Inflation, exchange rates,

development and externalities

Barriers to economic development in Zimbabwe

Inflation in Zimbabwe has reached a six-month high at 66.1 per cent in February. The inflation rate
started to move upwards in September last year as world commodity prices started to put pressure
on business costs. This was particularly true in the food sector where the price of necessities such as
maize and corn have increased significantly. [Paragraph 1]

In its most recent monetary policy statement, the Reserve Bank of Zimbabwe acknowledged the
existence of inflationary pressures in Zimbabwe and has decided to maintain the use of
contractionary monetary policy to try and control inflation. According to the central bank, the
monthly inflation data in February increased to 7 per cent up from 5.3 per cent in January.
[Paragraph 2]

In its most recent assessment of the Zimbabwean economy, the International Monetary Fund (IMF)
has forecast Zimbabwe’s economic growth to be 3.5 per cent by the end of the year. In a statement,
the IMF said growth was down from 6.3% in 2021 when the economy rebounded strongly from the
Covid19 pandemic where there was a bumper maize harvest along with strong growth in mining,
and construction. The IMF said some of the slow-down in Zimbabwe’s economic growth was due to
higher tax revenue and lower government expenditure which led to some fiscal tightening through
automatic stabilisers. [Paragraph 3]

Unemployment in Zimbabwe has remained fairly stable over the last ten years at around 5 per cent
but recent data produced by the ILO shows a rise to nearly 6 per cent although youth unemployment
amongst the 18-25 age group is nearly 9 per cent. [Paragraph 4]

Table 1 - Zimbabwe - economic indicators

This year Previous year

GDP Annual Growth Rate 4.1% 6.5%

Unemployment Rate (labour force 7,204,228) 5.7% 5%

Inflation Rate 66.1% 60.61%

Interest Rate 60% 60%

Balance of Trade -$35.9m -$178m

Government Debt to GDP 77.2% 66.2%

© Alex Smith
InThinking www.thinkib.net/Economics
The informal economy

86 per cent of economic activity in Zimbabwe is in the informal sector. This is a problem for the
Zimbabwe government because it is difficult to regulate the goods and services traded in the sector
and there is a loss in tax revenue. It is also true that labour drawn into the informal sector means
fewer workers are available in the formal economy which is a particular problem in industries where
there are skill shortages. [Paragraph 5]

The size of the informal sector in Zimbabwe has implications for corruption. One senior government
official commented that ‘the issue of corruption overshadows everything we are trying to do. We
see this every day in the way the authorities try to deal with unregulated street vendors.’ [Paragraph
6]

Deforestation

Over 50,000 hectares of forests in Zimbabwe are destroyed every year as a result of tobacco
farming. Much of the deforestation occurs because of tobacco ‘curing’ which means burning wood
continuously using a low flame for weeks to dry tobacco leaves. Deforestation along with the curing
process has adverse effects on local communities who live near tobacco farms. Deforestation also
has wider implications for climate change. [Paragraph 7]

Gender equality

As a country, Zimbabwe is making some progress towards greater gender equality. The country is
developing an institutional framework that promotes gender equality and the empowerment of
women. The National Gender Policy is providing a series of measures to develop greater gender
equality such as legal rights, economic empowerment, political decision making, health, and
education. [Paragraph 8]

Table 2 - Zimbabwe - economic development indicators

Value Ranking

HDI 0.571 150 out of 189

World happiness report 3.41 167 out of 178

GNI per capita $2,850 134 out of 181

Happy planet index 16.61 178 out of 188

Gini coefficient 44.3 39 out of 165

© Alex Smith
InThinking www.thinkib.net/Economics
Questions

a. (i) Define the term in commodity. [Paragraph 1] [2]

(ii) Using an aggregate demand and supply diagram, explain how rising world commodity prices
might lead to inflation in Zimbabwe. [Paragraph 1] [4]

b. Using an exchange rate diagram, explain how Zimbabwe’s contractionary monetary policy might
affect the value of the Zimbabwe dollar. [Paragraph 2] [4]

c. Explain how economic growth in Zimbabwe might lead to a rise in tax revenue and a fall in
government expenditure. [Paragraph 3] [4]

d. Calculate the number of unemployed in Zimbabwe. [Table 1] [3]

e. Using a cost/benefit diagram, explain the negative externalities of tobacco farming in Zimbabwe.
[Paragraph 7] [4]

f. Using a Lorenz curve diagram, explain how Zimbabwe’s Gini coefficient is calculated. [Table 2] [4]

g. Using the text provided and your knowledge of Economics, evaluate the importance of the
different barriers to economic development in Zimbabwe. [15]

Total [40]

© Alex Smith
InThinking www.thinkib.net/Economics