By Brian Mupindu
Zimbabwe aims to achieve sustainable economic growth and become a middle-income country by 2030. To attain this objective, the nation is directing its attention towards external sources of financial support, with remittances emerging as a pivotal component of this strategy.
However, recent research has highlighted a complex connection between remittance inflows and economic growth, leading to the need for a comprehensive policy strategy.
Over the last three decades, Zimbabwe’s economy has experienced fluctuations in real GDP growth rates. It reached a peak of 21.5% growth in 2010, but also faced negative growth due to political instability and environmental factors. Challenges like hyperinflation and a steep GDP decline were observed in the early 2000s, partly due to political issues.
In recent times, remittances have become vital for Zimbabwe’s economy, contributing significantly to external financial inflows. These remittance inflows, where money is sent from Zimbabweans abroad to their families at home, constituted a substantial 55% of total external financial inflows in 2020. This income stream often exceeded foreign direct investment (FDI) and played a crucial role in supporting households and the overall economy.
However, new research using an Ordinary Least Squares (OLS) econometric model has revealed a potential drawback of heavy reliance on remittances.
The study suggests a negative relationship between remittance inflows and economic growth. This is known as the “Dutch disease effect,” which occurs when remittances lead to an appreciation of the real exchange rate and a shift in production focus. Such shocks can push the economy into negative growth by weakening key sectors and hindering economic diversification and resilience.
As Zimbabwe aims for sustained economic growth, the creation of a comprehensive policy framework becomes crucial. Policymakers need to consider various strategic recommendations to address the complex challenges ahead.
Stimulating new growth
A central aspect of this transformation is reducing the country’s dependence on remittances as a primary income source. Achieving this requires fostering alternative industries. By providing tax incentives and financial support to sectors such as agriculture, manufacturing, and tourism, Zimbabwe can effectively stimulate growth. Moreover, export-promotion policies can broaden revenue streams, decreasing vulnerability tied to a single income source.
Enhancing access to financial services, especially in rural and underserved areas, is vital to channel remittances into productive investments. Integrating technologies like mobile banking, internet banking, ATMs, and rural banking will include more people in the formal financial system. This integration can enhance financial stability and significantly reduce poverty.
In the pursuit of economic growth, collaboration between the government and stakeholders is crucial, particularly in strengthening anti-money laundering and counter-terrorism financing efforts. This collaboration can streamline cross-border transactions and improve market access for Zimbabwean banks, reinforcing economic ties and creating growth opportunities.
To ensure a robust economic path, the government should establish credit guarantee schemes and venture capital funds. These initiatives will empower Small and Medium-sized Enterprises (SMEs), promoting entrepreneurship, job creation, and overall economic growth.
Zimbabwe’s journey toward middle-income status by 2030 hinges on a multidimensional policy framework.
By diversifying income sources, expanding financial inclusion, reinforcing financial integrity, reducing transfer fees, and supporting SMEs, the nation can lay the foundation for a prosperous future. The synergy of these strategies, combined with collaboration between the government and stakeholders, will undoubtedly lead to economic resilience and prosperity. As the nation follows this path, a balanced approach that embraces both remittances and broader economic reforms will be pivotal for a prosperous future.
Brian Mupindu is a holder of a 1st Class Degree in BSc Economics and has experience in Corporate Banking and Treasury Operations