 0.1 percent in August 2011 to 0.8 percent in September 2011. Communication costs were a major driver of monthly inflation. The increase in inflation reflects continued price pressures from recent increases in electricity tariffs (which were increased by 31 percent in August) and effects of the reintroduction of duty on some basic commodities.

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Figure 1. Gold Deliveries (January –September 2011)

Source: Fidelity Printers and Refiners

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Figure 2. Annual and Month-on-Month Inflation (August 2011)

Source: ZIMSTAT, September 2011.

4 Zimbabwe Monthly Economic Review October 2011

2.3 Interest Rate Developments.

Average commercial bank and merchant bank lending rates remained at a range of 16-30 percent and 16-32 percent, respectively, (in US dollar denominated loans) for the month of August. The weighted average base lending rates for commercial banks increased from 11.0 per cent in July to 12.1 per cent in August. For merchant banks, the weighted base lending rates increased from 18.2 per cent in July to 18.9 per cent in August 2011.

The weighted average base lending rate refers to the sum of minimum nominal lending rates weighted by the individual banks’ loan book sizes. In the month of August 2011, the RBZ changed the reporting of nominal lending rates to include weighted average base lending rates.

The three-month deposit rates increased marginally from 11.3 per cent in July to 11.9 per cent in August 2011. Saving rates, however, have remained unchanged at 2.7 per cent.

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Commercial Bank

Average BaseLending

Rate

Commercial Bank

Weighted Average

Base LendingRate

Merchant BankAverage

Base Lending Rate

Merchant BankWeighted

Average Base Lending

Rate

3-MonthDeposit

Rate

SavingsDeposit

Rate

Jan_11 1.26-28.00 9.50 11.00-34.00 29.5 9.3 1.0Feb_11 1.26-28.00 14.00 15.00-34.00 27.1 9.3 1.0Mar_11 1.26-28.00 9.50 16.00-32.00 19.9 8.3 1.0Apr_11 1.26-28.00 9.50 16.00-32.00 18.3 8.6 3.2May_11 8.00-30.00 12.80 15.00-32.00 18.1 8.6 2.7Jun_11 8.00-30.00 11.20 16.00-32.00 17.3 8.6 2.6Jul_11 8.00-30.00 11.00 16.00-32.00 18.2 11.3 2.7Aug_11 8.00-30.00 12.10 16.00-32.00 18.9 11.9 2.7Average … 11.20 … 20.9 9.5 2.1

Table 2. Interest Rate Levels (Percent Per Annum)

Source: RBZ

2.4 Monetary Developments

Annual broad money supply (M3) growth, defined as total banking sector deposits, declined from 51.6 percent in July 2011 to 44.7 percent in August 2011. This development is unfavorable, given the

prevailing liquidity constraints in an economy that is recovering.

On a month-on-month basis, M3 growth increased from 0.3 percent in July 2011 to 1.6 percent in August 2011. Month-on-month M3 growth has remained unstable over the year (Figure 3).

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Figure 3. Monetary Developments

Source: RBZ.

Total banking sector deposits (net of inter-bank deposits), marginally increased from US$2.91 billion in July 2011 to US$2.95 billion in August

2011 (Table 3). The increase was underpinned by the rise by US$110.5 million (6.5 percent) in demand deposits and US$30.6 million (13.4percent)

October 2011 Zimbabwe Monthly Economic Review 5

in long-term deposits. These increases were, however, offset by a decline of US$96.2 million (9.8 percent) in saving and short-term deposits.

Although, long-term deposits increased in August 2011, the amounts remain small.

