The World Bank’s new Zimbabwe Public Finance Review (PFR) comes at a critical time, seeking to support the government’s task of fiscal consolidation by identifying policy options to help expenditure rationalization and increase revenue mobilization. This can help to create fiscal space and move Zimbabwe onto a more sustainable fiscal pathway. In turn, prudent fiscal policy will help to stabilize the macroeconomic environment by providing an anchor for price and exchange rate stability, bolstering economic growth and job creation.
The Government of Zimbabwe (GoZ) recently embarked upon an important set of reforms aimed at moving beyond Zimbabwe’s history of macroeconomic instability. To support the Reserve Bank of Zimbabwe (RBZ) in its objectives and prevent it from having to resort to monetizing its debt servicing, the Treasury has assumed responsibility for the external debts, allowing the RBZ to dedicate its efforts towards stabilizing monetary and exchange rate policy. The introduction of the Zimbabwe Gold (ZiG) currency initially resulted in lower inflation and improved exchange rate stability between April and August 2024.
Despite progress, many of its macroeconomic risks are 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. At the same time, Zimbabwe was faced with its worst drought in 40 years, increasing fiscal pressures for drought-response and undermining tax collection. As shown in the Zimbabwe Economic Update 2024, the 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.
This PFR identifies significant potential for creating fiscal space that can help bridge Zimbabwe’s fiscal gap and reduce debt:
- Policies that stabilize 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 $4.5 billion, or 2.5% of GDP, due to its monetary and exchange rate policy distortions. The biggest loss comes from inflation-related tax losses ($ 1.4 billion), informalization ($1.2 billion) and customs duty foregone ($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.
- Tax revenue can be increased in a way that improves both efficiency and pro-poor outcomes. To increase tax revenue, Zimbabwe’s 2024 Budget announced various reforms to broaden the tax base, including removing some VAT exemptions. While these reforms can lead to revenue gain, they may also hurt poor households. Compensatory mechanisms can restore the impact of VAT reforms on poor households, potentially at a fraction of the new VAT collections. Other potential reforms to raise revenue include streamlining corporate tax incentives and strengthening mining tax policy. In addition, the report discusses options to better align public-health excise taxes on alcohol, tobacco, and sugar-sweetened beverages with World Health Organization standards, and reorganize the newly proposed wealth tax. Considerable benefits may be had from the newly introduced Tax and Revenue Administration System (TaRMS). Estimates suggests such policies could structurally raise tax collection between 3.1-3.8% of GDP.
- Public spending can be streamlined, and result in greater value-for-money. To ensure a more manageable wage bill, the GoZ’s jobs evaluation report suggests there are opportunities to streamline the civil service. There are also opportunities to enhance the efficiency of public spending, of procurement and public investments through improved evaluation systems and the use of e-procurement. Finally, there is a need to improve targeting of social protection through a “social registry”. Jointly, this could lead to a potential savings of 1.1–1.2% of GDP, out of which around 0.15% could be allocated to compensate low-income households.
These policy reforms would lead to a significant adjustment in the fiscal balance, and result in a fiscal surplus. This could enable Zimbabwe’s debt service-to-revenue ratio to peak in 2025 and thereafter to rapidly decline, and could result in a reduction in debt. Yet, fiscal reforms alone are unlikely to bring Zimbabwe back to sustainable debt levels, further highlighting the importance of Zimbabwe’s Structured Dialogue Platform for arrears clearance and debt resolution.
In sum, fiscal policy can be a critical anchor for Zimbabwe’s macroeconomic stability going forward. 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. This would lead to higher growth, major poverty reduction, and a major step toward achieving Zimbabwe’s development objectives.