Zimbabwe

Zimbabwe Conditions

Extreme poverty is estimated to have risen from 29% in 2018 to 34% in 2019, an increase from 4.7 to 5.7 million people. The increase is driven by economic contraction and the sharp rise in prices of food and basic commodities. Contraction of agricultural production following an El Nino induced drought worsened the situation in rural areas. One tenth of the rural households currently indicate they are going without food for a whole day, about double the proportion of urban households. Additionally, Cyclone Idai has worsened the situation in three key provinces that typically account for 30% of agricultural output. The drought has also led to broader impact on the electricity and water sectors, causing widespread rationing and tariff adjustments to manage costs.

Real gross domestic product (GDP) is expected to contract by 7.5% in 2019. Shortages of foreign currency, fuel, electricity, severe drought and Cyclone Idai dampened economic activity, especially in mining and agriculture, which experienced double-digit declines. Production of major minerals like gold, diamond and coal fell by more than 27% while production of maize, the main staple food, was less than half of its level in 2018, resulting in wide-spread food insecurity. Domestic demand weakened significantly as job losses and rapidly increasing inflation eroded disposable incomes of households while fiscal austerity kept government spending low.

Inflation has been increasing since October 2018, driven by monetization of sizable fiscal deficits of the past, price distortions, and local currency depreciation. Annual inflation reached 230% in July 2019 (compared to 5.4% in September 2018), with food prices rising by 319% in July 2019 while non-food inflation increased by 194%. Adjustment of external accounts was swift with the current account reaching a surplus in the first quarter of 2019 for the first time since 2009. The trade deficit also narrowed significantly in January-July 2019 as imports contracted by 31% (year-on-year) on the back of forex liquidity constraints and weak demand.

The government mandated the use of the Zimbabwe dollar as a sole legal tender on June 24, ending the multicurrency regime in place for over a decade. However, with critically low levels of official reserves, constrained access to external financing and limited tools by Central Bank to sterilize the economy, the local currency has continued to depreciate. Inflation is projected to continue increasing and to average close to 180% in 2019 before slowing down in 2020.

The fiscal deficit is projected at around 4.9% of GDP in 2019 and will gradually decrease to 4.5% and 4.4% of GDP in 2020 and 2021 respectively. Fiscal consolidation measures agreed under the International Monetary Fund (IMF) Staff Monitored Program are expected to contain spending growth and halt monetization of the fiscal deficit. However, the supplementary budget presented on August 1, 2019 envisages a significant increase in spending to counter the negative impacts of the drought, upward adjustment of wages, and increase in social spending. Potential spending overruns (especially driven by agriculture subsidies and wages) could widen the fiscal deficit and exacerbate macroeconomic instability, including the already high inflation.

Poverty is projected to remain stagnant in 2020 as positive impacts of a rebound in agricultural production will be countered by the negative effects of continued high inflation, further undermining the purchasing power of the poor. Continued cash shortages as well as weak targeting of public spending on social safety nets will continue to constrain social programs and the impact on poverty.

Real GDP growth is projected to pick up to 2.7 % in 2020, driven by a rebound in agriculture as rains largely return to normal. However, shortages of foreign currency and electricity are projected to persist in 2020, negatively affecting the recovery of industry and services. Weak domestic demand is likely to translate into a small current account deficit in 2019 (around 1% of GDP) which is likely to slightly increase in 2020 given continued foreign currency shortages.

In the absence of international support, Zimbabwe macroeconomic challenges may persist. With dwindling reserves, there is a high-risk exchange rate overshooting, contributing to inflationary pressures. Climate related risks may constrain recovery of the agriculture sector in the medium-term exacerbating food insecurity. Social and political pressures could lead to policy slippage, delay macroeconomic stabilization and political reforms. This might jeopardize the reform agenda under the IMF Staff Monitored Program and delay the government’s re-engagement aspirations.