Public Information Notices
Zimbabwe and the IMF
IMF Concludes Article IV Consultation with Zimbabwe
On December 6, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zimbabwe.1
Confronted with growing internal and external disequilibria (precipitated mainly by large fiscal deficits), the Zimbabwean government adopted in 1998 and again in 1999 a policy framework that was aimed at restoring macroeconomic stability. The program for 1999 targeted a decline in inflation to 30 percent by the end of the year from 47 percent in 1998, and real GDP growth of 1.2 percent. However, expenditure overruns, especially in the areas of wages and defense, and a weak revenue performance, caused the overall fiscal deficit to widen from 4½ percent of GDP in 1998 to 11½ percent in 1999, compared with a targeted 5.3 percent. Monetary policy was accommodating during the first half of the year, with reserve money growth peaking at 96 percent in the 12 months ended August. As a result, inflation rose to a peak of 70 percent in October before easing to 57 percent by end-1999, as a result of a tightening of liquidity by the Reserve Bank of Zimbabwe (RBZ) in midyear, while real GDP fell by 0.2 percent. The spillover to the external sector of the lax domestic policies and investor skepticism was compounded by the de facto pegging of the currency from January 1999, as the erosion of competitiveness and depressed commodity prices further weakened foreign exchange receipts.
The economic crisis has deepened during 2000, fueled by a continued deterioration in the fiscal position and erosion of competitiveness, as well as by political tensions related to the February constitutional referendum, the June parliamentary elections, and the land reform program. Fiscal performance in 2000 has again deviated sharply from the original target (a deficit of 3.8 percent of GDP), owing to overruns in wages, defense, and domestic interest outlays. The deficit amounted to 18 percent in the first eight months of the year at an annualized rate, and, in early September, parliament passed a supplementary budget that would widen the deficit to about 23 percent for the year. Faced with the government's rising borrowing requirement, the RBZ initially sought to contain monetary expansion but at the expense of the crowding out of the private sector. In August, however, monetary conditions were eased, resulting in an acceleration of broad money growth from 30 percent in 1999 to 49 percent in the year ended September 2000.
As a consequence, inflation rose to 61 percent in the year up to October and may exceed 80 percent by the end of the year. Economic activity and employment have faltered, especially in manufacturing, mining, and tourism, and real GDP is projected to contract by more than 5 percent, which would result in a 12 percent cumulative decline in per capita income over the past three years. While the downturn in economic activity and restricted access to foreign exchange have combined to compress imports, a sizable deterioration in Zimbabwe's terms of trade and a sharp drop in export volumes are expected to shift the external current account into a deficit of 2½ percent of GDP during 2000.
Executive Board Assessment
Directors expressed deep concern about the decline in per capita income and the deterioration in social conditions of the past several years as a result of Zimbabwe's weak macroeconomic policies, the rapid spread of the HIV/AIDS pandemic, poor governance, and escalating tension and uncertainty related to the government's land reform program.
Directors stressed that the slump in economic performance in 1999-2000 was due mainly to the pursuit of an unsustainable fiscal policy driven by large wage and defense overruns, and by governance problems that have undermined investor confidence. Economic activity has contracted, inflation has accelerated, and the balance of payments position has weakened significantly, as evidenced by the depletion of usable foreign reserves and the emergence of external payment arrears. Directors also noted the worrisome fallout from Zimbabwe's problems on neighboring countries and they urged the authorities to be mindful of the repercussions on their neighbors when framing domestic policies.
Directors considered that Zimbabwe needs to take corrective measures urgently in order to forestall a deepening of the current economic crisis. Despite the severe deterioration in recent years, Directors noted that Zimbabwe has the potential to resume vigorous and sustained economic growth, provided the authorities implement a strong economic program with determination. They were encouraged by the new economic team's commitment to reform, and hoped that it would attract the national consensus and broad ownership necessary for success. Directors agreed that a restoration of macroeconomic stability-which is a prerequisite for recovery-would hinge on the design and implementation of a credible adjustment program, anchored by a return to a sustainable fiscal path and restoration of external competitiveness. Rebuilding investor confidence will require determined efforts to improve the economic environment, including by taking decisive steps to strengthen governance and ensure a speedy return to the rule of law, and by implementing an orderly and transparent land reform program that garners domestic and international support. Directors also urged the authorities to normalize relations with foreign creditors and eliminate external payment arrears.
Directors considered that the brunt of the fiscal adjustment will have to come from savings in wage and defense outlays. They welcomed the government's plan to curtail these outlays so as to reduce the fiscal deficit substantially, and to realign spending priorities, especially to make room for increased spending to address the HIV/AIDS problem. They underscored that the establishment of strong expenditure control mechanisms will be essential to underpin fiscal discipline, and endorsed the government's statement that fiscal consolidation must be further deepened during 2002-03.
