Analysing Zimbabwe’s unconventional economy always proves somewhat cumbersome because it is a country bridled with policy inconsistency, unfavourable operating conditions buoyed by decades of unilateral sanctions and a touch of political upheaval every election cycle. The IMF economic structural adjustment policy, 13 climate-related droughts, economic mismanagement and civil unrest have also contributed to the country’s rapid decline. The lack of autonomy by the apex bank essentially means that monetary policy is compromised and is set to serve the interests of the ruling government, which can secure election funding willy-nilly to thwart the opposition.

Development has stalled for decades, as post-colonial infrastructure continues to dilapidate. Once Africa’s beacon, “the jewel of Africa” as it was formerly known, is now one of the saddest places to live in the world. In fact, to put that into context, a recent study found that Zimbabwe was the 3rd saddest country to live in the world, after Afghanistan and Lebanon in first and second place, respectively. Economic crisis after crisis has been the norm in one of the most resource-rich nations in Africa. Although Zim’s mining sector is highly diversified, with over 40 different minerals, the ruling party has never been able to leverage the sectors’ returns to create value for its people. Corruption persists like a festering wound slowly spreading to all of the state’s institutions.

From the outside, the situation looks dire and the economy is seemingly unlikely to return to its glory days. Most certainly, if the monetary authorities continue with their current policy trajectory, Zimbabwe will likely not attain middle-income status because simulations show that Zimbabwe will need to reach productivity growth rates of 8–9 percent per year in the next seven years to advance to UMIC status. Achieving such unprecedented rates for Zimbabwe will require dramatic improvement in the policy environment to address the binding constraints to productivity growth. The question is, does government have the incentive or the means to make such radical policy shifts, uncharacteristically? Well, there are two forces at play here. One is internal and within our control, but it’s also important to take into account the impact of external forces such as sanctions.

First and foremost, sanctions have never achieved their intended purpose anywhere they were ever deployed. In fact, they often give rise to tyrannical governments that use the very sanctions as precedence for complete control of power. Statistically, sanctions fail to achieve their aims in 65 to 95 percent of the cases in which they are imposed and it is the poorest that suffer the most through their implementation, rather than the elites that the sanctions aim to target. Through the economic damage of the sanctions, a significant impact is felt by the public: GDP per capita decreases at an increased rate, exports and imports decrease, international capital decreases, and inflation increases.

Due to the already fragile economies of sanctioned countries, the sanctions run the risk of leading to an economic collapse, which in turn leads to greater impoverishment. As import and export-focused sectors are more affected by economic sanctions and these sectors tend to hire low-skilled workers, deprived groups in society are affected more by sanctions.

In 2001, Zimbabwe’s official development assistance reached a 20-year low of $160.2 million as external debt reached 2.485 per cent of the gross national income, a level not seen since the early 1980s.

For Zimbabwe, lost revenues reportedly exceeded $42 billion from 2001 to 2019.

Zimbabwe historically relied on foreign trade to sustain its economy. It last registered a trade surplus in 2000, at $155 million, representing approximately 74% of its gross domestic product (GDP). Overall production increased 1.44% in 2001 after a shortfall in previous years. However, sanctions targeted various entities in key productive sectors of the economy, including mining, manufacturing, tourism and agriculture, which made it challenging for Zimbabwe to rely on its trade and industry to promote growth.

During the first decade under sanctions, the country’s trade balance spiralled to -23.8%, in 2010, and has stayed negative since then.

It doesn’t end there. Sanctions also facilitated deindustrialization, as key agriculture, mining and manufacturing companies were barred from selling their products in the United States and European Union markets. The economic contraction went from -3.1% in 2000 to -17.7 per cent in 2008. Thousands of workers were forced out of employment in the formal economy, and multiple local companies closed down. This nurtured the expansion of the informal sector as a method of resilience, estimated at 94.5% in 2014 and 75.6% in 2019.

Foreign direct investments were affected as investors avoided risks, given the negative perceptions about the economy and the country’s governance. This led to increased unemployment, estimated at 94 per cent in the formal sector by the end of 2008, and to a significant loss of qualified professionals. From 2000 to 2008, the gross national income per person fell by 35 per cent.

The list of the effects of sanctions goes on and on, from humanitarian impacts, the access to food, water and sanitation, access to healthcare, education and basic fundamental human rights. The irony is that the west says it’s fighting the abuse of human rights, but ends up inflicting worse damage on sanctioned economies.

Most economists consider this damage irreparable in the short term. Consequently, going into the 2023 election, even if the opposition party wins (let’s assume sanctions are lifted), they will have to contend with the effects of the sanctions for at least half a decade. Let’s delve into the internal forces.

