Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Zimbabwe

October 4, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2005 Article IV consultation with Zimbabwe is also available.

On September 9, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zimbabwe.1


Zimbabwe's pace of economic deterioration slowed somewhat in 2004, but appears to have picked up again in the first half of 2005. Staff estimates that real GDP fell by about 4 percent in 2004, compared with a contraction of 10½ percent the preceding year. Year-on-year inflation decelerated sharply from a peak of 623 percent in January 2004 to stabilize around 130 percent in early 2005, before surging again to 254 percent in July 2005. Staff projects that continued difficulties in agriculture, rising inflation, and foreign exchange shortages, particularly for fuel imports, will cause real GDP to contract by some 7 percent this year. The widening fiscal deficit and quasi-fiscal activities would contribute to money growth, pushing inflation to over 400 percent by end-2005.

Monetary policy has been tightened, but not consistently. Overnight interest rates were raised sharply in early 2004 and lowered subsequently as inflation declined, with real interest rates maintained at high levels for most of the year (albeit with credit subsidies for selected borrowers). Interest rates were lowered sharply around the end-2004 and reduced further in early 2005, despite evidence from monthly data of rising price pressures. In late August, the overnight rate was raised to the equivalent of 1,373 percent (on a compounded annualized basis) from 394 percent in June. The high rates of money growth that have fuelled the triple-digit inflation were mainly due to the sharp increase in the Reserve Bank of Zimbabwe's (RBZ) quasi-fiscal activities during 2004 and first half of 2005 that have resulted in mounting losses on its balance sheet. Some of these quasi-fiscal activities have recently been reduced or discontinued. In particular, the authorities have indicated that all official foreign exchange transactions are now conducted at a unified tender rate, tobacco and gold price supports have been discontinued, and producer price support for cotton will be discontinued, effective January 2006.

Staff projects the fiscal deficit to widen substantially in 2005 to 11½ percent of GDP from 4.7 percent of GDP in 2004 due to higher spending. While much of this increase is due to higher interest payments, the primary deficit (excluding interest payments) is also projected to increase by almost 2½ percent of GDP, compared with the outcome in 2004. This expansion is due to a sharp increase in the government wage bill from 15½ percent of GDP in 2004 to about 20 percent of GDP in 2005, a level that is very high by international standards, as well as other spending increases. This higher spending is projected to be only partially offset by higher revenue, due in part to measures adopted in the August 2005 supplementary budget, including an increase in the VAT rate to 17½ percent from 15 percent and a broadening of the VAT base. The authorities also announced public service and pension reforms, with details to be unveiled in the 2006 budget.

The official exchange rate was effectively devalued in 2004 and allowed to depreciate during the first eight months of 2005 but the parallel market premium widened. The introduction of a foreign exchange tender system early in 2004 and the gradual relaxation of surrender requirements on exporters resulted in a de facto depreciation of the official rate from Z$824/US$ at end-2003 to about Z$6,100/US$ by end-May 2005. The tender rate was allowed to depreciate further to some Z$24,500/US$ by early September 2005. Nevertheless the parallel market premium which had narrowed markedly in the first quarter of 2004, widened sharply from 45 percent in January 2005 to about 100 percent by early September 2005. The exchange rate regime remains highly restricted. The proportion of bids met at the foreign exchange tender has declined to about 10 percent and has been reflected in acute shortages of basic goods, particularly fuel and food.

Zimbabwe's financial system has shown remarkable resilience to the very difficult macroeconomic environment. Despite the turmoil in 2004 from the collapse of a number of insolvent institutions, the stability of the banking system was not threatened. With the exit of weak institutions, the sector is now largely populated by banks with high capital adequacy ratios, little foreign exchange risk, and very short-term maturities for both assets and liabilities to cope with fluctuating interest rates. The provision of full powers for banking supervision to the RBZ was instrumental in ensuring timely intervention in problem banks, although the Banking Act was recently amended to require the Governor of the RBZ to consult with the Minister of Finance in registering and intervening in troubled banks.

Progress has been limited on structural reforms. The authorities have embarked on a reform of public enterprises, but noted the difficulties with imposing hard budget constraints on these enterprises. They underscored their recent decision to privatize non-strategic public enterprises and to enter into joint ventures. The authorities also indicated their intention to remove price controls. On land reform, the private sector expressed concerns that the recent constitutional amendment and the lack of both transferability and protection from cancellation of the 99-year leases would adversely affect economic activity.

