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Publication design and layout by Cybil Maradza. ii CONTENTS Acronyms and Abbreviations ............................................................................................................................................................. iv Acknowledgements ................................................................................................................................................................................... v EXECUTIVE SUMMARY ................................................................................................................................................................. vi 1. Recent economic developments and outlook .......................................................................................................... vi 2. Special Topic: Improving Zimbabwe’s Resilience to Weather Shocks and Climate Change ... xiii PART 1. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK ................................................ 1 1.1 Real Sector ............................................................................................................................................................... 1 1.2 Fiscal Developments ........................................................................................................................................ 5 1.3 Monetary and Exchange Rate Developments ............................................................................... 10 1.4 External Sector ..................................................................................................................................................... 14 1.5 Poverty Implications ......................................................................................................................................... 16 1.6 Near and Medium-Term Outlook and Risks .................................................................................... 17 1.7 Policy Recommendations ............................................................................................................................. 20 PART 2. IMPROVING ZIMBABWE’S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE ................................................................................................................................................... 24 2.1 Introduction ............................................................................................................................................................ 24 2.2 Climate shocks in Zimbabwe ..................................................................................................................... 25 2.3 The economic impact of climate shocks in Zimbabwe .......................................................... 30 2.4 Policy recommendations to improve resilience to weather shocks and climate change ..................................................................................................................................................... 36 2.5 Conclusion ............................................................................................................................................................... 51 Annex 1: Policy recommendations to improve resilience to weather shocks and climate change ..... 52 References ....................................................................................................................................................................................................... 54 iii ACRONYMS AND ABBREVIATIONS AfDB African Development Bank MIF Mutapa Investment Fund AGRITEX Department of Agricultural, MoFEDIP Ministry of Finance, Technical and Extension Services Economic Development and ASP Aspirational Investment Promotion BAU Business-as-Usual NDRMP National Disaster Risk BZ Reserve Bank of Zimbabwe Management Plan CCDR Country Climate and OPC Office of the President Development Report and Cabinet CIT Corporate Income Tax PIT Personal Income Tax CPA Civil Protection Act PPP Public Private Partnership CPI Consumer Price Index QFO Quasi-Fiscal Operation DCP Department for Civil Protection RBZ Reserve Bank of Zimbabwe DRM Disaster Risk Management SDP Structured Dialogue Platform DT Drought Tolerant SMEs Small and Medium Enterprises EIB European Investment Bank SMP Staff Monitored Program ENSO El Niño-Southern Oscillation SOE State-Owned Enterprise EWS Early Warning System SOEs State-Owned Enterprises FDI Foreign Direct Investment SSM Surface Soil Moisture FLID Farmer-Led Irrigation UMIC Upper Middle-Income Country Development US$ United States Dollar GDP Gross Domestic Product VAT Value-Added Tax GoZ Government of Zimbabwe WB World Bank Ha Hectares WSS Water Supply and Sanitation HSCT Harmonized Social ZiG Zimbabwe Gold Cash Transfers ZWL Zimbabwe Dollar IMF International Monetary Fund IMTT Intermediate Money Transfer Tax iv ACKNOWLEDGEMENTS This fifth edition of the Zimbabwe Officer, AFEVP), Dhiraj Sharma (Senior Economic Update (ZEU) was prepared Economist, EAEPV), John Van Dyk (Senior with the leadership and support of the Social Protection Specialist, HAES1), Country Management Unit (CMU) led Kaushiki Singh (Consultant, EAEM1), by Nathan M. Belete (Country Director, Markus Enenkel (Consultant, SWAGL), AECE1) and Eneida Fernandes (Country Nathan Engle (Senior Water Resources Manager, AEMZW). The team benefited Management Specialist, SAEW2), Tawanda from technical support and guidance Chingozha (Consultant, EAEPV) and Victor from Abha Prasad (Practice Manager, Steenbergen (Senior Economist, EAEM1). EAEM1); William Bataille (Lead Country Economist, EAEDR) and Aghassi Mkrtchan Farai Sekeramayi-Noble (Program Assistant, (Program Leader, EAEDR). AEMZW) provided valuable administrative and logistical support. Cybil Maradza The task team was led by Victor created the graphic design. The team Steenbergen (Senior Economist, EAEM1), thanks the ZEU peer reviewers for their who also drafted the chapter on “Recent helpful suggestions and insights: Miguel economic developments and outlook” Angel Saldarriaga Noel (Senior Economist, together with Dhiraj Sharma (Senior EAEM2) and Ademola Braimoh (Senior Economist, EAEPV), and Kaushiki Singh Agriculture Economist, SSAA2). (Consultant, EAEM1), with inputs from Marko Kwaramba (Senior Economist, Finally, the team thanks the colleagues EAEM1). The chapter on “Improving from the Government of Zimbabwe’s resilience to weather shocks and Ministry of Finance, Reserve Bank climate change” was co-led by Easther of Zimbabwe, and Ministry of Lands, Chigumira (Senior Agricultural Specialist, Agriculture, Fisheries, Water And Rural SAEA3) and Dominick Revell de Waal Development for providing invaluable (Senior Economist, SAEW3), with inputs inputs and comments to earlier drafts of from Astrid Uytterhaegen (Operations this report. v EXECUTIVE SUMMARY 1. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Zimbabwe’s impressive recovery since the 2019/20 COVID-19 Growth has slowed recession has been slowed by the 2024 El-Niño-related drought. in 2024 due to the El- The fiscal deficit is projected to have fallen to below 3 percent Nino-related drought. in 2024. Challenges to finance the deficit persist, which has also put pressure on the newly introduced ZiG currency. The El Niño drought is resulting in a steep agricultural contraction, slowing overall economic growth. In 2024, GDP growth rate is projected to decline to 2.0 percent, driven by a sizeable agricultural contraction, as El Niño brought about the worst drought in Zimbabwe in the last 40 years (Figure E.1). While agriculture grew by 6.3 percent in 2023, it is expected to result in a steep 15 percent decline in 2024 (Figure E.2). The manufacturing sector has seen lackluster growth, driven in part by power shortages that were caused by the El Niño drought, as declining water levels in Lake Kariba affect Zimbabwe’s hydroelectric power generation. Yet, the mining sector continues to exhibit strong growth, bolstered by rising gold prices. Similarly, the tourism industry is growing rapidly, with increasing numbers of international arrivals and hotels’ bed occupancy. While the fiscal deficit surged in 2023, it lowered again in 2024, but challenges to finance the deficit persist (Figure E.3). High expenditures, driven by a one-time increase in capital spending, together with declining tax revenue, jointly resulted in a large fiscal deficit in 2023 (either 6.5 percent according to Government of Zimbabwe definitions, or 14 percent according WB/IMF definitions). In 2024, the rise in expenditure driven by wage increases, increased debt servicing and drought-induced spending are providing a new source of macroeconomic stress. While tax revenue increased, the overall deficit is expected to be kept at 3 percent of GDP. This is in line with SADC fiscal rules, but still difficult to finance given Zimbabwe’s challenges to access international funding and its strained domestic financial sector. vi EXECUTIVE SUMMARY The rising wage bill, increasing debt servicing costs, and the El While the fiscal deficit Niño drought have all put additional pressures on government was lower in 2024, spending, while revenue has not grown in similar pace. The challenges to finance wage bill saw a substantial increase (from 6.9 percent of GDP the deficit persist. in 2023, to 11.3 percent in 2024) due to combined pressures from a steady increase in the civil service headcount, higher compensation, and a wage indexation mechanism that pushes up real wage costs. The transfer of the RBZ’s external debt to the treasury, together with the payments of treasury bills associated with the increased capital spending in 2023, also resulted in steep increases in the Treasury’s debt servicing costs. At the same time, the El Niño-related drought increased fiscal pressures to support vulnerable households with maize and agricultural inputs. To raise additional domestic revenue, the 2024 budget included a range of new measures that helped increase tax collection from 14.6 percent of GDP in 2023 to 17 percent in 2024. Public debt has continued to climb in 2023, but stayed constant in 2024 (Figure E.4). Zimbabwe’s public debt is in distress and unsustainable, constraining access to international finance. As a result of accumulation of external arrears, legacy debt, the absorption of RBZ debt, and a large one-off transfer to the Mutapa Investment Fund, total public debt rose to US$21.2 billion in 2023 (97 percent of GDP). Most of this increase was in domestic, USD-denominated debt. In 2024, public debt stood stayed at US$21.1 billion (or 101 percent of GDP).1 ¹ While Zimbabwe’s total debt has been increasing, the debt-to-GDP ratio has been volatile due to exchange rate dynamics. Changes in the debt-to-GDP ratio are driven in large part by stock-flow adjustments from exchange rate depreciation and the gap between the average and end-of-period exchange rates. This leads to a situation where Zimbabwe’s 2023 GDP is at US$35.5 billion (using year-average exchange rates), but aggregate debt is US$21.2 billion and 96.6 percent of GDP (using year-end exchange rates) (see section 1.3). vii ZIMBABWE ECONOMIC UPDATE 2024 A SNAPSHOT OF ZIMBABWE’S MACRO-ECONOMIC SITUATION Figure E.1. After a rapid COVID-19 recovery, growth declined Figure E.2. … as the El Niño-induced drought led to a major significantly in 2024… decline in agricultural output GDP growth rate, percentage Agricultural growth rate, percent 10.0 8.5 20.0 17.5 15.0 8.0 10.0 6.3 6.1 4.1 4.9 5.3 5.0 6.0 0.0 4.0 -5.0 2.0 2.0 -10.0 -15.0 -20.0 -15.0 0.0 2021 2022 2023 2024 proj. 2020 2021 2022 2023 2024 proj. Figure E.3 While the fiscal deficit surged in 2023, it fell in Figure E.4 Public debt saw a rapid rise in 2023 (driven 2024, but challenges to finance the deficit persist by domestic USD-denominated debt), but has stayed Fiscal balance, percent of GDP relatively constant in 2024 Public debt stock, USD Billion 4 1.3 24 21.1 0 -0.1 20 -4 -2.7 -3.0 16 USD Billion -8 12 -12 8 4 -16 -14 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 proj. Fiscal balance Fiscal balance incl. transfer to MIF External Domestic Figure E.5 After brief period of stability, ZiG reserve money Figure E.6 Reserve money growth and exchange rate rapidly increased in September and October, resulting in depreciation also upset a brief period of price stability, as depreciation of parallel and official rate ZiG inflation rose a lot in October ZiG-USD exchange rate, ZiG reserve money index (April=100) Inflation rate - monthly USD, ZiG, and annual USD-ZiG blended (percent) 350 60.0 57.5 ZiG Reserve Money ZiG-USD Exchange Rate 37 300 50.0 33 250 32.7 41.1 40.0 29 200 Index 30.0 25 150 20.0 11.7 21 100 10.0 5.8 17 50 -2.4 0.0 -0.1 1.4 0.0 13 0 -10.0 8-Apr-24 29-Apr-24 20-May-24 10-Jun-24 1-Jul-24 22-Jul-24 12-Aug-24 2-Sep-24 23-Sep-24 14-Oct-24 4-Nov-24 25-Nov-24 Apr-24 May-24 Jun-24 Jul-24 Aug-24 Sep-24 Oct-24 Nov-24 Parallel rate Interbank rate Monthly - USD Monthly - Blended USD and ZiG ZiG Reserve Money Index [RHS] Monthly - ZiG Annual - Blended USD and ZiG Sources: World Bank staff calculations based on ZimStat, MoF and RBZ data. Notes: Data on ZiG’s Reserve Money is reported with a 3-month lag, and so only available until October 2024. viii EXECUTIVE SUMMARY In April 2024, the RBZ introduced a new currency called The introduction of Zimbabwe Gold (ZiG), converting all ZWL balances. The the ZiG resulted in introduction of the ZiG resulted in initial stability between initial stability but April and August 2024, as reserve money remained relatively fiscal pressures led to stable (compared to historical ZWL trends) (Figure E.5). Yet, exchange depreciation fiscal pressures (partly emanating from external debt servicing in September requirements) led Zimbabwe’s Treasury to borrow funds from and October. the RBZ. This resulted in a sharp depreciation of the ZiG on the parallel market and a spiking parallel premium. In response, the central bank devalued the currency in late September, bringing the parallel premium back down. A tighter monetary policy stance eventually resulted in a more stable formal and parallel market rate in November and December. ZiG inflation followed the same patterns of reserve money growth and exchange rate depreciation. Monthly USD and ZiG inflation initially remained in single digits between May and September 2024 (Figure E.6). Yet, the official ZiG devaluation contributed to ZiG inflation picking up to 37 percent in October. In contrast, the US$ inflation was steady in October. Because of the dominant role of the US-dollar in Zimbabwe’s economy, the monthly “blended” ZiG-US$ inflation rate remained in single-digits. The current account is expected to maintain its 0.4 percent of The current account is GDP surplus from 2023 into 2024, as a widening trade deficit expected to maintain is outweighed by growing remittances. Exports have been its 0.4 percent of growing, in part because rising commodity prices increased GDP surplus. exports of minerals and metals, particularly gold. However, imports are picking up due to drought in the country, resulting in significant imports of maize, and growing fuel and electricity imports. This is resulting in a growing trade deficit of US$1.7 billion. However, the current account is expected to remain in surplus – at 0.4 percent of GDP (unchanged from 2023). This is driven mostly by robust household remittance inflows, which have grown from US$ 1.2 billion in 2020 (or 5 percent of GDP) to 2.5 billion in 2024 (or 7 percent of GDP). Zimbabwe’s economic outlook is positive, due to an expected recovery in agriculture, and robust growth in industry and services. Growth is anticipated to increase again to 6 percent in 2025, due to a broad-based post-drought recovery. Agricultural production is expected to grow by almost 13 percent, driven by a strong recovery in maize and tobacco production. Ongoing ix ZIMBABWE ECONOMIC UPDATE 2024 investment initiatives are expected to increase production in the sectors of gold and lithium mining, as well as iron and steel manufacturing. Helped by expected improvements in macroeconomic management because of the renewed commitments by the Reserve Bank of Zimbabwe (RBZ) to control the supply of reserve money effectively and stabilizing the new ZiG currency, these will help maintain a higher-than-average growth rate of 5 percent in 2026. Inflation is expected to moderate to 10 percent in 2025 due Inflation is expected to strengthening of the monetary stance. The government is in to moderate to 10% discussions with the IMF to start a Staff-Monitored Program in the first quarter of 2025. This will likely include significant targets to contain monetary aggregates, thus resulting in a tight monetary policy stance. Over the medium term, inflation is thus anticipated IN 2025 to decrease further to 5 percent, contributing to a moderate re- monetization. Debt remains unsustainable and elevated. The economy is facing multiple downside risks. Given the vulnerability present in the economy, varying risks may evolve from price stability, exchange rate, contingent liabilities, and climate change induced natural disasters. With Lake Kariba operating below potential, hydroelectric power generation is under risk. The current wage bill setting modalities pose significant fiscal risks. For the 2024/25 agricultural season, there is a risk that rainfall may come too late for the summer harvest. Despite expectations of normal to above-normal rainfall across the country, the current agriculture season is affected by rainfall patterns that have been unevenly distributed both spatially and temporally. This mixed start to the season, coupled with current drier-than-average conditions, has delayed the cropping season and planting activities. The forecast for a strong La Niña has been revised down, indicating some regions may experience below- average rainfall (FAO, 2024). To boost economic growth, Zimbabwe will need to continue tackling its macroeconomic challenges, and press on with the Structured Dialogue Platform for arrears clearance and debt resolution. For the 2024/25 agricultural season, Continued efforts are needed to ensure price and exchange there is a risk that rate stability, in order to support economic growth and job rainfall may come too creation. High inflation and rapid exchange rate depreciation late for the summer harvest. x EXECUTIVE SUMMARY have historically constrained economic growth and reduced To boost growth, the competitiveness of Zimbabwe’s firms. While Zimbabwe has Zimbabwe will need generally been able to maintain robust post-pandemic growth to continue tackling (with exception of the 2024 drought), sustaining or accelerating its macroeconomic Zimbabwe’s level of growth will require to continue tackling the challenges country’s macroeconomic issues. The Structured Dialogue Platform (SDP) between the GoZ and development partners identifies an important set of reforms and offers a resolution to Zimbabwe’s pressing arrears and debt problems. This Zimbabwe Economic Update re-affirms the importance and urgency of the policies set out in the Economic Reforms Matrix to re-establish macroeconomic stability, enhance growth, and protect the most vulnerable. Resolute progress across the three reform platforms (economic, governance and land) provides a promising opportunity for the GoZ to end its long-standing external debt arrears, which will help to provide access to affordable external credit lines and stimulate much- needed public and private sector investment to boost growth. Yet, the economic adjustments required are not without short- term sacrifices. Efforts are needed to minimize the impact on vulnerable households. Zimbabwe has requested a Staff Monitored Program (SMP) from the IMF, with formal negotiations expected in the first quarter of 2025. The SMP provides an effective tool to assist in implementation of essential economic reforms, but likely also means the Government will have to make difficult decisions on spending cuts and raising domestic taxes to ensure a more balanced fiscal regime. It will be critical for government and development partners to identify ways to help minimize the impact of economic reforms on vulnerable Zimbabwe has households, including by further strengthening and utilizing the requested a Staff new National Social Registry to coordinate and target assistance. Monitored Program (SMP) from the IMF, with The World Bank acknowledges progress in implementing formal negotiations some of the reforms, and calls for continued commitment expected in the first from Zimbabwe’s senior leadership to ensure reform success quarter of 2025. (Table E.1): xi ZIMBABWE ECONOMIC UPDATE 2024 Table E.1. Economic Reforms Matrix - Priority reform areas and government action to date Reform Government action to date Recommendations Successfully • GoZ formally requested an SMP, multiple • The World Bank hopes for a swift conclusion implement an IMF IMF staff visits have resulted in notable of negotiations to initiate a credible, Staff Monitored convergence on GoZ and IMF macro-framework. implementable 12-month SMP, and is available Program • Official SMP negotiations planned for Q1 2025. to support where necessary. Establish a market- • GoZ introduced a new currency (ZiG), • Shift to a market-determined forex market determined and determined by a willing-buyer-willing-seller- by allowing more flexibility in the official competitive foreign market and RBZ’s open market operations, but exchange rate through transparent and exchange rate regime various de-jure and de-facto exchange rate market-driven price discovery. restrictions continue to contribute to a parallel market premium. End all quasi-fiscal • All of $2.16 billion of RBZ’s external liabilities • Critical that external debts are serviced operations, end transferred to the treasury. through tax revenue (not RBZ borrowing). all unbudgeted • SI prevents RBZ from taking on new external • End the forex retention policy to improve expenditure debt without Treasury agreement. competitiveness of Zimbabwe’s exporters. Strengthen • 2024 budget announced various new tax • Expand use of e-procurement for VfM in revenue collection revenue measures (VAT, wealth tax, mining, procurement and public investment. and expenditure informal sector) that expanded the tax base. • Reduce wage bill by rationalizing managerial management • New e-procurement launched in October posts and eliminate redundant positions in 2023 enabling procuring entities and bidders to line with GoZ jobs evaluation report. conduct digital procurement activities. • Rationalize tax expenditures, strengthen mining taxation and property tax systems. Maintain tight • High increase in money supply in early 2024. • Maintain RBZ’s tight monetary policy stance monetary policy Introduction of ZiG resulted in initial price and resist renewed (fiscal) pressures to ensure and sound fiscal stability, but increase in reserve money due low inflation and exchange rate stability. management to Treasury’s borrowing from RBZ to finance debt payments. RBZ has tightened money supply, increased the Bank Policy rate and raised the