Event

Zimbabwe is facing its worst economic crisis since the troubled 2008-09 period, when money printing sparked hyperinflation. Ever since the 2017 military coup that overthrew Robert Mugabe, the former dictator who died last month, the economic crisis has worsened. Indeed, under the succeeding president, Emmerson Mnangagwa, the country has been suffering from severe electricity cuts, fuel shortages and currency chaos. Moreover, the crisis is increasingly becoming humanitarian, with more than half of Zimbabwe’s population (that is, 8.5 million people) being confronted with food insecurity in 2019/2020 according to the UN.

Impact

Cyclone Idai, which hit southern Africa in March this year, and regional droughts contributed to poor harvests and inadequate water supply, which in turn impacted hydropower facilities. Still, the mess results mainly from bad governance, corruption and weak policy making under the ruling ZANU-PF party (in power since 1980). The Zimbabwean dollar – abolished following the 2008-09 hyperinflation – was reintroduced in February this year. However, the corrupt exploitation of public institutions and funds, both used for private interests (such as the central bank printing money for dubious business transactions), undermined the confidence in the local currency just a few months after its introduction. Indeed, the Zimbabwean dollar has already lost more than 60% of its value against the USD, fostering the inflation, which reached about 300% in August 2019 (year-over-year). This year’s GDP growth is expected to be pushed into deep negative numbers (-5.2%) due to the correction of past fiscal excesses and climate shocks impacting agricultural production and electricity generation, crippling what is left of Zimbabwe’s industries.

The controversial election of Mnangagwa in July 2018 resulted in violent oppression by security forces and in civil protests. Among worsening economic conditions and enduring violent abuse by security forces, popular anger and calls for further protests have only been growing. Under these circumstances, international investors and western governments are reluctant to re-engage with the post-Mugabe regime. Although the government is cooperating with IMF monitoring missions, the IMF cannot lend funds to Zimbabwe until the country clears the arrears it owes to other multilateral institutions, such as the World Bank. Outstanding external arrears owed to official creditors further prevent access to traditional external financing. Tobacco and private transfers have become the main foreign exchange earners (14.5% and 25.6% of current account revenues). Consequently, it remains to be seen how the country will finance its balance of payments and deal with acute liquidity shortages (foreign exchange reserves reached merely one week of import cover in August 2019). As civil servants and soldiers are getting paid in the dwindling local currency, President Mnangagwa could lose control over the army, which would raise the risk of a military coup. Consequently, Credendo keeps Zimbabwe in the highest risk category (7) for both short-term and medium- to long-term political risk.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com