Previous Quarterly Editions
Expropriation Risk: 94 88 85 85 Political Violence Risk: 60 62 64 65 Terrorism Risk: 25 25 25 25 Exchange Transfer and Trade Sanction Risk: 90 90 90 90 Sovereign Default Risk: 88 89 89 90
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Although Emmerson Mnangagwa won the presidential election in July 2018 while his ZANU-PF party won the simultaneous parliamentary elections, these victories have done little to resolve Zimbabwe’s economic crisis. Amid intensifying economic hardship and uncertainty, political instability looks set to escalate during 2019. Doctors went on strike in December, citing grievances that include deteriorating working conditions and shrinking supplies of essential drugs. However, their main demand was to be paid in US dollars rather than the government mandated surrogate currency of bond notes. Despite government insistence that bond notes have the same value as the dollar, they trade at substantial discounts so that, at the beginning of 2019, a dollar was worth three bond notes. The doctor’s strike is exacerbating a public health crisis that has included a cholera outbreak in September centred on the capital Harare. The strike continued into the second week in January when unions announced that 100,000 teachers at public schools would also go on strike. If both strikes are sustained, then strike action across the entire public service sector becomes a possibility. Immediately before the July elections, the government awarded an increase of 17.5% to the country’s more than 300,000 public servants in response to a previous wave of strikes. This move had serious negative effects on the budget deficit but has been of little benefit to workers because of the sharp rise in the annual rate of inflation, which was above 40% in December, as well as the slump in the purchasing power of bond notes and the increasingly widespread practice among businesses of accepting payment only in foreign currency for goods and services. Against this background of discontent, and in the apparent absence of political will to reform the currency system or radically overhaul the economy, there is potential for considerable social and industrial unrest. Although President Mnangagwa has appointed Mthuli Ncube, a former chief economist at the African Development Bank, as finance minister, he lacks any base in the party and has little leverage over policy as he faces a budget deficit of more than 11% and a public sector wage bill that consumes over 90% of revenues. In his statement introducing the 2019 budget, Ncube set out several actions to curb government expenditure but put his emphasis on a plan to tackle the problem of government salaries being paid to ‘ghost workers’ through the introduction of a biometric registration scheme. While these are steps in the right direction, his projection that the deficit will fall by more than half to 5% this year appears overambitious.
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Despite an apparent abandonment of its indigenisation programme, there is no sign that property rights will be respected by Mnangagwa’s ZPF government. The president does not regard his election last year as a mandate to dismantle the ZPF system of patronage and corruption. Even if he did, the influence of vested interests and wider populist expectations will prove hard to unravel. In the absence of specific guarantees backed up by legislation, the threat of expropriation will remain. In Mthuli Ncube’s first budget as finance minister, the amount of export proceeds that mining companies are allowed to keep in US dollars has been raised from 30% to 55%. Mining now accounts for 65-70% of Zimbabwe’s export revenue and has taken over from agriculture as the mainstay of the economy. While this status explains some concessions such as the higher dollar retention limit, it also makes mining a tempting target for further government control and rent seeking.
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Meeting Zimbabwe’s fuel needs now costs 100 million dollars a month and importers have to rely on the central bank for allocations of scarce currency to pay for it. The government has had to negotiate extended payment periods of six months, rather than 30 days, with fuel importers but this has not prevented severe fuel shortages. The government responded by more than doubling fuel prices, a move which saw civil society groups and trade unions lead a national 'stay away' from work that lasted for three days in mid-January. The security forces responded harshly and at least five people were killed in clashes with protesters. The violent response, first to the post-election demonstrations last year and now to the fuel price protests, suggests that state repression of dissent will remain as integral to Mnangagwa’s presidency as it was to the Mugabe regime.
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There is no evidence of any Zimbabwean links to international terrorist groups, and the risk of a terrorist attack by external or internal groups remains low given the strength of the security services.
The continuing shortage of dollars, together with the eroding value of the increasingly rejected bond notes, continues to hurt the economy through rising inflation and shortages of goods. The government brands the rejection of bond notes as illegal and vows to pursue street currency traders with harsh penalties of up to ten years in jail. Finance Minister Ncube has said that he wants to phase out the bond notes, but reports suggest he is being restrained by ZPF insiders who profit from foreign currency allocations. Ncube is also thought to be keen to loosen exchange controls but lacks the political backing to do so.
Zimbabwe ended 2018 with government debt amounting to 77% of GDP and a projected deficit for the year of 11.7%. However, confidence in these figures has decreased following the government’s unexpected decision in 2018 to rebase its measurement of GDP. This has enabled it to boost the size of the country’s GDP from 18 to 25 billion dollars. According to Ncube’s November budget speech, the deficit was driven by unbudgeted expenditure mainly related to employment costs and support to agriculture. The deficit was well above predictions, as well as the statutory limit, and cannot be funded on market terms. Instead, the government continues to rely on an overdraft at the central bank and the issuance of treasury bills and bonds.
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