Zimbabwe Economic Outlook

Economic performance and outlook


Economic growth is expected to improve to an estimated 2.6% in 2017 from 0.7% in 2016, driven by stronger performance in agriculture, mining, electricity, and water. Economic performance in 2018 is likely to be affected by political changes; real GDP growth is projected to be 1% in 2018 and 1.2% in 2019. The economy continues to face structural challenges from high informality, weak domestic demand, high public debt, weak investor confidence, and a challenging political environment. The country is experiencing a liquidity crisis, which is a manifestation of structural deficiencies and distortions in the economy. Progress was made in improving the business climate, but governance and accountability remain problematic.

Macroeconomic evolution

Fiscal policy is highly consumption-oriented, limiting fiscal space for capital and social expenditures. Total expenditure picked up as the government expanded the Command Agriculture Program and maintained the high public sector wage bill (around 19% of GDP). With limited access to foreign inflows, the budget deficit reached 8.7% of GDP in 2016, up from 2.4% in 2015. The 2018 elections are likely to put further pressures on the budget, and the government is resorting to domestic borrowing to cover the budget deficit. Public domestic debt almost doubled, to 25% of GDP in 2016; external debt stood at 42.6% of GDP. The government cleared its debt arrears with the International Monetary Fund, and a debt arrears clearance strategy is ongoing with the African Development Bank and the World Bank. Monetary financing of the budget deficit led to sharp increases in money supply by about 24% in 2017, fueled inflationary pressures, and undermined banks’ ability to finance private-sector activities.

Tailwinds

A modest recovery in international commodity prices is projected to spur growth in mining. Energy production is expected to improve following the completion of the Kariba South Extension Plant in December 2017. Agricultural output growth will be supported by scaled up coordination and funding from the government and private-sector and greater investment in irrigation development. Agriculture is expected to grow strongly in 2018 due to good rainfall and targeted support to farmers. Manufacturing is likely to see growth on the back of a protectionist policy to support local industry. This intervention resulted in significant increases in capacity utilization in local industry, from 34.3% in 2015 to 47.4% in 2016, before declining to 45.1% in 2017.

Headwinds 

Weak economic activity in 2016 led to a fall in total revenues of 6% (in nominal terms), exacerbating liquidity shortages. The 2016 introduction of bond notes pegged to the

U.S. dollar saw the emergence of a parallel market for foreign exchange, owing to the shortage of foreign currency. The real exchange rate remains overvalued, undermining external competitiveness. The external sector position is weak; net international reserves declined from $339 million in 2015 to $310 million in 2016, equivalent to 0.6 month of imports. The elections scheduled for 2018 are likely to generate uncertainties that will hinder economic growth and investment. The investment environment remains gloomy. According to the World Economic Forum’s 2017/18 Global Competitiveness Report, the most problematic factors for doing business include policy instability, inadequate foreign currency regulations, inefficient government bureaucracy, difficulties in access to finance, inadequate supply of infrastructure, restrictive labor regulations, and inefficient tax administration and regulations.

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