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Policy inconsistency Zim major weakness

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THE private sector arm of the World Bank Group has singled out Zimbabwe’s unpredictable policy environment as a major hurdle in building a strong viable economy and an impediment to foreign direct investment.

BERNARD MPOFU

In a new report, the multilateral lender says Zimbabwe’s opportunities for economic development stand out compared to other African countries, but growth has been wobbling.

The  International Finance Corporation (IFC) — a member of the World Bank Group — is the largest global development institution focused on the private sector in emerging markets.

In fiscal year 2023, the IFC committed a record $43.7 billion to private companies and financial institutions in developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity as economies grapple with the impacts of global compounding crises.

Official figures show that  Zimbabwe used to be one the countries with the highest standards of living in Africa — buttressed by a skilled work force and infrastructure superior to that of most countries on the continent.

“Notwithstanding its economic decline since 1995, it continues to boast several sectors that are still competitive or could — in the short to medium term — be competitive regionally and globally,” the IFC in its report titled Country Private Sector Diagnostic: Creating  Markets in Zimbabwe says.

“The main constraint to unlocking the private sector potential as an engine of economic growth in the country is chronic macroeconomic instability, historically caused by loose monetary and fiscal policy, foreign exchange rationing, and structural challenges — all of which culminated in two major recessions and hyperinflation in 2000–08 and 2019–20.”

The IFC says growth averaged only 1.1% between 2018 and 2022, compared to 4% in Cambodia, 5.4% in in Côte d’Ivoire, 6.4% in Ethiopia, and 4.6% in Kenya — Zimbabwe’s structural peers.

“While the country was one of the fastest growing economies in the South African Development Community (Sadc) in 2022 and 2023, with economic growth of 6.5% in 2022 and 4.5% in 2023, sustaining this growth will require Zimbabwe to tackle its macroeconomic and structural challenges,” reads the report.

“Limited access to external financing and poor revenue mobilisation, coupled with quasi-fiscal operations of the Reserve Bank of Zimbabwe to service foreign loans and legacy debt and support loss-making state-owned enterprises led to a monetary overhang, a rapidly depreciating exchange rate, and subsequently high inflation. Since 2000, the government of Zimbabwe has stopped servicing debt to international financial institutions (IFIs) and has accumulated arrears on external debt, which shot up from 26% to 52% of GDP between 2018 and 2022. Arrears to IFIs have limited access to concessional financing and increased the cost of private sector borrowing.

“Meanwhile, price and exchange rate volatility, and large export surrender requirements have pushed many companies into the informal sector, limiting their ability to obtain financing from the banking system and further reducing the tax base. Also, many foreign exchange transactions take place in the informal sector, further intensifying pressure on the parallel market exchange rate. Inflation has been consistently high (three digits in recent years) and reached more than 314% in 2023, with the local currency weakening at a fast pace.”

Zimbabwe’s concentration in three export commodities — gold, platinum, and tobacco — known for their price instability, has increased the unpredictability of export earnings and fiscal revenues and complicated macroeconomic management, the IFC warned.

“In addition, recent increases in the global prices of food, energy, and fertilisers due to Russia’s invasion of Ukraine have significantly reduced the purchasing power of households and elevated the costs of production,” the IFC says.

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