Zimbabwe

Executive Summary

Investor optimism following the 2017 fall of President Robert Mugabe has dissipated as the Mnangagwa government has been slow to follow through on its promise of reforms to improve the business environment.  The economy suffered hyperinflation and contracted sharply in 2019, worsened by climate shocks that crippled agriculture and electricity generation.  Unsustainable monetary policy has led to a protracted currency crisis, which continues to strain the economy.  The Zimbabwe dollar, introduced in February 2019, has already lost approximately 98 percent of its value on the black market.  Failure to implement monetary reforms to complement finance ministry efforts to rein in the budget deficit undermined public confidence in the financial sector.  The government adopted a stabilization and reform agenda supported by an IMF Staff-Monitored Program (SMP), but by February 2020 the IMF reported the SMP had gone off-track due to government failures to fully implement reforms.  Zimbabwe remains in arrears to the World Bank and other multilateral and bilateral creditors, restricting many forms of multilateral assistance.  Although the government has repeatedly affirmed its commitment to improve transparency, streamline business regulations, and address corruption, the last two years have brought limited progress.

Zimbabwe has attracted less than USD 600 million a year on average in foreign direct investment over the past decade.  Zimbabwe’s incentives to attract FDI include tax breaks for new investment by foreign and domestic companies and making capital expenditures on new factories, machinery, and improvements fully tax deductible.  The government waives import taxes and surtaxes on capital equipment.  The government has made slow progress at improving the business environment by reducing regulatory costs but policy inconsistency, weak institutions, and lack of fiscal discipline have continued to frustrate businesses.  Corruption remains rife and there is little protection of property rights, particularly with respect to agricultural land. Historically, the government has committed to protect property rights but has, at times, resorted to expropriating land without compensation.

In 2016, Zimbabwe introduced a surrogate currency (commonly called the “bond note” or Zimbabwe dollar), officially pegged to the U.S. dollar, used only for domestic transactions.  Money printing caused the local currency to lose value, and in February 2019, the Reserve Bank of Zimbabwe (RBZ) de-linked the local currency from the U.S. dollar and has not yet implemented a market-clearing exchange rate regime.  As a result, it remains difficult to access dollars at the official exchange rate.  This has given rise to an unstable black market for U.S. dollars with the price of dollars sometimes double the official exchange rate.  The government banned the use of foreign currencies for domestic transactions in June 2019, further complicating the business environment, but introduced some exceptions for investors and further relaxed rules in March 2020 amidst the COVID-19 pandemic.  Year-on-year inflation jumped from 10.6 percent in 2018 to 676 percent by March 2020, reflecting monetary expansion, currency depreciation, and the removal of subsidies on fuel and electricity.

Zimbabwe’s arrears in payments to international financial institutions and its high external debt (public and private) of over USD 10.7 billion limit the country’s ability to access official development assistance at concessional rates.  Additionally, domestic banks do not offer financing for periods longer than two years, with most financing limited to 180 days or less.  The sectors that attract the most investor interest include agriculture (tobacco, in particular), mining, energy, and tourism.  Zimbabwe has a well-earned reputation for the high education levels of its workers.