Zimbabwe's social situation remains difficult. According to the United Nations Special Envoy's report "Operation Restore Order", issued in late July, the government's recent drive to remove unauthorized dwellings and structures, has left some 700,000 people across the country either homeless, or without any source of livelihood, or both, and a further 2.4 million people indirectly affected in varying degrees. Food security is also an urgent concern given the drought and the slow progress in mobilizing food assistance.

Zimbabwe's recent payments performance to the IMF compares favorably with its past payments record. On August 29, Zimbabwe paid the Fund US$120 million (SDR 82 million) to settle its arrears to the General Resource Account (GRA). With this payment, Zimbabwe's total arrears to the Fund now stand at SDR 119 million (about US$175 million). Of this amount, arrears to the GRA are SDR 37 million (about US$54 million) and those to the PRGF Trust are SDR 82 million (about US$121 million).

Executive Board Assessment

Executive Directors expressed deep concern over the continued sharp economic and social decline in Zimbabwe, with prospects of continued triple-digit inflation, further output declines, and increased poverty. Food security is an urgent issue, given the sharp fall in agricultural production. Directors noted that stagnant export earnings and the necessary rise in food imports will squeeze non-food imports, increasing Zimbabwe's vulnerability to external shocks. In addition, the substantial humanitarian and economic consequences of "Operation Restore Order" pose further downside risks to the outlook. Directors observed that without a bold change in policy direction, the economic outlook will remain bleak, with particularly detrimental effects on the poorest segments of the population.

Directors urged the authorities to implement a comprehensive package of macroeconomic policies and structural reform to lay the basis for sustained growth, low inflation, and external viability. While welcoming recent measures, they noted that current policies fall short of what is needed to address the deteriorating economic situation. There is a significant risk that unless strong macroeconomic policies are implemented urgently, economic conditions—particularly inflation—will deteriorate even further. Directors therefore called for urgent implementation of a comprehensive package comprising several mutually reinforcing actions. These should include: strong fiscal adjustment; full liberalization of the exchange rate regime; adoption of a strong monetary anchor; elimination of all quasi-fiscal activity by the Reserve Bank of Zimbabwe (RBZ) and the absorption of RBZ losses by the budget; and fundamental structural reform, including improvements in governance. Strengthening relations with the international community and providing adequate social safety nets and food security for vulnerable groups, particularly those affected by "Operation Restore Order" and HIV/AIDS, are critical priorities that will also contribute to progress towards the Millennium Development Goals. A number of Directors suggested that the Fund could consider resuming technical assistance to Zimbabwe to facilitate strengthening of policies and co-operation with the Fund.

Directors stressed that decisive fiscal adjustment is essential in the near term. While regretting the substantial deterioration in the fiscal position in 2005, Directors stressed that a sharp fiscal tightening will be required in the 2006 budget. Given the high spending ratio, the bulk of the adjustment will need to come from spending cuts, especially in the wage bill and subsidy and transfer payments. In this context, Directors welcomed the authorities' intention to undertake public service and pension reforms, which should be aimed at cutting the wage bill while improving public service delivery. Directors noted that cash management could also be improved.

Directors urged the authorities to move towards full liberalization of the exchange rate regime for current account transactions. They welcomed the recent unification and increased flexibility of the tender rate, but noted that, despite the recent depreciation, the tender rate remains overvalued, as indicated by the substantial parallel market premium. Exchange controls on current payments and all surrender requirements should be eliminated, and the determination of the exchange rate left to the market in conjunction with establishment of a strong, credible monetary anchor. Directors noted that Zimbabwe continues to maintain exchange restrictions and multiple currency practices that have not been approved by the Fund under Article VIII, Section 2 (a) and 3. They urged Zimbabwe to eliminate these exchange restrictions and multiple currency practices as soon as possible.

Directors welcomed the recent tightening of monetary policy, and noted that a further sustained tightening along with the establishment of a monetary anchor is urgently needed to bring inflation under control. Given the likely reduction in the demand for real money balances, reserve money growth will need to be brought down sharply to keep broad money growth in 2005-06 well below the inflation target. The RBZ should shift to a broad money anchor with reserve money as the operational target.

