Zimbabwe needs policy adjustments: World Bank

THERE is a real risk that the Zimbabwean economy could come undone if no changes are made to current policies, the World Bank says.

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In its April 2018 Macro Poverty Outlook report on Zimbabwe, the World Bank says the prevailing financial sector policies could lead to unfavourable economic conditions. It warned that the economy could come undone later in the year if there are no changes to the current policies.

“In the absence of strong policy adjustments later this year, macroeconomic conditions could unravel. The continuation of current financial sector policies after the election would have adverse consequences for the parallel market exchange rate and economic development more generally,” says the report.

It adds that economic policy changes announced by the new government are expected to boost long-term growth, but their immediate impact would be modest as liquidity shortages continue.

“Long-term capital inflows are expected to rise, alleviating financial constraints to growth, but only after a successful election,” the World Bank said.

President Emmerson Mnangagwa claims that the country has received investment commitments of more than $11 billion in the last four months. He, however, concedes that the country is not likely to realise much of it before the July or early August general election.

The report says in the absence of major fiscal consolidation, liquidity shortages are expected to keep constraining private sector development economy-wide. Only exporters will enjoy unconstrained liquidity access and are projected to continue to grow rapidly.

In 2017, without access to international capital markets and faced by a growing fiscal deficit, government continued borrowing from the banking system. Banking sector lending to government reached $6,3 billion at the end of 2017, up from $3,7 billion a year earlier.

Zimbabwe’s outlook risks are primarily political in nature and political developments in 2017 demonstrated the sensitivity of the interbank dollar-to-cash dollar parallel market to changes in economic confidence and expectations, the World Bank noted.

“While market participants responded positively to the events of late 2017, those events also illustrated how quickly market perceptions can change. Deteriorating confidence could quickly translate into rising inflation, as parallel market transactions finance more than half of imports, which in turn are equivalent to a quarter of GDP,” the report says.