Zimbabwe was on the path to middle-income status in the 1990s, but then suffered from cycles of political and economic crises for nearly two decades. During this period, gross domestic product (GDP) declined by 96% and the country experienced record hyperinflation. Critical services including health care, water supply and sanitation, property rights and the investment climate were severely affected. Zimbabwe’s ranking on the Human Development Index fell to 173 out of 187 countries in 2011, when the poverty headcount reached 72.3%, with 22.5% of the population in extreme poverty. A lengthy isolation from the international community restricted the level of aid and saw a build-up of arrears to the majority of its multilateral and bilateral partners.
In 2009, the country embarked on a period of stabilization and growth ushered in by a political settlement and the adoption of a multi-currency regime, in effect dollarizing the economy. During 2009-12, the economy rebounded with growth rates averaging around 8.7%. Inflation stabilized; revenues and bank deposits recovered sharply. The country also embarked on its first Staff Monitored Program with the International Monetary Fund (IMF) which was completed in November 2014.
Social services have been recovering owing to a resurgence of both public and donor spending, and the rebound of many of its social institutions toward their earlier levels of sophistication. The Human Development Index recovered to 156 in 2014 and a Multi-Indicator Cluster Survey in 2014 revealed that in several key areas, Zimbabwe has regained outcome levels of the early 1990s. Life expectancy recovered from a low of 43.1 in 2003 to 53.3 in 2012 (compared with a high of 61.6 years in 1986). The maternal mortality ratio declined from 960 deaths per 100,000 live births in 2010-2011 to an estimated 614 deaths in 2014. HIV/AIDs prevalence is now around 15%, down 27% in 1998. Under-five mortality fell from 94 per 1,000 in 2009 to 75 in 2014. Nevertheless the progress remains slow and Zimbabwe has not achieved a significant number of the Millennium Development Goals (MDGs).
Since 2012, however, the economy has experienced a dramatic slowdown owing to deteriorating terms of trade, adverse weather and increasing policy instability. Growth slowed to 4.5% in 2013, 3.2% in 2014, and is projected at 2.8% in 2015. The banking sector saw a sharp increase in non-performing loans as business adjusted to new external conditions. Poor rains in 2013 and 2015, declining commodity prices and terms of trade with South Africa (Zimbabwe’s main trading partner) together with an unfinished structural transformation in its productive sector have created a maelstrom for the economy. Having dollarized, Zimbabwe must see real adjustments in productivity, which take time and financing, in order to regain its competitiveness in the global marketplace. But the large international arrears constrain financial flows into Zimbabwe for both the public and private sector.
Zimbabwe still has enormous potential for sustained growth and poverty reduction given its generous endowment of natural resources, existing stock of public infrastructure and comparatively skilled human resources. Realizing this potential will require a further renewal of institutional and operational capacity in the public sector, critical improvements in basic service delivery as well as deep reforms in economic policies and investment climate.
In 2013 Zimbabwe adopted a new Constitution and is in the process of aligning its laws and regulations to this new framework. The government prepared a development plan, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIMASSET) and has embarked on a series of reforms aimed to further lay the base for economic growth and poverty reduction.
The government has also embarked on a program to normalize relations with the international community. Besides successive Staff Monitored Programs (SMPs) with the IMF, the government has been making token payments to its preferred multilateral creditors (IMF, World Bank and the African Development Bank) since 2012. In 2014, the authorities a negotiated a new phase of its partnership with the European Union and adopted a debt strategy paper that authorizes discussion on various options to clear international arrears.
Since the 2014 Annual Meetings, Zimbabwe has continued to make positive steps in its relationship with development partners toward re-engagement with the international community. Following a commitment made at the 2014 Annual Meetings, in January 2015, the government increased its token payments to the World Bank in pari passu with its payments to other preferred multilateral creditors. In October 2014, Zimbabwe successfully completed its second Staff Monitored Program (SMP) with the IMF (the first was completed during the Government of National Unity) and agreed a third program. In November 2014, the European Union (EU) lifted its restrictions under the Cotonou Agreement to allow direct relations with the Government of Zimbabwe and signed the first National Indicative Program with Zimbabwe in February 2015. During this period, other development partners fielded several trade missions, including from Denmark led by the Minister of Trade and Development Cooperation, two from the UK, and one from France which met with President Mugabe. UK Permanent Secretary for Department for International Development (DfID) also visited Harare in March for the first time in many years.
Despite the strong 2009-2012 economic rebound, Zimbabwe’s growth in 2014 growth is estimated at 3.1% and could inch below 3% in 2015 as the mining and manufacturing sectors remain depressed. The mining sector is dampened by easing international prices, weak investment and rising production costs. The manufacturing sector is expected to remain sluggish at 1.4% in 2015, reflecting competitiveness pressures, subdued investment and further tightening of credit conditions. Agriculture which posted a robust 23% growth in 2014 could slow down to less than 3.5% in 2015 due to inadequate financing and flooding is some areas.
Overall, risks remain tilted to the downside, due to easing of international prices of minerals, vulnerabilities in the banking sector, policy inconsistencies affecting investment, deflationary pressures, potential fiscal slippages, and the unbalanced external position.
The external position remains under pressure. Exports contracted by 8.7% in 2014, and are expected to remain depressed in 2015. Imports declined by 7.4% in 2014. The current account is estimated at 22% of GDP and could narrow to 19% in 2015. It is largely financed by short term capital inflows and remittances. Reserves are inadequate while foreign direct investment (FDI) levels remain persistently low.
Annual inflation which closed 2014 at -0.8% slipped further into the negative, to -1.3% in January 2015 reflecting continued weakening of the South African Rand and depressed aggregate demand.
Vulnerabilities are rising in the banking sector, with low liquidity levels, rising credit risks and deteriorating asset quality. Non-performing loans retreated to 16% while liquidity edged down to 27% in the fourth quarter of 2014. Broad money picked up by 12% up to December 2014, reflecting gradual improvement in confidence in the banking sector, as private sector credit inched up 4.1%.
Fiscal revenues marginally recovered by 0.8 percent in 2014, but tax revenues remain depressed by the slowdown of the economy amidst visible deflationary pressures. Government expenditure stood at $3.91 billion and remained skewed towards employment costs which absorbed 73% of current expenditure, crowding out space for capital and social expenditures. A deficit of $184 million (1.3% of GDP) is estimated for 2014 and largely financed by treasury bills. A $4.1 billion budget has been presented for 2015.
Last Updated: Mar 25, 2015