Directors welcomed the recent announcements by the RBZ to discontinue cotton, tobacco, and gold subsidies, which were helping to fuel money growth and inflation. To lower money creation durably and help increase transparency, Directors suggested that the losses of the RBZ need to be absorbed by the budget, with fiscal measures taken, as noted above, to offset these costs. Directors cautioned against the issuance of bonds that are indexed to inflation given the prospect for continued high inflation and the potentially unsustainable public debt burden. They also urged the authorities to delay the operation of the Infrastructure Development Bank of Zimbabwe pending further review, given the risk of new quasi-fiscal activity and potential contingent public liabilities.

Directors commended the measures taken by the RBZ to strengthen banking supervision and standards of governance and risk management in the financial sector. They underlined the importance of ensuring that supervisors remain empowered to take timely action to address identified weak institutions, and in this context they regretted the recent amendment to the Banking Act requiring the RBZ to consult with the Minister of Finance before granting or withdrawing the licenses of financial institutions. Directors recommended that, over time, the RBZ should lower the very high statutory reserve requirements, which impede the financial sector's ability to effectively intermediate saving and investment to support economic growth.

Directors stressed that fundamental structural reforms will be essential for sustaining macroeconomic stability and achieving durable growth over the medium-term. They urged the authorities to initiate action without delay in a number of areas, including: deregulation to increase market forces in the economy; public enterprise reform; fiscal reforms and particularly civil service reform to achieve a sustainable fiscal position; land and agricultural reform; and improvements in governance to increase investor confidence, reduce corruption, and encourage private business activity. While welcoming the ongoing public enterprise reforms, Directors emphasized that these should be geared to ensuring that a hard budget constraint is imposed on enterprises—including the option to wind down nonviable entities—and that the transparency of the restructuring process should be increased. On land reform, Directors urged steps to restore orderly conditions in the agricultural sector, including stronger security of land tenure and transferability, and the provision of extension services to farmers.

Directors agreed that there is considerable scope for improving the provision of data for surveillance purposes, particularly on the balance of payments, international reserves, and external debt data as well as comprehensive data on general government, consolidated public debt, public enterprises, and the reconciliation of the fiscal and monetary accounts.

Directors called for strengthened cooperation with the Fund, including a satisfactory track record on payments, and timely disclosure of information. In this context, they welcomed Zimbabwe's recent payment to the Fund, which has substantially reduced arrears. A number of Directors sought clarification regarding the source of the funds for this payment. The Executive Board urged the authorities to resolve Zimbabwe's outstanding overdue financial obligations to the Fund, and decided to give Zimbabwe more time to demonstrate its commitment to improving cooperation with the Fund before considering a recommendation to the Board of Governors with respect to the Managing Director's complaint for Zimbabwe's compulsory withdrawal from the Fund. It was agreed that the Board will review Zimbabwe's overdue financial obligations and the Managing Director's complaint again in six months.

Zimbabwe: Selected Economic Indicators, 2002-2005











Real GDP (market prices; percentage change)






Savings and investment (percent of GDP)


Gross national savings (excluding grants)





Gross investment






Prices and interest rates (percent)


Consumer price inflation (annual average)





Consumer price inflation (end of period)





91-day treasury bills (simple annual, end of period)






Central government budget (percent of GDP)







Expenditure and net lending





Of which: interest on central government debt





Overall balance, (excluding grants, including interest arrears)





Primary balance, excluding grants





Overall balance, (including grants, excluding interest arrears)





Domestic financing (including privatization)





External financing





Combined government and RBZ balance 1/






Money and credit (percent change; end of period)


Broad money (M3)





Domestic credit





Of which: real credit to the private sector





Velocity (M3) 2/





Reserve money (percent change; end of period)






External trade (percent change)


Export volume





Import volume





Terms of trade






Balance of payments (billions of U.S. dollars, unless otherwise indicated)












Current account balance (excluding official transfers)





(In percent of GDP at the official exchange rate) 3/





(In percent of GDP at world prices) 4/





Overall balance






Official reserves (gold valued at market price)


Usable reserves (US$ millions, end of period) 5/





(months of imports of goods and services)





(percent of reserve money)










Sources: Zimbabwean authorities; and IMF staff estimates and projections.


1/ Combines (i) the central government overall balance, including grants and excluding interest arrears, and (ii) the RBZ's net losses, including from subsidies, exchange rate losses, and net interest expense.

2/ Velocity is calculated using end-period stock of money, and real GDP valued at end-period prices.


3/ Foreign currency units are converted into Zimbabwean dollars at the official exchange rate.

4/ GDP at world prices using real GDP growth and trading partner countries' inflation (base year is 1996).


5/ These data are not consistent with data on the RBZ's inflows and outflows of foreign exchange.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100