The situation stabilized somewhat after the government abandoned the Zimbabwean dollar in favor of a multi-currency system in 2009 and entered a power-sharing deal with the opposition party. A short-lived economic revival followed, helped by international assistance from European countries and multilateral institutions, and high prices for Zimbabwe’s commodity exports.
After Mugabe claimed victory in a disputed election in 2013, however, corruption increased, while the strengthening U.S. dollar – Zimbabwe’s de facto currency – decimated the country’s remaining industrial base by making Zimbabwean manufactured goods too expensive and uncompetitive.
Mugabe’s overthrow, by senior figures in the ruling party and military, was partly driven by his failure to turn the economy around. The new president knows he will need to meaningfully improve the business environment and living standards to secure his legitimacy.
Mnangagwa’s first actions in office underscore how important he views economic recovery. Even before announcing his new cabinet, Mnangagwa installed a key reformist, Patrick Chinamasa, as acting finance minister, tasked with tackling corruption and re-engaging with international institutions to unlock funds to ease liquidity shortages.
The president also announced the indigenization ministry will be disbanded and the program scaled back. He has proposed reforms, such as tax breaks for mining firms and commercial farmers, aiming to assist export-oriented businesses and earn Zimbabwe much-need hard currency. Mnangagwa is also taking steps to shift the culture in government towards assisting, rather than inhibiting business.
Revitalizing Zimbabwe’s economy will not be an easy task. The most significant challenge to resolve is the lack of cash in the economy which makes it difficult for consumers to transact and for business to import goods. Without its own currency, Zimbabwe relies on USD for over 90% of transactions, but the collapse in exports means money is in short supply.
Moreover, having regularly defaulted on its debts, few international institutions are willing to lend to the government, forcing it to rely on poorly capitalized local banks. This has left little credit for the country’s private sector, exerting a dampening effect on business activity and growth.
Progress on resolving these issues will be slow and incremental. After assuming office, for example, Mnangagwa successfully negotiated with the African Export and Import Bank to provide support for importers, as well as US$ 300 million in new guarantees to allow the central bank to increase printing of “bond notes” – a substitute currency that locally has the same value as the U.S. dollar.
While these measures will provide some temporary relief, accelerating growth will require Mnangagwa to convince institutions like the African Development Bank and the World Bank (to whom Zimbabwe still owes US$ 1.7 billion in arears) that the government is now a reliable borrower. Only then will Zimbabwe be able to access the credit it needs to re-inflate the economy, and this could take several years.
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