statutory reserve requirement. • High deficit in 2023 due to large one-off capital expenditure, but within bounds in 2024. Challenges to finance the fiscal deficit persist. Improve access • Current social registry system is live (online • GoZ should continue working with the World to inclusive social platform). Need for integration with other Bank and other development partners protection data systems, nationwide data collection, to scale up the single registry across capacity-building. Zimbabwe, and use this to improve targeting for all its social protection programs and other subsidies (e.g. on agriculture and electricity) to vulnerable households. Source: Authors’ elaborations. Note: SMP = Staff Monitored Program. MoFED = Ministry of Finance and Economic Development. RBZ = Reserve Bank of Zimbabwe. SOEs = State-Owned Enterprises. VfM = Value for Money. xii EXECUTIVE SUMMARY 2. SPECIAL TOPIC: IMPROVING ZIMBABWE’S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE This ZEU special topic highlights Zimbabwe's urgent need Agriculture employs 70% to bolster resilience against climate-related shocks, with a focus on the agriculture sector, a critical pillar of the economy. Contributing 11 percent to GDP, 40 percent to exports, supplying OF THE 68 percent of raw materials to the manufacturing sector, and employing 70 percent of the population, agriculture is central to POPULATION food security and economic stability. However, its heavy reliance on rainfed systems and maize production leaves it vulnerable to increasingly severe climate events, particularly droughts linked to El Niño-Southern Oscillation (ENSO). Drought episodes have historically led to steep declines in GDP growth, increased fiscal pressures to provide food to vulnerable households, and reduced tax revenue, resulting in a rising fiscal deficit, and is well-illustrated by the 2024 El Niño-induced drought (see section 2.3). The ENSO significantly influences Zimbabwe’s climate, predominantly through the El Niño and La Niña phases. El Niño conditions often result in above-average temperatures and below-average rainfall, leading to droughts, while La Niña brings above-average rainfall, at times leading to floods. Recent observations indicate that climate change is intensifying the frequency and intensity of El Niño events, exacerbating Zimbabwe's vulnerability to drought. The World Bank’s Country Climate and Development Report (2024) noted that climate change had increased the frequency of droughts, which rose from 1 in 10 growing seasons between 1902 and 1979, to 1 in 4 growing seasons between 1980 and 2011. This has made many Zimbabweans more vulnerable to variability in rainfall patterns. This growing trend highlights the urgent need for Zimbabwe to develop robust strategies to mitigate the adverse effects of these climate variations, and better insulate their negative impact on growth. In the 2023/24 growing season, Zimbabwe experienced severe El Niño conditions drought conditions attributed to El Niño. This resulted in a often result in above- 60 percent decline in maize yield compared to the five-year average temperatures average. The significant reduction in rainfall, coupled with and below-average high temperatures, has led to widespread food insecurity and rainfall xiii ZIMBABWE ECONOMIC UPDATE 2024 economic hardship. Consequently, 7.8 million Zimbabweans (almost half the population) faced acute food shortages, driving many to adopt unsustainable coping mechanisms, including the sale of livestock and other critical assets. The drought raised rural poverty rates by up to 34 percent in maize-producing zones and left 57 percent of rural households’ cereal-insecure during peak hunger periods. The government's ambitious target to boost agricultural The 2023/24 El output to US$12.5 billion is under threat due to these climate- Niño-induced induced challenges. Climate shocks disrupt GDP, trade balances, drought alone caused and fiscal stability. The 2023/24 El Niño-induced drought alone damage losses of caused approximately US$363 million in damage losses. It approximately US$363 resulted in a World Bank estimated 3.2 percent drop in GDP, lowered export earnings, and widened the fiscal deficit by 0.9 percent of GDP, compared to a no-drought scenario. This is driven MILLION by both reduced revenue and higher government expenditures. Government revenue is expected to decline to 18.5 percent of GDP due to the slowdown in economic activity, compared to 19.2 percent in a no-drought scenario, and its expenditure is anticipated to rise to 20.9 percent of GDP, up from 20.6 percent in a no-drought scenario, primarily to fund food imports and increased salaries. The contraction of the rainy season, increased temperatures, Climate adaptation and reduced soil moisture are reshaping agro-ecological focuses on medium- regions, further complicating efforts to maintain consistent to-long-term planning agricultural output. This cycle of drought and recovery to build resilience to undermines sustainable development and exacerbates poverty current and future levels, making it imperative to enhance the resilience of the weather shocks agricultural sector. As such, to strengthen Zimbabwe’s resilience to weather shocks and climate change, a dual approach is essential, involving substantial investment in climate adaptation and the enhancement of anticipatory actions. Climate adaptation focuses on medium-to-long-term planning to build resilience to current and future weather shocks, while anticipatory actions aim to mitigate the humanitarian impact of climate hazards through proactive measures based on forecasts and risk analysis. As such, key policy areas for investments in climate adaptation and anticipatory action are proposed (see Table E.2). xiv EXECUTIVE SUMMARY Table E.2 Summary of policy recommendations Zimbabwe’s ability to cope with weather shocks and climate change Policy Area Short-term recommendations Medium- to long-term recommendations (<24 months) (>24 months) Investing in Climate Adaptation Research and • Institutionalize e-extension and digital • Shift approach of Pfumvudza from top-down Extension services advisories in AGRITEX through existing to participatory to improve learning in the network of 3000 extension workers ag innovation system including for livestock • Utilize government agricultural extension and breeding support schemes to expand adoption of DT • Pursue e-voucher system so farmers are maize from 30 percent to 80 percent of farmers provided with inputs • Improved rangeland and pasture management • Create enabling environment for mechanization practices and precision agriculture: 99 year leases, tax • Continue support for the Pfumvudza/ exemptions and credit schemes for small- Conservation Agriculture Program, enhancing holder agricultural equipment targeting mechanisms through leveraging the social registry to improve efficiency • Undertake rigorous randomised controlled trials of the program and its components, to provide the evidence needed to further replication and scale-up farmer adoption. Irrigation • Use Public Investment Program to support • Expand large scale irrigation rehabilitation and rehabilitation of existing small and medium development, where possible through PPPs sized dams to enable FLID. • Certify FLID related equipment such as solar pumps and provide import and VAT tax exemptions. • Promote supplier finance2 to small-holders by providing guarantees Landscape/ • Revitalize the practice of sub-catchment • Enable large-scale land restoration to be Watershed management land and water-use planning to financed through carbon markets and Management stem further land degradation associated biodiversity benefits of nature- based tourism ² The limited availability of long-term financing not only undermines agriculture but also affects other productive sectors. Strengthening macroeconomic stability is crucial to addressing this challenge. For further details, refer to Part 1 of the report. xv ZIMBABWE ECONOMIC UPDATE 2024 Policy Area Short-term recommendations Medium- to long-term recommendations (<24 months) (>24 months) Strengthening Anticipatory Action Early warning • Establish consistent whole of government policy • Establish GoZ disaster response fund and disaster risk definition for triggering drought and flood warnings • Utilize collective schemes to facilitate financing • Scale-up climate shock cover purchased through the small-holder access to ag insurance Africa Risk Capacity markets • Expand/Scale agricultural insurance as a risk mitigation measure and safety net for farmers. This should be integrated with digital climate advisory services to enhance farmers' decision-making and reduce their exposure to climate-related risks. Social Safety Nets • Continue implementation of national social registry • Progressively scale-up HSCT to and Community to improve targeting, enhancing coordination, and cover all vulnerable people as the Resilience reducing duplication in social protection efforts country’s tax-base grows Source: Authors’ elaborations. Notes: DT = Drought Tolerant. FLID = Farmer-led Irrigation Development. GoZ = Government of Zimbabwe. HSCT = Harmonized Social Cash Transfers. PPPs = Public-Private Partnerships. VAT = Value Added Taxes. Investing in Climate Adaptation: In the short-term, there is an opportunity to re-orient public investment from agricultural subsidy programs to investment in climate adaptation focused on research and extension services, irrigation, and landscape/ watershed management: • Improving Research and Extension Services. To strengthen agricultural planning for climate resilience, it is key to institutionalize e-extension and digital climate advisories and support a more participatory approach to the agricultural innovation system. In the medium-to-long-term creating an enabling environment for mechanization and precision agriculture could drive both productivity and climate adaptation. In addition, the government agricultural extension system should be used to expand drought-tolerant In the short-term, (DT) maize adoption from 30 percent to 80 percent of there is an opportunity farmers. This adoption could both increase yields and build to re-orient public resilience of around 1 million hectares of maize production, investment with a projected 29 times return on public investment.³ ³ The total cost for DT maize adoption at this scale is estimated at US$50 million per year. However, only a fraction of this amount would be required for the extension system, as promotion efforts would leverage farmers' investments. Given the scale and leverage of this adaptive action, it could safeguard over 80,000 tonnes of maize output in a moderate drought year. xvi EXECUTIVE SUMMARY • Enhancing Irrigation Development. Zimbabwe could Farmer-led irrigation strengthen irrigation development by enhancing farmer- development (FLID), led irrigation development (FLID), which is cost-effective, is cost-effective, with investments ranging from US$50–1,200/ha and a 2 to with investments 3-year payback period, requiring minimal public funding. ranging from Facilitating FLID through measures like certifying land rights, streamlining tenure policies, offering tax exemptions for US$50- solar pumps, and promoting supplier credit can unlock significant private investment. Public funds should also 1,200/ha prioritize rehabilitating small and medium-sized dams to support FLID expansion. Simultaneously, the government should collaborate with private partners to develop large- scale irrigation schemes, utilizing Zimbabwe’s 10,000 dams and groundwater to support 130,000 additional hectares by 2030. This integrated approach will strengthen food security, climate resilience, and economic growth. • Invest in landscape and watershed management. Large- scale landscape restoration would help address deforestation and land degradation to enhance ecosystem services and rural resilience to climate change. Short-term actions should focus on revitalizing sub-catchment management and restoring upper water catchments and riparian buffers to prevent further degradation and protect water resources. Long-term investments should focus on restoring degraded habitats, afforestation, and improved land-use practices, which can generate over US$400 million annually in local benefits, reduce emissions by 11 million tCO2e per year (25% of Zimbabwe’s current annual emissions), and unlock US$50 million annually in carbon credits. Strengthening Anticipatory Action: In the short term, priority lies with improving the early warning system (EWS) and the social protection system, while in the medium term these could be enhanced through a climate fund and a scaled-up harmonized social cash transfer program. • Enhancing early warning and disaster response systems. The country should finalize the Disaster Risk Management Short-term actions (DRM) legislation and plan to fully implement early warning should focus and disaster response systems. In the medium-term, it would on revitalizing be important to set up a dedicated disaster response fund sub-catchment and scale-up access to regional disaster risk finance. management xvii ZIMBABWE ECONOMIC UPDATE 2024 • Strengthen Social Safety Nets and Community Resilience. There are significant GoZ should continue strengthening the National Social benefits to progressively Registry to improve targeting, enhancing coordination, and scaling-up the reducing duplication in social protection efforts. In the harmonized social medium-term, there are significant benefits to progressively cash transfer program, scaling-up the harmonized social cash transfer program, in in order to cover all order to cover all vulnerable people. vulnerable people. By implementing these recommendations, Zimbabwe can enhance its resilience to climate shocks, protect livelihoods, and ensure sustainable agricultural development. The commitment to building a climate-resilient future is essential for the well-being of its population and the stability of its economy. xviii PART ONE RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1.1 REAL SECTOR While Zimbabwe has seen robust economic growth in recent years, the El-Niño induced drought resulted in a significant decline in growth for 2024. Zimbabwe witnessed strong GDP growth in 2023 due to rapid expansion in agricultural outputs and mining investments (Figure 1.1a). While continued macroeconomic instability undermined the formal sector firms operating in the local currency, the informal sector continued to thrive by operating in US$. Zimbabwe’s 2023 economic growth rate significantly exceeds the average across Sub-Sahara African, and at par or exceeding most of its regional peers (Figure 1.1b). This recovery was broad-based, with improvements in agriculture, industry, and services (Figure 1.1c). The return to legal tender status of the US dollar in March 2020 was pivotal in driving this growth by reducing vulnerability to ZWL’s volatility. Nonetheless, most of this growth derived from increases in private consumption and the informal sector, which supported the services sector. Government of Zimbabwe’s (GoZ) contribution to growth came from consumption in 2021 and 2022, and capital expenditures in 2023 (Figure 1.1d). In 2024 the projected GDP growth rate significantly declined to 2.0 percent, driven by a sizeable agricultural contraction, as El Niño brought the worst drought in Zimbabwe in the last 40 years. 1 ZIMBABWE ECONOMIC UPDATE 2024 Figure 1.1: GDP growth for Zimbabwe was higher than many regional peers in 2023, but slowed down in 2024 a. Zimbabwe GDP growth rate (%) b. GDP growth rate of selected countries, (%) 10.0 8.5 10.0 8.0 8.0 6.0 6.1 6.0 5.3 4.0 2.0 4.0 0.0 2.0 2021 2022 2023 2024 proj. 2.0 Zimbabwe Zambia South Africa 0.0 2021 2022 2023 2024 proj. Mozambique Sub-Saharan Africa c. Real growth, contribution by sector d. Real growth, contribution by expenditure 10.0 15.0% 10.0% 5.0 5.0% - 0.0% -5.0 -5.0% -10.0% -10.0 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Trade balance Government investment Private gross fixed capital formation Agriculture Mining Industry Government consumption Private consumption Services Taxes and subsidies GDP growth Source: ZimStat, MoF, World Bank. After years of robust agricultural growth, the El Niño drought is resulting in a steep agricultural contraction driven by maize and tobacco. Agriculture grew by 7.1 percent in 2023, in comparison to 4.9 percent in 2022, while the El Niño drought in 2024 is expected to result in a steep contraction of 15 percent in 2024 (Figure 1.2a). This shock is countering multiple years of robust agricultural growth. Compared to 2020, Zimbabwe’s four major agricultural commodities all saw significant growth up to 2023 – Maize and wheat production were up by 115 and 98 percent, while tobacco and horticulture sales increased by 38 and 10 percent, respectively (Figure 1.2b). In 2024, wheat and horticulture sales continued to expand because of their dependence on irrigation, while rain-fed maize and tobacco declined significantly by 63 and 22 percent (Figure 1.2c). Maize output in 2024 is projected at 635,000 tonnes, compared with 1.5 million in 2023. Maize is the primary crop, serving both as a major feed grain and a staple food for most of the population. This has also triggered food security concerns for the country’s rural population. In response to domestic shortfalls, maize imports have also grown significantly (see section 1.4). 2 2 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Figure 1.2: Robust agriculture growth was brought to a halt in 2024, as the El Niño drought led to a major decline in tobacco and maize crop production a. Agricultural growth (%) b. Agricultural output by commodity c. Agricultural growth (index, 2020 = 100) (annual change in 2024) 20.0 17.5 250 215 15.0 Wheat 22.4% 7.1 200 10.0 4.9 198 4.1 138 5.0 150 0.0 Horticulture 3.8% 100 110 -5.0 -10.0 50 Tobacco -21.5% -15.0 2020 2021 2022 2023 2024 -15.0 proj. -20.0 Tobacco Maize 2020 2021 2022 2023 2024 Maize -63.1% proj. Horticulture Wheat Source: Zimstat, MoF, World Bank. The mining sector continues to exhibit strong growth, bolstered by rising gold prices. Mining activity saw a significant rise in 2023, growing at 5.3 percent. However, it is expected to dip to 2.3 percent in 2024 (Figure 1.3a). This is driven by significant growth in gold output, which makes up almost 45 percent of all mining output and has seen historic price rises in recent years (Figure 1.3b). In contrast, platinum metals make up around 32 percent of mining output, and while their production in Zimbabwe has increased their global prices have been declining across 2023 and 2024. As a result, in 2024, gold outputs are 5 percent higher, while platinum group sales are 3 percent lower (Figure 1.3c). Figure 1.3: Mining output growth has been driven by rising gold prices, while platinum group metals have recently underperformed a. Mining growth (%) b. Mining output by commodity c. Mining growth (index, 2020 = 100) (annual change in 2024) 12.0 10.5 180 163 Chrome 9% 10.0 155 8.0 5.9 130 Gold 5% 6.0 5.3 119 4.0 98 2.3 Platinum Group -3% 2.0 80 0.2 2020 2021 2022 2023 2024 0.0 Gold Platinum Group 2020 2021 2022 2023 2024 Nickel -10% proj. Chrome Nickel Source: Zimstat, MoF, World Bank. 3 ZIMBABWE ECONOMIC UPDATE 2024 The manufacturing sector has seen lackluster growth, driven in part by (hydroelectric) power shortages that were caused by the El Niño drought. Between 2021 and 2023, the manufacturing sector has exhibited growth rates between 1.2 and 2.1 percent growth. In 2024, it continues this subdued performance with a predicted 2 percent growth. Recent Business Tendency Surveys show that manufacturing capacity utilization remains below 50 percent capacity (Figure 1.4a), with respondents citing power shortages, cash flow challenges and macroeconomic volatility and uncertainty as major constraints to their production. Electricity generation continues to struggle, as declining water levels in Lake Kariba affect Zimbabwe’s hydroelectric power generation (Figure 1.4b). Power generation in 2023 exceeded the average monthly rate in 2020-2022 for most of the year, driven by the construction of Hwange Unit 7 and 8 coal-fire powerplants, which added more than 600MW to the national grid. This also boosted the first half of 2024. Yet, since then the El Niño drought depleted most of the usable storage of water in Lake Kariba present for hydroelectricity. According to the Zambezi River Authority, only 3.7 percent of water is available in November 2024, compared to 15.7 percent in November 2023. This has resulted in extremely low power generation in October and November 2024, that is over 40 percent lower than the same months in 2023. Apart from El Niño this year, the erratic weather conditions plaguing the country due to climate change is expected to further disrupt the water availability in the Lake. Figure 1.4: The manufacturing sector has seen lackluster growth, driven in part by power shortages a. Capacity utilization in manufacturing, (%) b. Volume of electricity generation in GWh 60 1,000 40 750 20 500 0 250 2022Q1 2022Q2 2022Q3 2022Q4 2023Q1 2023Q2 2023Q3 2023Q4 2024Q1 2024Q2 January February March April May June July August September October November December Manufacturing Manufacturing highest capacity utilization Average 2020-2022 2023 2024 Proj. Source: Zimstat. The tourism industry continues to grow, with rapidly increasing number of international arrivals and hotels’ bed occupancy. Following the COVID-19 pandemic, Zimbabwe has experienced robust increases in tourist arrivals every year since, growing from 1 million in 2022 to over 1.8 million arrivals projected for 2024 (Figure 1.5). Critically, hotels’ bed occupancy has also expanded every year, and is projected to increase by 15 percent between 2023 and 2024 to 1.2 million. 4 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Figure 1.5: Tourism continues to grow both in terms of international arrivals and hotels’ bed occupancy (International tourist arrivals and hotels’ bed occupancy) 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - 2019 2020 2021 2022 2023 2024 proj. International tourist arrivals Bed occupancy Source: Zimbabwe Tourism Authority. 1.2 FISCAL DEVELOPMENTS Government expenditures surged in 2023, led by a large capital transfer, marking a sharp rise after relative stability between 2019 and 2022 (Figure 1.6a). A sizeable expenditure shock was driven by a large one-off capital transfer of US$3 billion in domestic treasury bonds to finance Zimbabwe’s new SOE holding company - the Mutapa Investment Fund (MIF), and to expunge legacy debt at the Reserve Bank of Zimbabwe (RBZ). This resulted in a historically elevated amount of public spending of 28.6 percent of GDP. In 2024, the rising wage bill, increased debt servicing costs, and the El Niño drought have put additional pressures on government spending (Figure 1.6a). The wage bill saw a substantial increase (from 6.9 percent in 2023 to 11.3 percent in 2024) due to combined pressures from a steady increase in the civil service headcount,⁴ higher compensation, and a wage indexation mechanism that pushes up real wage costs.