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Macro poverty outlook for select sub-Saharan African countries

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Macro poverty outlook for select sub-Saharan African countries

Macro poverty outlook for select sub-Saharan African countries
Photo credit: World Bank

The Macro Poverty Outlook is jointly produced by the Poverty & Equity and Macroeconomics & Fiscal Management Global Practices of the World Bank. This semi-annual report, which analyses macro and poverty developments in developing countries, is released for the Spring and Annual Meetings of the World Bank and IMF.

Botswana

Weakening global demand for diamonds in 2015 led growth in Botswana to stall, pressured the fiscal position to deficit and narrowed the current account surplus. GDP should rebound in 2017 as commodity prices improve and counter-cyclical stimulus is undertaken. Medium-term structural reforms are critical to manage volatility and sustainability risks, notably reforms in the water and energy sectors; while labor market distortions require addressing to spur private sector job creation. Recovery to low per-capita growth in the medium-term suggests that gains in poverty reduction are likely to be modest.

Recent developments

Weakening global demand for rough diamonds, combined with falling prices of metals have led to a deterioration in the near term growth outlook. Real growth is estimated to have contracted slightly in 2015 by 0.3 percent, down from a gain of 3.2 percent in 2014 on the back of poor outcomes in the diamond sector. The slowdown in China and falling global prices for commodities caused the mining sector to contract sharply in 2015 Q3 and Q4; mining GDP contracted by 21 percent for the year. Continuing electricity and water supply disruptions have impacted manufacturing, whereas the negative effects of a regional drought adversely effected agriculture. In contrast, service and retail sectors led the non-mining sectors to overall growth of above 3 percent.

The fiscal position moved into deficit in 2015/16 after three years of consecutive surpluses. The fiscal balance swung from a surplus of 3.8 percent of GDP in 2014/15 (the fiscal year starts April 1) to an estimated deficit of 2.9 percent of GDP in 2015/16, as revenues fell and spending increased. On the revenue side, Government relies mainly on two volatile sources of inflows, mineral revenues (which accounts for almost 40 percent of total revenue) and SACU customs revenues (27 percent of total revenue). Both have declined, the former from weak global demand and the latter from the decline in South Africa’s economic growth. On the expenditure side, in 2015 Government started an ambitious Economic Stimulus Program. This Program emphasizes development spending on building construction, roads, tourism development, agriculture and manufacturing. The Government has substantial fiscal savings from diamond revenues (i.e., the Pula fund), and international reserves stand at about 11 months of imports, which provides Botswana ample space to gradually adjust expenditures to the SACU shock in the long run, and to provide counter-cyclical stimulus in the near term.

Weak performance across the mining sector will narrow the current account surplus. In 2014, Botswana achieved a current account surplus of 15.7 percent of GDP. External factors mentioned above adversely affected exports in 2015, and the current account surplus narrowed to 9.3 percent of GDP. Foreign reserves remain strong at USD 7.5 billion at end- 2015, or 65 percent of GDP.

Economic growth has been pro-poor, leading to very significant and rapid poverty reduction. Between 2002/03 and 2009/10, the share of the population living on less than $1.90 a day at 2011 international prices declined steadily from 29.8 percent to 18.2 percent (figure 2) thanks to a combination of equitable growth, demographic changes (e.g. decreasing fertility rates and dependency ratios), increased credit, and expansion of social assistance schemes (especially direct transfers to rural households), and employment expansion (especially of agricultural employment in rural areas by 5.6 percent). Progress in rural poverty reduction has been especially rapid, as it was almost halved (from 45.2 percent in 2002/03 to 23.7 percent in 2009/10). However, inequality in Botswana remains high with the Gini coefficient of 60.5 in 2009/10, down moderately from 64.7 in 2002/03.

Risks and challenges

As long as growth is heavily dependent on commodity exports and public sector activity, Botswana will remain heavily exposed to external shocks. Slowdown in major economies, particularly China, would further constrain diamond and other commodity production, with followon impacts across Government revenues, and the retail and service sectors. Slowing revenue growth over coming years, partly reflecting declining SACU receipts, requires careful management of expenditure pressures, especially in relation to the wage bill. Continued delays in upgrading electricity and water infrastructure will dampen non-mining activity, especially in the manufacturing sector.

