The World Bank has released a new Zimbabwe Public Finance Review (PFR) aimed at supporting the government's efforts toward fiscal consolidation. The review seeks to identify policy options that can aid in expenditure rationalization and increase revenue mobilization, creating fiscal space and moving Zimbabwe onto a more sustainable fiscal path.
Recent reforms by the Government of Zimbabwe (GoZ) have focused on addressing the country's history of macroeconomic instability. In an effort to support the Reserve Bank of Zimbabwe (RBZ), the Treasury has taken responsibility for external debts, allowing the RBZ to focus on stabilizing monetary and exchange rate policy. The introduction of the Zimbabwe Gold (ZiG) currency initially resulted in lower inflation and improved exchange rate stability from April to August 2024.
However, despite these advancements, macroeconomic risks are re-emerging. The transfer of RBZ's external debt and increased capital spending in 2023 have led to steep rises in the Treasury's debt servicing costs. Additionally, Zimbabwe faced its worst drought in four decades, increasing fiscal pressures and affecting tax collection. As reported in the Zimbabwe Economic Update 2024, reliance on the reserve bank’s overdraft facility has renewed pressure on exchange rates and inflation.
The PFR highlights significant potential for creating fiscal space to bridge Zimbabwe’s fiscal gap and reduce debt:
Policies that stabilize prices and remove exchange rate distortions are expected to strengthen government revenue significantly. According to World Bank analysis, between 2020 and 2023, monetary and exchange rate policy distortions cost Zimbabwe’s treasury over $4.5 billion or 2.5% of GDP. Inflation-related tax losses accounted for $1.4 billion, informalization for $1.2 billion, and customs duty foregone for $580 million.
To improve efficiency and pro-poor outcomes while increasing tax revenue, various reforms were announced in Zimbabwe’s 2024 Budget. These include broadening the tax base by removing some VAT exemptions. Although these reforms could lead to revenue gains, they may adversely affect poor households unless compensatory mechanisms are implemented. Other potential revenue-raising reforms include streamlining corporate tax incentives and strengthening mining tax policy.
Public spending can be optimized for greater value-for-money by streamlining civil service through job evaluations as suggested by GoZ's report. Opportunities exist to enhance public spending efficiency through improved evaluation systems and e-procurement use.
These reforms could lead to a significant adjustment in the fiscal balance resulting in a surplus which would enable Zimbabwe’s debt service-to-revenue ratio to peak in 2025 before rapidly declining thereafter.
In conclusion, adopting bold fiscal reforms can help stabilize Zimbabwe's macroeconomic environment by anchoring price stability and fostering economic growth while reducing poverty levels.