THE World Bank has revealed that Zimbabwe’s Finance, Economic Development and Investment Promotion ministry and the Reserve Bank of Zimbabwe (RBZ) exchange rate policy distortions cost the market US$4,5 billion between 2020 and 2023.
During the period, both Treasury and the RBZ implemented policies that controlled the exchange rate, creating a premium that averaged over 50% between itself and the parallel market.
These distortions ultimately led to the demise of the Zimbabwe dollar, for the adoption of the Zimbabwe Gold (ZiG) currency in April 2024.
However, the same hawkish policies from the RBZ and Treasury that caused massive losses from the market are mostly still in place, with some new stringent measures added.
Consequently, an exchange rate premium of over 30% has emerged between the official and parallel foreign currency exchange rates.
“Policies that stabilise prices and remove exchange rate distortions will significantly and quickly strengthen government revenue. World Bank analysis suggests that between 2020 and 2023, Zimbabwe’s Treasury lost over US$4,5 billion, or 2,5% of GDP [gross domestic product], due to its monetary and exchange rate policy distortions,” the World Bank said in a statement attached to its new Zimbabwe Public Finance Review report.
“The biggest loss comes from inflation-related tax losses (US$1,4 billion), informalisation (US$1,2 billion) and customs duty foregone (US$580 million). In absence of such distortions, tax revenue in 2023 could have been as high as 18,9% of GDP, compared to 14,6% of GDP observed.”
The global bank said its new report comes at a critical time, as it was seeking to support the government’s task of fiscal consolidation by identifying policy options to help expenditure rationalisation and revenue mobilisation.
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“This can help to create fiscal space and move Zimbabwe onto a more sustainable fiscal pathway,” the World Bank said.
“In turn, prudent fiscal policy will help to stabilise the macroeconomic environment by providing an anchor for price and exchange rate stability, bolstering economic growth and job creation.”
The bank commended the government for recently embarking upon an important set of reforms aimed at moving beyond Zimbabwe’s history of macroeconomic instability.
“To support the Reserve Bank of Zimbabwe in its objectives and prevent it from having to resort to monetising its debt servicing, the Treasury has assumed responsibility for the external debts, allowing the RBZ to dedicate its efforts towards stabilising monetary and exchange rate policy,” World Bank said.
“The introduction of the Zimbabwe Gold (ZiG) currency initially resulted in lower inflation and improved exchange rate stability between April and August 2024.”
However, despite progress, the bank said many of the macroeconomic risks were re-emerging on the fiscal side.
“The transfer of the RBZ’s external debt, together with increased capital spending in 2023, resulted in steep increases in the Treasury’s debt servicing costs,” the bank said.
“At the same time, Zimbabwe was faced with its worst drought in 40 years, increasing fiscal pressures for drought-response and undermining tax collection.”
The World Bank revealed that Treasury’s use of the reserve bank’s overdraft facility resulted in renewed pressure on the exchange rate and inflation in September and October 2024.
The bank advised the government to streamline corporate tax incentives and strengthen the mining tax policy, cut jobs to lessen the wage bill and enhance procurement oversight to increase revenue collections.
Such actions could lead to higher revenue collections which could go towards stabilising the ZiG as it would increase foreign currency reserves.
“The government of Zimbabwe is at a crucial juncture. By adopting a bold set of fiscal reforms, it can turn the page on a prolonged history of macroeconomic instability and set the foundations for a credible national budget that is efficient, able to manage unforeseen fiscal risks, and can ensure a stable and competitive currency,” World Bank said.
“This would lead to higher growth, major poverty reduction, and a major step toward achieving Zimbabwe’s development objectives.”