Over the medium-term, diversification of the economy and exports away from mining is a priority. Structural reforms remain critical in the medium term to manage volatility and sustainability risks, including reforms in the water and energy sectors and addressing labor market distortions to spur private sector job creation. Investments are needed in infrastructure and human capital, as well as establishment of trade, business environment, and immigration policies that encourage competition.


Lesotho

The decline in growth since 2013 is expected to continue through 2016 due to persistent drought effects and weak regional conditions leading to a decline in SACU revenues and associated fiscal pressures. Accompanying the resumption of moderate economic growth, the poverty rate ($1.9 PPP a day) is projected to fall by 1.1 percentage points to 55.3 percent by 2018.

Recent developments

Following an average growth rate of 4.7 percent in 2012 and 2013, real GDP growth declined to 3.6 percent in 2014, and is estimated to have further declined to 2.7 percent in 2015. The main drivers include shrinking agricultural production due to adverse weather conditions, and industry declines due to uncertainty of AGOA extension and the halt in the Kao mine production. Services remain a relative bright spot, growing at 3.9 percent in 2015.

On the demand side, net exports declined in 2015 due to supply reductions and weak demand from trade partners. Investment contracted both due to the underexecution of the government’s capital budget, AGOA uncertainty and the completion of the Metelong Dam. Government consumption remained high due to the increased wage bill (22 percent of GDP in 2015). The overall budget execution was at 67.3 percent of the approved budget as of December 2015 mostly due to the underexecution of the capital budget.

Fiscal balances will deteriorate over the next years due to lower SACU revenues which equaled 30 percent of GDP in 2014/15 (the fiscal year starts April 1). The overall fiscal balance is estimated to be 0.1 percent of GDP. The non-SACU fiscal deficit is estimated to be 24.6 percent of GDP in 2015/16, improving from 28.6 in 2014/15. The current account deficit in 2015 is estimated to be 10.4 percent of GDP. Lesotho’s public debt has increased to 60 percent of GDP in 2015 due to the recent depreciation.

Although falling fuel prices helped drive CPI inflation down, increasing food prices has mostly offset this decline in 2015. CPI inflation is estimated to be 4.1 percent in 2015 and is expected to rise to 5 percent in the medium term. International reserves are estimated to be 6.1 months of imports in 2015 similar to last year driven mostly by the under-execution of the budget.

Between 2002 and 2010 Lesotho made virtually no progress in reducing extreme poverty. The headcount poverty rate was 57.1 percent in 2010 (national poverty line), accompanied by high inequality, measured at 54.2 percent by the Gini coefficient, itself an obstacle to poverty reduction. Lesotho’s economic structure and poorly targeted social protection policies are at the heart of high and stagnant poverty and inequality. Low-productivity agriculture remains the main source of income for over 1 in 3 households. The benefits of a well-paid public sector mainly flow to the most affluent households. Most of the social protection transfers do not target the poor.

Risks and challenges

Risks to the outlook are the decline in SACU revenues, political instability, slow global recovery, lower growth prospects in South Africa, fiscal sustainability and the competition Lesotho is facing due to the Transpacific Partnership agreement. In the medium term commitment to fiscal adjustments is crucial for macroeconomic stability. The current level of spending places a strong pressure on the sustainability of the public debt and the peg. The government has shown some commitment to consolidation by keeping wage rate increases in 2016 in line with inflation, however proposed measures in the budget fall short of the necessary adjustment. In the medium to long term Lesotho needs to move to a model that can deliver broadbased employment growth to promote shared prosperity and eradicate extreme poverty. In addition to the fiscal adjustment ambitious structural reforms are needed to raise potential output. Improvements in human capital through lower HIV/AIDS prevalence rates and better education outcomes, in investment climate constraints, and in key infrastructures are necessary.


Namibia

Fiscal stimulus, rapid credit growth, and large scale mining investments have been driving strong growth and a widening current account deficit over recent years. As construction of new mining projects winds down and production begins, the current account should narrow, while the government’s recent budget statement signals welcome fiscal consolidation. Strong recent growth and public spending on social programs has contributed to impressive reductions in poverty rates. Further poverty-reduction will require structural change in the economy to generate more jobs for the unskilled.

Recent developments

Growth of the Namibian economy moderated in 2015 to 4.5 percent, from 6.4 percent in 2014. Growth was driven by ongoing massive extractive sector investments and continued government stimulus, partially offsetting the impact of low commodity prices, slowing of private sector credit growth (9.5 percent in 2015, down from 16.5 percent in 2014) and lower agricultural production and exports resulting from drought and an outbreak of foot and mouth disease.

Namibia has maintained an expansionary fiscal stance since 2011, with government pursuing a stimulus program to support job creation and poverty reduction. An overall deficit of around 6.6 percent of GDP is expected in 2015 (the fiscal year runs from April 1 to March 31), higher than the budgeted deficit of 5.4 percent of GDP due to over-optimistic income tax revenue projections. The deficit was partially financed by a US$750 million Eurobond in 2015 (5.375 percent coupon with 10-year maturity), with proceeds used to support foreign exchange reserves and finance investment projects. Total government debt has grown rapidly and now stands at around 36 percent of GDP (from 12 percent of GDP in 2010).

Inflation remained low and stable during 2015, at 3.4 percent down from 5.3 percent in 2014, with low energy prices partly offsetting the impacts of depreciation and increased food prices arising from drought. Monetary policy has tightened, however, to maintain alignment with South African interest rates and avoid capital outflows, and in response to incipient inflationary pressures arising from depreciation, continued credit growth, and increasing food prices. The repo rate has been increased five times since June 2014, most recently with a 25 bps increase to 6.75 percent in February 2016.

The current account deficit remains wide (14.3 percent of GDP in 2015) reflecting low prices for mineral exports and elevated imports for both mining investments and consumer products, the latter driven by fiscal stimulus and credit growth. International reserves reached a low of just 1.5 months of import cover during 2015, but have since recovered to 3.5 months, primarily due to SACU receipts and currency depreciation.

Relatively strong economic growth has not been sufficient to deal with poverty, inequality, and unemployment. Using the national poverty line of N$ 377.96, 28.7 percent of Namibian were poor in 2009/10, following a 9.0 percentage point fall from 37.7 percent in 2003/04. The reduction was driven by gains in in rural areas. Using the international poverty lines, 19.7 percent of the population lived on less than $1.9 a day in 2015 compared to 22.6 percent in 2009. 42.9 lived below the 3.1 per day poverty line in 2015 compared to 45.7 percent in 2009. Namibia remains one of the most unequal countries in the world, with a Gini coefficient of 0.61.

High unemployment is of particular concern. The 2014 Labor Force Survey reports an unemployment rate of 28.1 percent in 2014, down slightly from 29.6 percent in 2013. At 39.2 percent, unemployment is highest among youth. Unemployment is higher among women (31.7 percent) compared to men (24.3 percent). Most employment (31.4 percent) is in low productivity sectors, including agriculture, forestry and fishing. 47.1 percent of employment is in the informal sector, contributing to income insecurity and vulnerability.

Risks and challenges

Planned fiscal consolidation and production from new extractive industry projects should support a reduction in fiscal and current account deficits. This outcome, however, is dependent on successful implementation of planned expenditure cuts in the context of expected declines in SACU revenues. Further declines in commodity export prices and worsening of external conditions also present downside risks.

Over the longer-term, Namibia faces important challenges in diversifying the economy and broadening economic opportunities. The economy remains heavily dependent on mining, while limited demand for unskilled labor leads to concentration of labor in unproductive subsistence agriculture. Policy priorities for a more inclusive economy include: i) improving access to and quality of secondary, tertiary, and vocational education; and ii) addressing labor market rigidities.


