Zimbabwe economy slows to 2% on severe El-Niño crisis

The IMF forecasts that Zimbabwe’s economy will decelerate to about 2% this year, down from 5.3% in 2023, due to a severe El-Niño-induced drought.
Declared a national disaster in April 2024, the El-Niño-induced drought in Zimbabwe has severely hit agriculture, and tourism while sparking human-wildlife conflict.
Traditional grain suppliers Zambia and Malawi are unable to meet Zimbabwe’s needs, compelling Harare to import GMO maize from South Africa.

The International Monetary Fund (IMF) has projected that Zimbabwe economy will decelerate to about 2 percent this year, down from 5.3 percent in 2023, primarily due to a severe El-Niño-induced drought, which has adversely affected agriculture, a critical sector for the Southern African country’s economy.

Declared a national disaster in April 2024, the El-Niño-induced drought in Zimbabwe has severely depleted water sources, with Lake Kariba, one of the country’s primary water reservoirs, holding only 13 percent of its capacity. The dire situation is increasingly posing consequences for both people and wildlife in the region.

Impact of El-Niño crisis on Zimbabwe economy

At the moment, a severe food crisis looms with traditional grain suppliers such as Zambia and Malawi unable to meet Zimbabwe’s needs, compelling the Southern African country to import genetically modified maize from South Africa. Prices of food items are on the rise, further straining the already vulnerable population.

What’s more, the drought’s impact extends beyond agriculture, affecting cross-border trade, tourism, and daily life, with women in rural areas walking for over two kilometres to fetch water, often risking their safety due to worsening human-wildlife conflicts.

Additionally, in its latest review, the IMF says Zimbabwe’s economy is also facing escalating import bills, which as further straining its balance of payments outlook for this year.

“But growth is expected to recover strongly in 2025 to about 6 percent, supported by a rebound in agriculture and ongoing capital projects in manufacturing,” notes IMF’s Wojciech Maliszewski, who led a team that conducted a second mission to Harare between June 18-27, 2024, to conclude the 2024 Article IV Consultation.

IMF says that the anticipated recovery next year is attributable to the expected rebound in agriculture coupled with ongoing capital projects in the country’s manufacturing industry.

Zimbabwe’s monetary policy and currency stabilization

In response to the economic instability experienced earlier in the year, the Reserve Bank of Zimbabwe (RBZ) introduced a new currency, the Zimbabwe Gold (ZiG), in April 2024.

According to the IMF, the ZiG has so far maintained a stable exchange rate, helping to check the macroeconomic instability that saw the Zimbabwean dollar depreciate by about 260 percent in the three months to March.

Assuming continued macroeconomic stability, the IMF projects cumulative inflation for the remainder of the year to be about seven percent.

In their latest review, the IMF has commended the RBZ’s improvement in monetary policy discipline and recommended further refinements.

“Price stability would be best achieved by stabilizing the ZiG nominal exchange rate against a suitable basket of currencies (accounting for the dominant role of the USD in the economy). This could be in turn accomplished by controlling base money growth: for now through unremunerated Non-Negotiable Certificates of Deposits (NNCDs), but over time through indirect (interest-rate-based) monetary instruments to increase the attractiveness of the new currency.

“The exchange rate should be determined in a deeper market to provide relevant information in the decision regarding the monetary policy stance, which would require identifying and removing any remaining impediments to the functioning of the FX market to promote price discovery,” the Bretton Woods institution explained.

Fiscal policy and debt management

Addressing Zimbabwe’s fiscal financing gap is critical for sustainable currency stabilization. The IMF mission acknowledged the transfer of past debt obligations related to the RBX’s quasi-fiscal operations to the Treasury as a significant step towards financial discipline.

Enhanced coordination between the RBZ and the Ministry of Finance, Economic Development, and Investment Promotion on macro-policies and liquidity management was also noted positively.

However, the mission highlighted that the cost of servicing quasi-fiscal operations-related debt and Treasury Bills, combined with weaker-than-expected revenues and drought-related expenditures, has created a substantial financing gap in the 2024 budget.

The IMF said there is a need to close this gap without undermining the monetary policy stance and offered its support to the Zimbabwean authorities in identifying suitable measures.

Structural Reforms and Governance

Strengthening the governance framework for the newly established Mutapa Investment Fund is vital for Zimbabwe’s stabilization efforts, too. The IMF recommended ensuring the fund’s mandate is clearly defined and aligned with the National Development Strategy.

Enhancing transparency and integrating the fund fully into the budget process were also highlighted as critical steps. The fund’s financial management should adhere to the highest standards of corporate accountability as regulated by the Public Finance Management Act, the IMF counseled.

Additionally, the IMF underscored the need for structural reforms aimed at improving the business climate in Zimbabwe, strengthening economic governance, and reducing corruption in the country.

Addressing these weaknesses is essential in promoting sustained and inclusive growth in the country, the IMF noted. Currently, corruption remains a big risk in Zimbabwe’s macroeconomic performance, and comprehensive reforms are needed to help tackle the issue.

International re-engagement and debt resolution

The IMF reiterated that international re-engagement is vital for Zimbabwe’s debt resolution and the plan to clear arrears. Successful re-engagement would unlock access to external financing, which is vital for the country’s economic stability and growth.

The authorities’ efforts through the Structured Dialogue Platform are key to achieving debt sustainability and gaining concessional financial support. IMF urged authorities in Zimbabwe to maintain high standards of public debt transparency, including the appropriate treatment of newly issued debt in public and publicly guaranteed debt statistics.

Due to Zimbabwe’s unsustainable debt situation and official external arrears, the IMF is currently precluded from providing financial assistance to Harare. An IMF financial arrangement would, however, be possible if Zimbabwe establishes a clear path to a comprehensive restructuring of its external debt, including arrears clearance.

This would require a reform plan aimed at restoring macroeconomic stability, enhancing inclusive growth, reducing poverty, and strengthening economic governance.