⁵ At a projected 60 percent of revenue, the wage bill is expected to breach the government’s own fiscal rules,⁶ and exceeds that of most regional peers. The transfer of the RBZ’s external debt to the treasury, together with the payments of treasury bills associated with the increased capital spending in 2023, has resulted in steep increases in the Treasury’s debt servicing costs (rising from 0.1 percent in 2023, to 2 percent in 2024). At the same time, the El Niño-related drought increased fiscal pressures to support vulnerable households with maize and agricultural inputs (see section 2.2 of this report). Tax collection saw a decline in 2023 due to macroeconomic distortions and rising informality. Total revenue stood at 14.6 percent of GDP in 2023, lower than 16.6 percent in the previous year, led by a decline in both tax and non-tax components (Figure 1.6b). Taxes on incomes and profits saw the biggest drop, from 7 percent of GDP in 2022 to 4.6 percent in 2023. This recent decline has been driven by macroeconomic instability, which pushed the economy towards the informal sector (World Bank, 2022), and contributed to a significant reduction of the tax base. Estimates suggest ⁴ Between January 2023 and April 2024 (latest data available), the civil service headcount grew by 9 percent – the number of public administration workers grew by 21.3 percent, health workers by 4.8 percent, and education workers by 2.4 percent. ⁵ World Bank estimates suggest the average annual USD compensation per civil service worker has increased from around US$7,570 in 2023 to US$10,600 in 2024 – a 40 percent increase. ⁶ Internal government guidelines stipulate a wage bill ceiling of 50 percent of government revenues. 5 ZIMBABWE ECONOMIC UPDATE 2024 that in 2023, the government lost almost US$1.4 billion in tax revenue due to macroeconomic policy distortions and rising informality (Steenbergen, Pindiriri, Psillos and Kwaramba, 2024). To strengthen revenue collection, the government implemented a set of new revenue enhancing measures in 2024, that helped improve revenue collection. The 2024 budget included a range of new tax measures.⁷ Current estimates suggest that tax collection increased to 17.0 percent of GDP (Figure 1.6b), driven in part by macroeconomic stabilization (that increased revenue yields across all tax heads), and policy reforms resulting in base-broadening, higher VAT collection and higher taxes on specific services. While the fiscal deficit surged in 2023, it lowered again in 2024, but challenges to finance the deficit persist (Figure 1.6c). The high expenditures driven by a one-time increase in capital spending, together with declining tax revenue jointly resulted in a large fiscal deficit in 2023 (either 6.5 percent according to MoF definitions, or 14 percent according WB/IMF definitions).⁸ In 2024, the rise in expenditure driven by wage increases, increased debt servicing and drought-induced spending are providing a new source of macroeconomic stress. While tax revenue increased, the overall deficit is still expected to be kept at 3 percent of GDP (in line with SADC fiscal rules, but difficult to finance given Zimbabwe’s challenges to access international funding and its strained domestic financial sector. Figure 1.6: Expenditure surged in 2023 and is expected to remain elevated in 2024. Revenue mobilization declined in 2023 due to high inflation and rising informality, but saw a recovery in 2024. Overall, the fiscal deficit surged in 2023, but lowered again in 2024, yet challenges to finance the deficit persist a. Expenditure (% of GDP) b. Revenues (% of GDP c. Fiscal deficit (% of GDP) 30 28.6 20.0 4 1.3 25 0 20.0 20 -0.1 10.0 -4 -2.7 -3.0 15 10 -8 5 0.0 -12 0 2020 2021 2022 2023 2024* 2020 2021 2022 2023 2024 -16 -14.0 Proj Non-tax revenue Other taxes Wages Social benefits Taxes on international trade 2020 2021 2022 2023 2024 Other spending Interest Total Taxes on income and profits Fiscal balance Proj Capital spending Transfer to MIF Taxes on goods and services Total Fiscal balance incl. transfer to MIF Source: World Bank staff calculations using MoF data. ⁷ This included the introduction of new progressive measures (such as a 30 percent duty surcharge on luxury cars, a new wealth tax of 1 percent on properties valued above $250,000, and ensuring a 15 percent tax on profits for large multinationals); strengthening mining taxation (through a new levy on gross process, a capital gains tax for transfer of mining ownership, and establishment of a register of mining rights); and strengthening VAT collection (broadening the VAT base by shifting various items from zero-rated or exempted to standard-rating, lowering the VAT threshold from US$40,000 to $25,000, and including a withholding tax for informal transactions). ⁸ According to GoZ, the issuance of treasure bills to the benefit of the Mutapa Investment Fund is considered government internal financing, and thus excluded from GoZ expenditure/deficit figures. WB/IMF have classified this as a capital transfer and therefore included it in GoZ expenditure/deficit figures. 6 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK The World Bank’s new Zimbabwe public finance review examines options to create fiscal space and identify policy options that can contribute to a return of Zimbabwe’s fiscal accounts to a prudent trajectory. This in turn could anchor inflation and stabilize the exchange rate. Key reforms include policies to ensure macroeconomic stabilization, enhancing domestic revenue mobilization and rationalizing expenditures, which could lead to fiscal consolidation of 7.2 percent of GDP by 2027 (see Box I.1). Box I.1: Key Policy Takeaways from Zimbabwe’s Public Finance Review The World Bank’s new Zimbabwe Public Finance Review discusses strategies and policies which can help the country to create the necessary fiscal space to absorb quasi-fiscal expenditures, reverse the upward trend in public debt, and support macroeconomic stability. Bringing together the policy options from this report suggests that there is a pathway toward a credible medium-term fiscal strategy. Gains from macroeconomic stabilization and reversing informalization, expenditure rationalization, and improved tax policy and tax administration could result in a potential fiscal consolidation of up to 7.2 percent by 2027. In line with findings from the international literature, most gains are expected in domestic revenue mobilization rather than through expenditure rationalization. Careful fiscal design (focused on tax base broadening, government consumption and avoiding a reduction in capital expenditure) means that the cost of fiscal consolidation to GDP is limited. Table B.1 provides a summary of all key recommendations. Table B.1. Summary of recommendations from the Zimbabwe Public Finance Review Area Potential fiscal gains Key recommendations Macroeconomic 2.5-3.4% of GDP • Remove monetary and exchange rate distortions to enable low and stabilization stable inflation, and a competitive exchange rate. • Reverse the trend on informalization by removing macroeconomic obstacles, high compliance burden for SMEs, and reforming the Intermediate Money Transfer Tax. Domestic revenue 3.1-3.8% of GDP • Remove VAT exemptions and zero-rating to increase revenue collection mobilization but ensure that low-income households are adequately compensated. • Publish the fiscal cost of CIT tax incentives as part of the annual budget, and identify potential corporate tax incentives to rationalize. • To raise mining tax collection, strengthen and simplify transfer pricing safeguards, properly manage excess interest deductions, and improve Zimbabwe’s international tax treaty framework. There is also a need to simplify CIT and royalty taxes for the mining sector, and strengthen tax administration for mining audit assurances. • Raise tobacco and alcohol excise tax rates to World Health Organization standards and continue with the sugar-sweetened beverages tax. 7 ZIMBABWE ECONOMIC UPDATE 2024 Area Potential fiscal gains Key recommendations • Strengthen the property tax rate system through improving housing registration, computer-aided mass appraisals, digital billing/payments, and the integration of appropriate technologies. Reform the new (property-related) wealth tax by lowering the exemption threshold. • Accelerate rollout of the Tax and Revenue Administration System, and prioritizing modules facilitating taxpayer registration (especially informal sector). Expenditure 0.9-1.1% of GDP • Strengthen the National Social Registry to improve targeting, rationalization enhancing coordination, and reducing duplication in social protection efforts. • Reduce the wage bill by rationalizing managerial posts and eliminating redundant positions. • Improve value-for-money in procurement through eProcurement and standardized price lists. • Strengthen public investment management by strengthened appraisal processes, which would lead to the prioritization and selection of capital projects. • Improve State Owned Enterprise (SOE) transparency, timely financial reporting, and more effective oversight to limit the fiscal risks of SOEs. Source: Zimbabwe Public Finance Review, World Bank, 2025. Public debt has continued to climb in 2023, driven by external arrears, legacy debt, absorption of RBZ debt, and a transfer to the MIF, but stayed constant in 2024. Zimbabwe’s public debt is in distress and unsustainable, constraining access to international finance. Public debt rose to 113 percent of gross domestic product (GDP) in 2022 and stood at 97 percent in 2023, and 101 percent in 2024 (Figure 1.7a). Total public debt rose to US$21.1 billion in 2024 (Figure 1.7b). While high inflation and a sharp depreciation of the ZWL helped keep domestic debt low, external debt increased sharply. This is partly driven by debt arrears. As the GoZ stopped servicing external debt in 2000, external arrears accumulated to US$7.3 billion in 2023 (Figure 1.7c), including US$2.5 billion in multilateral arrears.⁹ The Treasury also took over three types of legacy debt to redress historical policy missteps. While crucial to help redress historical policy missteps, this meant a large rise in US$-denominated public debt: • “Blocked funds” (US$3.73 billion): In 2021, the GoZ accepted to compensate stakeholders for losses on cashflows that could not be repatriated during a currency conversion in 2019. ⁹ US$1.5 billion is owed to the World Bank, US$700 million is owed to the AfDB, and US$400 million to the EIB. Arrears to the IMF were cleared in October 2016. 8 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK • Former farm owners (US$3.5 billion): In 2022, the GoZ accepted liabilities to compensate former farmers who had been affected by the early 2000s land reform initiative. • Absorption of the RBZ’s debt (US$2.16 billion): In 2023, the Treasury agreed to take over US$2.16 billion in the RBZ’s external debt, to reduce macroeconomic pressures arising from the RBZ’s debt monetization. Additional debt was accumulated in December 2023, when the Treasury issued US$1.9 billion in T-bonds as a transfer to the newly-founded government holding company for state-owned enterprises (SOEs), then the MIF. As such, most new debt in 2023 was domestic, but USD- denominated. Jointly, these debt-creating flows increased from 35 percent of total public debt in 2018, up to 72 percent in 2023 (Figure 1.7c). While Zimbabwe’s total debt has been increasing, the debt-to-GDP ratio has been volatile due to exchange rate dynamics. Changes in the debt-to-GDP ratio are driven in large part by stock-flow adjustments from exchange rate depreciation and the gap between the average and end-of-period exchange rates¹⁰ (Figure 1.7d). Figure 1.7: Public debt (as share of GDP and US$ billion) and main drivers of public debt a. % of GDP b. US$ billion 100 24 21.1 80 20 Percent of GDP USD Billion 60 16 12 40 8 20 4 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 External Domestic External 2024 Domestic c. Selected debt-creating flows (US$ billion, % of debt) d. Contributions to change in public debt (% of GDP) 16 80% 60 Percent of Total Debt Percent of GDP 40 12 60% USD Billion 20 8 40% - -20 4 20% -40 - 0% 2020 2021 2022 2023 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Other debt-creating flows Exchange rate depreciation External arrears Legacy debt RBZ debt Economic growth Real interest rate Mutapa Investment Fund Share of public debt [RHS] Primary deficit Change in public debt Source: World Bank staff calculations using IMF-WB DSA (2024) and MoF data. ¹⁰ For example, while 2023 GDP in US dollars is estimated by converting ZWL-denominated accounts using year’s-average exchange rate (3,692:1), debt in US dollars is estimated by converting ZWL-denominated debt using years’-end exchange rate (7,143:1). This leads to a situation where aggregate debt is US$21.2 billion and 96.6 percent of GDP, even though year-averaged exchange rate estimates put Zimbabwe’s 2023 GDP at US$35.5 billion. 9 ZIMBABWE ECONOMIC UPDATE 2024 The cost of servicing public debt is substantial, and crowding out financing for social services. World Bank estimates suggest debt servicing (principal and interest) adds up to US$ 368 million between January and September 2024 – driven by external debt (US$ 276 million) and domestic debt (US$92 million) (Figure 1.8a). As a share of total expenditure and net lending between January to September 2024 (Figure 1.8b), debt servicing (13.8 percent) exceeds spending on social protection (1 percent), health (7.4 percent), and basic education (12.3 percent), and thus crowds out space for social services. Figure 1.8: The cost of servicing public debt is substantial, and crowding out social services a. Debt servicing expenditure in Jan-Sept b. Share of total expenditure and net lending between Jan-Sept 2024 (USD Million) 2024, by ministry/item 400 Lands, Agriculture, Fisheries, Water and Rural Development ... 300 Debt servicing (principal + interest) 200 Primary and Secondary Education Health and Child Care 100 Higher and Tertiary Education, Innovation, Science and Technology Development 0 USD Million Public Service, Labour and Social Welfare Domestic External Total 0.0 5.0 10.0 15.0 Source: World Bank staff calculations using MoF data, 2024 public debt report, and the 2025 national budget statement. Note: debt servicing includes principal and interest payments. To move toward a pathway to clearing external arrears and resolving its unsustainable public debt, the authorities launched a Structured Dialogue Platform (SDP) with development partners in December 2022. The platform, hosted by the AfDB, offers a forum to discuss key thematic issues between senior government officials, development partners and multilaterals. Three working groups were set up, focused on: (i) economic growth and stability; (ii) governance; and (iii) land. Measures in the economic reforms matrix focus on liberalizing the exchange rate, transferring the RBZ’s external liabilities that arose from quasi-fiscal operations (QFOs) to the Treasury, strengthening domestic revenue mobilization, ensuring fiscal and monetary policy is non-inflationary, and improving access to inclusive social protection. Finally, it calls for an IMF staff-monitored program to help further define and implement strategies from the economic reform matrix (see section 1.7). 1.3 MONETARY AND EXCHANGE RATE DEVELOPMENTS Expansionary monetary policy resulted in high inflation and exchange rate depreciation, and the eventual demise of the Zimbabwean Dollar. The RBZ has historically engaged in substantial QFOs by directly financing external debt servicing payments, agricultural subsidies, and supporting state- owned enterprises (SOEs). Such QFOs were financed through international commercial loans, and printing of large amounts of money. Growth in reserve money is closely correlated with Zimbabwe’s inflation, and big spikes in reserve money resulted in the periods of high inflation throughout 2023 10 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK (Figure 1.9a). On average, reserve money in 2023 increased year-on-year by over 1800 percent, resulting in ZWL inflation of over 700 percent, and the official ZWL-USD exchange rate depreciating by over 95 percent. To try to slow down depreciation arising from excess ZWL money supply growth, the government influenced the auction system and used official exchange rate controls. This resulted in the auction rate being artificially overvalued and contributed to a persistent premium between parallel and official exchange rates (Figure 1.9b). The first quarter of 2024 saw continued high reserve money growth, resulting in a 260 percent depreciation of the ZWL official exchange rate, and ultimately led to the demise of the Zimbabwean dollar. Figure 1.9: Expansionary monetary policy resulted in high inflation and exchange rate depreciation, and the eventual demise of the Zimbabwean Dollar a. ZWL inflation and reserve money growth b. Official and parallel market exchange rates, ZWL$/US$ (y-o-y change, 2022-2023) ZWL-USD Exchange Rate 12,000 3,500 1,200 3,500 10,000 3,000 Growth (percent) Reserve Money 3,000 8,000 2,500 ZWL inflation 2,500 (percent) 800 6,000 2,000 2,000 1,500 1,500 4,000 1,000 400 1,000 500 2,000 500 - - - 2022M1 - 2022M3 2022M5 2022M7 2022M9 2022M11 2023M1 2023M3 2023M5 2023M7 2023M9 2023M11 2022M1 2022M4 2022M7 2022M10 2023M1 2023M4 2023M7 2023M10 ZWL inflation [LHS] ZWL inflation (estimate) [LHS] Official exchange rate [LHS] Reserve Money [RHS] Parallel exchange rate [LHS] Reserve Money [RHS] Source: World Bank staff calculations using RBZ and Zimstat data. In April 2024, the RBZ introduced a new currency called Zimbabwe Gold (ZiG), converting all ZWL balances. After a 10-year term of the previous RBZ governor a new governor was appointed to launch the new Monetary Policy Statement, and introduced the new ZiG currency.¹¹ The ZiG’s exchange rate system is based on a Willing-Buyer-Willing-Seller (WBWS) market.¹² The RBZ aims to intervenes in the market through open market operations to target a value that holds close to movement in the price of a composite basket of reserves and the ZiG-USD inflation differential. The introduction of the ZiG resulted in initial stability, but volatility re-emerged due to the Treasury’s borrowing from RBZ to finance its debt payments. ZiG reserve money remained relatively stable (compared to historical trends under the ZWL) between April and August 2024. However, fiscal pressures (mostly emanating from external debt servicing requirements) led Zimbabwe’s Treasury ¹¹ ZIMSTAT’s also re-started publishing disaggregated inflation indicators. In previous years, only the “blended” inflation measure was officially published, but under the new governor’s term, the RBZ has re-started the publication of ZiG, USD and blended inflation measures. This is an important reform to ease macroeconomic analysis. ¹² Exporters are required to surrender 25 percent of their USD export proceeds to the RBZ at the official exchange rate, in exchange for the local currency (ZiG). The WBWS framework allows the RBZ to utilize part of this export surrender to provide trading liquidity to the market. Authorized dealers (usually banks processing requests for USD from importing clients) can then purchase this foreign exchange at the official (interbank) rate. In theory, all participating dealers can use the WBWS market to both purchase and sell USD for ZiG, but in practice the RBZ is the sole seller of USD. 11 ZIMBABWE ECONOMIC UPDATE 2024 to borrow approximately US$186 million¹³ in ZiG from the RBZ, that contributed to an almost 200 percent increase in reserve money between August and October 2024 (Figure 1.10). This, in turn, also shaped exchange rate dynamics. The official ZiG-USD exchange rate saw notable stability until August, and the parallel exchange rate depreciated gradually. Yet in September, the parallel exchange rate quickly lost value (Figure 1.11a), resulting in a spiking parallel premium exceeding 130 percent (Figure 1.11b). In response, the central bank devalued the currency in late September by 74 percent, bringing the parallel premium back down. It also increased the Bank Policy rate from 20 to 35 percent and raised the statutory reserve requirement from 15 to 20 percent. This tighter monetary policy stance eventually resulted in a more stable formal and parallel market rate in November and December. Locally currency (ZiG) inflation continues to be shaped by dynamics of reserve money growth and exchange rate depreciation. Monthly USD and ZiG inflation initially remained in single digits between May and August 2024 (Figure 1.12). Yet, the official ZiG devaluation and money supply growth contributed to ZiG inflation picking up to 37.2 percent in October. In contrast, US$ inflation was steady and unchanged from September, at 0.7 percent. Because of the dominant role of the US-dollar in Zimbabwe’s economy (see Figure 1.13 below), the monthly “blended” ZiG-US$ inflation rate remained in single-digits. ZiG’s introduction led to a decline in annual (blended) inflation from 58 percent in April 2024, to 41 percent by November 2024. Figure 1.10: ZiG reserve money saw a rapid increase in September and October 2024 (ZiG Reserve Money, Indexed to April 2024 = 100 and USD Million) 500 800 593 650 Index (Apr 24=100) 400 450 548 500 USD Million 300 362 392 316 350 200 341 200 100 119 50 100 0 -100 Apr-24 May-24 Jun-24 Jul-24 Aug-24 Sep-24 Oct-24 ZiG Reserve Money Index ZiG Reserve Money in USD million RBZ Claims on and Loans to Central Government in USD Million Source: World Bank staff calculations using RBZ data. Notes: ZiG reserve money in USD million is estimated using the monthly average ZiG-USD official exchange rate. ¹³ World bank estimates based on the change in ZiG reserve money at the monthly average ZiG-USD official exchange rate. According to the RBZ's central bank survey, RBZ reserve money increased from 7.7 billion to 20.4 billion ZiG between August and October 2024. In that time, RBZ claims on central government and RBZ loans to central government increased from 8.8 billion to 18.8 billion ZiG. 12 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Figure 1.11: The official ZiG-USD exchange rate saw notable stability up until August, and the parallel exchange rate depreciated gradually. Yet in September, the parallel exchange rate quickly lost value, resulting in a spiking parallel premium and an eventual sizeable devaluation of the official exchange rate. a. ZiG-USD exchange rate b. Parallel Market Premium (%) 132% ZiG-USD exchange rate 37 140% 33 120% 29 100% 25 80% 21 60% 17 40% 13 20% 33% 8-Apr-24 8-May-24 8-Jun-24 8-Jul-24 8-Aug-24 8-Sep-24 8-Oct-24 8-Nov-24 8-Dec-24 0% 8-Apr-24 8-May-24 8-Jun-24 8-Jul-24 8-Aug-24 8-Sep-24 8-Oct-24 8-Nov-24 8-Dec-24 Parallel rate Interbank rate Source: World Bank staff calculations using RBZ and WB data. Figure 1.12: After a brief period of relative price stability, ZiG inflation rose significantly in October Monthly USD, ZiG and blended monthly inflation rate, annual USD-ZiG blended inflation rate (percent) 60.0 57.5 50.0 37.2 40.0 41.1 30.0 20.0 11.7 10.0 -2.4 0.0 -0.1 1.4 5.8 0.0 -10.0 Apr-24 May-24 Jun-24 Jul-24 Aug-24 Sep-24 Oct-24 Nov-24 Monthly - USD Monthly - ZIG Monthly - Blended USD and ZIG Annual - Blended USD and ZIG Source: World Bank staff calculations using Zimstat data. Foreign exchange rate restrictions continue to contribute to a parallel market premium. The exchange rate system was partially liberalized by terminating the foreign exchange auction system and shifting to the WBWS system. Yet, functioning of this system is impaired by the small number of authorized banks and the RBZ operating as main seller of ZiG. Rather than allocating forex based on the highest -bidder, RBZ has been doing so through central planning (proportional to banks’ proven “pipeline” demand from their clients). This limits the incentive to bid for more forex by offering higher prices, thus impairing the WBWS’ ability to result in true price discovery. The Government also re-introduced exchange controls (SI 81A of 2024) – that requires businesses to sell at the official (interbank) foreign currency selling rate. Jointly, this contributes to a continued parallel market. In attempts to limit the parallel market premium, the government suppressed the parallel market (through arrests of forex traders), which resulted in an increase in official bank forex transactions at the expense of the parallel market. In November 2024, the RBZ expressed the intention to reform the WBWS-system to ensure a freely floating foreign exchange rate market that is not interfered with by administrative measures.