South Africa

Real GDP per capita has been falling in South Africa since 2014 – aggravated most recently by drought – which has raised poverty levels. Growth is not expected to exceed population growth until 2018. Weak commodity prices continue to put pressure on exports, the exchange rate and in turn inflation, while structural constraints including rigid labor and goods markets, hamper adjustments to seize the opportunities from the real effective depreciation of the rand.

Recent developments

South Africa’s economy grew by 1.3% in 2015, 0.5p.p. below population growth, making it the second consecutive year of falling GDP per capita. Mining recovered from prolonged strikes in 2014, but decelerated markedly through 2015 due to tumbling global demand (and prices) for commodities. Agriculture was hit by the worst drought in a century. This has plunged at least an estimated 50,000 South Africans into poverty. Manufacturing sector performance has been mixed, somewhat supported by a maintenance-related rebound in steel and stronger automotive exports. Structural constraints, including rigid labor and goods markets, skills mismatches, and barely sufficient electricity provision limit the economy’s ability to rebalance from commodities to manufacturing and services. In addition, policy uncertainty is increasingly undermining investment – in 2015 this ranged from new legislation affecting investor rights, uncertainty on continued access to AGOA, more stringent rules for tourist visas, and abrupt cabinet reshuffles. Finance and business services continue to be the remaining engine of growth in South Africa.

Although tax revenue grew by 8.5% in 2015/16, partly supported by new revenue measures including higher marginal personal income tax rates, the weaker-than expected economy resulted in collection shortfalls, especially in income taxes and VAT. Expenditure growth was propelled by a three-year wage agreement raising wage growth above inflation. The 2015/16 budget deficit was 3.9% of GDP. Defending its investment-grade credit rating, new revenue measures and expenditure cuts were introduced in the 2016/17 budget. Two-thirds of the fiscal adjustment will come from taxes, largely from fuel and sin levies and excises as well as only limited relief from ‘fiscal drag’. The budget deficit is expected to fall to 2.4% of GDP in 2018/19, and net public debt to stabilize at 46.2% of GDP in 2017/18, two years earlier than previously expected (gross debt is expected to peak at 51% of GDP in 2017/18).

In addition to the mining rebound after several strikes, manufacturing exports – such as automotives – benefited from strengthening global demand. Although the drought put pressure on (food) imports, this supported a narrowing of the current account deficit. The rand depreciated by 30% against the US dollar. This helped cushion the effect of falling commodity prices on the current account – however, it also limited tailwinds from falling oil prices.

Imported inflation – aggravated by the drought – largely explains the breach of the 6% upper inflation target (since January 2016), leading the South African Reserve Bank to raise interest rates most recently in January and March 2016, by a cumulative 75bp to 7%. Poverty has fallen over the past decade, however the revised national poverty lines leave 36.9% (close to 20 million people) below the national lower bound of R501 per month. Extreme poverty, based on the international poverty line of $1.9 per day (PPP, 2011), is expected to remain almost unchanged falling slightly from 15.5% in 2010 to 15.0% (close to 8.0 million people) in 2015. The Gini coefficient of 63.4 makes South Africa one of the world’s most unequal countries in the world.

South Africa’s high unemployment hampers progress in poverty reduction. Unemployment was 24.5% in Q4 after briefly reaching 26.4% in Q1 2015, the highest since the early 2000s. The number of unemployed grew by 5.3% y/y in the first three quarters, outpacing growth of the labor force of 4.1% y/y, leaving 5.4 million South Africans unemployed in Q3 2015. Youth and unskilled workers have particular difficulty finding work. Discouragement is a driver of low labor force participation.

Risks and challenges

As less can be expected from global demand, the onus lies on policymakers to spur growth. Making the economy more nimble to help it rebalance toward the non-mineral sectors holds the key to future growth and poverty reduction. South Africa’s economy will need to restructure, and carefully managing labor relations in the process will be vital to secure the required investment. Strong efforts to maintain the integrity of South Africa’s institutions, a major selling point to investors, and to increase investor confidence through greater certainty in policymaking too will be vital for the return of investment and growth. While fiscal consolidation forms part of the policy mix to defend South Africa’s investment grade credit rating, ambitious structural reform will be required to lift South Africa’s weak growth prospects and accelerate poverty reduction.