Directors also observed that the 2001 budget bill features a number of tax cuts, and they encouraged the authorities to adopt offsetting measures to bolster tax revenue, particularly by broadening the tax base and improving tax administration. In this regard, they welcomed the imminent establishment of an autonomous revenue authority. Directors welcomed the decision to strengthen the position of the state oil and power companies through periodic adjustments in fuel and electricity tariffs. They also encouraged the authorities to take steps to improve the finances of the other major parastatals. Directors noted that structural initiatives such as civil service reform and restructuring or privatization of public enterprises would also help reduce the fiscal deficit and promote efficiency.
Directors urged the authorities to tighten monetary policy until inflation is brought firmly under control, while noting that fiscal adjustment should ease the burden on monetary policy and avoid a crowding out of the private sector. They recommended elimination of interest rate caps and a return to market determination of treasury bill yields. Directors welcomed the steps that have been taken to strengthen banking supervision. In view of current dislocations in economic activity and strains on the financial sector, however, they urged the authorities to be vigilant in identifying weaknesses in the banking system, and to promptly issue the guidelines for dealing with troubled banks.
Directors welcomed Zimbabwe's decision to exit from the fixed exchange rate regime, and underlined the need for further steps to restore competitiveness in conjunction with a tightening of macroeconomic policies. In this connection, they stressed that a flexible and market-determined exchange rate would be appropriate.
Directors encouraged the authorities to deepen trade liberalization, and recommended the elimination as soon as possible of the multiple currency practice and the exchange restriction subject to approval under Article VIII of the Fund's Articles of Agreement.
Directors expressed considerable concern about the impact on Zimbabwe's economy of the government's policy on land reform. They noted that it was important to conduct the process in a lawful manner, and to dispel uncertainties that could entail further large output and employment losses. They urged the authorities to work closely with donors, and recommended, in particular, a close examination of the economic and legal aspects of the land reform program, as well as a careful phasing of the program, commensurate with available financial resources and implementation capacity.
Directors expressed deep concern over the decline in social indicators, and the rapid spread of HIV/AIDS and related diseases. They strongly urged the authorities to formulate appropriate measures to address the social and economic consequences of the health crisis.
Directors underlined the importance of transparency in government operations. Zimbabwe's database continues to suffer from numerous deficiencies in coverage and timeliness, and they urged the authorities to address these shortcomings as soon as possible,
Directors welcomed the authorities' decision to publish the staff report for the 2000 Article IV consultation.
|Zimbabwe: Selected Economic Indicators, 1995-2001|
|Real economy (change in percent)|
|Real GDP (market prices; percentage change)||0.6||8.7||3.7||2.5||-0.2||-5.5||-6.5||-10.0|
|Consumer prices (end of period)||25.8||16.4||20.1||46.6||56.9||85.9||44.0||155.1|
|Government finances (in percent of GDP)|
|Revenue, excluding grants||...||...||29.4||30.5||27.3||27.1||28.0||25.1|
|Expenditure and net lending||...||...||38.2||35.1||38.8||49.9||38.5||54.1|
|Overall balance, excluding grants and arrears||...||...||-8.8||-4.6||-11.5||-22.8||-10.5||-29.0|
|Primary balance, excluding grants||...||...||-1.5||5.0||-1.4||-6.0||4.1||-1.7|
|Money and interest rates|
|Broad money (M3, end of period; percentage change)||22.7||27.7||34.9||14.0||29.9||70.1||42.0||116.5|
|91-day treasury bill yield (annualized yield)||28.0||24.5||31.4||35.0||74.0||87.4||36.5||...|
|Balance of payments (in US$ billions, unless otherwise indicated)|
|Current account balance|
|(excluding official transfers)||-0.37||-0.18||-0.83||-0.36||0.03||-0.19||-0.37||0.05|
|(in percent of GDP)||-5.2||-2.1||-9.6||-5.6||0.5||-2.6||-7.8||0.0|
|Gross reserves (end of period; in US$ millions) 1/||882||830||259||229||288||193||286||376|
|(in month of imports of goods and services)||3.3||2.9||0.9||1.0||1.5||1.2||1.8||3.8|
|Total external debt (in percent of GDP; end of period)||75||61||58||71||82||62||98||82|
|Debt service (in percent of exports of goods and services)||19||17||17||33||22||29||29||41|
Sources: Zimbabwean authorities; and IMF staff estimates and projections.
1/ Gross reserves as reported by the authorities, which includes substantial amounts of pledged or illiquid assets. Gold valued at 100 percent of market price.
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. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT