ECONOMIC growth depends on investment, which has averaged around 11% of gross domestic product (GDP) in recent years — consistent with growth of 2,2%. To achieve 6% growth, Zimbabwe needs to invest at least 25% of GDP.
This would require significant increases in domestic savings and foreign direct investment, alongside a reduction in consumption spending, which currently stands at 90% of GDP and would need to fall to 80%.
Unfortunately, loose fiscal and monetary policies — specifically triple-digit inflation and deeply-negative real interest rates — have discouraged savings or diverted them towards financing civil servant wages and agricultural subsidies. Until this mindset changes, low investment levels will continue to perpetuate economic underperformance.
In 2009, local currency debt was written off following dollarisation. Today, however, this is not an option. The situation is different now because 95% of the total debt is denominated in foreign currency and cannot be written off. Over the past year, largely due to currency devaluation, public debt in local currency has increased 13-fold to ZiG 156 trillion (US$21 billion), equivalent to 130% of GDP.
Servicing this debt will absorb approximately 40% of total government revenue in 2024. Since this is unaffordable, the government will have to choose between allowing arrears to accumulate further or negotiating a debt-restructuring agreement with creditors. This problem is becoming increasingly urgent.
An unsustainable fiscal deficit, financed domestically, is inflationary and has led to the creation of large Real-Time Gross Settlement balances that are not backed by liquid cash or US dollars. That said, there is no quick fix to the structure of government expenditures or the accompanying deficit. International donors and concessional lenders will take time to provide support.
A budget statement without a credible path to debt resolution is akin to a “two-legged pot” — unstable and ineffective. A debt position of US$21 billion will continue to exert pressure on the budget, limiting its effectiveness. The concerning reality is that the pace of debt accumulation remains alarmingly high. The government must focus on broadening the tax base rather than deepening it. It is critical to improve the business environment to promote a thriving industrial sector that can contribute to tax revenues.
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With an external debt of US$13 billion — 100% above the budget size — and a local currency-denominated budget vulnerable to exchange rate losses, debt resolution remains a distant prospect. The multicurrency regime is likely to persist in the short to medium term. There is a need to temper the push for a monocurrency during this period.
The government must decide whether it wants an open, Western-style capitalist economy or a partially closed, authoritarian state-driven model akin to those of China or Russia. Re-engagement with the global community would push Zimbabwe towards the more open Western model.
However, if re-engagement is not on the table, there will be a temptation to adopt a command economy approach — a path that aligns more closely with the political leanings of the current government.
My sense — and I am in no position to make political judgments, as this falls far outside my area of expertise — is that there is little appetite within the government for a market-driven economy. This suggests that Zimbabwe will likely stick to its current policies on the basis that “if it isn’t broken, why fix it?”
- Mugaga is chief executive officer of the Zimbabwe National Chamber of Commerce.