Swaziland

Economic growth in Swaziland is estimated to have decelerated to 1.7% in 2015 down from 2.5% in 2014, and is forecasted to further decline to 1.3% in 2016. This is partly due to adverse weather conditions and a gloomy regional economic outlook. A marginal recovery is expected in 2017 and 2018 with 1.4% and 1.6% real GDP growth forecasts, respectively. Declining Southern Africa Customs Union (SACU) revenues pose fiscal challenges. As a result of poor macroeconomic conditions, poverty rates are expected to remain high while labor conditions remain weak.

Recent developments

Recent real GDP growth slowed to 1.7% in 2015 from 2.5% in 2014, on the back of declining SACU revenues, adverse weather conditions and poor regional economic outlook especially in South Africa. The manufacturing sector suffered from the loss of the country’s African Growth and Opportunity Act (AGOA) trade benefits in January 2015, and the textile industry was characterized by retrenchments.

Despite significant improvements in domestic revenue collection as a result of tax reforms including the new VAT refund at border posts with South Africa, the fiscal deficit widened to 3.6% of GDP in 2015/16 (the fiscal year starts April 1) on the back of declining SACU revenues (which constitute about 48% of Swaziland revenue) and rising recurrent expenditures especially the wage bill. SACU revenues are estimated to have fallen to 13.3% of GDP in 2015/16 from 15.3% in 2014/15.

The external sector position moderated in 2015. The current account surplus narrowed to 0.4% of GDP in 2015 down from 4.4% in 2014, while international reserves rose slightly to 3.6 months of import cover in 2015 from 3.5 in 2014. This is above the international accepted minimum threshold of 3 months of import cover but below the government’s medium term target of 5-7 months of imports. The current account decline was cushioned by increased exports of textiles to South Africa following the depreciation of the Rand.

Inflation remained below the upper bound threshold of 6% in 2015, and averaged 5% in 2015. The decline in international commodity prices kept inflation within the threshold while the 2015 drought exerted an upward pressure on prices.

The decline in growth continued to put pressure on development challenges in Swaziland, which have not significantly improved over the past decade. 63% of Swazis lived below the national poverty line in 2010 which is relatively high for a lower middle income country. Poverty is largely a rural phenomenon: in 2010, 73% of Swazis living in rural areas were living below the national poverty line compared to 31.1% in urban areas. The adverse weather conditions are expected to further widen the gap between rural and urban poverty. Using the international extreme poverty line of $1.9 per day suggests that an estimated 41.1% of Swazis were poor in 2015 compared to 42.0% in 2010.

With a Gini coefficient of 51.5, inequality is high and actually increased in rural areas between 2001 and 2010. Swaziland’s labor markets suffer from low labor force participation rates and high unemployment, exacerbated by skills mismatches and a high prevalence of HIV/AIDS (27.7% among adults). The bulk of employment is in low value added activities, particularly in subsistence agriculture and low value added services. Government accounts for a large share of employment, with the private sector lacking the vibrancy to create employment opportunities to support faster poverty reduction.

Risks and challenges

The economic outlook for Swaziland remains poor, in line with broader concerns for South Africa and the SACU region. Lower SACU transfers and exports to South Africa are expected. There is no scope for public sector stimulus, and a rationalization of expenditures in line with the fall in SACU transfers is needed, particularly with respect to the public wage bill. Postponed implementation of the salary review would help in this regard, as well as improved focus on the quality of spending and coordination of social protection programs, together with adjustments to their design and implementation.

Swaziland needs to step up efforts to increase investment especially in the private sector. This is crucial for stimulating growth and job creation which is key to higher, inclusive economic growth needed to tackle the challenges of high poverty, inequality, and unemployment. To promote private investment, there is need to implement policies that address human capital challenges, improve the regulatory environment and ease of doing business (currently ranked 105 out of 189 countries). Private investment is central to export diversification that will build resilience to external shocks such as the one emanating from expiration of AGOA.