¹⁴ ¹⁴ Bloomberg (2024) “Zimbabwe Central Bank to Ease Currency Reins and Allow Free-Float of ZiG”, published on November 7. Available on https://www.bloomberg.com/news/articles/2024-11-07/-usd-zwg-zimbabwe-to-ease-currency-reins- and-allow-free-float-of-zig. 13 ZIMBABWE ECONOMIC UPDATE 2024 The share of dollarization in Zimbabwe’s Finally, the financial sector remains adequately economy has increased slightly since capitalized, with non-performing loans (NPLs) the introduction of the ZiG. Zimbabwe’s at very low levels. The financial sector has macroeconomic instability in previous years has significant capital reserves¹⁵ and is able to progressively pushed up the use of US dollars, and withstand unexpected shocks or losses. All foreign currency deposits increased from less than banking institutions were compliant with the 4 percent in January 2019, to 82 percent by March prescribed minimum capital adequacy ratio of 12 2024 when the ZWL ended. The introduction of percent and tier 1 ratio of 8 percent, respectively, the ZiG resulted in a further increase in share of as at 30 June 2024. Credit risk in the banking dollars used in Zimbabwe’s formal economy, to 87 sector remained low as reflected in the aggregate percent as of October2024 (Figure 1.13). non-performing loans to total loans ratio (NPL) of 2.0 percent as of 30 June 2024, but this is against Figure 1.13: Dollarization has increased and pushed up the limited bank intermediation.¹⁶ use of foreign currency in domestic transactions. (FCA as a percentage of deposits in M3) 1.4 EXTERNAL SECTOR 100% 87% 82% The trade deficit remains high, driven by the El Niño- 80% induced drought, as export growth is outpaced by 60% higher food (notably maize) imports. Exports have been growing post-pandemic, in part because rising 40% commodity prices increased exports of minerals 20% and metals, particularly gold (Figure 1.14a). However, 0% imports are picking up due to drought in the country, Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 resulting in significant imports of maize, and growing fuel and electricity imports (Figure 1.14b). As a result, ZWL ZIG the trade deficit remained constant between 2023 Source: RBZ. and 2024 at 0.4 percent of GDP. Figure 1.14: Zimbabwe saw a surge in commodity exports, especially gold, but imports increased even more led by a rise in maize and other food a. Exports (US$ million, and % growth) b. Imports (US$ million, and % growth) 10,000 40 10,000 60 Growth, percent Growth, percent 8,000 30 8,000 US$ million US$ million 6,000 6,000 40 20 4,000 4,000 20 2,000 10 2,000 0 0 - 0 2021 2022 2023 2024est 2021 2022 2023 2024est Manufactured goods Other minerals Other Fuel Machinery and vehicles Gold Agricultural goods Exports growth, % (RHS) Other food Maize Imports growth (RHS) Source: World Bank staff calculations using Zimstat data. ¹⁵ The capital adequacy ratio rose from 32.86 percent in December 2021 to 46.15 percent in June 2024. ¹⁶ RBZ (2024) Banking Sector Report for the Quarter ended 30 June 2024. 14 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK The current account is expected to maintain its 0.4 percent of GDP surplus from 2023 into 2024, as a widening trade deficit is outweighed by growing remittances. Despite a US$1.7 billion trade deficit, the current account surplus is expected to remain in surplus – at 0.4 percent of GDP (Figure 1.15). This is driven mostly by robust household remittance inflows, which have grown from US$ 1.2 billion in 2020 (or 5 percent of GDP) to 2.5 billion in 2024 (or 7 percent of GDP) (Figure 1.16). In the medium term, current account improvements are expected to be driven by increased mining activities for lithium, continued growth in gold production and increased steel exports. Figure 1.15: Narrowing current account surplus, and widening trade deficit. Current account, (% of GDP) 8.0 3.0 6.0 4.0 2.0 1.0 - -2.0 -1.0 -4.0 -6.0 -8.0 -3.0 2020 2021 2022 2023 2024 Proj Trade balance Services balance Other Remittances CAB (RHS) Source: Zimstat and RBZ. Figure 1.16: Remarkable rise in remittances in recent years Remittance inflows (USD million, % of GDP) 3,000 8% 6% 2,000 4% 1,000 2% 0 0% 2020 2021 2022 2023 2024 Remittances in USD Million [LHS] % of GDP (RHS) Source: Zimstat and RBZ. While foreign exchange reserves grew slightly in 2024, they remain at low levels, thus exposing the country to external shocks (Figure 1.17). Allocation of the IMF’s Special Drawing Rights (SDR) quota to Zimbabwe increased the level of foreign exchange reserves to around 1.5 months of goods and services in 2021. However, a considerable proportion of the SDR quota was subsequently utilized in 2021 and 2022 to support economic recovery. Consequently, by 2022, foreign exchange reserves of the RBZ had fallen back to 1.1 months of imports and further to only 0.1 months of import in 2023. In 2024, the RBZ has attempted to increase its reserves by buying up a part of the export-surrender requirement. This increased official usable reserves from US$110 million in 2023 up to US$350 million, or 0.4 months of imports. 15 ZIMBABWE ECONOMIC UPDATE 2024 Figure 1.17: Zimbabwe continues to face gross international reserves and import cover 1,000 4.0 800 3.0 600 2.0 400 200 1.0 0 0.0 2020 2021 2022 2023 2024 Gross international reserves in US Million [LHS] Months of imports of goods and services [RHS] Source: RBZ. 1.5 POVERTY IMPLICATIONS The contraction of the agricultural sector due to the El-Niño induced drought of 2024 has likely had a significant impact on household welfare, particularly that of agricultural households. About 60 percent of the total population, and almost 90 percent of the poor households rely on agriculture as the main sector of employment (World Bank, 2022). As mentioned above, maize production in 2024 is expected to decline by 63 percent. Despite the increase in imports, maize price has increased significantly in 2024. The price of maize grain had doubled between October 2023 and March 2024 (Figure 1.18a).¹⁷ More than 90 percent of smallholder farmer grow maize, and of those who grow maize, about 80 percent do not sell it in the market. Thus, most smallholder farmers grow maize primarily for self-consumption. Due to such autarkic behavior, they will not gain from an increase in maize price. Rather, they will lose from having to pay a higher price during purchase. Figure 1.18: The impact of Zimbabwe’s drought on maize a. Retail maize grain price in Marondera b. Maize purchase and own consumption as fraction of total food consumption (by consumption decile) 10 9 0.25 Fraction of total food USD/17.5kg 8 0.2 consumption 7 0.15 6 0.1 5 0.05 4 0 Jan '23 Apr '23 Jul '23 Oct '23 Jan '24 1 2 3 4 5 6 7 8 9 10 Decile Zimbabwe, Marondera, Maize Grain (White), RETAIL, USD/17.5kg Market purchase Own production Source: FAO (2024) Zimbabwe Food Price Monitoring and Analysis.18 Source: World Bank calculations using PICES 2017. ¹⁷ Marondera is a city in Mashonaland East, located 72 kilometres east of Harare. This is considered for illustration purposes. ¹⁸ Available on https://fpma.review.fao.org/giews/v4/zwe/media/frontend/home.html 16 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK Poorer households also spend a large share of total household food consumption on staples like maize. For instance, maize consumption from market purchase and own production comprise 20 percent and 11 percent of total food consumption for households in the poorest decile (Figure 1.18b). In contrast, spending on maize represents a far smaller share of total food consumption (and total consumption) of the better-off households. This implies an increase in food price disproportionately high impact on poorer households. Primary data collected since the onset of the drought corroborate the deduction based on historical data. The 2024 Rural Livelihoods Assessment Report by the Zimbabwe Livelihoods Assessment Committee (ZIMLAC) shows a marked increase in food insecurity in 2024. The share of households with acceptable level of food consumption dropped from 70 percent in 2023 to 50 percent in 2024 (FNC, 2024). At the same time, the proportion of households that consumed poor diet doubled, from 5 percent to 10 percent. This suggests the drought is beginning to affect food intake, especially that of rural households (FNC, 2024). The intersection between drought and poverty goes beyond this specific episode. There is a historical correlation between weather shocks and welfare in Zimbabwe. Poorer rural wards experience droughts more frequently in the 30-year period from 1981 to 2012. Land use in rural areas is dominated by cropping (around 10 million ha), and more than 90 percent of rural employment is in agriculture, which aggravates the exposure and vulnerability of the rural population to drought and other climate shocks. Historical data also show an association between drought and household consumption. Per capita household consumption is approximately 4 to 5 percent lower in areas with lower soil moisture. About 3–17 percent of the rural population would be pushed into extreme poverty under the worst weather conditions observed over the last 14 years (Gascoigne et al., 2023). The pre-existing vulnerability will be aggravated by climate change. Climate projections show that a decline in labor productivity due to heat stress will be the largest contributor to the decline in GDP. Looking ahead to 2050, relatively poorer districts will experience a greater loss in labor productivity through the heat stress channel. By 2050, Mbire, Chiredzi, Hwange Urban, Kariba Urban, Kariba and Mwenezi are projected to experience the highest labor productivity losses (in that order). At the same time, Mutasa, Marondera Urban, Mutare Urban, Nyanga, Marondera and Makoni will be the least affected. Districts that will experience higher labor productivity loss due to heat stress have a larger share of their workforce in agriculture and with no secondary education, limiting the mobility of the workers to non-agricultural occupations that are less affected by heat stress. 1.6 NEAR AND MEDIUM-TERM OUTLOOK AND RISKS Growth is anticipated to increase again to 6 percent in 2025, due to a recovery in agriculture, and robust growth in industry and services. Once the influences of the drought begin to wane, agricultural production is expected to grow by 12.8 percent, driven by a strong recovery in maize and tobacco production. Ongoing investment initiatives are expected to increase production in the sectors of gold and lithium mining, as well as iron and steel manufacturing. This will help maintain a higher-than-average growth rate of 5 percent in 2026. In parallel, the Reserve Bank of Zimbabwe (RBZ) plans to adhere to its commitment to control the supply of reserve money effectively, with the aim of stabilizing the new Zimbabwean currency. 17 ZIMBABWE ECONOMIC UPDATE 2024 Inflation is, therefore, expected to moderate to 10 percent in 2025, while a base effect is initially keeping it high. The government is in discussions with the IMF to start a Staff-Monitored Program in the first quarter of 2025. This will likely include significant targets to contain monetary aggregates, thus resulting in a tight monetary policy stance. Over the medium term, inflation is thus anticipated to decrease further to 5 percent, contributing to a moderate re-monetization. The economy is expected to face downside risks as impact of drought on agriculture and hydropower unfolds. Further, closing the public sector financing gap given financing constraints and lack of fundamental adjustment would be challenging. As the country sails through turbulent waters, it remains to be seen if confidence can be restored in a short span to mobilize private external financing (along with remittances) to close the financing gap. The country is subject to various fiscal risks which might lead to deviation from baseline or forecasts. Given the vulnerability present in the economy, varying risks may evolve from price stability, exchange rate, wage setting, contingent liabilities, quasi-fiscal operations and climate change induced natural disasters. With Lake Kariba operating below potential, hydroelectric power generation is under risk. The current wage bill setting modalities pose significant fiscal risks. Related to this, the current wage-bill-setting modalities present significant fiscal risks. The GoZ has pegged wages to exchange rate to preserve wage values. The indexing of the local component of public service wages against the US dollar exchange rate implies continual adjustment of wages, especially when the exchange rate experiences large depreciations. This presents the possibility of huge deviations between the budgeted wage bill and actual outturn. Furthermore, paying salaries in US dollars maintains a rigid wage bill that cannot change even if the structure of revenue collection changes. In general, wage demands that are not in line with revenue generation capacity may result in inflationary pressures and may also compromise service delivery causing deviation of targets and actual outcomes. The mitigation may involve delinking salaries from the exchange rate to moderate continual increase in wages. The presence of many SOEs presents potentially significant and common source of fiscal risks, with government bailouts of troubled SOEs costing the GoZ. Loss-making state entities constitute larger fiscal risks, as they may require periodic recapitalization or ongoing support. A new source of fiscal risks emanates from the recently formed Mutapa Investment Fund. While the MIF was recently established with a view of enhancing the GoZ’s agility to deal with SOE assets, its governance framework is underdeveloped, and results in a potential overlap with other ministries’ legal oversight over SOEs. The MIF could create fiscal risks, as a spending authority that can circumvent the budget process and allows opens the door for risks associated with extra-budgetary entities. Finally, Zimbabwe is susceptible to many external, natural and climatic shocks. The risks emanating from climate change are huge, droughts have become more frequent, with the 2024 drought not only affecting the budget provision but also economic growth. Climatic shocks or natural disasters are associated with unbudgeted expenditure (additional costs) either on reconstruction of public infrastructure and/or provision of disaster relief. Furthermore, commodity shocks or global conflicts may negatively impact revenue sources or increase spending more than previously anticipated. For the 2024/25 agricultural season, the La Niña phenomenon is expected with above-normal rainfall, but there is a risk that this will come too late for the summer harvest. Despite expectations 18 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK of normal to above-normal rainfall across the country, the current agriculture season is affected by rainfall patterns that have been unevenly distributed both spatially and temporally. While some areas, like Manicaland Province, have received effective rainfall for planting, others are still awaiting sufficient precipitation (MSD, 2024). This mixed start to the season, coupled with current drier- than-average conditions, has delayed the cropping season and planting activities. However, rainfall outlooks suggest improvements from January 2025—a critical period for crop yield formation (MSD, 2024). The forecast for a strong La Niña has been revised down, indicating that some regions may experience below-average rainfall despite earlier expectations (FAO, 2024). Table 1.1. Selected economic indicators for Zimbabwe (annual percent change unless indicated otherwise) 2021 2022 2023 2024f 2025f 2026f Real GDP growth, at constant market prices 8.5 6.1 5.3 2.0 6.0 5.0 Private consumption 9.2 5.1 -0.1 3.0 6.6 4.9 Government consumption 58.9 70.1 13.9 5.4 5.3 4.0 Gross fixed capital investment 12.8 21.8 14.4 0.5 4.6 6.3 Exports, goods and services 47.0 43.4 -8.4 1.3 5.7 5.7 Imports, goods and services 61.5 54.0 -11.0 2.0 6.0 5.0 Real GDP growth, at constant factor prices 8.4 6.2 5.5 2.0 6.0 5.0 Agriculture 17.5 6.2 6.3 -15 12.8 7.7 Industry 6.4 5.2 3.2 2.7 5.1 4.4 Services 7.7 6.9 6.7 5.6 5.2 4.8 Inflation (consumer price index) 94.1 160.2 257.0 40.0 10.0 5.0 Current account balance (% of GDP) 1.2 0.8 0.4 0.4 0.7 0.9 Net foreign direct investment inflow (% of GDP) -0.8 -0.9 -1.5 -1.4 -1.5 -1.5 Fiscal balance (% of GDP) -2.2 0.1 -14.0 -3.0 -1.7 -1.6 Revenues (% of GDP) 15.3 16.6 14.6 17.0 17.5 17.5 Debt (% of GDP) 58.4 100.5 96.6 101.0 87.2 77.0 Primary balance (% of GDP) -2.1 0.2 -13.9 -2.4 -0.9 -1.1 International poverty rate ($2.15 in 2017 PPP)a,b 41.4 39.8 38.4 38.6 36.8 35.6 Lower middle-income poverty rate ($3.65 in 2017 PPP)a,b 65.8 64.5 63.3 63.3 61.4 60.5 Upper middle-income poverty rate ($6.85 in 2017 PPP)a,b 85.6 85.0 84.6 84.6 83.8 83.1 GHG emissions growth (mtCO2e) 1.5 1.3 0.7 -0.5 -0.7 -0.2 Energy related GHG emissions (% of total) 10.5 11.0 11.4 10.6 10.3 10.0 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. Notes: e = estimate, f = forecast. Poverty data are expressed in 2017 PPP, versus 2011 PPP in previous editions - resulting in major changes. See pip.worldbank.org (a) Calculations based on 2019-PICES. Actual data: 2019. Nowcast: 2020-2023. Forecasts are from 2024 to 2026. (b) Projection using neutral distribution (2019) with pass-through = 0.87 (Med (0.87)) based on GDP per capita in constant LCU. 19 ZIMBABWE ECONOMIC UPDATE 2024 1.7 POLICY RECOMMENDATIONS Sustaining economic growth will require Zimbabwe to tackle its macroeconomic challenges, arrears clearance and debt resolution. Zimbabwe’s history of high inflation and rapid exchange rate depreciation has offered considerable challenges to Zimbabwe’s private sector, misallocating resources to sectors and firms with low productivity and limiting private investment. The accumulation of public debt arrears has limited Zimbabwe’s access to external financing and kept public investment at low levels, further negatively impacting growth. As such, addressing price and exchange rate volatility and public debt arrears is a necessary condition for economic growth and job creation.¹⁹ The Structured Dialogue Platform for Arrears Clearance and Debt Resolution identifies an important set of reforms that offers the best way forward on macroeconomic stabilization and addressing Zimbabwe’s pressing arrears and debt problems. The process started in December 2022. Since then, three working groups were set up to report to the dialogue platform, focused on: (i) economic growth and stability; (ii) governance; and (iii) land. The dialogue provides the best way forward for the GoZ to end its long-standing external debt arrears, and would then help to provide Zimbabwe with access to affordable external credit lines, and stimulate much-needed public and private sector investment to boost growth. Sufficient progress across the three pillars of the Structured Dialogue Platform would allow Zimbabwe to fully re-engage with multilateral financial institutions and provide significant amounts of new funding to Zimbabwe. Full reengagement will provide the Government with the necessary concessional financing, encourage public and private investments, bolster economic growth, and allow swift progress towards Zimbabwe’s Vision 2030 to achieve rapid growth and poverty reduction. However, the economic adjustments that will be required for success under the Structured Dialogue Platform, while necessary to stabilize the economy, are not without short-term sacrifices. Zimbabwe has requested a new Staff Monitored Program from the IMF, with formal negotiations expected to take place in the first quarter of 2025. This will provide an effective tool to assist in the implementation of economic reforms and boost credibility of Zimbabwe’s economic programs to re- anchor macroeconomic stability. Yet, this SMP may also make 2025 a challenging year for Zimbabwe’s citizens. To create the necessary fiscal space, the Government will have to make difficult decisions on spending cuts and raising domestic taxes. In addition, it will be challenging to find the necessary ¹⁹ See also World Bank (2022) Zimbabwe - Country Economic Memorandum: Boosting Productivity and Quality Jobs. 20 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK resources for government to help settle its legacy debts, such as those on land compensation. Both will require reinforced and continued commitment from Zimbabwe’s senior leadership to ensure their success. It is critical for government and development partners to consider ways to help minimize the impact of economic reforms on vulnerable households. It will be critical to strengthen the National Social Registry, to allow ministries and development partners to better coordinate and target assistance to the most vulnerable in society. The World Bank has also recently concluded a “Public Finance Review,” which sets out various policy opportunities for pro-poor fiscal consolidation and is working with government to help implement recommendation. This edition of the Zimbabwe Economic Update re-affirms the importance and urgency of the policies set out in the Economic Reforms Matrix to re-establish macroeconomic stability, enhance growth, and protect the most vulnerable. It also commends the government on the progress made across the six areas of the economic matrix: 1. Successfully implement an IMF staff-monitored program (SMP). An SMP will help with further defining and implementation of economic reforms highlighted in the rest of this matrix. • Government action to date: The Government has formally requested an SMP in June 2023. Multiple IMF staff visits have resulted in notable convergence on GoZ and IMF macro-framework. • Recommendations: The World Bank recognizes the constructive and open discussions, transparency and data sharing observed during the IMF mission. Continuation along this way will be important to help support the reengagement, arrears clearance and debt resolution. 