Zimbabwe

Economy hit by drought and hyperinflation

Crippled by the chronic uncertainty that has hampered private consumption and investment in Zimbabwe for a number of years, economic growth will be weaker in 2024 due to agricultural production (around 10% of GDP and accounting for over 60% of jobs) being hampered by the dramatic consequences of the El Niño weather phenomenon. However, bigger harvests, a buoyant mining sector (albeit at a modest level) and an increase in tourism should contribute to a rebound in growth in 2025. Although the fall in nickel prices (32.3% of exports in 2022) will reduce export revenues from mining products – the main source of foreign currency – the sustained high prices of gold (30.3%) will offset the losses, while there are numerous projects to exploit lithium, of which the country has the largest reserves in Africa. In December 2022, Zimbabwe suspended exports of the ore in its raw form, aiming to encourage the development of a local processing industry and attract foreign investors, almost exclusively Chinese. This decision led to the signing of a USD 310 million agreement in June 2024 for the construction of a lithium concentrator (under a Sino-British consortium), which is expected to be operational in early 2026. However, the country's strategy is hampered by a deteriorating business environment and, more importantly, recurrent power cuts which are estimated to cost up to 6% of GDP every year despite the extension of the capacity of the Hwange thermal power station in 2023 to compensate for the drop in hydroelectric production caused by the drought. Public spending on modernising infrastructure, particularly the road network, will also help to support the expansion of the construction sector, even if the profound lack of interest shown by external creditors, put off by unsustainable debt, severely limits the prospects for long-term growth to below the target of 5% per year.

In recent years, the country's economy has suffered several bouts of hyperinflation triggered by a sharp depreciation in its currency (the official rate). The latest depreciation of around 70% over the first three months of 2024 forced the Reserve Bank of Zimbabwe (RBZ) on 5 April 2024 to replace the old Zimbabwean dollar with a new currency, the Zimbabwe Gold (ZiG), which is backed by the US dollar and backed by the country's mineral reserves, less than five years after its creation. While the exchange rate of the ZiG has remained more or less stable since its introduction and price rises appear to be moderating, inflationary pressures still remain, including drought, which has led to a serious shortage of foodstuffs and increases in domestic taxes, all of which will continue to weigh on household consumption as shrinking purchasing power is only very partially being offset by pay rises.

Severely restricted access to external financing

The budget situation is set to deteriorate further in 2025 as it has already in 2024. This is due to additional emergency spending in response to the agricultural crisis (mainly on food imports), high levels of investment in modernising the country's infrastructure and the increase in civil servants' salaries (almost 45% of government spending in 2024) in an attempt to tackle hyperinflation. At the same time, recent tax measures (higher taxes on companies and on lithium exports, the introduction of taxes on mining capital gains and on sugar, etc.), some of which have not in fact been applied (thus discrediting the budget) will not fully offset the rise in spending. The imbalance will nevertheless remain limited due to the difficulty of financing it other than by borrowing from local banks and a few rare foreign partners (bilateral or commercial banks), the majority of which are Chinese, since the state has undertaken to stop monetising the public deficit.

After two decades of suspended debt servicing, Zimbabwe resumed (symbolic) repayments to its external creditors in 2021. However, negotiations to clear its arrears and restructure its debt are progressing slowly, which is restricting any significant international financial support. As a result, public debt – around 70% of which is held by foreign partners – will continue to weigh on GDP in 2024 before easing in 2025 thanks to the rebound in growth. As a gesture of good faith, Zimbabwe plans to adopt an IMF benchmark programme in the second half of 2024, which will informally monitor its economic programme.

The trade deficit, weakened by increased import requirements associated with the drought which has hit the agricultural sector hard, as well as the need for capital goods to modernise the country's transport infrastructure, is set to widen in 2024. The trend will be exacerbated by slower growth in exports, mainly from mining, but should be reversed by 2025. At the same time, imports of services and repatriation of dividends from foreign companies related to mining will continue to drag over the period. These items will be more than offset by growing remittances from migrant workers, which is the main driver of the moderate current account surplus. That said, Zimbabwe's external position will remain fragile due to limited capital inflows and clandestine outflows. As a result, FDI, which is already particularly low and concentrated in the mining sector, is forecast to decline over the 2024-2025 period.

Controversial elections against a backdrop of international isolation

President Emmerson Mnangagwa, who rose to power in November 2017 after a period of “military-assisted transition” that forced Robert Mugabe to resign after more than 30 years at the head of the country, was re-elected for a second term in 2023. At the same time, the presidential party (ZANU-PF), which has ruled the country since its independence in 1980, won the legislative elections and secured a majority in Parliament. The elections were nonetheless marred by numerous irregularities that were denounced by the opposition, while international observers pointed to their lack of transparency. The population's discontent, exacerbated by hyperinflation, food insecurity, harsher living conditions, rising poverty – the poverty rate rose from 21.6% in 2011 to 39.8% in 2019 – and the erosion of civil liberties, remains contained by the security forces, which are backed by the government and its iron fist.

After a period disrupted by post-election unrest, the country's strategy of international re-engagement and negotiations to restructure its debt are tentatively resuming. Relations with the West remain tense, and Europe and the US have applied economic sanctions against several of Zimbabwe's top leaders, including President Mnangagwa himself, who has been accused of corruption and human rights violations. Against this backdrop, China remains a major economic ally, providing almost all foreign investment, particularly in the mining sector, while South Africa is the country's main trading partner, given that Zimbabwe has no access to the sea. At regional level, the regime's poor reputation did not prevent Zimbabwe from taking over the rotating presidency of the Southern African Development Community (SADC) in August 2024 for a period of one year.

Last updated: August 2024