shortages, the RBZ announced on May 4, ZIMBABWE 2016 that it would issue “bond notes”, Recent developments triggering increased demand for US dol- lars. At present, demand for imports is The first half of 2016 indicates weakening constrained by liquidity shortages as well economic activity compounded by a li- as restrictions introduced to protect do- Table 1 2015 quidity crisis that has intensified since mestic producers. Population, million 15.6 May 2016. The El Niño induced drought The domestic-interbank payment system coupled with a decline in agricultural continues to function, but cash payments GDP, current US$ billion 13.8 productivity, adversely affected the agri- command a premium, complicating the GDP per capita, current US$ 885 cultural sector leading to growth of 1.1 measurement of inflation. Officially, infla- b School enrollment, primary (% gross) 102.4 percent in 2015, down from 3.8 percent in tion at end July 2016 year-on-year was b Life Expectancy at birth, years 53.6 2014. While declining agricultural growth reported to be -1.6 percent. However, dis- Sources: World Bank WDI and M acro Poverty Outlook. was more than offset by continued growth counts for US dollar cash payments exist Notes: in services (at over 3 percent per year on and complicate the effective monitoring of (b) M ost recent WDI value (2014) average), poverty increased. This was price developments. particularly pronounced in rural arears. The external position remains difficult. The number of extremely poor people are The current account deficit narrowed by estimated to have increased by 100,000 4½ percentage points of GDP in 2015, due during 2015 to 3.2 million (figure 2). to the rising cost of financing options. In During 2015-16, aggregate demand was June 2016, the government imposed tem- supported by an expansionary fiscal poli- porary restrictions on imports of basic cy. From March 2015 to June 2016, govern- goods that compete with local production, ment borrowing from the banking sector contributing to a further narrowing of the Zimbabwe has been severely affected by a increased by US$1.4 billion or about 10 current account deficit. During January – financial crisis and drought; the economy percent of GDP. Most of the increase in July 2016 imports declined by US$568 is projected to grow by only 0.4 percent public borrowing was to pay Reserve million (16 percent) compared to the same this year. An expansionary fiscal policy Bank of Zimbabwe (RBZ)-and selected period in 2015. And despite a fall in ex- State-Owned Enterprises arrears. In turn, ports (a decrease of 10 percent) the current has cushioned the slowdown so far. Going this was financed primarily by Treasury account narrowed by US$420 million, 3 forward, external payment arrears may Bills (T-Bills), which were purchased by percentage points of annual GDP. lead to a further contraction in imports the commercial banks at a discount. The Central Government deficit widened and a decline in GDP. The financial crisis Bank’s purchases of T-Bills and other pub- for the first six months of 2016 as revenues lic sector borrowing may have contributed contracted and expenditures increased. continues to have a significant impact on to liquidity shortages and crowded out Revenues from January to June 2016 fell incomes, while the drought has dispropor- bank lending to the private sector. Faced by 3.6 percent year-on-year, while total tionately affected the rural poor. with cash shortages, banks were unable to expenditure increased by 21 percent. As a honor demand deposits. Quantitative lim- result, the deficit increased to US$623 mil- its on cash withdrawals (supported by the lion, up from US$57 million during the RBZ) were imposed. To address liquidity same period last year. Expenditures are FIGURE 1 Zimbabwe / Public sector borrowing from bank- FIGURE 2 Zimbabwe / Number of extremely poor people ing system (January 2010-January 2016) and food insecure people in Zimbabwe US$ million Millions of extremely poor people Millions of food insecure people 3.5 7 2,500 3.4 6 2,000 5 3.3 1,500 4 3.2 1,000 3 3.1 2 500 3.0 1 0 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 2.9 0 2011 2012 2013 2014 2015 2016* 2017* Government from banks