2. Establish a market-determined and competitive foreign exchange rate regime: Strategies to realize this include removing restrictions on the exchange rate at which banks, dealers, and businesses can transact; and implementing regulations to allow markets to set the exchange rate. • Government action to date: The Government of Zimbabwe introduced a new currency (ZiG), determined by a willing-buyer-willing-seller-market and RBZ’s open market operations, but various de-jure and de-facto exchange rate restrictions continue to contribute to a parallel market premium. • Recommendations: The parallel FX market premium remains large at above 30 percent, and so additional efforts are likely needed to shift towards a market-determined forex market by allowing more flexibility in the official exchange rate through a more transparent and market-driven price discovery. 21 ZIMBABWE ECONOMIC UPDATE 2024 3. End all QFOs and end all unbudgeted expenditures: The matrix calls for all RBZ liabilities to be formally moved to the treasury’s books, and for all government transactions to be carried out at market rate (unless via on-budget subsidies). It also calls for the ending of forex retention policy. • Government action to date: All of US$2.16 billion of RBZ’s external liabilities have been transferred to the Treasury. In addition, a Statutory Instrument was adopted that prevents RBZ from taking on any new external debt without explicit Treasury approval. • Recommendations: While the transfer is complete, it is now paramount that these external debts are serviced through tax revenue (rather than borrowing from RBZ). While the imposition of a 25 percent forex retention policy has helped to distribute foreign currency to strategic non-generators of foreign currency and sustain the dual currency environment, it acts as a tax on the tradable sector. As such, in the medium- term there is a need to end the forex retention policy to improve the competitiveness of Zimbabwe’s exporters. 4. Strengthen revenue collection and expenditure management: To absorb RBZ’s forex liabilities on its budget, the GoZ will need to raise additional domestic revenue. It may also have to rationalize expenditures, which can be done by improve spending effectiveness via financial analysis of state-owned enterprises (SOEs) and value-for-money (VfM) reviews for procurement contracts. The benefits would be even greater if the results of the VfM analysis were published. • Government action to date: The government implemented a set of new revenue enhancing measures in 2024, that helped improve revenue collection.²⁰ This, together with macroeconomic stabilization, helped increase tax revenue from 14.6 to 17 percent of GDP. The government also introduced e-procurement in October 2023 that enables procuring entities and bidders to conduct digital procurement activities. • Recommendations: There may be options to rationalize expenditures by improving value- for-money in procurement and public investment management through eProcurement and strengthened appraisal processes. In addition, GoZ should consider reducing the wage bill by rationalizing managerial posts and eliminating redundant positions in line with the GoZ jobs evaluation report. To raise additional domestic revenue, GoZ may wish to consider rationalizing tax expenditures, increasing Zimbabwe’s mining revenue, and raising excise tax on products that negatively impact public health. ²⁰ This included the introduction of new progressive measures (such as a 30 percent duty surcharge on luxury cars, a new wealth tax of 1 percent on properties valued above $250,000, and ensuring a 15 percent tax on profits for large multinationals); strengthening mining taxation (through a new levy on gross process, a capital gains tax for transfer of mining ownership, and establishment of a register of mining rights); and strengthening VAT collection (broadening the VAT base by shifting various items from zero-rated or exempted to standard-rating, lowering the VAT threshold from US$40,000 to $25,000, and including a withholding tax for informal transactions). 22 PART ONE: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 5. Maintain tight monetary policy and sound fiscal management: The matrix calls for the maintenance of appropriately tight monetary policy, and the use of interesting-bearing certificates of deposits to mopping up surplus liquidity. • Government action to date: High increase in money supply in early 2024. Introduction of ZiG resulted in initial price stability, but increase in reserve money due to Treasury’s borrowing from RBZ to finance its debt payments. In response, RBZ has tightened money supply, increased the Bank Policy rate and raised the statutory reserve requirement. On the fiscal side, there was a large deficit in 2023 due to large one-off capital expenditure. In 2024, the fiscal deficit is within bounds, but challenges to finance the fiscal deficit persist. • Recommendations: It will be critical to maintain the RBZ’s tight monetary policy stance and resist renewed (fiscal) pressures to ensure low inflation and exchange rate stability. 6. Improve access to inclusive social protection: To improve the effectiveness of social protection, government could consider consolidating multiple, fragmented programs into a few focused programs, and strengthening the targeting toward the most vulnerable people. • Government action to date: The GoZ and World Bank completed a pilot in 2022 to establish a single registry of vulnerable people in nine districts. A new national social registry system (online platform) is now live, but there is a need for integration with other data systems, nationwide data collection, and ongoing capacity-building. • Recommendations: The GoZ to continue working together with the World Bank and other development partners to jointly scale up the single registry across Zimbabwe as a whole, and use this to improve targeting for all its social protection programs and other subsidies (e.g. on agriculture and electricity) to vulnerable households. 23 PART TWO IMPROVING ZIMBABWE’S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE 2.1 INTRODUCTION The agri-food sector plays a crucial role in Zimbabwe's economy, contributing significantly to employment, GDP and export earnings. Through its multiplier effect, the sector accounts for an average of 11 percent of the Gross Domestic Product (GDP) and 40 percent of total export earnings. It also provides employment to nearly 70 percent of the population and supplies approximately 68 percent of raw materials to the manufacturing sector, sustaining a considerable market demand for industrial products. As showcased from the strong agricultural season in 2020/21, agriculture can play a pivotal role in driving Zimbabwe’s economic growth and poverty reduction. Zimbabwe’s agricultural sector is largely driven by smallholder farmers, which are often more dependent on rainfed production and hence vulnerable to weather-related shocks. Agriculture on smallholder farms is highly maize-centric, with over 90 percent of smallholders growing maize. The crop accounts for more than half of the average calorie consumption for most Zimbabweans. 24 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE However, over the past two decades, national production levels have averaged just below 0.8 million tonnes, fluctuating from below 0.5 million tonnes to as high as 2.7 million tonnes. During deficit years, maize is imported from neighboring countries and global markets, primarily from South Africa and Mexico. In 2018, maize yields in Zimbabwe were 0.6 tonnes per hectare, significantly lower than the yields in Malawi (1.6 tonnes per hectare), Zambia (2.2 tonnes per hectare), and South Africa (5.4 tonnes per hectare) World Bank (2019). The government of Zimbabwe has set an ambitious target of increasing agricultural output to US$12.5 billion a year by 2025 from around US$2.4 billion in 2022. However, the country's vulnerability to climate-related shocks, particularly drought, significantly impacts agricultural productivity, GDP, and food security. Climate variability and change has led to an alarming increase in the frequency of droughts: from one in every ten growing seasons between 1902 and 1979, to one in every four growing seasons from 1980 to 2011 (ZMSD 2023). This frequent cycle of dry shocks and recovery undermines sustainable development in the agricultural sector. This diminishing recovery time for farms and farmers highlights the urgent need for Zimbabwe to build resilience to climate shocks. The 2023/24 El Niño-induced drought alone caused damage losses to the sector of approximately US $363 million (FAO, 2024). This special topic focuses on Zimbabwe’s vulnerability to climate-related shocks induced by the El Niño-Southern Oscillation (ENSO). It aims to: (a) take stock of what is known about the relationship between ENSO and climate variability in Zimbabwe; (b) quantify the impact of climate variability on poverty; and (c) assess policy options for anticipatory and adaptive actions to reduce the effects of climate variability in the short-to-medium term as well as to climate change in the long-term. 2.2 CLIMATE SHOCKS IN ZIMBABWE In recent decades, Zimbabwe has experienced a high frequency of mid-season dry spells and a contraction of the rainy season through the late-onset, and early cessation of the rainy season. The number of rainy days has reduced while the number of dry days has increased. Increasing temperatures have raised evapotranspiration rates and reduced soil moisture, further worsening the severity of droughts and mid-season dry spells, particularly in the southern and western regions of the countries (GoZ 2022). This has led to an increase the frequency of agricultural drought from 1-in-10 before 1980, to 1-in-4 growing seasons since 1980 impacting maize harvests in particular. Late-onset and early season cessation of the rain has been observed for all the main five agro-ecological regions. This is already reshaping Zimbabwe’s agro-ecological regions, with drought-prone regions having become drier and having increased in area, while major food-producing regions have shrunk. A large part of the country has high to very high levels of vulnerability to drought, dependency on rainfed farming for livelihood, poverty, household head characteristics and prevalence of chronic illness. There are two main channels that are shaping Zimbabwe’s climate shocks: the El Niño-Southern Oscillation (ENSO) phenomena (which includes El Niño and La Niña phases), and climate change. The El Niño conditions in Zimbabwe are typically associated with above-average temperatures and below-average rainfall that may cause drought, while La Niña is linked to above-average rainfall. There is growing evidence that climate change is making El Niño events more common and intense. 25 ZIMBABWE ECONOMIC UPDATE 2024 Additionally, global warming is expected to increase the frequency of agricultural droughts, which suggests that climate change is contributing to abnormal rainfall patterns beyond typical climate variability (World Bank, 2024).²¹ We will discuss each in turn. The El Niño-Southern Oscillation and weather shocks in Zimbabwe Rains in the 2023/24 growing season were very poor and led to a drought-induced below-average 2024 harvest in much of southern Africa and Zimbabwe in particular (Figure 2.1). Zimbabwe experienced a 60 percent decrease in maize yield compared to the five-year average (see section 1.1). By August 2024, many poor households in the region had nearly or entirely depleted their stocks from the 2024 harvest and were increasingly turning to unsustainable coping strategies, such as selling livestock and other assets, or facing food consumption shortages. Between 5.8 and 7.7 million people in Zimbabwe will be food insecure by the end of the lean season, while 4.5 million children were chronically malnourished (Famine Early Warning Systems Network, 2024 and GoZ).²² Figure 2.1: Rainfall anomalies in the SADC region during the main growing season (December 2023 to March 2024) Precipitation Percent Difference from Average (%) Source: World Bank calculations using Climate Hazards Center InfraRed Precipitation with Station data (CHIRPS). Notes: Baseline: 1991-2020. Climate plays a significant role in Zimbabwe's economic landscape, which features a complex physical and climatic structure. Northern Zimbabwe is characterized by a subtropical climate with dry winters and hot summers, while the southern regions are dominated by a hot arid and steppe climate. The national climate is heavily influenced by teleconnections, which are climate anomalies that occur across large distances and cause deviations from average conditions. Teleconnections ²¹ World Bank (2024). Zimbabwe Country Climate and Development Report. ²² https://fews.net/southern-africa/alert/august-2024 26 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE represent the connection between shifts in atmospheric and oceanic conditions in one region and their impact on climate patterns in another. A well-known example is the El Niño-Southern Oscillation (ENSO), which includes both the El Niño and La Niña phases. ENSO impacts weather patterns globally, including in Southern Africa, where it plays a crucial role in climate variability. Winds are central to this process—particularly the trade winds over the Pacific, which influence sea surface temperatures and related rainfall patterns. During El Niño, weakened trade winds allow warm water to shift eastward in the Pacific, altering weather patterns worldwide (see box 2.1, Figure 2.2). Box 2.1: What are El Niño and La Nina? Figure 2.2: El Niño vs la Niña schematic representation of wind anomalies (arrows) and ocean temperature anomalies (colors) Source: https://thecolumn.ahacentre.org/insight/vol-66-getting-to-know-el-Niño-la-nina The El Niño has historically been associated with warmer sea surface temperatures in the central and eastern Pacific Ocean, leading to an increased risk of dry conditions in Southern Africa (Figure 2.3A). During strong El Niño events, Zimbabwe and neighboring countries frequently experience reduced rainfall during the main rainy season (December to March). This leads to soil moisture deficits, reduced river flows, and stress on water resources, which can severely affect agriculture and food security. Historical data shows that El Niño events have coincided with some of the most severe droughts in Zimbabwe, such as those in 1991- 92, 2015-16, and 2023-24. The La Niña, on the other hand, is characterized by cooler-than-normal sea surface temperatures and is often associated with wetter conditions in parts of Southern Africa (Figure 2.3B). La Niña can bring above-average rainfall, which increases the risk of floods. In Zimbabwe, this can lead to riverine floods and flash floods, particularly in low-lying areas and 27 ZIMBABWE ECONOMIC UPDATE 2024 along major rivers such as the Zambezi. While beneficial for water resources and agricultural production in some instances, La Niña-induced heavy rains can also trigger landslides and waterlogging, damaging infrastructure and crops. Figure 2.3: Historical impacts of El Niño and La Nina for Sub-Saharan Africa a. El Niño impacts on rainfall b. La Niña impacts on rainfall Source: World Bank adapted from International Research Institute for Climate and Society. Notes: The regions and seasons shown on the map indicate typical but not guaranteed impacts of La Niña. Overall, the risk of drought tends to be much higher than the risk of (river) floods for Zimbabwe. The cyclical nature of ENSO means that Southern Africa is subject to periodic shifts between droughts and floods. According to the global emergency database EMDAT (www.emdat.be), seven droughts and 12 floods have been recorded in Zimbabwe between 2000 and mid-2024. While successive droughts affected more than 28.7 million people, floods have affected around 344,000 people over the period.²³ However, the increasing probability of strong tropical storms also increases the risk of large-scale flood events. In 2019 alone, two consecutive storms, Idai and Kenneth, led to large- scale floods that affected and displaced hundreds of thousands of people in the region. Idai affected around 270,000 people in Zimbabwe, primarily in the eastern and southern provinces.²⁴ ²³ EM-DAT: The Emergency Events Database - Universite catholique de Louvain (UCL) - CRED, D. Guha-Sapir - www.emdat. be, Brussels, Belgium. https://www.emdat.be/database ²⁴ Recent research has indicated that drought events often show critical data gaps regarding the human and economic losses related to weather- or climate-related disasters. Around 70 percent of all globally reported droughts do not include any information on human losses with potentially far-reaching consequences for policy-making, public awareness, and risk modeling. Drought-related losses tend to be confounded with other disaster categories, such as famine (i.e. “complex emergency”), even if the drought was a major root cause or contributing factor to the famine. Similar misclassifications can happen between flood- and tropical storm-related socioeconomic impacts. Hence, it is expected that the number of people affected by floods is much higher than currently reported in disaster databases. https://iopscience.iop.org/ article/10.1088/1748-9326/ad58fb 28 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE The El Niño-Southern Oscillation and long-term climate change in Zimbabwe There is growing evidence that human-induced climate change is making El Niño events more frequent and intense. Annual mean surface temperature warmed by about 0.9°C from 1900 to 2018, and average annual rainfall declined by about 5 percent across the country over the same period. Since the 1970s, the formation of El Niños can increasingly be attributed to anthropogenic forcing, meaning that global warming has led to more frequent and extreme El Niño events.²⁵ In addition, rising global temperatures are expected to alter rainfall patterns, leading to more frequent and intense droughts in Southern Africa. Climate models indicate that Zimbabwe will experience longer dry spells, heat waves, reduced rainfall during critical growing seasons, and higher evaporation rates, which can exacerbate water scarcity and reduce agricultural productivity. In short, the frequency and severity of droughts in Zimbabwe are likely to increase as global warming continues. Global warming is also expected to increase the risk of floods in Zimbabwe. While droughts may become more frequent, climate change can lead to more intense and erratic rainfall events. These heavier and more unpredictable rainfalls can cause flash floods, particularly in areas where the soil is dry and less able to absorb water or in regions with inadequate infrastructure. As temperatures rise, the atmosphere can hold more moisture, leading to increased precipitation intensity. This can increase the chances of severe flood events, especially during the rainy season or in conjunction with tropical storms. Zimbabwe, like other parts of Southern Africa, is thus likely to face a dual threat from both increased drought and more frequent or intense flooding events due to global warming. To understand the plausible extremes in climate change variability it is important to look at clusters of dry/hot and wet/warm scenarios, as defined in the World Bank’s Country Climate and Development Report (World Bank, 2024). The main climate scenarios SSP1-1.9 (Paris aligned) to SSP5-8.5 (high-emissions) are ensemble means of multiple underlying global circulation models (GCMs). The underlying GCMs are generated by different research and modelling groups around the world using different methods and assumptions. Some of these GCMs project hotter and drier climate futures others that project warmer and wetter futures for Zimbabwe. To examine plausible worst-case scenarios at both ends of this spectrum of GCMs, the Zimbabwe CCDR examined a cluster of hot/dry and a cluster of warm/wet models around the 90th percentile of the SSP3-7.0 (Figure 2.4A and 2.4B). These naturally show much higher variations in plausible worst-case scenarios. Under the cluster of dry/hot scenarios examined, four extreme drought events on at least the 2023/24 scale would be expected over the next two decades (Figure 2.4B). In addition, the warm/wet scenarios flag the possibility of heavier than average rainfall in nine of the next 20 years. The regular recurrence of both drought and flood highlights the urgent need to take anticipatory actions now. ²⁵ https://agupubs.onlinelibrary.wiley.com/doi/10.1029/2023GL105201 29 ZIMBABWE ECONOMIC UPDATE 2024 Figure 2.4: Zimbabwe change in mean temperature and precipitation from climate change a. Zimbabwe change in mean temperature b. Zimbabwe change in mean precipitation (lines 5-year 2.5 moving average, shaded area annual variation) Change in mean temperature (C) 30 Change in precipitation 2 20 10 (percent) 1.5 0 1 -10 -20 0.5 -30 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 0 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 Dry/Hot (annual) Wet/Warm (annual) Dry/Hot SSP1-1.9 SSP3-7.0 Wet Warm Dry/Hot SSP1-1.9 SSP3-7.0 Wet Warm Source: World Bank. 2023a. Without adaptation measures, climate change could raise the percentage of Zimbabwe's population at very high risk from drought from 32 percent to 86 percent by 2100. This risk is compounded by reduced runoff and groundwater recharge combined with potential population growth. Even under the most favorable greenhouse gas emissions and low population growth scenarios, national per capita water availability is expected to drop by 38 percent, from 2.45 million liters per capita per year in 2012 to 1.52 million liters per capita per year by 2050. With medium to high population growth, water availability could decline further, potentially moving Zimbabwe from "water stress" to "absolute water scarcity" by 2080 (Davis and Hirji, 2014). 2.3 THE ECONOMIC IMPACT OF CLIMATE SHOCKS IN ZIMBABWE The 2024 ENSO event has had significant macroeconomic repercussions for Zimbabwe, particularly through its profound impact on drought conditions. These climate-induced shocks have exacerbated the nation's fiscal and economic vulnerabilities, severely affecting agricultural output, energy production, and overall economic stability. This section delves into the macro-fiscal and distributional effects of the 2024 El Niño-linked drought, examining how these weather anomalies have disrupted Zimbabwe's external and fiscal sustainability, and the broader economic implications of long-term climate change. The macroeconomic impacts of the 2024 El Niño linked drought The macro-fiscal effects of droughts and floods in Zimbabwe are complex and operate through various channels. Dry and wet weather shocks impact the country’s external sustainability by altering the levels and structure of imports and exports, leading to reduced industrial activity and increased grain imports, which widen current account deficits. This situation results in growing external indebtedness with long-term stability concerns. On the fiscal sustainability front, climate-induced supply shocks erode the tax base, reducing tax revenue while increasing government expenditure and fiscal deficits. Consequently, Zimbabwe faces higher external and domestic debt, with government efforts to implement mitigation and adaptation measures further straining its fiscal capacity. 