Type of DepositUS$ Billion(July 2011)

percent of Total

Deposits(July 2011)

US$ Billion(Aug 2011)

percent of Total

Deposits(Aug 2011)

Monthly ChangeUS$ Million(percentage)

Demand Deposits 1.70 58.30 1.81 61.20 110.5 (6.5%)Saving and Short-Term Deposits 0.98 33.80 0.89 30.00 (96.2) (-9.8%)Long-Term Deposits 0.23 7.90 0.26 8.80 30.6 (13.4%)Total Banking Sector Deposits 2.91 … 2.95 … …Source: RBZ (August 2011)

Table 3. Level of Banking Sector Deposits in August 2011

The bulk of the banking sector deposits remain short-term in nature. This has translated into short-term lending by the banks, which is

unfavourable for long-term investment. This however reflects the market’s assessment of risks in the economy.

2.5 Fiscal Performance

In August 2011, total revenues exceeded targeted levels. Total and current expenditures for the month also exceeded targeted levels, even though capital expenditures were still below target.

Over the period January to August 2011, the economy posted fiscal surpluses excluding the

month of August, where a deficit of US$3.3 million was registered. In August 2011, expenditures amounting to US$246.6 billion exceeded the revenues that amounted to US$243.3 billion. This data however excludes government arrears.

August 2011 August 2011(Actual) (Target)

Total Government Revenue (Net) 243.3 220.9Tax Revenue 211.4 201.1Non-Tax Revenue 31.9 19.8Total Government Expenditure (Net) 246.6 220.9Current Expenditure 220.0 178.6Capital Expenditure 23.6 39.3Surplus (+)/Deficit (-) -3.3 …Source: Ministry of Finance (MoF)

Table 4. Actual Versus Targeted Fiscal Performance (August 2011), US$ Million

6 Zimbabwe Monthly Economic Review October 2011

2.6 External Sector Developments

Over the period January to September 2011, provisional data indicates that exports amounted to US$3,153.40 million while imports amounted to US$6,265.27 million. This resulted in a cumulative trade balance of US$3,111.88 million over the period of review. On a monthly basis, however, the

trade balance declined from US$872.49 million in August 2011 to US$508.84 million in September 2011. The trade balance structure remains a potential challenge to the management of the current account. The high growth rate of imports, against a sluggish growth of exports, is not favorable for the recovery process of the economy.

2.6.1 International Commodity Price Developments

The international prices of metals fell in the month of September 2011, mainly as a result of continued European debt crisis, amid down-grading of Italy’s credit rating by S&P from A+ to A. The appreciation of the US dollar over other hard currencies (mainly Euro, Australian dollar and Canadian dollar) pushed investors to rally towards the dollar investments. Gold prices fell by 13 percent while Platinum dropped by 19 percent. Copper and Nickel retreated 16 percent and 24 percent,

respectively. Brent crude oil prices remained stable in the first half of September before dropping off in the last half of the month. During the month, oil prices dropped by 8 percent from US$111.69/ barrel to US$103.12/barrel. The drop in prices was mainly attributed to the appreciating US dollar and the decline in stock piles of oil. Fuel prices in Zimbabwe remained stable for the first half of the month of September, before falling slightly towards the end of the month. Generally, prices for both diesel and petrol fell by an average of US$2 cents over the month.

October 2011 Zimbabwe Monthly Economic Review 7

3. Stock Market and Banking Sector Developments

3.1 Stock Market

The stock market recorded its worst performance statistics for the year in September 2011. The industrial index slumped from 160.53 in August to 155.82 in September, the lowest to date for this year. The mining index slumped by the biggest margin, sliding from 164.52 in August to 152.42 in September, again the worst level for the year. Market capitalization also slumped below the $4 billion mark to $3.98 billion, from $4.11 billion in August. Underpinning the trend are the uncertainties that are currently hovering in the economy in relation to indigenization. This was further worsened by the rumour on the 7th of September 2011 that the licence for the country’s

Gold Platinum Copper Nickel Brent Crude OilUS$/tonne US$/tonne US$/tonne US$/tonne US$/barrel

