External Headwinds Compound Zim Economic Prospects

Headwinds of a global scale expected to slow down investment growth in the next three years have cast a gloomy outlook on Emerging Markets and Developing Economies (EMDEs), Zimbabwe included, as mounting debt levels continue to weigh down economic sustainability, the latest World Bank Group’s June Global Economic Prospects Report revealed.

The forecast further plunges Zimbabwe’s economic prospects deep into a cloud of uncertainty amid concerted efforts by the government to lure investors to stimulate its economy.

“Investment growth in EMDEs over the next three years is expected to be subdued and below historical averages. This continues a prolonged, broad-based slowdown after the global financial crisis, notwithstanding a modest recovery between 2016 and 2018. During the forecast period, EMDE investment growth is expected to be held back by weak global growth, limited fiscal space against the backdrop of elevated debt,” reads the report.

Zimbabwe has in the past five years averaged around US$ 500 million in foreign direct investment, a far cry relative to average regional investment figures of over US$ 2.5 billion annually.

However, foreign investment is integral to the  government’s Vision 2030 agenda that seeks to make Zimbabwe an upper-middle income economy, but the anticipated slowdown in global investments in the short to medium term poses a major threat amid weaker investor sentiment over destabilizing exchange rate movements and unsustainable debts.

“Financial market turbulence in 2018 illustrated, once again, that EMDEs continue to face the risk of destabilizing exchange rate movements. These stress episodes often compel central banks to tighten policy to lessen currency pressures and fend off inflationary pressures despite slowing growth,”

“Government debt has risen substantially in EMDEs, by an average of 15 percentage points of GDP since 2007 to 51 percent of GDP in 2018,” warned the report.

Zimbabwe is undergoing unsustainable exchange rates distortions that have destabilized its financial system, high inflation and minimum inward capital flows among other challenges.

The World Bank also notes the importance of credible Central Banks, independent of fiscal influence as prerequisites to strengthening and stabilizing financial systems in emerging economies.

“The pass-through to inflation tends to be largest when currency movements are triggered or amplified by monetary policy action. In contrast, the pass-through is significantly smaller when Central Banks pursue a credible inflation target, operate in a flexible exchange rate regime, and are independent from fiscal authorities. This highlights the critical importance of Central Bank credibility, given the self- reinforcing feedback loop between credibility, the exchange rate and price stability,” read the report.

This comes amid concerns from analysts over Reserve Bank of Zimbabwe (RBZ)’s independence that has spelt low market confidence, weakening its capacity to effectively manage monetary policy.

Zimbabwe’s economy is expected to grow 3.7 percent by year end, a downgrade from the 4.2 earlier projected.