Fiscal Reforms in Zimbabwe: Tackling Debt, Inflation, and Revenue Challenges

Zimbabwe faces a critical economic crisis with soaring debt, inflation, and inefficient public spending, requiring urgent fiscal consolidation through tax reforms, expenditure rationalization, and macroeconomic stabilization. The World Bank, IMF, and AfDB emphasize that successful implementation of these reforms could restore stability, attract investment, and enable long-term growth.

Zimbabwe is at a critical crossroads in its economic trajectory, facing rising inflation, exchange rate volatility, and a growing fiscal deficit. A new Public Finance Review by the World Bank, with research support from the International Monetary Fund (IMF) and the African Development Bank (AfDB), highlights the urgent need for fiscal consolidation. The report reveals how Zimbabwe’s unsustainable debt, distorted monetary policies, and inefficient government spending have deepened macroeconomic instability. With public debt soaring to 97% of GDP in 2023, inflation eroding tax revenues, and government expenditures expanding unsustainably, decisive action is required to stabilize the economy.

Post-pandemic, Zimbabwe experienced a strong but unsustainable economic recovery, largely driven by private consumption and an expanding informal sector. However, this growth has failed to translate into fiscal stability. The government’s fiscal deficit widened due to increased borrowing, inefficient spending, and the transfer of Reserve Bank of Zimbabwe (RBZ) liabilities to the Treasury. The introduction of the Zimbabwe Gold (ZiG) currency in 2024 initially brought some stability, but its long-term impact remains uncertain. Adding to economic difficulties, Zimbabwe faced its worst drought in 40 years, further straining government finances and threatening food security.

Monetary and Exchange Rate Distortions: The Hidden Drain on Public Finances

The report highlights Zimbabwe’s dangerous reliance on quasi-fiscal operations (QFOs)—where the RBZ engages in off-budget expenditures by printing money and manipulating exchange rates. These distortions have led to high inflation, currency depreciation, and revenue losses, severely undermining the government’s ability to fund essential services.

Between 2020 and 2023, Zimbabwe lost an estimated US$4.5 billion due to monetary and exchange rate distortions, significantly reducing tax revenues. The misalignment of exchange rates has further eroded government revenue, particularly through reduced customs duties and increased informal sector activity. With the parallel market exchange rate consistently higher than the official rate, businesses and individuals have moved away from formal transactions, worsening tax compliance.

As inflation surged, budget credibility weakened. The government repeatedly revised budget estimates, with actual expenditures often exceeding approved amounts due to inflation-driven cost overruns. Ministries struggled to plan and execute their budgets effectively, as economic instability led to unpredictable revenue inflows. The report warns that unless exchange rate policies are stabilized and QFOs are eliminated, Zimbabwe will continue to suffer from fiscal mismanagement and economic uncertainty.

Public Spending: Where is the Money Going?

The report reveals that while public spending reached 21% of GDP in 2023, significant inefficiencies persist. The government wage bill accounts for 47% of total expenditure, far exceeding regional benchmarks. High allowances, an expanding civil service, and a growing number of ministries have contributed to fiscal rigidity. The government has attempted to control public employment costs, but the workforce continues to grow, further straining public finances.

Procurement inefficiencies have also led to excessive costs and wasteful spending. A lack of value-for-money audits and outdated procurement systems have inflated government expenditures, while state-owned enterprises (SOEs) continue to drain public resources through budget transfers. Despite high spending levels, the health and education sectors remain underfunded.

The World Bank recommends improving procurement processes, strengthening public investment management (PIM), and increasing financial oversight. If implemented, these measures could lead to savings of approximately 1.1% of GDP, helping Zimbabwe better allocate public resources.

Taxation and Revenue: Unlocking Zimbabwe’s Tax Potential

Zimbabwe’s tax revenue collection (14.6% of GDP in 2023) remains significantly below its estimated potential of 22% of GDP. The report identifies inefficient tax policies, including excessive VAT exemptions, weak corporate tax enforcement, and outdated mining taxation.

Removing VAT exemptions and zero-rating could increase tax revenue by 0.88% of GDP, provided that low-income households are adequately compensated. Corporate tax incentives need to be rationalized to prevent excessive tax breaks that weaken revenue collection.

The mining sector remains vastly under-taxed, largely due to profit shifting, weak transfer pricing safeguards, and outdated royalty structures. The report suggests that strengthening mining tax administration could yield additional revenues of 0.5–0.76% of GDP.

Excise tax reforms on health-damaging products such as tobacco, alcohol, and sugar-sweetened beverages could generate additional tax revenues of 0.18% of GDP. Property and wealth taxes also offer untapped potential, particularly through improved registration, digital billing, and streamlined valuation processes. Implementing a modern tax administration system (TaRMS) would further enhance compliance, reduce tax evasion, and improve efficiency. With these tax reforms, Zimbabwe could increase domestic revenue collection by 3.1–3.8% of GDP over the medium term.

Fiscal Sustainability: A Path to Stability and Growth

To ensure long-term fiscal sustainability, the World Bank suggests a structured fiscal consolidation strategy. A combination of macroeconomic stabilization, expenditure rationalization, and enhanced revenue mobilization could reduce Zimbabwe’s fiscal deficit by 3.3% of GDP in 2024, rising to 7.2% by 2027.

The IMF’s proposed Staff-Monitored Program (SMP) will be instrumental in guiding these reforms, ensuring fiscal discipline and debt restructuring. Zimbabwe’s Structured Dialogue Platform (SDP) with international creditors aims to clear external debt arrears, unlocking concessional financing and restoring investor confidence. The report underscores that sustainable fiscal policies will be essential for stabilizing the economy, attracting investment, and enabling long-term economic growth.

Despite these recommendations, significant risks remain. Inflation, exchange rate volatility, and climate-related shocks could derail fiscal consolidation efforts. The 2024 drought is expected to reduce GDP growth by over 4.3%, adding further pressure on government spending. Additionally, fluctuations in international commodity prices pose a risk, given Zimbabwe’s heavy reliance on mining exports. To mitigate these threats, the government must adopt strong fiscal risk management strategies and strengthen its macroeconomic policies.

The success of these reforms will depend on political commitment, transparency, and institutional capacity. Strengthening budget execution, enforcing public finance regulations, and improving financial oversight will be key to restoring fiscal discipline and economic stability. If implemented effectively, Zimbabwe has the opportunity to rebuild its economy, attract foreign investment, and lay the foundation for sustainable growth.

The World Bank’s Public Finance Review provides a clear roadmap for Zimbabwe to navigate its economic crisis. By adopting bold and disciplined fiscal policies, the government can restore macroeconomic stability, unlock international support, and set Zimbabwe on a path to long-term prosperity. However, without consistent implementation and strong governance, the country risks further economic decline and prolonged financial distress. The coming years will be crucial in determining Zimbabwe’s economic future.