30 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE The short-term impact of the 2023/24 El Niño linked drought in Zimbabwe is expected to reduce real GDP by over 3.2 percent, compared to a no-drought scenario. To estimate this impact, a “no- drought” projection from early 2024 was compared to the most recent World Bank macroeconomic forecasts (Figure 2.5). The most important changes come from a steep revision in agricultural output (from 3.3 to -15 percent growth). In addition, the energy sector is experiencing a major decline in production due to the drought’s impact on hydropower production at Kariba dam, the world’s largest reservoir, and a major source of electricity in Zimbabwe. Yearly comparison of Lake Kariba’s reservoir data for the month of September shows that the amount of water in the reservoir dropped sharply to an all-time low (see section 1.1). This impacted the output of the entire industrial sector (with a decline in growth from 6.8 to 2.7 percent). Finally, household losses in purchasing power from the drought (through crop failures and higher prices) also negatively affect the wholesale and retail industry. However, this is offset by higher-than-expected remittance inflows that help bolster household income, resulting in no major effect on the services sector. Figure 2.5: Estimated impact of El Niño-induced Drought on Zimbabwe’s growth. 10.0 6.8 5.6 5.2 5.6 5.0 3.3 2.7 2.0 0.0 0.0 -5.0 -3.2 -10.0 -4.1 -15.0 -20.0 -15.0 -18.3 2024 - No Drought Projection 2024 Drought Projection Impact of Drought Agriculture growth Industrial growth Services growth Real GDP growth Source: WB staff estimates using MFMod. The El Niño-induced drought is also expected to raise expenditures and reduce revenue, leading to a 0.9 percent increase in the overall fiscal deficit. Government revenue is expected at 17.0 percent of GDP (due to the slowdown in economic activity), versus 18.3 percent of GDP without El Niño. Government expenditure is expected to increase to 20.0 percent of GDP, versus 19.7 percent without El Niño. The drought is thus expected to increase the fiscal deficit from 1.4 percent to 3.0 percent of GDP (a change of 1.6 percent of GDP). Government expenditure is expected to increase by 0.3 percent of GDP to source food imports and accommodate higher government salaries. As part of its food mitigation program for the 2024 fiscal year, the government has planned to import 400,000 tonnes of food for vulnerable populations. Furthermore, it will also facilitate the importation of over 570,742 tonnes of grain for human consumption and 450,000 tonnes for livestock by the private sector. In addition, to address drought-related price increases the government is responding by raising employee salaries. While part of these costs is achieved through expenditure reprioritization, overall expenditure is expected to increase to 20.9 percent of GDP (versus 20.6 percent without El Niño). 31 ZIMBABWE ECONOMIC UPDATE 2024 Finally, the drought is also expected to result in lower exports, and higher imports. Exports are projected at 22.1 percent of GDP in 2024 (down from 36.7 percent of GDP without the drought). This is in large parts due to lower tobacco production. Yet, imports were projected to rise to 30.6 percent of GDP in 2024 (up from 26.6 percent of GDP without the drought). Grain imports, maize in particular, are expected to be higher to augment sub-optimal domestic production. In the same manner, the drought will lower the country’s hydro electricity production leading to higher imports. Jointly, this results in a growing trade deficit. Poverty and distributional impact of the 2024 El Niño linked drought The 2024 ENSO-induced drought has had a profound impact on poverty and its distribution across Zimbabwe. The drought, characterized by significant rainfall deficits, has led to a substantial decline in household consumption, exacerbating poverty levels, particularly in rural areas.²⁶ The spatial distribution of the drought reveals that the Surface Soil Moisture (SSM) during the 2023/24 agricultural season was significantly lower than the long-term average²⁷ across the entire country. As shown in Figure 2.6, the SSM was lower than the previous 23-year average (2000 – 2022) in the entire country, with particularly severe shortfalls in the center and northeast of the country (Figure 2.6A). Expressed differently, a large swath of the country was in severe drought, defined as an SSM of more than two standard deviations²⁸ below the long-term average SSM (Figure2.6B). Figure 2.6: Surface Soil Moisture anomaly in the 2023/24 season a. SSM anomaly in the 2023/24 agricultural season b. Areas in severe drought in 2023/24 (SSM is below 2 (relative to 2000-22 average in standard deviations standard deviations from the long-term average) Legend Zimbabwe z-score < -4 Legend -4 < z-score < -3 -3 < z-score < -2 Zimbabwe -2 < z-score < -1 No Drought (z-score > -2) -1 < z-score < 0 Drought (z-score < -2) Source: Authors’ calculations are based on data from Climate Engine (https://app.climateengine.org/climateEngine). ²⁶ The estimation of the impact of the 2024 ENSO-induced drought on poverty is done using the vulnerability (or damage) function for the relationship between rainfall deficits and household consumption. The damage function is taken and applied to the rainfall anomaly for the 2023-24 growing season to evaluate the loss in consumption. ²⁷ The period November to February is used to capture the sowing and early growing months. ²⁸ The marginal effect of one standard deviation shortfall in soil moisture (relative to the historical mean) is derived from Gascoigne et al. (2024). There is a negative relationship between climate hazard and per capita consumption, with household consumption approximately 5 percent lower for every standard deviation shortfall. On average, soil moisture in the 2023-24 season was 2.8 standard deviations below the long-term mean. 32 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Our analysis suggests that per capita consumption declines by approximately 5 percent²⁹ for every standard deviation below the historical mean of soil moisture (Table 2.1). A model by Gascoigne et al. (2024) was used to analyze the relationship between soil moisture and per capita consumption. The analysis further differentiates the impact between households with and without land in both the maize and highland zones, revealing how the severity of the drought varied based on land ownership. The overall effect on consumption is a product of the marginal impact on per capita consumption and the average soil moisture deficit observed during the 2023/24 agricultural season. The drought significantly affected household consumption and poverty, particularly in the maize and highland livelihood zones (Table 2.1). The 2023/24 season saw soil moisture levels 2.8 standard deviations below the long-term mean. In the maize livelihood zone, consumption is expected to decrease by 16.5 percent among landed households, leading to a 33 percent rise in the poverty rate. For landless households in this zone, per capita consumption is projected to fall by 13.8 percent, and the poverty rate is expected to increase by 34 percent. The poverty headcount ratio increases at a faster rate than consumption declines due to the sensitivity of the poverty line to small changes in consumption distribution. In the highland zone, the drought has a noticeable impact on landed households, with a 10 percent reduction in consumption and an 18 percent rise in poverty, but there is no statistically significant effect on landless households. Table 2.1. Impact of drought on household consumption and poverty Marginal impact SSM deviation % decline in % increase in on per capita in the 2023-24 consumption poverty headcount consumption season (2023-24) (2023-24) Maize livelihood zone Landed households 5.5% -3.01 -16.5% 33% Landless households 4.3% -3.21 -13.8% 34% Highland livelihood zone Landed households 4.5% -2.16 -9.7% 18% Landless households 0% -2.20 0% 0% Source: Authors’ calculations using Gascoigne et al., PICES 2017, and Climate Engine. The decline in cereal production during the 2023/24 season, coupled with the depletion of cereal stocks from the previous year, significantly worsened food insecurity in rural areas. The decrease in cereal production in the 2023/24 season, along with the depletion of stocks from the prior year, has increased food insecurity. In 2024, 26 percent of rural households were cereal insecure, up from previous levels. The proportion of households consuming an acceptable diet dropped from 70 percent in 2023 to 50 percent in 2024. Data collected from households in 2024 supports these findings and aligns with simulations based on historical data. The Rural Livelihoods Assessment (2024) done by ²⁹ We consider linear effects for simplicity, although we recognize that there may be important non-linearities and threshold effects. 33 ZIMBABWE ECONOMIC UPDATE 2024 the Zimbabwe Livelihoods Assessment Committee (ZimLAC) estimated that approximately 57 percent of rural households will be cereal insecure during the peak hunger period of January to March 2025. Low cereal production in the 2023/24 season and depletion of cereal stocks from the previous season contributed to an increase in food insecurity. This is a significant escalation from the 2024 hunger season, where 26 percent of rural households were cereal insecure. The proportion of households that consumed acceptable diet dropped from 70 percent in 2023 to 50 percent in 2024.³⁰ Primary data collected from households in 2024 qualitatively corroborate the simulation results based on historical data. The economic impacts of long-term climate change The Zimbabwe CCDR examined two separate growth scenarios and how these would be impacted by a range of climate scenarios out to 2050. The report proposed ways that the two growth scenarios could be made greener and more resilient and ways to transition towards the aspiration scenario. The growth scenarios were: (i) a business-as-usual (BAU) scenario, which projects past economic trends into the future; and (ii) an aspirational (ASP) scenario, based on the full implementation of Zimbabwe’s Vision 2030. The BAU scenario envisaged that the macroeconomic environment remains volatile and reengagement stalls, resulting in: (i) continued constraints to private and public investment in key economic sectors such as mining, agriculture, manufacturing, transport (particularly rail), and renewable energy (RE); and (ii) further deterioration in public services such as health, education, electricity, water supply and sanitation (WSS), agricultural extension, and safety nets. Under this scenario, Zimbabwe remains an LMIC, economic growth continues to be modest (3 percent a year), and tax revenues remain low due to continued informality in the economy. Mining exports reach US$5.5 billion a year but the structure of the economy changes little all the way to 2050, and the urban share of the population increases modestly to just over 40 percent of the population. The aspirational (ASP) scenario envisaged that the macroeconomic environment significantly improves, prices and exchange rates stabilize, and there is full re-engagement. Under this scenario, Zimbabwe becomes a UMIC economy by 2030, achieving the Vision 2030 goal. This growth scenario: (i) enables at-scale FDI in key economic sectors such as mining, agriculture, manufacturing, transport and RE (solar, wind and hydro); (ii) boosts revenues needed for improvements in public services such as health, education, and WSS, agricultural extension, and safety nets; and (iii) generates the finance for public investment in scaling the electricity grid, roads, water supply, irrigation and large-scale landscape restoration. Overlaying climate change projections onto Zimbabwe’s possible growth trajectories revealed just how critical development is to poverty reduction, particularly in rural areas. Under the BAU growth path, only very modest reductions in poverty rates are projected all the way out to 2050, with the relative impact of climate change scenarios contributing to the spread of poverty rate outcomes—the ³⁰ Acceptable diet is defined based on households’ dietary diversity, food consumption frequency, and relative nutritional value of different food groups. 34 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE dry/hot scenario leading to 4 percent higher poverty rate than the wet/warm scenario. In contrast, under the ASP scenario, poverty rates are reduced substantially (to under 10 percent in 2050), with the impact of climate change being very muted—just 1 percent between the dry/hot and the wet/warm scenario. These results highlighted that poverty reduction in Zimbabwe will be highly dependent on the country getting onto the aspirational UMIC path and much less determined by climate change. However, development alone would not be enough to avoid the macroeconomic impacts of climate change. The analysis in the report showed that climate change would impose large costs on the economy for both the BAU and ASP scenarios – getting progressively larger over time (Figure 2.7). The climate impacts on these two growth scenarios (BAU and ASP) under a range of climate scenarios were relatively similar, both in terms of trend and the magnitude of the reduction until the 2040s. In the Paris-aligned world scenario (SSP1–1.9 mean), the climate impacts are under 1 percent of GDP (for both BAU and ASP) while, in a world on course for an average 3.6°C of warming (SSP3–7.0 mean), this rises to over 2 percent of GDP for the BAU scenario.³¹ Most relevant to drought-prone Zimbabwe, though, is that, under a combined cluster of SSP3–7.0 hot/dry global climate models (GCMs), this rises further to just under 5 percent GDP loss for the BAU scenario versus 3.5 percent for the ASP scenario. Thereafter, the development interventions set out in the ASP scenario provided a basis for strengthening resilience in the outer years, particularly under the combined hot/dry climate scenario. However, the development interventions assumed under the ASP growth path are, on their own, insufficient to adapt to the impact of climate change. Figure 2.7: Climate impacts on GDP across policy and climate scenarios a. SSP1–1.9 mean b. SSP3–7.0 mean 1.0 1.0 0.0 0.0 -1.0 -1.0 -2.0 -2.0 -3.0 -3.0 -4.0 -4.0 -5.0 -5.0 2020 2030 2040 2050 2020 2030 2040 2050 BAU Aspirational BAU Aspirational c. Combined Warm/Wet (SSP2–4.5 and SSP3–7.0) d. Combined Hot/Dry (SSP3–7.0 only scenario) 1.0 1.0 0.0 0.0 -1.0 -1.0 -2.0 -2.0 -3.0 -3.0 -4.0 -4.0 -5.0 -5.0 2020 2030 2040 2050 2020 2030 2040 2050 BAU Aspirational BAU Aspirational Source: World Bank staff calculations using CC-MFMOD. ³¹ For more details, see the World bank Climate Change Portal: https://climateknowledgeportal.worldbank.org/overview 35 ZIMBABWE ECONOMIC UPDATE 2024 2.4 POLICY RECOMMENDATIONS TO IMPROVE RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Improving Zimbabwe’s resilience to weather shocks and climate change demands a dual approach that combines greater investments in climate adaptation and strengthening anticipatory actions (Figure 2.8). Climate adaptation and anticipatory action are both approaches to reducing the impacts of climate change, but they differ in their focus and timing. Climate adaptation focuses on medium- to-long-term planning and building resilience to the current and expected effects of weather shocks and climate change. Key policy areas for Zimbabwe’s climate adaptation are related to research and extension services; irrigation; and landscape and watershed management. In contrast, anticipatory action focuses on acting before a climate hazard occurs to reduce the humanitarian impact. This is based on forecasts and risk analysis to determine when, where, and how a hazard will unfold. The two most important anticipatory actions for Zimbabwe focus on establishing adequate early warning system (EWS) and strengthening its social protection system. Table 2.2 provides a summary of the short-term and medium-to-long-term policy recommendations on climate adaptation and anticipatory actions (see annex 1 for more detail). We will discuss both types of intervention in turn. Figure 2.8: Key policy areas to improve Zimbabwe’s climate adaptation and strengthen anticipatory action Type INVESTING IN CLIMATE ADAPTATION STRENGTHENING ANTICIPATORY ACTION Policy Increase medium-to-long-term resilience Prevent or reduce the immediate (humanitarian) objective to weather shocks and climate change needs arising from a climate disaster Key policy Research and Landscape/ extension Irrigation watershed Early warning and disaster Social safety nets and areas services management risk financing community resilience Source: Authors’ elaborations. 36 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Table 2.2. Summary of policy recommendations Zimbabwe’s ability to cope with weather shocks and climate change (see annex 1 for more detail) Policy Area Short-term recommendations Medium- to long-term recommendations (<24 months) (>24 months) Investing in Climate Adaptation Research and • Institutionalize e-extension and digital • Shift approach of Pfumvudza from top-down Extension services advisories in AGRITEX through existing to participatory to improve learning in the network of 3000 extension workers ag innovation system including for livestock • Utilize government agricultural extension and breeding support schemes to expand adoption of DT • Pursue e-voucher system so farmers are maize from 30 percent to 80 percent of farmers provided with inputs • Improved rangeland and pasture management • Create enabling environment for mechanization practices and precision agriculture: 99 year leases, tax • Continue support for the Pfumvudza/ exemptions and credit schemes for small- Conservation Agriculture Program, enhancing holder agricultural equipment targeting mechanisms through leveraging the social registry to improve efficiency • Undertake rigorous randomised controlled trials of the program and its components, to provide the evidence needed to further replication and scale-up farmer adoption. Irrigation • Use Public Investment Program to support • Expand large scale irrigation rehabilitation and rehabilitation of existing small and medium development, where possible through PPPs sized dams to enable FLID. • Certify FLID related equipment such as solar pumps and provide import and VAT tax exemptions. • Promote supplier finance32 to small-holders by providing guarantees Landscape/ • Revitalize the practice of sub-catchment • Enable large-scale land restoration to be Watershed management land and water-use planning to financed through carbon markets and Management stem further land degradation associated biodiversity benefits of nature- based tourism ³² The limited availability of long-term financing not only undermines agriculture but also affects other productive sectors. Strengthening macroeconomic stability is crucial to addressing this challenge. For further details, refer to Part 1 of the report. 37 ZIMBABWE ECONOMIC UPDATE 2024 Policy Area Short-term recommendations Medium- to long-term recommendations (<24 months) (>24 months) Strengthening Anticipatory Action Early warning • Establish consistent whole of government policy • Establish GoZ disaster response fund and disaster risk definition for triggering drought and flood warnings • Utilize collective schemes to facilitate financing • Scale-up climate shock cover purchased through the small-holder access to ag insurance Africa Risk Capacity markets • Expand/Scale agricultural insurance as a risk mitigation measure and safety net for farmers. This should be integrated with digital climate advisory services to enhance farmers' decision-making and reduce their exposure to climate-related risks. Social Safety Nets • Continue implementation of national social registry • Progressively scale-up HSCT to cover and Community to improve targeting, enhancing coordination, and all vulnerable people as the country’s Resilience reducing duplication in social protection efforts tax-base grows. Source: Authors’ elaborations. Notes: DT = Drought Tolerant. FLID = Farmer-led Irrigation Development. GoZ = Government of Zimbabwe. HSCT = Harmonized Social Cash Transfers. PPPs = Public-Private Partnerships. VAT = Value Added Taxes. Investing in Climate Adaption In the short-term, there is an opportunity to re-orient public investment from agricultural subsidy programs to investment in climate adaptation focused on research and extension services, irrigation, and landscape and watershed management. In recent years Zimbabwe has allocated considerable resources towards agricultural input (such as providing farmers with seeds and fertilizer directly or indirectly through loans), and output subsidy programs (such as supporting the Grain Marketing Board to purchase maize at levels higher than import costs to protect domestic production) (World Bank, 2019a). These programs have been costly, hitting a high of US$920 million in 2021.³³ Reviews of these subsidy programs have suggested that there are potentially large benefits from redirecting some of this funding towards public goods such as agriculture research and extension and balancing the focus on increasing output with that of increasing climate resilience (World Bank 2019a, 2019b, 2020). Evidence from agricultural interventions in Zimbabwe and elsewhere in Sub-Saharan Africa (Table 2.2) suggests re-orienting government support towards the highest-impact climate adaptation interventions in (1) research and extension services, (2) irrigation, and (3) landscape/water management could have a large return on investment. This is illustrated with four examples: • Using the government agricultural extension system to expand adoption of drought tolerant (DT) maize from 30 percent to 80 percent of farmers could both increase yields and build resilience of around 1 million hectares of maize production. Though the total cost of DT maize adoption at this ³³ Estimated using the World Bank BOOST database on Zimbabwe’s public expenditure. 