Article: What the Zimbabwean crisis costs South Africa

June 13th, 2008
Posted in Articles

Written by Jayendra Naidoo

South Africa’s actions and interventions around Zimbabwe’s election will have a crucial influence on the developments there. While many question the role of South Africa and its right to intervene, the real question is whether we can afford not to intervene.

Zimbabwe stands on the edge of an election outcome leading either to a democratic change or a political disaster. While the stakes are undoubtedly high for Zimbabwe, South Africans with other pressing challenges such as electricity shortages, unemployment, crime, and AIDS, will inevitably ask why Zimbabwe should be given priority.

Social and political organizations should operate upon principles of social justice and human rights. This allows strong moral stands to be taken regardless of economic interests. However, calculating the financial costs and benefits of the challenges we face helps measure relative priorities, and provides guidance on what amount of resources can be ‘invested’ to resolve an issue.

Using public data, Macquarie First South’s economists have ‘run the numbers’ on Zimbabwe’s effect on the SA economy. The question South Africa must ask is whether the current SA Government policy of ‘quiet diplomacy’ is an appropriate response, or should we rather be ‘investing’ in a stronger approach to ensure a successful democratic election outcome and the restoration of the Zimbabwean economy?

The effect on South Africa’s GDP

SA Reserve Bank data shows that the combined GDP of South Africa and Zimbabwe in 1994 was USD143bn, with Zimbabwe’s share being about 5 percent. After experiencing steady growth through most of the ‘90’s, Zimbabwe’s economy has since 1998 deteriorated to the extent that today it is the world’s fastest shrinking economy with the world’s highest inflation rate. By 2007, the combined size of SA’s and Zimbabwe’s economies had doubled to USD283bn, but Zimbabwe’s economy accounted for just 0,2% of the total.

The Zimbabwean economy today is 40% smaller than it was in 1999. If it had maintained its pre 2000 growth rate, its GDP would be at least USD7bn larger than it currently is. South Africa is Zimbabwe’s largest trading partner, supplying 40% of its imports and receiving 25% of its exports. It is estimated that our share of ‘lost’ exports from South Africa to Zimbabwe is approximately USD2,8bn (R22bn).

Furthermore, perceived political risk due to the Zimbabwean political crisis has a big impact on South Africa, especially taking account of our current account deficit and the tough current global financial environment. International negative sentiment on Zimbabwe hurts South Africa as investors in SA bonds and equities calculate the negative consequences on SA in terms of employment, growth and our own social stability.

In 2001, the initial wave of negative sentiment on Zimbabwe coincided with a 3% increase in South Africa’s cost of borrowing foreign currency. Macquarie Research estimates that in the current global environment a meltdown in Zimbabwe could weaken the rand by as much as 20% percent. This would push interest rates up by at least 2%. This raises the borrowing and investment costs of public and private companies, and hits consumers in the form of higher transport costs, electricity costs, house rentals or mortgages, and higher cost of goods generally. This would equate to a total cost to South Africa of USD3,2bn (R24bn).

Add to this the loss of SA exports to Zimbabwe, and this results in a total loss in GDP to our economy of USD6bn (R46bn) in the current year. Of course the cumulative effect over the past seven years is larger, and if the crisis continues for years ahead the costs will continue to grow.

Conversely, in the context of a successful transition in Zimbabwe, positive sentiment would strengthen the rand and result in a reduced cost of borrowing. Another way of looking at it is that taking action to restore the Zimbabwean economy will potentially add 2% to our economy – a not insignificant number.

The effect on employment patterns

Zimbabwe’s crisis is not just a lost opportunity in terms of GDP, but in addition is currently a huge direct cost to South Africa! Formerly a food exporter, Zimbabwe is now an exporter of poverty and refugees. An estimated 3,5 million Zimbabweans are in South Africa, most working “illegally” in SA homes, restaurants and the construction sector. At the same time, there are about 4 million unemployed South Africans who are actively looking for jobs.

If the Zimbabwean economy began functioning normally and started to create job opportunities again, many would return and find jobs there. Assuming that only a third of the jobs currently held by Zimbabweans are taken by South Africans after democracy is re-established in Zimbabwe, unemployment in South African would drop from the current 23% to around 16%.

That translates into more income per average South African household, plus additional savings in unemployment benefits currently being paid, and a decrease in remittances sent to Zimbabwe saving South Africa additional foreign exchange.

According to the SA Reserve Bank, the average total compensation for a SA employee (taking into account a labour force of 17 million people) is about R49 000 pa, or R4 000 pm. Assuming that the average Zimbabwean employed in SA earns even half of this, the direct effect of 1,2 million more South Africans being employed in those jobs would be about USD3,9bn (R30bn). Each average SA household would be roughly R3000 better off each year!

Still more costs …

There are still other costs. Zimbabwean food production has fallen 40 percent since 2000 and the UN’s World Food Programme estimates that 2,6m Zimbabweans need food aid in 2008. Zimbabwe has lost major tourism revenues, foreign direct investment has dropped to less than 10% of its pre-2000 levels to USD30m, and SA suppliers have lost millions as a result of non-payment from Zimbabwean companies. The valuable Zimbabwean mining and agricultural sectors have lost out on the high prices for commodities due to dramatic falls in their output.

South Africa’s top challenge

Zimbabwe stands out as a high value challenge and opportunity for South Africa. The costs or gains of getting it wrong are high. As are the gains of getting it right. If South Africa was a company, the shareholders of SA Inc would link the bonus of the top executive management to resurrecting Zimbabwe and helping get it on the right path.

Weak action on South Africa’s part now is in itself an “action” and a choice. Zimbabwe cannot afford to miss this critical chance for change. But we in South Africa cannot afford to miss this opportunity either!

(Jayendra Naidoo is the Executive Chairman of the J&J Group, writing in his personal capacity)
Jayendra Naidoo is currently Executive Chairman of the J&J Group, a diversified investment company with interests inter alia in Investment Banking, Telecoms, Transport and Energy.

He was a trade union leader from the early 1980’s, and served as COSATU Negotiations Co-ordinator in the early 1990’s. From 1995 he served as the first Executive Director of the National Economic Development and Labour Council (NEDLAC), the body through which Government, Business, Labour and Community Organisations negotiated on social and economic policy and legislation

1 Comment

A. Nundeekasen said...
...on July 7, 2008 @ 1:13 pm

The socio-political consequencies are observable in RSA namely, xenophobia, inflammtory remarks by ANC YL and COSATU,attack on our judiciary,indiscipline in our society. I fear that our country may fall victim to this ZIM -TREND.

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