This briefing note is the result of a collaborative research process with the Zimbabwean private sector, government representatives, industry organizations and experts, drawing on best practice and senior-level insights to identify policy options for long-term economic revival and expansion in Zimbabwe, and pathways for inclusive development.
Stabilizing the Macroeconomy
The short-term priority for Zimbabwe’s government and private sector is achieving a stable currency and prudent fiscal management, both of which are absolute prerequisites for long-term growth. The government has taken steps to reduce the deficit, notably continuing to cut the wage bill to free up funds for social programmes and capital investment. The fiscal deficit peaked at 9.9 per cent of GDP in 2017, having been under 3 per cent annually from 2008 to 2015,13 driven by the rapid increase in government subsidies supporting small-scale farmers, and government grain procurement at above-market prices. This increased spending took place at a time of falling revenues due to low prices for Zimbabwe’s major commodities and a diminishing consumer tax base. In 2018, however, the government reported a narrowing of its deficit, and preliminary data for the first quarter of 2019 indicated revenues around 30 per cent above forecast, in part due to the implementation, from October 2018, of a controversial 2 per cent tax on electronic financial transfers.
The introduction, in February 2019, of a new currency,14 is an essential step in stabilizing the economy, but an immediate effect has been high inflation that has outstripped salaries, especially for civil servants, and further deepened the cost-of-living crisis. The initial reaction from elements of the private sector was tentatively supportive of the de-pegging of RTGS and Bond from the US dollar and the establishment an interbank foreign exchange market.15 The move created a mechanism for businesses to trade currency, decriminalized trading activity that was already happening on the parallel market, and may allow Zimbabwean-manufactured goods to become more competitive in regional markets.
Zimbabwe debt and currency challenges
The government deficit rose considerably between 2015 and 2018, financed through significant government borrowing, including an overdraft and issuance of bonds and treasury bills. A shortage of US dollars – the national currency since the collapse of the Zimbabwe dollar in 2009 – resulted in the circulation of alternative bond-backed notes issued in 2016 and the use of Real Time Gross Settlement (RTGS) electronic balances as currency.16 In 2009 2 million electronic transactions accounted for a value of $6.87 billion. By 2018, this had risen to a value of $151.75 billion in 1.96 billion transactions. Bars offer pre-pay drinks cards, and street vendors take payments via mobile.
This had a number of negative effects.17 While officially equal to one US dollar, RTGS and Bond cash had a fraction of the US dollar spending power. People became accustomed to paying a different price in dollars, RTGS, or bond coins and notes.18 Inconsistent statements from government officials regarding the value of RTGS contributed to growing uncertainty and a widening informal exchange rate.19 With limited access to forex, businesses that rely on imported inputs have been unable to pay for their imports. Exporters in mining and agriculture have struggled to get the correct value of local currency for their product. Regional and international businesses have complained about their inability to re-patriate profits and dividends.
Furthermore, government debt crowded out private sector investment, as banks lent available credit to government rather than businesses. Many private companies also bought government debt, which limited funds available for capital investment and contributed to wider uncertainty of how to value RTGS on their balance sheets, given the split between official and informal values.
However, significant uncertainty remains over the creation of a fully liberalized exchange rate, and inflation continues to rise. In June 2019 the government banned foreign currency transactions, although exemptions were soon made.20 The foreign currency black market is likely to remain a major force in the national economy. The establishment of a market-driven foreign currency trading system under the supervision of an independent currency board is a priority for the private sector.21 The system should not allow the government to crowd out the private sector in foreign currency markets. There have been calls for structural reform of the Reserve Bank of Zimbabwe, including the appointment of an independent chairperson and board of directors, to improve the checks and balances in its governance mechanisms.22
13 IMF (2019), ‘Staff-Monitored Program: Press Release and Staff Report’, IMF Country Report 19/144, May 2019, https://www.imf.org/en/Publications/CR/Issues/2019/05/31/Zimbabwe-Staff-Monitored-Program-Press-Release-and-Staff-Report-46952 (accessed 6 Sept. 2019).
14 Reserve Bank of Zimbabwe (2019), Monetary Policy Statement: Establishment of an Inter-bank Foreign Exchange Market to Restore Competitiveness, 20 February 2019, https://www.rbz.co.zw/documents/mps/mpsfeb2019.pdf (accessed 6 Sept. 2019).
15 ‘Zimbabwe Futures 2030: Policy Priorities for Economic Expansion’, Roundtable, Harare, 28 February 2019.
16 RTGS systems are used worldwide as interbank settlement systems. In Zimbabwe the term has been used to describe electronic bank balances, initially pegged to the US dollar. RTGS money rose from under RTGS 1 billion in 2016 to a peak of over RTGS 9 billion in December 2018, although the level has subsequently declined.
17 Reserve Bank of Zimbabwe (2019), Monetary Policy Statement, 20 February 2019, https://www.rbz.co.zw/documents/mps/mpsfeb2019.pdf (accessed 6 Sept. 2019).
18 It was widely claimed that Zimbabwe had both one of the highest and one of the lowest fuel prices in the world, depending on what currency was being used for the transition.
19 In 2018 Minister of Finance Mthuli Ncube acknowledged that the rate was not equal for consumers. The Governor of the Reserve Bank of Zimbabwe, John Mangudya, reaffirmed that the two currencies – RTGS and US dollar – were still of equal value.
20 Banya, N. (2019), ‘Update 2-Zimbabwe c.bank eases forex rules for some in bid to improve dollar flows’, Reuters, 24 July 2019, https://www.reuters.com/article/zimbabwe-economy/update-2-zimbabwe-c-bank-eases-forex-rules-for-some-in-bid-to-improve-dollar-flows-idUSL8N24P5S2 (accessed 26 Sept. 2019).
21 NewsDay (2019), ‘Zim urged to adopt currency board’, 4 March 2019, https://www.newsday.co.zw/2019/03/zim-urged-to-adopt-currency-board/ (accessed 6 Sept. 2019).
22 Zimbabwe Futures 2030 roundtable series.