13 Things World Bank says you must know about Zimbabwe's Economy

Since 2016, the World Bank Group published an Economic Update on the Zimbabwean economy; herewith is the second update. 

The Zimbabwe Economic Update (ZEU) offers a World Bank perspective on recent economic developments in Zimbabwe and also undertakes evidence-based analysis on key areas of the Zimbabwean economy. 

This second edition explores the Zimbabwean public sector: local authorities and state-owned enterprises and parastatals and has significantly benefited from authorities’ input. Both in the preparation and review. 

The ZEU is intended to enhance ongoing policy debates to foster the country’s goals to increase growth, reduce poverty and lessen inequality.

1. Zimbabwe faces complex fiscal and macroeconomic challenges, and well-designed policies will be vital to accelerate growth and poverty reduction. 

Government debt to the banking sector increased dramatically since 2015 and contributed to a protracted financial crisis that severely limited credit to the economy, negatively affecting the private sector. 

Meanwhile, the drought experienced during the 2015/16 agricultural season reduced agricultural output and exacerbated rural poverty. However, favorable rains received in 2016/17 are projected to boost growth of the agricultural sector in 2017 and per capita output is projected to increase this year.

2. The GDP growth rate fell from 1.4 percent in 2015 to just 0.7 percent in 2016, continuing negative per capita income growth. 

Severe credit constraints have caused a significant contraction in private demand. Per capita consumption fell by some 5 percent and the investment-to-GDP ratio shrunk from a level that was already well below the average for Sub-Saharan Africa. 

A fiscal expansion and an increase in net exports partially offset the contraction in private demand. While a drought caused a drop in agricultural production and hydroelectricity generation in 2016, mining grew strongly and output in the manufacturing, and services sectors increased modestly. 

Consequently, economic growth remained positive on balance.

3. Slowing growth has disproportionately affected poor households. Rural areas are home to 67 percent at least two-thirds of Zimbabwe’s population, including 79 percent of the poor and 92 percent of the extremely poor. 

The agriculture sector remains the primary livelihood for many poor households, and a combination of poor weather and financial shocks in 2016 adversely impacted vulnerable households: the drought reduced the output of smallholder farms, while cash shortages delayed payments to agricultural workers. 

By 2016 the number of people experiencing food insecurity had increased to an estimated 2.8 million, or 17.5 percent of the country’s total population. 

This is estimated to fall to 2.2 million or 13.8% of the total population as food security improves in 2017.

4. The central government shifted to an expansionary fiscal stance in 2016, resulting in the financial sector turmoil and crowding out credit to the private sector. 

Slowing growth reduced public revenue, while emergency food imports, the public distribution of agricultural inputs, payment of domestic arrears and a burgeoning public-sector wage bill increased expenditures. 

The decision in 2016 to increase agriculture-related spending despite the decline in revenue and the continued growth of the wage bill substantially widened the fiscal deficit. The government’s fiscal position expanded by some 8 percentage points of GDP. 

The banking sector bore the brunt of the government’s financing needs, which led to liquidity shortages in the economy.

5. Prior to 2016, the Zimbabwean central government maintained a prudent fiscal-policy stance, but other public institutions developed large financial imbalances. Zimbabwe’s public sector accounts for roughly 50 percent of GDP, yet the central government’s expenditures averaged about 25 percent of GDP during 2012-16. 

Statutory extra-budgetary funds, spending by local authorities (LAs), the operations of state-owned enterprises and parastatals (SEPs), user fees imposed by schools and medical facilities, and support from development partners account for over half of the Zimbabwean public sector and a quarter of the national economy.

6. The fragmentation of the public sector poses considerable fiscal challenges, which are exacerbated by the limited oversight of many public institutions and parastatals. 

Oversight of extra-budgetary funds, LAs, and SEPs is largely limited to expenditure auditing. Delays in the publication of audited financial reports prevents timely fiscal assessments of the consolidated public sector. Chapters two and three of this Economic Update provide an indication of the scale of the government’s fiscal challenges, particularly those involving LAs and SEPs. 