38 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE scale is estimated at US$50 million per year, only a fraction of this would be needed for the extension system as promotion would leverage farmers’ investment. This leverage would yield an estimated return to public investment of 29 times. Due to both the scale and the leverage of this adaptive action, it could protect over 80,000 tonnes of maize output in a moderate drought year. • In contrast, current investments in state-led irrigation tend to barely break even and are usually less cost-effective. An investment in 10,000 hectares of a state-led irrigation (such as through the Gwayi-Shangani scheme) would have an initial outlay of US$610 million, would barely break even, and would only protect around 23,500 tonnes of crop output in a moderate drought year. • In between these options, rehabilitation of 39,000 hectares of irrigation schemes, combined with Farmer-Led Irrigation Development (FLID) could generate an estimated return to public investment of 10 times and protect around 69,000 tonnes of maize output in a moderate drought year. • Large-scale landscape and watershed rehabilitation, which has a modest return to public investment of 4 times, could protect around 78,000 tonnes of crop output in a moderate drought year. This is estimated to require US$ 1.6 billion and would affect 4.7 million hectares. These examples illustrate that public investment choices should be guided not just by their returns per hectare but by the scale of resilience that they can bring to agricultural production. Table 2.3. Potential costs and benefits of different climate adaptation investments (based on international literature) Adaptive Action Cost Benefit Scale of Total cost % cost Total Leveraged (US$/ha) (US$/ha) action (US$ covered benefits benefit to (ha 1000s) millions) by state (US$ cost ratio millions) Drought tolerant maize* 50 290 1,000 50 20% 290 29 State-led irrigation 41,024 59,767 10 611 100% 598 1 (Gwayi-Shangani)** FLID: Rehabilitation of irrigation 9,000 70,495 39 527 50% 2,749 10 schemes in the resettled former large scale commercial farms** FLID: Irrigation development using 1,400 146,599 25 51 50% 205 8 dams with idle water** Landscape and watershed 340 1,108 4,668 1,587 80% 5,174 4 restoration (50% conservation agriculture adoption)*** Sources: *Lunduka et al (2019); **GoZ (2020); ***World Bank (2024). Notes: FLID = Farmer-Led Irrigation Development. 39 ZIMBABWE ECONOMIC UPDATE 2024 Short-term adaptive actions should aim to address immediate challenges while laying the groundwork for long-term resilience. Promoting DT maize varieties and testing other conservation agriculture technologies in newly defined agroecological zones should be the highest priority. These efforts should adopt an evidence-based learning approach to ensure high returns on investment and resilience at scale. In parallel, accelerating the rollout of digital climate advisory services to provide farmers with timely and actionable crop husbandry information would enhance their ability to adapt to changing conditions. A second priority would be to combine the rehabilitation of irrigation schemes with FLID. This would enable farmers to tap into the potential of the 10,000+ existing dams and other water resources (surface and groundwater) across the country. Indeed, rehabilitating areas where these dams are located was proposed in the National Water Resources Master Plan (GoZ 2020) and would be a better investment than expanding state-led irrigation (such as through the Gwayi-Shangani scheme) both in terms of increased output and resilience. These initiatives can be pursued using existing public resources allocated to agriculture, supplemented by funding from development partners, climate- finance facilities, and commercial investments. By integrating these immediate and adaptive actions, the foundation for a more resilient and climate-proof future can be effectively established. In the medium- to long-term, additional public resources can be put into public goods such as agricultural research, large-scale irrigation schemes, livestock breeding, and landscape restoration. The agricultural research and extension system should develop programs for crop- switching and crop diversification. NDS1 development plans for agriculture include investment in expanding the area equipped with irrigation by over 130,000 ha, livestock breeding programs, and improved livestock feeding practices. There would likely be a rapid expansion of financial services, not only agricultural insurance but also financing for mechanization and the deployment of precision agriculture technology under this scenario. Pursuing these investments may also help to revitalize Zimbabwe’s agricultural export industry, particularly in horticulture to both the Europe and East Asia. Improving research, extension services and digital climate advisories An enhanced agricultural knowledge innovation system is key to building the evidence base to drive adaptation and mitigation measures in the agriculture sector. Zimbabwe has a vibrant history of investment in agricultural research and extension, involving both the public and the private sector. For example, the Government’s Pfumvudza program is built on conservation agriculture principles on a carefully designed household plot that is: (i) adequate for a household’s annual grain food and nutritional requirements; (ii) is operated using household labor; and (iii) amenable to manual irrigation Zimbabwe has a vibrant history of investment in agricultural research and extension, involving both the public and the private sector 40 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE by bucket during mid-season dry spells. Conservation agriculture principles promoted for Pfumvudza include mulching and organic manure application, which combine to improve the moisture-holding capacity of soils during drought spells and heatwaves. In neighboring Zambia, Ngoma et al. (2024) showed that minimum tillage practices were a greater driver of resilience than fertilizer use or the use of hybrid maize seed. Extension services in Zimbabwe face significant challenges that limit their effectiveness in supporting farmers. Staff shortages and a lack of motorized transport force many extension workers to rely on bicycles, severely restricting their mobility and ability to reach remote farmers. Extension workers often live far from the communities they serve, further reducing their accessibility. The prevalent top-down approach to extension restricts farmer participation and slows the adoption of innovative practices. As such e-extension and digital climate advisory services (DCAS) can strengthen the adaptive capacity of smallholder farmers by providing timely and relevant information to improve their production planning, decision-making and risk management. These tools enhance knowledge transfer, promote skill development, and drive the adoption of innovative practices, resulting in increased productivity and profitability. For instance, SMS-based advisory services in Ethiopia have boosted wheat yields from one ton per hectare to three tonnes, while small sugarcane farmers in Kenya experienced an 11.5 percent increase in yields through similar SMS-based interventions.³⁴ Additionally, digital advisories play a pivotal role in encouraging climate-smart agricultural practices, such as optimal planting and harvesting schedules, which reduce pre-harvest losses and improve resilience to climate variability. These services also promote the use of climate-resilient seed varieties, ensuring sustainable productivity. By harnessing digital technologies, smallholder farmers gain access to essential information on best practices, weather forecasts, and market trends, enabling them to adapt to climate challenges and strengthen food security. There is a long-standing effort to encourage crop-switching to more drought tolerant crop varieties in Zimbabwe. Much of this effort has been to support the growing of DT traditional grains such as sorghum and millet which are less vulnerable than maize to mid-season dry spells during the flowering stage. However, due to the additional work traditional grains require, the lower yields per acre and the limited markets, little progress has been made in pushing back the reliance on maize. Better progress has been made in promoting the adoption of DT maize varieties which currently stands at around 30 percent, leaving considerable scope for their expansion. Lunduka et al. (2019) demonstrated, that in South-East Zimbabwe (Chiredzi and Chipinge) yields of DT maize varieties yielded over 40 percent more than non-DT varieties and that DT varieties, could generate an extra income of US$240/ha and better food security. The downside of DT maize varieties is that they are mainly hybrid varieties requiring farmers to purchase them each year rather than open pollenated varieties that farmers can propagate without purchasing afresh each year. In the short-to-medium term, the ministry responsible for agriculture should institutionalize e-extension and digital advisories and support a more participatory approach to the agricultural innovation system. Building on the existing pilot for digital climate advisory services (DCAS), the Ministry of Lands, Agriculture, Fisheries, Water and Rural Development could further train the existing ³⁴ Sunamika Singh;Namita Datta.2021. Digital Solutions for Youth Agripreneurs . Washington, D.C. : World Bank Group. https://documentsinternal.worldbank.org/search/34022164 41 ZIMBABWE ECONOMIC UPDATE 2024 network of 6000 extension workers, making DCAS a core part of the extension workers’ responsibility and so building resilience in the short-term. In the medium term, supporting a more inclusive and participatory approach to Pfumvudza could improve learning across the agricultural innovation system. This would drive progress in the development and adoption of DT and heat-tolerant crop varieties of both maize and other crops, and breeding programs for climate-resilient livestock. In the medium-to-long-term creating an enabling environment for mechanization and precision agriculture could drive both productivity and climate adaptation. Improving the enabling environment and working with the private sector to accelerate the expansion of mechanization and precision agriculture would include putting in place 99-year leases for agricultural land (like Botswana); creating tax exemptions and credit schemes for small-holder agricultural equipment such as two-wheel tractors; and, promoting digitally enabled agricultural research and extension system that could support precision agriculture. Enhancing Irrigation Development Irrigation development is positioned by the government as a Vision 2030 accelerator, essential for strengthening Zimbabwe’s agricultural resilience to climate change, enabling adaptation to erratic rainfall and droughts, and ensuring stable productivity and food security. Scattered across the country, there are over 10,000 dams and untapped groundwater resources that could significantly increase the availability of water for agriculture. Irrigation can more than double small- holder dryland yields compared to rain-fed agriculture (Xie et al 2018). Two broad approaches to irrigation expansion that can be pursued include state-led irrigation development and farmer-led irrigation development (FLID). Across Africa most governments have focused on state-led irrigation development and have overlooked the potential for enabling the rapidly expanding practice of FLID. FLID is low cost (US$ 50-1,200/ha), has a short payback period (2 to 3 years) and does not require significant public funding as farmers can invest using credit provided by equipment suppliers. By contrast state-led irrigation development is significantly more expensive (>US$ 12,000/ha) though it can provide greater resilience to weather variability than FLID (Izzi et al 2021). FLID has also received little recent attention in Zimbabwe but would have significant benefits because of its lower cost and lower burden on public finances. Most of Zimbabwe’s pre-independence irrigation area was FLID, albeit that this was done by commercial farmers. Since independence, GoZ has focused on state-led irrigation development rather than facilitating FLID. Facilitating FLID would be less demanding on public finances than pursuing the state-led irrigation development target of expanding the irrigation area by 130,000 ha by 2030 set out in NDS1. Over the past decade, the widespread availability of solar-powered water pumps has created new opportunities to expand FLID, particularly for smallholder farmers. While dam rehabilitation may require some catalytic public investment, improving the enabling environment for FLID could crowd in significant private investment. Clarifying rights and regulations for land use and tenure is central to improving the enabling environment for FLID. This involves individual capital investment that is difficult to relocate (unlike other investments in know-how or agricultural machinery). 42 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE The GoZ should build on its recent policy direction to promote FLID by supporting the enabling environment for FLID, and by identifying areas in which to scale up its adoption. Enabling measures would include: (i) completing certification of beneficiary land rights; (ii) refining and streamlining land allocation and tenure policies; and (iii) certifying FLID related equipment such as solar pumps; (iv) providing import and VAT tax exemptions for solar pumps; and (v) promoting supplier credit to A1 and A2 farmers. In parallel, the Public Investment Program should identify specific areas in which to support rehabilitation of existing small and medium sized dams to enable FLID. In the medium-to-long term, and preferably with private sector investment, options to develop larger-scale irrigation schemes – estimated to be able to support around additional 130,000ha by 2030 – should be developed to make full use of available water resources to boost agricultural output and resilience (GoZ 2020). Invest in landscape and water management Deforestation and landscape degradation are reducing the availability of critical ecosystem services used by rural households to cope with climate variability. Leading up to 2010, Zimbabwe experienced some of the world’s highest rates of deforestation rates, losing forests at a rate of 3,090 km² a year. Conversion of forest land to grassland had the highest emission contribution (41 percent) in the agricultural sector. This land use change has eroded critical ecosystem services, diminishing the availability of wild resources, ecosystem capacity for water regulation (baseflow and groundwater) and sediment regulation, as well as carbon retention. This erosion of ecosystem services makes both landscape and livelihoods more vulnerable to climate change impacts. Moreover, this erosion increases vulnerability to both warmer/wetter futures, as well as to hotter/drier futures. The benefits of investing in large-scale landscape restoration are estimated to be over US$400 million a year to Zimbabweans. These benefits are based on investments in restoring degraded natural habitats, riparian buffers, afforestation, improved rangeland and pasture management practices as well as expanding community conservancies and improved management of tourism facilities in state protected areas. The mitigation benefits of this large-scale land restoration are estimated to reduce emissions by an average 11 million tCo2e per year up to 2050 as compared to the BAU scenario with continued land degradation. This is equivalent to around a quarter of Zimbabwe’s current annual emissions. Using a relatively low estimate of US$4.5 per tCO2e, landscape restoration could generate around US$50 million a year in carbon credits. Valuing these emissions reductions at the social value of carbon would generate around $686 million a year in global benefits. Since independence, GoZ has focused on state-led irrigation development rather than facilitating FLID 43 ZIMBABWE ECONOMIC UPDATE 2024 In the short-term, revitalizing Zimbabwe’s approach of sub-catchment management, and land and water-use planning could help prevent further degradation. In the past Zimbabwe has ensured that, for example, protection of upper water catchments and riparian buffers along rivers supported ecosystem services such as dampening the impact of heavy rainfall and preventing sediment run- off into rivers from agricultural areas. Short-term actions to re-establish and restore these upper catchments and riparian buffers would enhance the resilience of rural livelihoods and reduce sediment build up in dams. In the longer-term, large-scale land restoration could be financed from carbon markets and associated biodiversity credits as well as the benefits of nature-based tourism. Strengthening Anticipatory Action In the short term, the biggest priorities for anticipatory action relate to the early warning system (EWS) and the social protection system, while in the medium term these could be improved through a climate fund and a scaled-up harmonized social cash transfer program. The urgent policy action on the EWS is to create a robust, whole-of-government policy framework that enables timely responses to droughts and floods. This includes developing and implementing early warning systems to enhance preparedness and facilitate swift humanitarian interventions, minimizing the adverse impacts of extreme weather events. Related to the social protection system, the priority action is to strengthen the National Social Registry to improve targeting, enhancing coordination, and reducing duplication in social protection efforts, and ensure that vulnerable populations receive timely and effective support. In the medium term, establishing a “Zimbabwe Adaptation Fund” could offer significant benefits by acting countercyclically to enhance climate resilience. Similarly, there are significant benefits to progressively scaling-up the harmonized social cash transfer program in the medium-term, in order to cover all vulnerable people. Enhancing early warning and disaster response systems Early warning systems (EWS) are vital for effective disaster risk management, offering timely information to mitigate disaster impacts. They enable proactive, locally tailored responses, crucial for protecting agricultural productivity and food security. Reliable hydrometeorological monitoring and forecasting support EWS, benefiting producers and consumers alike. In Ethiopia, the World Bank’s Productive Safety Net Programme demonstrates that early drought intervention, guided by EWS, is more cost-effective in safeguarding lives and livelihoods than delayed action. Integrating EWS into development planning strengthens agricultural resilience and promotes sustainability. Zimbabwe does not have legislation and policies that pertain specifically to EWS, however, there are institutions, legislation, policies, strategies and frameworks that provide an enabling environment for disaster risk reduction to climate-related extremes (Box 2). The country needs to finalize and enact specific legislation and policies for EWS and disaster response systems. This includes operationalizing the institutional framework proposed under the National Climate Change Response Strategy, the National Framework for Climate Services, and the Draft Disaster Risk Management (DRM) Bill of 2012. These actions will strengthen disaster risk reduction and climate resilience. As such, the country should finalize the DRM legislation and a policy plan to fully implement EW and disaster response systems. This should include developing a consistent whole of government policy definition for triggering drought and flood warnings. 44 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Box 2.2: Enabling Environment for Early Warning Systems The Civil Protection Act (CPA) (1989) is the guiding legislation underpinning disaster response in the country. The CPA focuses narrowly on civil protection and disaster response management led by the Department for Civil Protection (DCP). The GoZ recognizes the challenges, both structural and functional, posed by current national legislation in delivering a modernized approach to DRM, that accentuates prevention, mitigation, preparedness, response, recovery and reconstruction, and resilience-building. The 2012 proposed DRM Bill requires revisions and amendments first, prior to its advancement, as well as the development of a new DRM Policy aligned with the Bill and its forward-looking provisions. The National Disaster Risk Management Plan (NDRMP) sets out the multi-agency and multi- sectoral arrangements in Zimbabwe for disaster risk management (DRM), allowing Ministries, Departments, Agencies, and communities to effectively prepare for, and respond to, any disasters occurring. The NDRMP is the master plan and cornerstone for all emergency response planning and activities in Zimbabwe and is supported by Provincial / District level plans that provide a further layer of more detailed and locally contextualized information. Support to the finalization and adoption of the National Disaster Risk Management Plan and rollout at provincial and district levels. There is an official definition of drought and drought indicators are used but this falls short of a formal drought (or flood) early warning system. Drought and flood monitoring in Zimbabwe is carried out by the Ministry of Environment, Climate, Tourism and Hospitality Industry (MECTH) through the Meteorological Services Department (MSD) as well as through several national initiatives such as the Agricultural and Rural Development Advisory Services (ARDAS) (formerly Agriculture Research and Extension Services (AGRITEX)) and Zimbabwe National Water Authority (ZINWA) as well as plethora of regional and international initiatives. The MSD uses the globally accepted Standardized Precipitation Index which qualifies the severity of droughts in drought monitoring, whereas ARDAS mainly uses the Water Requirement Satisfaction Index (WRSI) in drought monitoring. ARDAS also does drought monitoring by concentrating more on the water requirement for crops and livestock using temperature, soil quality, evapotranspiration and rainfall. These two institutions provide updates to the government on the country’s drought status and are both members of Zimbabwe’s National Early Warning Unit (NEWU) which facilitates coordination and dissemination of information (Nangombe, 2015). The MSD is responsible for disseminating drought early warnings and forecasts to the public. However, the seasonal forecast is not generated by MSD but by climate experts in the Southern Africa regional forum called the Southern Africa Regional Climate Outlook Forum (Nangombe, 2015). There is a need for capacity strengthening within MSD to begin to provide these services. In MSD’s pursuit to improve its EWS and monitoring capacity investments are needed for upgrading and providing critically needed new equipment, systems, and operator training for data collection and processing for improved hydro-meteorological and agro-meteorological forecasts. For example, while drought hazard is quantified with precipitation records, weather stations are not evenly distributed in Zimbabwe, nor do they provide spatially- and temporally consistent records that make multi-decadal analyses possible (Frischen et al., 2020). 