Zimbabwe: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant mineral resources (platinum, gold, diamonds, nickel)
- Agricultural wealth (maize, tobacco, cotton)
- Tourism development potential
- Member of the Southern African Development Community (SADC)
- Liquidity and currency shortages
- Economic and financial situation affected by the long period of hyperinflation (2000 to 2009)
- Under-investment in infrastructure (especially energy)
- Precarious food and health situations: the majority of the population depends on humanitarian aid and AIDS prevalence rates are among the highest in Africa and the world
- Payment arrears with international donors
- Subject to numerous international sanctions
The economic crisis continues
Due to the rapid devaluation of the new currency, a restrictive fiscal policy, drought, power supply disruptions, Cyclone Idai and the COVID-19 pandemic, activity recorded two consecutive years of sharp contraction in 2019 and 2020. While the economy is expected to return to growth in 2021, the outlook remains very difficult. A modest rebound in household consumption, due to the easing of social distancing measures, will be stifled by persistent foreign exchange shortages and still very high inflation. Furthermore, even if the drought gradually subsides, the impact of pandemic-related movement restrictions on planning for the next harvest and the difficulty for farmers to obtain inputs is expected to threaten the income of those dependent on farming revenues (60-70% of the population). Concomitantly, the slow pace of the country's international re-engagement since the September 2018 elections means that it remains largely deprived of external financing due to its debt arrears. The contribution of public investment is therefore expected to be negative. This economic context, coupled with an unpredictable and constraining business climate, will not be conducive to private investment. This will also be hampered by the tightening of lending conditions, with the increase in the key rate from 15% to 35% in June 2020 aimed at curbing the depreciation of the Zimbabwean dollar. If the likely disruptions to electricity supply (after Zambia warned of the low water level of the Kariba dam, which supplies electricity to both countries) do not disrupt activity in the mining sector, exports could benefit from gold prices and, to a lesser extent, of platinoids, which are expected to remain relatively high.
The Zimbabwean dollar in a tailspin
In 2021, the budget deficit is projected to widen because of increased spending to meet high social needs. In a context of very high inflation, recurrent strikes in the civil service, particularly among teachers, have already pushed the government to increase wages by 41%. These will put pressure on the state wage bill, which absorbs more than 40% of revenues. Nevertheless, very limited government revenue and borrowing capacity will limit the execution of expenditure, especially capital investment. Financing constraints, which could hamper the achievement of the objectives of the new Five-Year National Development Strategy 2021-2025 presented in November 2020, and the government's ability to respond to social demands, could encourage financing through the printing of money, which would fuel currency depreciation and inflation.
Following two years of recession that took a toll on imports, the current account would be in surplus in 2019 and 2020. In 2021, it is expected to remain in surplus, again thanks to low imports and a surplus in the transfer account. However, mainly driven by remittances from expatriates in South Africa, the current account is expected to shrink, after surging in 2020 due to travel restrictions that have led to the use of official channels. Weak domestic demand will continue to weigh on inward trade flows, but the recovery in exports, still limited, is expected to maintain the trade deficit. The narrower income account deficit is also expected to remain. Weak capital and FDI flows will maintain the net external liability position, forcing the country to accumulate external arrears.
With demand for the U.S. dollar remaining strong, the adjustment following the collapse of the multi-currency regime (introduced after the hyperinflation episode in 2009) is expected to continue. After the break in the formal parity between locally issued quasi-currencies (RTGS dollar) and the USD (February 2019), the change to the name of the currency and the formal abandonment of the multi-currency system (June 2019), and the introduction of the new Zimbabwean dollar (November 2019), the exchange rate regime underwent another new reform in June 2020. The currency peg was removed and an auction system introduced. Although it lost more than 80% of its value in 2020, reducing the gap with parallel market exchange rates, depreciation will continue in 2021. With insufficient foreign exchange reserves to cover more than a few weeks of imports, the central bank does not have the capacity to support the currency.
Emmerson Mnangagwa faces growing risk to his authority
President Emmerson Mnangagwa came to power following the "army assisted transition" of November 2017, which forced the resignation of President Robert Mugabe. Despite his victory and that of ZANU-PF (in power since independence) in the 2018 general elections, he will continue to be weakened by a very difficult social and political climate. The lockdown and management of the pandemic come in addition to the fierce protests fuelled by a long economic crisis that has led to shortages of necessities. The year 2021 will therefore be further troubled by social unrest, while a new law criminalising criticism of the country's human rights record (October 2020) signals an increasingly limited tolerance for dissent. The growing social risk increases the likelihood that President Mnangagwa's regime will lose the crucial support of the military.