3 February 2016

Zimbabwe: Economic Headwinds in 2016 Could Challenge Zimbabwe's Achievements Since Stabilization

press release

Harare — Today, the World Bank launched the first edition of its Zimbabwe Economic Update (ZEU) focusing on Changing Growth Patterns; Improving Health Outcomes. The ZEU aims to provide a new perspective on the macroeconomic issues facing the nation, and focuses on key developments in a particular sector. This edition examines progress in the health sector and innovations to spend limited public resources more efficiently while achieving greater equity in service delivery.

The ZEU 2015 recognizes that Zimbabwe's economy made a strong recovery during 2009-14 following "dollarization" and stabilization measures. The fundamentals for this recovery are still strong, but the headwinds are increasing. Traditional sectors - agriculture, mining and industry are facing key challenges and in the process of structural transformation, the services sector has continued to growth strongly, building on Zimbabwe's key competitive advantage - its educated population.

"The World Bank's twin goals of eliminating extreme poverty and increasing shared prosperity are very relevant for Zimbabwe today," notes Guang Chen, World Bank Country Director for Zimbabwe. "The authorities' push toward reengagement will allow the Bank to do more to help Zimbabwe face the coming headwinds, and ensure that the growth and recovery is pro-poor."

Coming on the heels of a severe drought in 2015, the outlook for 2016 remains difficult and growth is projected to remain around 1.5 percent. Growth has slowed sharply since 2012 as the impact of "dollarization" ran its course, and the economy's vulnerability to climate and terms of trade shocks resurfaced. The global economy is slowing, commodity prices remain depressed, terms of trade with Zimbabwe's main trading partner are deteriorating, and the impact of the El Nino on agriculture, water and power sectors is already being felt.

To raise growth from its current medium term trend of 2-3 percent, Zimbabwe will need to correct key macroeconomic balances. Recent growth has been largely driven by consumption, and both public and private investment have fallen since 2011. Capital flows, including external borrowing and asset sales, are sustaining consumption growth by financing an unsustainably high current account deficit. Without exchange rate policy, tackling today's current account deficit and low investment ratios will require real improvements in productivity and adjustments in public spending, both of which take time but also have a more durable impact on competitiveness.

These headwinds and the brunt of the economic corrections, both domestic and global, will likely be most deeply felt by poor households. In Zimbabwe, without substantial improvements in the allocation and efficiency of public spending, the recovery could well be regressive - increasing inequality rather than further dampening it.

The ZEU showcases how the introduction of results-based financing for rural clinics has helped to significantly improve maternal and child health care outcomes in Zimbabwe. This innovation, which channels resources to clinics based on quality and quantity measure of care, has not only helped to lower the reliance on user fees that caused many poor households to forego medication attention, but also improved the share of women who achieve the recommended four pre-natal visits as well as other key services during pregnancy. So far the program has 4.5 million beneficiaries in rural and low income urban areas.

"Results based financing in the health sector shows that, even with limited resources, there are ways to raise the efficiency of spending and at the same time improve service delivery. Extending these types of innovations across government can help Zimbabwe to weather the difficult climate ahead," says World Bank Zimbabwe's Senior Economist Johannes Herderschee.


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