How can Zimbabwe Improve its Economy

Zimbabwe’s economic development continues to be hampered by price and exchange rate instability, the misallocation of productive resources, low investment, and limited structural transformation. High inflation, multiple exchange rates, unsustainable debt levels, and the ineffective control of public spending have increased the cost of production, reduced incentives for productivity-enhancing investment, and encouraged informality.

Trade integration has declined, and foreign direct investment remains low, limiting the transfer of new technologies and investment in modernizing the economy. Unsustainable debt levels and longstanding arrears to international financial institutions (IFIs) limit the country’s potential for growth. External debt is estimated at 76% of GDP in 2022. Over 70% of the debt is in arrears, constraining the access to concessional finance needed to support productive investment. Against this, the government has prepared an Arrears Clearance, Debt Relief and Restructuring Strategy and resumed token payments to IFIs and Paris Club creditors.

Macroeconomic volatility, high dependence on low-productivity agriculture, the lack of creation of high-productivity jobs, and intermittent shocks—such as droughts and the pandemic—have all contributed to increasing vulnerability in both urban and rural areas. Furthermore, Zimbabwe’s social assistance programs have low coverage and may benefit from improved targeting.

Recent developments

Economic activity slowed in 2022, constrained by worsening agricultural conditions and price instability. Real GDP growth is projected to slow to 3.4% in 2022 from 5.8% in 2021. Mining, trade, and tourism took advantage of high commodity prices and the relaxation of COVID-19 restrictions, helping to drive growth. However, due to limited rains, agricultural production contracted after growing by double digits in 2021.

Rising inflation, the depreciation of the local currency, and higher interest rates have dampened consumption and investment. Strong remittance inflows mitigated to some extent the adverse impact on private consumption and, together with higher gold exports, have kept Zimbabwe’s external current account in surplus.

To tame inflation, the Central Bank tightened monetary policy, raised the interest rates (from 80% to 200%), further liberalized the forex market, and issued gold coins as a store of value. These measures have stabilized the parallel market and narrowed the parallel market premium to below 35% in September 2022.

Economic Outlook

Inflation is estimated to average 213% in 2022 and remain in triple digits in 2023. Real GDP growth is expected to grow at 3.6% in 2023 and 2024, supported by a better agricultural season, slowing inflation, and the relaxation of pandemic requirements.

Agricultural production is projected to return to growth as rain levels normalize and fertilizer prices go down. However, downside risks to the outlook are high, reflecting the global slowdown of growth, volatile commodity prices, climate change, and the ability of the government to control inflation and forex market distortions in an election period. In 2023, the country will hold an election.

Continuing wage pressures and demands for higher spending on agriculture remain key fiscal risks. The poverty rate is expected to decline modestly in the medium term, but vulnerability due to climate shocks and inflationary pressure remains high. Shocks to agricultural output due to a changing and more unpredictable climate, and economic shocks, such as inflation and supply-chain disruptions, will continue to strain household finances.

Is the Zimbabwean economy improving?

After rising to about 7 per cent in 2021, real GDP growth is expected to decline to about 3½ percent in 2022 reflecting a slowdown in agricultural and energy outputs owing to erratic rains and rising macroeconomic instability, amidst a recovery in mining and tourism.

What can be done to reduce inflation in Zimbabwe?

Fiscal policy – a higher rate of income tax could reduce spending, demand and inflationary pressures.
Monetarists would stress policies such as:

  • Higher interest rates (tightening monetary policy)
  • Reducing budget deficit (deflationary fiscal policy)
  • Control of money being created by the government.

What is the economic future of Zimbabwe?

Real GDP growth is thus expected to decline to about 3.5 per cent in 2022. These multiple shocks will continue to weigh on Zimbabwe’s growth prospects.

What drives Zimbabwe’s economy?

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Zimbabwe has the second biggest Informal economy in the world as a percentage of its economy, with a score of 60.6%. Agriculture and mining largely contribute to exports.