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

This study analyzes the relationship between fiscal deficits and the economic performance of Zimbabwe for the period 1980–2018. A descriptive approach is used to analyze developments in the Zimbabwean economy over the study period. The study 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 performance. 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 impacted on fiscal revenue inflows and economic performance. Developments in the country’s political economy also had an influence on its economic performance.