The reintroduction of the Zimbabwean dollar comes as the government reached a deal with the IMF to cease borrowing from the central bank in order to service its external debts. However, challenges in accessing foreign currency, as well as severe drought and cyclone damage affecting agricultural production, are forecast to bring down GDP growth in 2019 to 1.8%.
Protests are expected in the coming 12 months, given the increasingly poor economic environment.
Zimbabwe has been severely affected by Cyclone Idai — one of the worst tropical cyclones on record to affect Africa and the Southern Hemisphere — and widespread drought, which has left more than two million people in the major cities of Harare and Bulawayo without regular access to clean drinking water.
Protests over a 150% fuel price increase led to road blockades, looting, and a violent crackdown by the police in January 2019, resulting in the deaths of six civilians.
There is a heightened risk that the rise in living costs (consumer price inflation stood at 75.9% year-on-year in April 2019), together with shortages of food, fuel, and medicine, will result in large-scale protests in Harare in the near term.
Any protests are expected likely to be met with a hard-line response by security forces, presenting significant collateral damage risks to both foreign individuals and businesses.
Zimbabwe’s growth outlook has been weakened by the collective impact of drought and Cyclone Idai on the agricultural sector.
With agriculture providing employment and income for between 60% and 70% of the population, drought is certain to negatively affect private consumption in the coming year.
The necessary reconstruction efforts will also lead to a rise in government consumption to US$ 5.2 billion in 2019, and US$5.4 billion in 2020, up from US$5 billion in 2018.
The expected increase in government spending over the coming quarters will widen Zimbabwe’s current account deficit from 3% of GDP in 2018, to 4% in 2020. In addition, economic headwinds to key export sectors will weaken Zimbabwe’s external account position.
Power outages will affect mining sector output, with production of gold set to slow down from 20.9% growth year-on-year in 2018, to 2.9% growth and 1,070,000 ounces in 2019.
Currency weakness will persist in spite of the reintroduction of the Zimbabwean dollar, which will combine the electronic real time gross settlements (RTGS) dollar and bond notes, as the country’s legal tender.
Annual inflation rose by 176% in June 2019, the highest level seen since the country abandoned its currency a decade ago.
The government has also taken the decision to ban local trading in foreign currencies, including the US dollar, with immediate effect.
This will present evident currency inconvertibility and transfer risks for both domestic and foreign businesses. However, exemptions are to be made in strategic sectors.
Mining companies in Zimbabwe will use foreign currency to pay for power utility bills, and will be allowed to make their own arrangements for imports from foreign suppliers.
The operational environment in Zimbabwe will remain very challenging for businesses in the near term. Drought has reduced water levels at the Kariba Dam hydropower plant; as a result, the state-owned energy company has introduced national power cuts, lasting up to eight hours per day.
This will significantly disrupt the operations of foreign businesses in the mining and infrastructure sectors, particularly as they will struggle to source alternative supplies from neighboring South Africa over the next six months.
As of April 2018 expropriation risks have declined given the new government’s intention to amend the Indigenisation and Empowerment Act by removing the minimum 51% local ownership requirement for all businesses, except for extractive firms mining diamonds and platinum.
The government, facing a shortage of foreign exchange reserves, is under significant pressure to meet the preconditions for an IMF credit facility.
This government is, therefore, increasingly unlikely to threaten or enforce expropriation of foreign-owned investments in the mining, agricultural, and manufacturing sectors.
5 Key Takeaways
- The Zimbabwean dollar was reintroduced in July 2019 with trade in foreign currency also restricted.
- Widescale drought and cyclone damage are forecast to drag down GDP growth in 2019 to 1.8%.
- Reconstruction efforts will also lead to a rise in government consumption of US$ 5.2 billion in 2019 and US$5.4 billion in 2020.
- Spending increase will widen Zimbabwe’s current account deficit from 3% of GDP in 2018 to 4% in 2020.
- Consumer price inflation stood at 75.9% year-on-year in April 2019.
The monthly Risk Outlook is supported by our proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.