02-sept-11 1,862.88 1,883.00 9,031.50 21,235.00 111.6909-sept-11 1,865.25 1,849.50 8,886.50 21,392.50 112.2916-sept-11 1,794.00 1,799.00 8,687.50 21,760.00 112.8823-sept-11 1,709.50 1,673.00 7,388.00 18,455.00 104.5030-sept-11 1,624.50 1,524.50 6,884.00 17,895.00 103.12Source: Bloomberg, BBC, Reuters

Table 5. International Commodity Prices

Export prices of wheat and maize declined slightly in September 2011. The benchmark US wheat price (HRW, f.o.b.) averaged US$ 329/t, 2 percent below its level in August. Whilst international prices for both wheat and maize, especially in the US, dropped during the month of September, regional prices of maize have been rising. For example, the average monthly spot prices for white maize on the South African Futures Exchange (SAFEX) increased to about US$290/t from around US$240/t

recorded in May during the peak of harvesting. In Zimbabwe, retail prices of maize slightly increased as household stocks are dwindling, especially in those areas which had no good harvests. Those with good harvests normally would have stocked for own consumption and may withhold supplies until the projections of the 2011/2012 season indicate prospects of a good harvest. This, notwithstanding, price trends continue to be largely influenced by the ready availability of food on local markets.

Wheat (USA Export Price HRW) Maize (USA)US$/tonne US$/tonne

02-sept-11 360 32209-sept-11 348 31716-sept-11 327 29523-sept-11 256 23930-sept-11 230 230Source: International Grain Council

Table 6. Maize and Wheat Prices

biggest platinum producer, ZIMPLATS, had been cancelled by the Government, after the company had failed to meet the requirements of the indigenization policy (this has subsequently been proven to be untrue). Such uncertainties have resulted in limited participation of investors on the stock market as they move to protect their investments.

Figure 7 shows the downward trend in the movement of the indices. A sharp recovery of the mining index towards the end of the month can be attributed to the extension of the deadlines for submission of indigenization proposals by those mining houses that either had their proposals rejected or had failed altogether to comply with the law. However, the general trend shows that the law is negatively impacting on the performance of the stock market and the economy in general.

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Figure 7. Mining and Industrial Indices, September 2011

Source: ZSE, September 2011

In line with the fall in the indices, the stock market saw the lowest participation of foreigners (reflecting uncertainty regarding indigenization), with 36,737,905 shares worth $7.3 million having been bought in the month of September. On the other hand, 50,087,622 shares worth $9.1 million were disposed by foreigners, indicating a net outflow of $1.72 million in the same month. The volume of the foreign transactions does not correspond with the value of the share, indicating a huge loss in value of most counters, led by Econet Wireless that shed $169 million in value since the beginning of the year. On the first day of trading of the year, the mobile phone company was valued at US$800 million, with the share price quoted at US$4.80. However, the price tumbled to a low at US$3.90 by the 10th of September, meaning the firm was valued at just over US$650 million.

3.2 Banking Sector

The Reserve Bank of Zimbabwe has indefinitely suspended the implementation of a recently introduced policy measure requiring proceeds from the disposal of immovable property valued at more than $50 000 to be paid in tranches. Upon selling property worth over $50 000, the seller was to be paid $50 000 and the remainder would be paid in tranches over a period of one year. The policy, which came into effect on 1 August 2011, was meant to enhance foreign exchange monitoring and possibly curb externalization of foreign currency. However, permanent emigrants with approved formal emigration status, deceased estates with

beneficiaries staying abroad and individual foreign property owners with documentary proof of transferring funds into Zimbabwe for the purchase of immovable property, were entitled to 100 percent of net proceeds. Presumably, some reservations on the benefits of this policy expressed by players in the property market and the perverse signals this policy measure sent to the investor community led the RBZ to reverse the implementation of the policy until further notice.

African Development Bank Zimbabwe Field Office. For inquiries please contact zwfo@afdb.org. Link to the report on AfDB website: http://www.afdb.org/en/countries/southern-africa/zimbabwe/monthly- economic-review/