Zimbabwe is facing an economic crisis, further worsened by COVID-19 (coronavirus) pandemic. In 2019, Zimbabwe was hit by severe drought and Cyclone Idai, that coupled with shortages of foreign currency led to double-digit contraction of agriculture, electricity, and water production and pushed more than half of the population into food insecurity. Policy missteps—lack of effective fiscal-monetary-forex policy coordination and significant quasi-fiscal activities by the Central Bank—undermined the de-dollarization effort and resulted in a rapid depreciation of the local currency and high inflationary pressures.
High inflation eroded disposable incomes of population and depressed domestic demand. Gross domestic product (GDP) is estimated to have contracted by 8.1% in 2019 and the recession is projected to continue in 2020 due to persistent climate shocks and domestic vulnerabilities worsened by COVID-19. The pandemic has negatively affected exports, tourism, and manufacturing, deepening the economic crisis and poverty. As uncertainty about the duration and severity of the virus spread remains high, GDP is expected to contract in 2020 between 5% under the baseline scenario and 10% in the low case scenario.
Inflation reached triple digit levels in 2019, and is projected to remain high in 2020 as COVID-19 disrupts production and trade. Inflation surged to 521% year-on-year in December 2019, fueled by a rapid exchange rate depreciation, poor harvests, and reduction of subsidies on fuel and electricity. Food prices increased by 725%, resulting in a severe loss of purchasing power for the poor. Continued local currency depreciation, disruption of production and trade as a result of COVID-19 are likely to fuel inflationary pressures in 2020.
The government introduced a new inflation rate in June 2020 based on blending US$ and ZWL$ (local currency) prices. The blended annual inflation rate stood at 457.2% in June 2020 while the unblended (usual) annual inflation rate stood at 737.3% down from 786% in May 2020. With limited access to external financing and growing humanitarian needs due to COVID-19 and persistent climate shocks, the government may resort to monetary financing, stoking further inflation.
Human Capital
Despite increases in social protection spending, including repayment of arrears on important social programs, most extremely poor citizens remained unprotected, and their numbers are rising. Education and health spending budgets, which have a large salary component, were eroded by inflation, worsening human capital outcomes and jeopardizing opportunities for future generations. On the back of sizable financing needs and deteriorating revenue generation capacity, the pandemic has increased expenditure pressures. Efforts to scale up health care financing and provide social protection to urban beneficiaries who are most exposed to the lockdown are ongoing. As a result, the fiscal deficit is expected to widen to 5.6% of GDP.
Development Challenges
Poverty levels increased sharply in 2019 and are projected to worsen further in 2020. In 2019, the number of extreme poor is estimated to have reached 6.6 million, double the level in 2011. A substantial decline in agriculture production and high food prices increased food insecurity, with close to 50% of the population being food insecure in 2019. Extreme poverty reached 40% of the population in 2019, up from 33.4% in 2017, with urban poverty rising faster (from 4% to 10%) than rural poverty. The poverty levels are projected to rise further in 2020 due to continuing economic contraction and loss of employment and income, exacerbated by the restrictions on mobility, inflationary pressures and drought conditions. The number of extreme poor is projected to increase from 6.6 million in 2019 to 7.6 million in 2020 under the baseline scenario and to eight million under the low case scenario.
Last Updated: Aug 15, 2020