Zambia

The economy has come under strain as external headwinds and domestic pressures have intensified. GDP growth slowed to 3.6 percent in 2015 from 4.9 percent in 2014. External headwinds include slower regional and global growth and the strengthening of the U.S. dollar against the kwacha. Domestic pressures include a power crisis impacting on all sectors of the economy, repeat fiscal deficits that have weighed on investor confidence, and low and poorly-timed rains that have reduced agricultural incomes of the poorest households.

Recent developments

On the back of higher copper production, foreign direct investment in manufacturing and the mining sectors, government infrastructure spending, and stronger private sector investment in construction and services, Zambia grew at an average annual rate of 7 percent between 2010 and 2014. But as copper prices plummeted in 2015 the Zambian economy has come under strain.

External headwinds have intensified, including slower regional and global growth and a sharp decline in the price of copper. While many commodity-driven economies face this threat, it has been more severe for Zambia as copper accounts for 75 percent of exports. Domestic pressures have also risen. Zambia faces a power crisis, repeated fiscal deficits have reduced confidence in the economy, low and poorly-timed rains have dented agricultural incomes of population in poverty, and the mining sector has faced job losses. The country’s currency, the kwacha, lost 41 percent of its value against the dollar during 2015, making conditions yet more adverse. The strength of the dollar globally was a factor, but the kwacha’s decline was much greater than other currencies in the region. Since November 2015 exchange rate stability has been achieved through central bank intervention and changes to inter-bank trading rules. Following the loose fiscal position and depreciation of the kwacha, inflation picked-up from 7.3 percent in August 2015 (year-on-year) to 21.1 percent in December 2015 and remained above 20 percent in February 2016. Inflation will remain elevated until pass through from the depreciation unwinds in the second half of the year.

Fiscal expansion since 2012 has helped to boost GDP, but it has exhausted fiscal space, and reining in deficits is now vitally important for macro-fiscal stability. Government spending advanced by an average 12.3 percent in real terms since 2012, and the fiscal deficit reached 8.0 percent of GDP in 2015, up from 6.1 percent in 2014. The 2016 budget plans a consolidation but one based on higher revenues to meet still -higher expenditures.

Given slower growth, surging external debt service costs (following depreciation), August-11 election spending pressures, and a need for emergency power imports, the 2016 budget appears optimistic. While the deficit can be reduced in 2016, it is unlikely that the government meets its target of 3.6 percent of GDP. Large Eurobond issuances in 2012, 2014 and 2015 have been used to finance the deficits, almost doubling the size of external debt relative to GDP from 13.5 percent in 2012 to 38.7 percent in 2015. Total public sector debt breached 52 percent of GDP in 2015.

Copper prices declined by almost a third from their peak in February 2011 to US$4,595 per metric ton by February 2016 (LME), and are expected to remain soft over the medium-term as global supply currently exceeds demand. Accordingly the current account registered a deficit of 3.4 percent of GDP in 2015 after a surplus of 2.1 percent in 2014.

Poverty in Zambia remains stubbornly high, especially in rural areas where three out of every four people had income below the national poverty line in 2010. Such situation is likely to continue this year linked to the failure- and late onset of 2015 rains, which will reduce agricultural incomes in 2016 and cause some households to fall into poverty. On the other hand, the benefits of growth have accrued mainly to urban areas where many of the gainful economic activities in the country take place, such as in the highly urbanized Copperbelt and Lusaka regions. But recent adverse developments in the country, such as power shortages (and effects on SMEs in industry and services) and depreciation may impact adversely on urban centers. Zambia also has one of the most unequal distributions of income in Sub-Saharan Africa, with a Gini coefficient of 55.6.

