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What Does the Future Hold for Zimbabwe’s Economy?

 6 min read / 

On Sunday, Zimbabwe’s ruling party sacked President Robert Mugabe as its leader, being replaced by Vice-president Emmerson Mnangagwa. This will be welcomed by the people of Zimbabwe; for decades Mugabe has been at the heart of the nation’s collapse, and the stricken country may finally be able to kick-start and rejuvenate its dwindling and faltering economy.

Zimbabwe used to be regarded as a country with huge economic potential, capable of developing into one of Africa’s leading lights. This was largely due to its strong agricultural sector, giving it the title of the ‘bread basket’ of Africa. Alongside this, it has an abundance of natural resources including diamonds, gold and tobacco, yet its potential has been curtailed by a number of structural economic problems including hyperinflation, corruption and the imposition of sanctions from the likes of the US and the UK.

When Robert Mugabe came into power, Zimbabwe had the 10th biggest economy in sub-Saharan Africa. However, it has now fallen to 20th, showing the staggering decline the economy has experienced over the last few decades.

Where Did It All Go Wrong?

Zimbabwe has seen an incredible downturn in its agricultural production, with its wheat production falling by 16 times, from 320,000 tons in 1990 to 20,000 in 2016. Alongside this, its corn production has also collapsed, largely due to the seizure of agricultural land from white farmers starting in the 1990s. Moreover, although tobacco exports to the likes of China and South Africa have remained high, income from this industry declined in 2017, whilst the gold and platinum industries have been restricted by governmental intervention, which has included the central bank limiting exports in order to contain a shortage of dollars. Most notably, diamond production has fallen significantly over the last few years, from 3.5 million carats in 2015 to just 961,000 in 2016. This has greatly affected the economy as Zimbabwe generates roughly half of its export earnings from the mining of these goods.

Alongside this, Zimbabwe has been on the receiving end on a number of economic sanctions including a travel ban and an asset freeze imposed by the US, condoning the government’s human right abuses and allegations of electoral fraud. Britain has also placed economic sanctions on Zimbabwe, which have further restrained the economy. These sanctions have also heavily affected the nation’s reputation, contributing to the falling levels of FDI.

Moreover, the economic situation has been worsened by the mass and wide-scale corruption in the nation, with Transparency international estimating that the country is losing more than $1bn a year due to corruption. This is largely as a result of the actions of the police and local councils, whilst Mugabe’s wife has earned the nickname ‘’Gucci Grace’’ for her luxurious and controversial lifestyle.

Zimbabwe is also drowning in debt. According to Zimbabwe’s finance ministry, the nation owed lenders such as the IMF and World Bank roughly $9bn as of October this year. The chart below illustrates a major hike in debt levels from 2012 onwards (the previous fall was due to a power-sharing deal between Mugabe’s Zimbabwe African National Union-Patriotic Front and Morgan Tsvangirai’s Movement for Democratic Change).

Source: Ministry of Finance & Economic Development and Reserve Bank of Zimbabwe

Is It All Doom and Gloom?

Despite all the economic problems within Zimbabwe’s economy, there is reason for optimism. First of all, the nation receives significant and consistent foreign direct investments from China, accounting for half of Zimbabwe’s annual FDI. This has helped boost tobacco exports, whilst it has also contributed to an improvement in the nation’s level of energy infrastructure, including the construction of solar power plants.

Furthermore, over the last decade, Zimbabwe has seen a slight economic recovery, whilst the World Bank reported that the nation has strong fundamentals for economic growth and poverty reduction due to its huge potential, should it introduce fiscal and investment reforms. This potential is a result of its abundance of natural resources, with the nation boasting the third and fifth largest reserves of platinum and lithium in the world, respectively. As such materials are key inputs into electronic equipment, with lithium being a vital component of rechargeable batteries, investment from mining companies may see a significant rise now that Mugabe’s rule has ended. Finally, Zimbabwe also has a significant supply of skilled labour and adequate infrastructure, which will be crucial to the nation’s resurgence and recovery.

Additionally, it must be highlighted that the US’ regional interest in South Africa is heavily dependent on Zimbabwe’s economic performance. This is due to the fact that South Africa is Zimbabwe’s biggest regional economic partner, and thus a faltering Zimbabwe, will adversely affect South Africa. This can be highlighted by the fact that goods delivered to Zimbabwe form roughly 40% of total South African exports, whilst Zimbabwean goods also form 40% of total South African imports. Thus, this means that the US may be forced to increase its investment in Zimbabwe in the foreseeable future in order to preserve its interests in South Africa, which may help revive Zimbabwe’s stricken economy.

How Can Zimbabwe Kick-start Its Economy?

‘The road to foreign financial aid and debt relief will be challenging”. This assessment given by Bloomberg analyst Mark Bohlund gives a perfect illustration of the path ahead for Zimbabwe. Under new leader Emmerson Mnangagwa, it is likely that the nation will return to a more orthodox economic policy, through instilling confidence in business, with a strong focus on the mining and agricultural sectors. This will likely include the installation of property rights (including for old farm owners) in order to spark a revival in agricultural production.

Such policies are likely to help resuscitate Zimbabwe’s economy, whilst also boost the nation’s reputation. This could potentially spark an increase in FDI, including from the UK. Moreover, improvements in liquidity and FX levels are likely to result from rising agricultural outputs, which could, in turn, boost electricity supply and minerals production.

Aside from this, it is also crucial that schools and hospital return to normal operation, in order to directly offer relief to the people of Zimbabwe, whilst also sparking greater confidence within the economy, particularly from abroad.

The success of such policies was highlighted by a research paper from 2016, showing the mass economic benefits of the implementation of such reforms, according to the IMF. The chart below depicts the benefits of major structural and economic policies, such as those listed above, on Zimbabwe’s economic growth. As can be seen, short-term growth could increase by just under 4%, whilst longer-term growth will also increase substantially.

The potential success of reforms in Zimbabwe:

Source: Ministry of Finance & Economic Development and Reserve Bank of Zimbabwe

Conclusion

Zimbabwe’s economic future is in balance. It is a country with huge economic potential, meaning that if new leader Emmerson Mnangagwa is able to dictate and implement a successful programme, the nation could experience a significant economic revival. However, the introduction of a programme is far from certain, and it remains to be seen whether or not investors will return to the economy.

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