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)
- Cash and currency shortages
- Economic and financial position damaged by long period of hyperinflation (2000 to 2009)
- Underinvestment in infrastructure (particularly energy)
- Precarious food and healthcare situation: majority of the population depends on international aid; one of the highest rates of AIDS infection in Africa and in the world
- Arrears with international donors
Badly weakened activity
Hurt by lack of liquidity, inflation, Cyclone Idai, drought and electricity supply disruptions, the economy plunged into recession in 2019. In 2020, it is likely to remain there, continuing to be suffocated by the currency and liquidity crisis. Households will continue to suffer from shortages of basic goods, limited access to a stable currency and high inflation, resulting in a negative contribution from private consumption, which is also expected to be affected by the impact of drought on household incomes. The reconstruction of infrastructure affected by Cyclone Idai is likely to support public consumption and investment. Nevertheless, the government, which is still in arrears with international donors, will remain deprived of external funding sources, constraining its ability to act. The economic crisis and unclear policy formulation are expected to weigh on the contribution from private investment. Budget support measures (reduction of VAT and corporate tax rates) are unlikely to be sufficient to offset the many obstacles to domestic demand. In addition, shortages of basic necessities are expected to lead to increased imports of cereals and energy, affecting the contribution from foreign trade. Further disruptions in electricity supply, precipitated by drought and years of underinvestment, could affect mining exports. In addition, late rains for the 2019/2020 season and the downward trend in international tobacco prices bode ill for the country’s main export crop revenues.
The Zimbabwean dollar makes a comeback
The budget deficit is expected to remain high in 2020. Revenue growth will be driven mainly by the increase in inflation-indexed taxes, but is expected to be limited, given how inhibited activity is. Expenditure pressures, particularly on the public wage bill, will be exacerbated by demands for higher wages. Most of the budgetary resources are expected to remain allocated to current expenditure, at the expense of capital investment spending. Without the support of international donors and wishing to avoid monetary creation by the central bank (in order to prevent an inflationary spiral), Zimbabwe is expected to base its financing essentially on the issuance of debt on the domestic market. Debt remains unsustainable due to the continued accumulation of external arrears and the expansion of domestic debt.
After weak domestic demand constrained imports, reducing the current account deficit in 2019, the deficit is expected to widen again, mainly as a result of higher imports of basic necessities. The trade deficit (including services) will therefore continue to increase the current account deficit. The primary income deficit will also contribute to this. Expatriate remittances, mainly from South Africa, will continue to contribute to a transfer surplus. Financing the current account deficit is expected to remain difficult and will certainly require the accumulation of external arrears.
The twin deficits are expected to keep up the pressure on the new currency introduced in November 2019, fuelling inflation. Foreign exchange reserves, which cover less than one month of imports, will remain at a minimal level. Abandoned in 2009 following a bout of hyperinflation that caused the currency to lose all its value, the Zimbabwean dollar was replaced by a multiple exchange rate system, dominated by the USD. However, the stability of this system has been undermined by the recurrent twin deficits, which have led to a foreign currency shortage. From 2016 onwards, the use of bond notes and electronic balances, officially at par with the USD, created a parallel market where these quasi-currencies were traded at a discount. The gap with the parallel market led the authorities to break the formal parity between locally issued instruments and the US dollar (February 2019) before abandoning the multiple exchange rate regime (June 2019) and introducing a new currency (November 2019).
The economic crisis is weakening Emmerson Mnangagwa
President Emmerson Mnangagwa came to power following the November 2017 “army-assisted transition” that forced President Robert Mugabe to resign. Despite fierce protests, Mr. Mnangagwa and ZANU-PF, the party in power since independence, won the July 2018 general elections. Nevertheless, regular demonstrations resulting from the worsening economic crisis, leading in some cases to violence, suggest that the President’s authority is already being challenged. As the economic situation deteriorates, his position could be weakened by the emergence of divisions within ZANU-PF. The loss of army support, particularly in the event of difficulty in paying military wages, could also threaten the President. Despite the willingness to engage in dialogue, relations with the international community remain difficult, as evidenced by the tensions surrounding the extension of US sanctions in 2019.