Understanding the Dynamics of the Fiscal Deficit and Economic Performance in Zimbabwe

Kavila William

Working Papers from African Economic Research Consortium

Abstract: The Government of Zimbabwe's desire to meet the country's development expenditure needs, following the attainment of independence in 1980, resulted in high fiscal expenditures which were not supported by adequate fiscal revenue inflows. This led to high and persistent fiscal deficits, with a negative impact on economic growth. This paper uses a descriptive approach to analyze developments in the Zimbabwean economy over the period 1980–2018, with emphasis on the relationship between fiscal deficits and economic growth. The paper also provides a descriptive analysis of the impact of external shocks, structural breaks, and policy shifts on the Zimbabwean economy and their influence on the relationship between fiscal deficits, inflation, and economic growth. The analysis indicates that there could be a two-way relationship between fiscal deficits and real GDP growth, with one possibly causing the other. High fiscal deficits, largely financed through borrowing from the central bank, resulted in high money supply growth, leading to high inflation and a negative impact on economic growth. Conversely, low economic growth resulted in low fiscal revenue inflows, against high government expenditure, leading to high fiscal deficits. External shocks, such as droughts and the decline in international commodity prices of Zimbabwe's export products, negatively affected fiscal revenue inflows and economic growth. Developments in the country's political economy also had an influence on economic growth.

Date: 2022-04
Note: African Economic Research Consortium
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