45 ZIMBABWE ECONOMIC UPDATE 2024 The absence of a dedicated funding mechanism for disaster response is a recognized shortcoming. Disaster risk financing for climate shocks and other natural disasters is mainly financed through ex-post budgetary reallocations and international development partners. While Zimbabwe has a general contingency budget for unforeseen expenditures, including those from weather and climate shocks, budget reallocations that draw on unutilized funds from non-performing capital projects are the main source of disaster risk financing. Zimbabwe also has a range of funds that either explicitly serve as contingency reserves or are routinely used to respond to climate shocks. Most of the funds are hosted at line ministries or departments and are used as back-up funds for specific contingencies that affect them. Reallocations within votes are easy to make and can be mandated by the relevant Minister. Reallocations between votes require parliamentary or presidential approval and are also regularly used to finance disaster response. Zimbabwe’s efforts to tap into disaster risk finance are modest and inadequate to cover potential losses and risks faced by the country. The GoZ remains exposed to significant and increasing flood and storm risk, as there is currently no insurance for public assets and critical infrastructure. Access to the international insurance market is through the African Risk Capacity (ARC) from which the GoZ first took out a national drought insurance policy in 2019 and, since then, continues to purchase cover, although due to financial constraints the amount of coverage purchased declined sharply in 2022. In 2020, Zimbabwe received a payout of US$1.4 million from its drought policy, benefiting over 155,000 people through direct cash transfers. The policy is designed to cover losses of about US$130 million or at least 3.5 million people. However, due to the limited ability of the GoZ to pay premiums, the ceding percentage has remained low (under 10 percent) and, in 2022, dropped sharply to 1.74 percent, which only covers 42,000 people (World Bank, 2024). As a result, Zimbabwe is still heavily dependent on international aid, especially to respond to its persistent food insecurity. Following the 2023/24 drought, ARC paid out US $32 million, with the government receiving $16 million. Overall, the GoZ’s risk financing instruments are inadequate for the scale of losses and the range of perils that Zimbabwe faces. Furthermore, the use of domestic insurance is severely constrained by macroeconomic volatility. As such, there is a substantial gap between available prearranged disaster and climate risk funds, and the average annual cost of disaster response. In addition to further defining EWS, GoZ could further strengthen early warning systems in the medium-term by setting up a dedicated disaster response fund and scaling-up access to regional disaster risk finance. A dedicated “Zimbabwe Disaster Response Fund” could consolidate the fragmented disaster response mechanisms hosted by line ministries and improve response coordination. According to research from Masiyandima (2024), such a fund could bring considerable economic benefits to Zimbabwe (Box 2.3). The Fund could also be used to channel and coordinate the payouts from scaled-up cover purchased through the African Risk Capacity, as well other bilateral sources of disaster response funding. 46 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Box 2.3: The potential benefit of a “Zimbabwe Adaptation Fund” to improve climate resilience A "Zimbabwe Adaptation Fund" could yield substantial macroeconomic benefits for Zimbabwe. To analyze its potential impact, Masiyandima (2024) uses the Debt-Investment- Growth and Natural Disasters (DIGNAD) model developed by Aligishiev et al. (2022) which is a dynamic general equilibrium model tailored to assess the potential impact of a climate shock on key economic indicators. The calibrated results on the impact of natural disaster on economic performance under three policy scenarios: 1 The baseline (no adaptation): wherein public infrastructure investment financing is limited to concessional debt and there is no investment in adaptation infrastructure. 2 Modest investment into adaptation: The scenario has modest investment into adaptation public infrastructure capital of 2 percent of GPP per year from grants and concessional debt. 3 The use of a contingent fund amounting to 0.5 percent of GDP per year allowing government to invest 2.5 percent of GDP into public adaptation infrastructure. The analysis suggests that investing in adaptation infrastructure offers significant advantages to limit the cost from climate-change related shocks (Figure 2.9). A climate shock significantly reduces private investment, which can reduce total factor productivity by up to 30 percent. At the peak of the effect of the climate shock, economic growth falls by up to 10 percent from its steady state when there is no adaptation investment, and by up to 2.5 percent when there is adaptation investment financed from grants, concessional loans and the contingent fund. The recovery of economic growth is fastest when the government invests in adaptation public infrastructure and uses the contingent fund. These benefits are amplified when a government utilizes a contingent fund to finance such infrastructure, especially if the fund is kept offshore and used as collateral to access additional external financing at lower or concessional rates. Yet, the findings indicate that the advantages of a contingent fund have their limits; an excessively large fund can lead to unsustainable debt levels. Therefore, the policy implications highlight that investing in climate-resilient public infrastructure is crucial for mitigating the negative impacts of climate change on the economy. Moreover, the country can achieve even greater benefits from using a contingent fund for climate adaptation investments, provided that the fund is appropriately structured and sized. 47 ZIMBABWE ECONOMIC UPDATE 2024 Figure 2.9: Growth implications of climate shocks, and the impact of a contingency fund. a. Public adaptation inv. (% of GDP) b. Private inv. growth (% dev. from SS) 5 0 -5 4 -10 3 -15 2 -20 2025 2030 2035 2040 2025 2030 2035 2040 Years Years c. TFP shock to GDP d. Real GDP (% dev. from SS) 10 0 %∆ from S.S. 0 -10 -20 -5 -30 2021 2024 2027 2030 2036 2039 2042 2045 2048 2051 -10 Year 2025 2030 2035 2040 Implied by the adjusted baseline Years DIGNAD - dom & ext, Baseline No Adaptation, Debt temp. shock. DIGNAD - dom & ext, Baseline Adaptation, Debt & Grant temp. shock. DIGNAD - dom & ext, Adaptation, Cont Fund, Debt & Grant temp. shock. Source: Masiyandima, 2024. Beyond national disaster risk financing, scaling-up farmer access to agricultural insurance markets could provide greater protection for small to medium farmers. Currently, US$3 million in written premium covers just 3.5 percent of agriculture value added. Agricultural insurance commonly covers risks related to crop losses arising from weather events, pest infestations, and diseases, as well as loss and damage of agricultural equipment, mainly for sugar, maize, tobacco, cotton, and wheat subsectors. Small-scale commercial farmers can also benefit from climate-related index insurance. Agricultural insurance in Zimbabwe is dominated by tobacco insurance, a key export earner, where cover is provided for hail, in addition to other perils that affect the crop. While the overall demand for insurance including microinsurance has increased in recent years, the actual level of insurance coverage in the agriculture sector remains low owing to supply side constraints such as limited data and technical underwriting capacity, as well as demand-side constraints, such as low financial capability and low confidence in insurance products. GoZ is piloting new ways to provide small-holders with access to insurance through the Area Yield Index Insurance scheme. The scheme is being implemented by state-owned agricultural insurer, AFC Insurance, on the back of the GoZ’s Pfumvudza input scheme. The pilot covers four districts, namely 48 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Chivi, Bulilima, Makonde and Nkayi, from December 2022 to July 2023. The GoZ paid 100 percent of the premium for a sum insured of US$4 million, which is equivalent to the cost of inputs provided. The index used was 60 percent of historical crop yields. Key lessons emerging from the pilot include: (i) the need to address the high cost of crosscutting experiments, which have the potential to affect sustainability; and (ii) the need to review the program design, taking into consideration the lack of direct pay-out to farmers, not only limiting ex ante benefits of insurance but also delaying payment. GoZ could build on the above area scheme pilot to facilitate small-holder access to agricultural insurance markets. Developing collective area-based schemes could be a way to reduce the individual transactions costs of managing individual insurance contracts with small and even medium-sized farmers. Strengthen Social Safety Nets and Community Resilience Poor and vulnerable households face disproportionate impacts from climate shocks, such as droughts and floods, which exacerbate poverty and reduce resilience. These shocks threaten livelihoods by reducing agricultural incomes, worsening food insecurity, and causing housing losses, health risks, and job displacement in sectors linked to agriculture. Shock-responsive social safety nets can mitigate these effects by helping households maintain consumption during crises and preventing negative coping mechanisms like reducing food quality, withdrawing children from school, or selling productive assets. Such measures protect human capital and productivity, reducing the risk of long- term poverty traps. Complementing these are longer-term safety nets aimed at poverty reduction, which enhance resilience by promoting savings, asset building, and human capital development. While critical for crisis response as well as poverty reduction over the longer run, the social protection system in Zimbabwe has eroded under recurrent crises. The lack of concessional financing has strained the country's ability to deliver basic services in an inclusive, timely, and transparent way. The drought emergency declared by the Government on April 3, 2024, led to an increasing need for social protection among the population. Despite this growing need, Zimbabwe’s social protection response capacity remains inadequate, with limited coverage. Most of the extremely poor receive no benefits from any social assistance programs, severely limiting their capacity to adapt to shocks. The system is highly fragmented and inefficient, with numerous small programs that face targeting challenges. Strengthening and streamlining Zimbabwe's social protection system is crucial to meeting the growing needs of its population. GoZ is piloting new ways to provide small-holders with access to insurance through the Area Yield Index Insurance scheme 49 ZIMBABWE ECONOMIC UPDATE 2024 Expanding social protection coverage for Zimbabwe's poorest requires better targeting and increased financing. According to the Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE) from the 2017 Poverty Survey, the benefit incidence of social safety programs for the poorest households—defined as the percentage of total assistance accruing to the bottom quintile—is very low, with only 5 percent of total funding reaching the bottom. This is due to a combination of poor targeting, low coverage and inadequate benefits, with social spending dominated by social insurance benefiting only people in the formal sector. In the short term, better targeting of existing programs can enhance coverage. The World Bank is supporting GoZ with the implementation of the social registry (Box 2.4), which is helping to improve the current social protection system. Furthermore, as noted in the World Bank’s 2024 Country Climate and Development Report (CCDR), there is a need to transform social protection to a proactive approach that can mitigate climate-induced food insecurity shocks. Box 2.4: National social registry: A critical tool for improving targeting and coordination Social registry systems are an important tool to support the outreach, intake, registration, and targeting of social programs. Social registries provide a platform for the coordination of targeted social programs across various sectors. Unlike beneficiary registries, which compile lists of beneficiaries from existing programs, social registries maintain a broader set of data on households that may be eligible for assistance. A well-functioning social registry is critical for improving targeting, enhancing coordination, and reducing duplication in social protection efforts. In crisis situations, such a registry enables rapid response by facilitating the quick preparation of beneficiary lists without requiring extensive fieldwork. Many registries also include GPS coordinates, allowing precise targeting during localized shocks like floods. Zimbabwe’s Integrated Social Protection Management Information System (ISPMIS) provides a foundation, with data on approximately 70,000 households. However, fully operationalizing this system requires extensive household data collection, optimized server and hosting arrangements, strengthened partnerships with ministries and development partners, and capacity building across all levels of implementation. The World Bank is working with the Government to prepare a crisis response manual to pre- define key elements of response to different types of crises. Pre-defining parameters and procedures is essential for a rapid and effective social safety net response during crises. This need has been further reinforced in the context of the ongoing El Niño drought crisis, where there are multiple response mechanisms being developed with the potential for substantial overlap and conflicting operational approaches. Leveraging the experience in several sub- Saharan African countries highly prone to climate and other shocks, this manual will set out the main parameters for targeting beneficiaries through the social registry and set out targeting criteria, benefit amounts, payment modalities, institutional responsibilities, financing sources, monitoring and evaluation arrangements, and other operational aspects. 50 PART TWO: IMPROVING ZIMBABWE'S RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE 2.5 CONCLUSION This Zimbabwe Economic Update has highlighted the critical importance of enhancing the country's resilience to weather shocks and climate change. The interplay between climate variability, economic stability, and food security necessitates a multi-faceted approach to ensure sustainable development. The agriculture sector remains highly susceptible to climate variability, due to its dependency on rain-fed agriculture and that so many smallholders are so reliant on maize as their main source of calories. However, beyond agriculture, drought also impacts other aspects of the economy including: i) industry due to Zimbabwe’s high dependence on hydropower from Lake Kariba and the energy sector; ii) the services sector due to diminishing purchasing power; iii) lowering tax revenue; iv) widening trade imbalances; and v) pushing a significant proportion of people back under the poverty line. To counter both the impact of both of dry weather shocks such as the 2023/24 drought and long- term climate change impacts, which will likely further increase the frequency and severity of these dry shocks, the country needs to increase investment in both anticipatory and adaptive actions. Anticipatory actions, such as enhancing early warning systems, access to disaster risk financing and social safety nets will help the Government of Zimbabwe and its cooperating partners to address the symptoms of weather-related shocks in a more timely and targeted way. In addition, and an essential complement to anticipatory actions, adaptive actions are essential to reduce the impact that dry (or wet) shocks have on the people of Zimbabwe. These adaptive actions which aim to build the resilience, particularly of rural people, include investment in: i) research, extension and digital climate advisory services; ii) farmer-led and large-scale irrigation development; iii) mechanization and precision agriculture; iv) scaling-up farmer access to agricultural insurance; v) sub-catchment management planning; and vi) large-scale landscape restoration. Priority in the short-to medium term should be given to rigorously testing and promoting conservation agriculture, particularly to protect maize harvests. In the medium- to long-term, additional public resources can be put into public goods such as agricultural research, large-scale irrigation schemes, livestock breeding, and landscape restoration. By investing in climate adaptation and anticipatory action strategies, Zimbabwe can effectively ameliorate the adverse effects of weather-related shocks and climate change. A collaborative approach involving government agencies, international partners, and local communities is essential to enhance resilience and ensure sustainable agricultural development. By investing in innovative research, robust early warning systems, and resilient agricultural practices, Zimbabwe can build a more secure and prosperous future for its people, particularly those in vulnerable rural areas. The country needs to increase investment in both anticipatory and adaptive actions 51 ZIMBABWE ECONOMIC UPDATE 2024 ANNEX ANNEX 1: POLICY RECOMMENDATIONS TO IMPROVE RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Type Policy Area Sub-area Policy Recommendation Potential impact/benefits Timescale Climate Research and E-extension and Institutionalize e-extension and Has been trialed in Zimbabwe so Short-term Adaptation extension digital climate digital advisories in AGRITEX some capacity exists and is possible services advisories & train the existing network even with existing telecoms of 6000 extension workers, infrastructure and handsets making it a core part of their responsibility Participatory Shift approach of Pfumvudza Low cost, no regrets and capacity Short-to- research and (conservation ag program) exist. Though insufficient to medium -term extension for CSA from top-down to participatory support resilience in extreme years (e.g. min till) to improve learning in the ag it would build base resilience, innovation system minimum tillage has been shown to be more effective than fertilizer *** Crop-switching Utilize government agricultural Drought tolerant (DT) maize 40%> Medium-term to drought- and support schemes (such as than non- DT maize. Can increase heat-tolerant Pfumvudza) to expand adoption income by US$240/ha and improve crop varieties of DT maize from 30% to 80% food security*** of farmers. Pursue e-voucher Hybrid seed needs to be purchased system so farmers are provided each year to maintain hybrid vigor with inputs Mechanization Put in place 99-year leases for Would increase agricultural Long-term and precision agricultural land (like Botswana) productivity but relies on agriculture Create tax exemptions and transformational shift in enabling credit schemes for small-holder environment including: land agricultural equipment such as tenure, SME and farmer access two-wheel tractors to credit, public and private investment in ag research and extension system Irrigation Farmer-led Use Public Investment Program Irrigation can more than double Short-term development irrigation to support rehabilitation of dryland yields compared to rain-fed development existing small and medium sized agriculture. FLID is low cost (US$ dams to enable FLID. 50-1,200ha), has short payback Certify FLID related equipment period (2 to 3 years) and does not such as solar pumps and provide require significant public funding import and VAT tax exemptions. as farmers can invest using Promote supplier finance to credit provided by equipment small holders by providing suppliers. Needs to be expanded in guarantees parallel with strengthening water governance and allocation systems 52 ANNEX 1: POLICY RECOMMENDATIONS TO IMPROVE RESILIENCE TO WEATHER SHOCKS AND CLIMATE CHANGE Type Policy Area Sub-area Policy Recommendation Potential impact/benefits Timescale Large-scale Public funding for large-scale Can provide greater resilience than Medium-term irrigation irrigation schemes FLID but has much higher cost (>US$ schemes 12,000/ha) Landscape/ Sub-catchment Revitalize the practice of sub- Low cost, no regrets and capacity Medium-term Watershed management catchment management land exists. It would also ensure that Management land and water and water-use planning to stem expansion of FLID leaves use planning further land degradation riparian buffers. At-scale Enable large-scale land restoration Diversifies livelihoods but requires Long-term landscape to be financed through carbon considerable upfront public sector restoration markets and associated investment biodiversity benefits of nature- based tourism Adaptive Early warning Early warning Have a single whole of government Currently there are multiple parallel Short-term Action and disaster systems policy definition for triggering definitions use by different domestic risk financing drought and flood warnings and donor agencies Disaster Develop dedicated and Would replace existing system Short-term response fund consolidated GoZ funding of contingency reserves and mechanism for disaster response fragmented funds hosted by line ministries to improve coordination of response Disaster risk Scale up cover purchased through Higher premiums could increase Short-term finance the Africa Risk Capacity as current cover from tens of thousands limited premiums (ceding <2% in to millions 2022) result in heavy dependence on international aid Scale-up access Facilitate small-holder access to Insurance market is partially Medium-term to agricultural agricultural insurance markets functioning for tobacco but could insurance through collective schemes be expanded to other crops though markets coop mechanisms Social Safety Social registry Continue implementation of Only 66% HCTS reach the poorest Medium-term Nets and national social registry to improve 40%. The existing system only has Community targeting, enhancing coordination, data on 70,000 HH. This needs to be Resilience and reducing duplication in social expanded to all vulnerable HHs. This protection efforts would incentivize donors to use HTSC rather their own fragmented systems Scale -up the Progressively scale-up HCTS currently covers <2% of Long-term social protection harmonized social cash-transfers the poor system (HSCT) and e-Vouchers to cover all vulnerable people as the country’s tax-base grows Source: Authors’ elaborations. Notes: DT = Drought Tolerant. FLID = Farmer-led Irrigation Development. GoZ = Government of Zimbabwe. HSCT = Harmonized Social Cash Transfers. PPPs = Public-Private Partnerships. VAT = Value Added Taxes. 53 ZIMBABWE ECONOMIC UPDATE 2024 REFERENCES Davis, Richard and Hirji, Rafik (2014). 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