Risks and challenges

Lower copper prices, power outages and fiscal imbalances present the major challenges over the medium term. Large fiscal deficits will remain costly to finance, sending adverse signals to investors that reduce confidence in the kwacha. Bringing spending on subsidies and government salaries under control is an urgent priority. Reforming farm subsidies is important for both poverty reduction and fiscal consolidation. And improving the economic benefits from Zambia’s mineral wealth in an environment of depressed world prices is a further challenge. Income inequality poses a major impediment for poverty reduction in Zambia as it erodes possible gains associated with income or economic growth, reflecting inequalities in the access to assets, services and opportunities across the population which could compromise the prospects of future generations.


Zimbabwe

The post-dollarization boom is over and trend GDP growth is now 2-3 percent. Continued adverse weather conditions have drastically reduced agricultural production, and Zimbabwe is forecast to grow by 1.4 percent in 2016. Recently, per capita income has stagnated as trend growth barely covers population growth. In 2016, poverty is expected to rise and the poor, especially in rural areas, will bear the brunt of the decline in economic growth. Moreover, the economic downturn generates continued deterioration in income distribution, leaving the rural poor even poorer.

Recent developments

In 2015 growth slowed to 1.1 percent down from 3.8 percent in 2014 driven by poor agricultural output (figure 1). The worst affected are those that reside in rural areas as agriculture is the foundation of rural livelihoods. As a result, the poverty rate is estimated to have increased by approximately 2.8 percent in rural Zimbabwe (figure 2). Rural areas are home to two-thirds of Zimbabwe’s population, 79 percent of the poor and 92 percent of the extreme poor. The decline in production of both cash and subsistence crops has negative welfare implications. The sharp decline in the rural areas’ production base contrasts with greater resilience displayed by a number of sectors in urban areas, leading to a growing income divide between the rural and urban areas. Though the manufacturing and mining sectors struggled in 2015 due to rising capital costs, decline in external competitiveness, as well as sharp declines in commodity prices among other factors, a persistent shift in economic activity from industry to services ensured that growth continued in urban areas. The services sector grew by 2.7 percent in 2015.

The fiscal situation remained tight in 2015 as Zimbabwe follows a cash budget. The fiscal deficit remained below 3 percent of GDP, far below the average of Sub Saharan African countries. However, about 80 percent of total expenditure covered the wage bill, leaving little for other crucial spending such as social and capital spending that impacts directly on the poor. And user fees became the source of revenue for non-wage expenditures in education and health services, again negatively impacting access for the poor.

The current account balance is large at 10.8 percent of GDP in 2015. This is almost equal to the investment rate of about 13 percent of GDP, mainly driven by appreciation of the U.S. dollar against major trading partner currencies and inadequate domestic production. International reserves remained at around 2 weeks of import cover in 2015, leaving Zimbabwe highly exposed to external shocks.

Inflation remained in negative territory, as prices declined by 2.4 percent in 2015, driven mostly by depressed domestic demand and depreciation of the South African Rand. Deflation was experienced in both tradable and non-tradable goods. The depressed prices at least served as a hedge for the poor, as food inflation remained lower than any other CPI category in 2015.

Risks and challenges

Despite near-term adverse developments, Zimbabwe’s growth prospects appear to be favorable in the medium to longer run, with a pickup in output growth to more than 5 percent in 2017, provided the risks and challenges associated with investment spending are addressed. To rebound above trend growth, Zimbabwe should prioritize attracting stronger foreign investment. For example the current guidelines of the Indigenization Act are still not clear on the compliance levy. There is need for much greater transparency in the design of investment policies.

Zimbabwe’s current challenge is that the rural economy, where most of the poor live is not integrated into the mainstream of economic activity. The reorganization of the rural economy in the wake of land reform provides an opportunity for broad-based growth, but both the extent of this growth and its contribution to public finances will hinge on the authorities’ efforts to strengthen tenure security in the rural sector and create a stable investment climate for both large agribusinesses and smallholder farmers. Formal financial intermediation is critical to strengthen agricultural value chains and tighten integration with international markets.

Zimbabwe has a comparative advantage of a well-educated population that can be exploited to increase economic growth by exporting services. The current stepped up polices on remittance channels should be complemented by government policies that attract service industry into Zimbabwe and build a base for exporting services.

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