Given the important role SEPs play in Zimbabwe’s economy, the government guarantees their debt, and the contingent liabilities generated by SEPs have increasingly strained the public finances. 

According to audited reports of Stateowned Enterprises, as of end 2015 SEP debt guarantees accounted for US$ 2.1 billion of Zimbabwe’s total public and publicly-guaranteed debt.

7. Zimbabwe’s growing public debt burden and large, fragmented public sector continue to threaten fiscal sustainability. 

Zimbabwe’s total public debt stock has grown rapidly, reaching 70 percent of GDP in 2016. External debt, most of which is in arrears, accounts for two-thirds of the debt stock. 

With limited access to international capital markets, Zimbabwe has increasingly turned to domestic debt financing, largely through the banking system. 

The domestic financial sector covered most of the widening fiscal deficit in 2016, and as banks depleted their US dollar reserves, many were unable to accommodate withdrawals. Cash shortages developed in early 2016, forcing banks to limit both cash withdrawals and import payments.

Severe liquidity constraints also increased premiums for cash payments.

8. New bond notes introduced in November 2016 have eased liquidity shortages but are unable to address the underlying macroeconomic imbalances. 

The bond notes have increased the cash supply, boosting liquidity and attenuating deflationary pressures. 

However, further issues of bond notes will need to be carefully monitored to contain inflationary pressures.

9. The liquidity crisis contributed to a narrowing of the current account deficit. 

While a decline in imports has narrowed the current-account deficit, Zimbabwe’s external position remains precarious. 

A combination of tight credit conditions, the inability of Zimbabwean banks to honor international payments, and import restrictions caused imports to contract by about 14 percent. 

Meanwhile, exports increased by about 2.4 percent, and the current-account deficit contracted by 6 percentage points to 4.1 percent of GDP in 2016.

10. Policies favoring exporters have facilitated the current account adjustment. 

Exporters of selected manufactured goods and agricultural products (except tobacco) have been able to retain their export earnings in US dollars, which enables them to benefit from the depreciating value of the dollar-denominated deposits in Zimbabwean banks. 

This policy has successfully encouraged certain export sectors, but it reflects a tacit recognition that prices in Zimbabwe no longer reflect international US-dollar prices. 

While some firms have been able to increase exports to take advantage of this price differential, thus far this effect remains modest.

11. The GDP growth rate is expected to recover to 2.8 percent in 2017, though mediumterm projections remain relatively modest. 

Favorable rains and a revitalized agriculture sector are expected to underpin GDP growth in 2017. 

However, the incomplete implementation of fiscal-adjustment policies and structural reforms, and the possibility that a rising money supply will boost inflation, are likely to dampen Zimbabwe’s medium-term growth outlook.

12. The clearance of external arrears could expand the government’s access to international capital, but only notably so if sound fiscal management and structural reforms successfully restore fiscal and external sustainability. 

In October 2016, Zimbabwe settled US$108 million in arrears to the IMF’s Poverty Reduction and Growth Trust. 

The authorities are committed to expediting the clearance of arrears to other multilateral creditors, including the African Development Bank (US$610 million), the World Bank (US$1.2 billion), and the European Investment Bank (US$212 million). 

However, resorting to non-concessional lending to clear arrears in a context of tight liquidity conditions and depleted international reserves could add pressures to an already tight budgetary situation if not accompanied by fiscal, monetary and investment reforms.

13. Zimbabwe’s long-term growth prospects are positive, but to restore fiscal and debt sustainability the government must adopt policies that reduce the country-risk premium in international capital markets. 

Despite the turbulence of recent years, Zimbabwe’s economic fundamentals remain strong: the country has considerable human capital and a wealth of natural resources, and it continues to spend more on education as a percentage of GDP than any other country in Sub-Saharan Africa. 

A reduction in the country-risk premium would improve the government’s access to affordable capital, enabling it to complete much-needed infrastructure investments and revive its major industries.