Zimbabwe

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENt

Despite persistent challenges, the recovery continues

After two consecutive years of recession precipitated by the shocks associated with Cyclone Idai, drought, and then the COVID-19 pandemic, activity rebounded, supported by an exceptional 2020/21 agricultural season and mining activity. In 2022, although growth is expected to moderate, it will remain relatively robust. Private consumption should provide support as the COVID-19 vaccination campaign progresses. With more than a quarter of the population having received at least one dose of the vaccine by the end of 2021, one of the highest rates on the continent, restrictions associated with the pandemic are expected to be eased. This will support spending, which is also set to benefit from reduced erosion of household income as inflation moderates, while remaining extremely high. Decent rainfall would further boost purchasing power among the two-thirds of the population that depend on agriculture. Reliance on rain-fed agriculture means, however, that the sector is unlikely to repeat its 2021 performance. Public investment in transport and energy infrastructure under the National Development Plan will promote growth, but will be hampered by the country’s limited access to international financing. Private investor sentiment will remain dampened by a difficult operating environment and the unstable exchange rate regime, further limiting the contribution of gross fixed capital formation. Rainfall would also provide support for hydroelectricity generation and, by extension, mining production. While exports are expected to grow accordingly, the net contribution of foreign trade is likely to be negative, as imports are set to grow faster in the wake of the recovery in domestic demand.

Limited access to international markets

In 2022, the budget deficit is expected to widen but remain moderate. While revenues are expected to rise as the economy improves, they will be outpaced by spending, which will focus on support for agriculture and industry, investment in health, education and infrastructure. Spending on state-owned enterprises, including recapitalisation of the national airline, and wages, which absorb over 30% of revenues, will also contribute to the increase. Part of the IMF's 2021 special drawing rights (SDR) allocation will go towards financing the deficit, along with domestic Treasury issuance and some external loans. Beyond Afreximbank's support, however, external loans will remain very limited, as the country is in a situation of debt distress. External arrears (about 60% of public debt), including with the World Bank and the AfDB, are a major obstacle to accessing financing. The authorities should continue to avoid monetary financing, which was largely responsible for triple-digit inflation in the past.

 
In 2022, as since 2019, the current account is expected to record a surplus, driven mainly by expatriate remittances, which maintain a positive balance on the transfer account. The surplus will narrow, however, due to an increase in imports of goods and services in response to the recovery in domestic demand. Despite the authorities' attempts to reduce them, imports of energy, food and capital goods are expected to grow faster than ore exports. The primary income account will remain in deficit due to profit repatriation by foreign firms. Despite the current account surplus, the external position is fragile due to low capital inflows. Although the SDR allocation helped rebuild foreign exchange reserves, they remain extremely low, at less than two months of import coverage. High demand for the USD is expected to continue to fuel depreciation of the Zimbabwean dollar, which lost 30% of its value in 2021, after being formally reintroduced in 2019 following the scrapping of the multi-currency system. The Zimbabwean dollar’s official rate, which has been determined by an auction system since June 2020, was still about half that of the parallel market rate at the end of 2021. To finance the auctions, the foreign exchange retention rule, which requires most companies to convert 40% of their export earnings into local currency, is expected to remain in place. While it may be less pronounced, depreciation will keep the cost of imported goods rising.

Increased risk of instability as 2023 elections approach

President Emmerson Mnangagwa came to power following the November 2017 "military-assisted transition" that forced Robert Mugabe to resign after more than 30 years in power. Despite his victory and that of ZANU-PF (the party in power since independence) in the 2018 general elections, he will continue to be weakened by a very difficult social and political climate. Fuelled by repeated economic crises, tensions could intensify in the run-up to the 2023 presidential and parliamentary elections. Although economic conditions are expected to improve slightly in 2022, protests and strikes are expected to continue to occur regularly. However, President Mnangagwa and ZANU-PF control the main levers of power and have support in rural communities (70% of the vote in 2018), putting them in pole position to win the elections. A disrupted electoral process would put a damper on the government’s international re-engagement strategy. Progress in this regard (beyond aid to address the COVID-19 pandemic) has been slow, despite the stated goals when President Mnangagwa came to power.

Last updated: February 2022