Zimbabwe Faces USD 5 Billion Setback Due to Economic Policy Turmoil, Says World Bank

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The World Bank (WB) has announced that Zimbabwe incurred a loss of over USD 4.5 billion, equivalent to 2.5% of its gross domestic product (GDP), from 2020 to 2023, due to issues with its monetary and exchange rate policies. The report, released on Wednesday, indicates that the largest losses came from tax revenue losses linked to inflation (USD 1.4 billion), informal economic activities (USD 1.2 billion), and missed customs duties (USD 580 million).

The bank noted that without these distortions, tax revenue in 2023 could have reached 18.9% of GDP, compared to the actual 14.6% recorded. The new Zimbabwe Public Finance Review (PFR) report suggests that tax revenue could be increased in a manner that enhances efficiency and benefits poorer households. Zimbabwe’s 2024 Budget includes various reforms aimed at broadening the tax base, such as removing certain VAT exemptions.

While these changes could boost revenue, they may negatively impact low-income families. The WB recommends implementing compensatory mechanisms to mitigate the effects of VAT reforms on these households, potentially using a small portion of the additional VAT revenue. Other revenue-raising strategies include refining corporate tax incentives and improving mining tax policies.

The report also examines ways to align public health excise taxes on alcohol, tobacco, and sugary drinks with World Health Organization standards and proposes reorganising the new wealth tax. The introduction of the Tax and Revenue Administration System could significantly enhance tax collection, potentially increasing it by 3.1% to 3.8% of GDP.

Additionally, the WB highlights opportunities to improve public spending efficiency, procurement practices, and public investments through better evaluation systems and e-procurement. Enhancing the targeting of social protection programs using a ‘social registry’ could yield potential savings of 1.1% to 1.2% of GDP, with around 0.15% dedicated to supporting low-income households.

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The WB asserts that these policy reforms could lead to a substantial improvement in the fiscal balance, resulting in a fiscal surplus. This may help Zimbabwe’s debt service-to-revenue ratio peak in 2025 before declining rapidly, thereby potentially reducing overall debt. The PFR aims to assist the government in achieving fiscal consolidation by identifying strategies to rationalise expenditures and increase revenue mobilisation, ultimately creating fiscal space and guiding Zimbabwe toward a more sustainable fiscal future. A sound fiscal policy will contribute to stabilising the macroeconomic environment, supporting price and exchange rate stability, and fostering economic growth and job creation.