Government from RBZ Number of extremely poor people in Zimbabwe (left axis) SOEs from banks, incl. RBZ Number of food insecure people in Zimbabwe (right axis) Source: Reserve Bank of Zimbabwe. Sources: World Bank staff estimates and Zimbabwe Vulnerability Assessment Committee (ZIMVAC). Note: * projection. MPO 286 Oct 16 dominated by the wage bill which ac- limit, and hence the fiscal deficit is project- adjustment in the form of a reduction in counted for over 97 percent of revenues ed at 4.2 percent of GDP, implying dra- the public sector wage bill is needed to and 70 percent of total expenditures dur- matic narrowing of the deficit during the prevent further accumulation of govern- ing January to June 2016. This wage bill remainder of the year. ment borrowing from the banking sys- leaves little for non-wage expenditures, The fall in agricultural output will in- tem. Without a fiscal adjustment and/or which have become increasingly financed crease poverty. The number of extremely access to external credit through arrears by user fees and extra-budgetary funds. poor people is expected to increase to 3.28 clearance, the government will have to million in 2016 up from 3.16 million in borrow from banks. This is likely to result 2015. Moreover, the number of food inse- in an accumulation of public debt, dimin- Outlook cure people will increase to over 4.4 mil- lion people by end 2016 and early 2017 ishing investor confidence and limiting Zimbabwe’s growth prospects. (figure 2). Greater transparency in the management The economic outlook remains challeng- In response to the crisis, the Government of the conversion of interbank dollars and ing. Agriculture is projected to shrink by announced a fiscal adjustment program in cash dollars is a key challenge to ensure 4.2 percent in 2016 due to the drought, the Mid-Year Fiscal Statement presented the unification of prices, which is vital for while growth in services is expected to on September 8, 2016. The program in- private and public transactions. Similarly, slow in the wake of the financial crisis. volved measures to limit the wage bill. recently introduced trade restrictions risk Industry continues to expand thanks to a However some of these were subsequent- limiting competition, encouraging rent recovery in gold and platinum produc- ly reversed. The Mid-Term Monetary Poli- seeking, and discouraging efficient and tion. While imports and exports are cy Statement published on September 16, competitive production, while also raising viewed to contract by 18 percent and 9 reiterated the authorities’ commitment to the cost of exports. percent, respectively. As supply com- issuing “bond notes” later this year. presses, investment is projected to fall by two-thirds and private consumption by 0.3 percent. Fiscal revenues are seen to fall by 4 percent, driven mainly by a fall in Risks and challenges import-based fiscal revenues, such as cus- toms duties and value added tax. Govern- In the absence of a strong adjustment ment borrowing from the banks and non- program the economic situation is pro- bank financial institutions has reached its jected to continue to deteriorate. Fiscal TABLE 2 Zimbabwe / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2013 2014 2015 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 4.5 3.8 1.1 0.4 3.8 3.4 Private Consumption 6.8 0.7 0.3 -0.3 1.0 0.2 Government Consumption 5.1 4.7 0.3 0.2 -2.9 -2.4 Gross Fixed Capital Investment -41.3 7.7 -3.6 -62.7 73.3 61.8 Exports, Goods and Services -3.6 -3.7 -2.8 -9.0 -2.2 -2.1 Imports, Goods and Services 1.5 -7.4 -3.9 -18.0 -6.1 -5.0 Real GDP growth, at constant factor prices 2.7 9.8 1.2 1.3 3.6 3.8 Agriculture -2.6 25.0 -5.2 -4.2 12.0 3.5 Industry 4.8 -2.5 1.4 3.9 2.4 3.0 Services 2.7 13.9 2.7 1.2 2.4 4.4 Inflation (Private Consumption Deflator) 5.1 -0.2 -0.1 -0.4 1.1 1.6 Current Account Balance (% of GDP) -18.1 -15.1 -10.6 -3.1 -1.9 -1.4 Fiscal Balance (% of GDP) -1.9 -1.5 -1.2 -4.3 -2.0 -2.4 Debt (% of GDP) 54.1 53.3 41.3 43.9 43.9 48.6 Primary Balance (% of GDP) -1.0 -0.4 -0.5 -2.7 -0.5 -0.9 So urces: Wo rld B ank, M acro eco no mics and Fiscal M anagement Glo bal P ractice, and P o verty Glo bal P ractice. No te: f = fo recast. MPO 287 Oct 16