Zimbabwe’s GDP growth in 2021 according to World Bank was 5.85%, making Zimbabwe the 10th fastest-growing economy in Africa in 2021. Zimbabwe’s economic growth accelerated to an anticipated 5.9% in 2021 from a 6.2% fall in 2020 due to a bountiful harvest that expanded agriculture by 36.2% in 2021 as opposed to 4.2% growth in 2020. The per capita GDP also increased, jumping by 4.9% in 2021 after declining by 6.7% in 2020. However, in 2022, economic growth was held down by unstable prices and deteriorating agricultural circumstances. The real GDP growth rate is anticipated to decrease from 5.8% in 2021 to 3.4% in 2022.

Zimbabwe's economic growth is expected to end the year at 4% in 2022, down from 4.6% previously targeted, finance minister Mthuli Ncube said in a speech on Thursday. Growth is then projected to slow to 3.8% in 2023 before increasing to 4.8% in 2024 and 5% in 2025, he said. The overall fiscal deficit is seen at 1.5% of GDP for next year. "This growth will be sustained by mining, construction and agriculture, as well as accommodation sectors," Ncube said. 

The mining sector is expected to grow by 10.4% in 2023 on the back of anticipated favourable international mineral prices, as well as the increase in investment, especially in exploration, mine development and mechanisation, he added. A barrage of measures introduced by government mid-year, which include the introduction of gold coins, the temporary suspension of bank lending, higher taxes on capital markets, a 200% policy rate, and the temporary suspension of payments to contractors, have seen the economy stabilising and recording growth, riding on investments in the mining, agriculture and manufacturing sectors.

Month-on-month inflations for September significantly declined to 3.5% from 12.4% in August 2022. Meanwhile, foreign currency earnings amounted to US$7.7 billion for the 8 months up to August 31, 2022. This reflects a 32.4% increase from the US$5.8 billion recorded over the corresponding period in 2021. With increased activity in both the mining and manufacturing sectors where industrial capacity utilisation is now at 66% up from 47% in 2020, the country is now facing increased power demand, with solutions already in place to meet the growing demand.  

A new mineral royalty policy announced earlier this year is being utilised, as the country considers more than doubling spending in 2023 to help revive the economy. The royalty policy that came into effect in October, compelled miners to pay royalties as follows. Half in mineral form, 40% in local currency and 10% in foreign-currency cash.

The government has made some significant strides in taking back the reins of the economy and looks set for another stable economy next year, ceteris paribus. However, to ensure this long-fought stability, government has to focus on three key metrics.

Investor confidence

After probably the longest foreign investor drought, the new dispensation has worked overtime to win back the confidence of both external and domestic capital, since coming to power in 2017. Billions of dollars, primarily from big-ticket investments in mining, power generation and an assortment of infrastructure projects have been flowing into the country. One of these is the greenfield US$1 billion Chinese-led steel venture in Mvuma, the US$1.3 billion thermal power project in Hwange, and huge road and airport re-development programmes around the country as well as Invictus’s gas exploration in the north of the country.

The Second Republic has not unlocked even 1% of the potential FDI Zim could receive and that is because the “Zimbabwe is open for business” mantra doesn’t leverage tax incentives to nurture and underpin investor love and confidence.

Government should look to reducing general corporate income tax, implementing tax holidays and tax-privileged zones. Governments may also choose to offset the investment cost of the FDI by providing subsidies, or paying for some of the expenses of the project. Opponents of this practice claim it takes money from taxpayers and gives it to foreign entities. This is true in the short term, but the investment is also intended to boost the economy (local and national). Land can also be used as a subsidy, either through reduced prices or by giving it away for free. However, if large tracts of land are going to be subsidized, then why not set up a special economic zone?

Ensuring stable exchange rates

Of equal concern should be maintaining stable exchange rates to anchor the government’s short-term economic stabilisation, lay a strong foundation for medium to long-term growth, and ultimately foster the public’s confidence in the local unit. The local unit on the exchange parallel market has seen some slight depreciation, while the interbank rate has been somewhat steady over the past month or so.

Ensuring a stable exchange rate will be anchored on the government’s ability to keep liquidity out of the parallel market. The gold coins have played a vital part in moving that liquidity back to the RBZ. The 40% tax on short-term investments on the ZSE also got rid of arbitrage that was being exploited with returns being dumped back into the parallel market. However, ultimately, the suspension of payments to contractors had probably the most significant impact on the exchange rate, so it will be interesting how the resumption of these payments affects the market, particularly because the issue of forex shortages has not been addressed. 

Keep inflation in check

The other measure, still being rolled out, is the introduction of gold coins. These have sucked out billions of dollars from the market which could have otherwise ended up on the black currency market, thereby driving up inflation. And as long as the RBZ is able to settle all gold contracts without a hassle, that should see market players taking a keener interest in the new saving instrument. Gold coins valued at ZW$ 9.5 billion were sold as of September 30, 2022. Smaller denominations of the gold coins have been unveiled by the Reserve Bank of Zimbabwe to broaden access and inclusivity and half of the released coins were bought within the first week.