Public Information Notices
Zimbabwe and the IMF
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On December 14, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zimbabwe.1
Zimbabwe's economic crisis has continued to deepen. The deterioration has mainly been the result of inappropriate macroeconomic policies and a general breakdown in the rule of law in the context of the government's fast-track land reform program launched in early 2000. This deterioration has undermined investor confidence, contributed to the rise in unemployment, destroyed capital, and eroded institutions important for economic development, thereby darkening the longer-term outlook. Real GDP is projected to contract by 8½ percent in 2001, bringing the cumulative decline in real per capita GDP since 1997 to 23 percent. Expansionary monetary policies have pushed inflation toward triple-digit levels and created an asset price bubble. Poverty and unemployment are rising, and food shortages-stemming from price controls on main commodities and foods, crop destruction, drought and floods, and the lack of foreign exchange-are becoming serious. Zimbabwe's economic and social problems are spilling over to other countries in the region in the form of increased illegal immigration, weakened investor confidence, and financial market turmoil.
Unsustainable fiscal policies have been at the center of the deterioration in the economy. The overall budget deficit rose sharply to 23 percent of GDP in 2000, owing to large, unbudgeted increases in civil service wages, military spending, and domestic interest payments. Some progress has been made to return fiscal policy to a sustainable path in 2001, although the expected reduction in the overall deficit to about 12½ percent of GDP will be achieved mainly through a sharp fall in interest payments in the wake of the forced restructuring of domestic debt by the government. The recently announced budget for 2002 proposes a deficit of 15 percent of GDP, well above the outcome for this year and the 8 percent of GDP target set last year in the context of the three-year rolling budget. Government borrowing is therefore expected to remain substantial in 2002.
Monetary policy was relaxed during the second half of 2000, as the government's domestic borrowing requirement rose rapidly, and has become highly expansionary in 2001. The restructuring of government debt and heavy borrowing from the Reserve Bank of Zimbabwe (RBZ) caused interest rates to collapse from 65 percent at end-2000 to 14 percent in January 2001. As inflation has accelerated after mid-2001 and government borrowing from the RBZ has approached the statutory limit of 20 percent of the previous year's revenue, yields on treasury bills have recently risen somewhat, although remaining highly negative in real terms. Reserve money growth increased sharply to 150 percent in the year to September 2001, compared with 22 percent in the same period in 2000. Asset substitution away from money market instruments has created bubbles in equity and residential real estate prices. Moreover, the deteriorating economic situation has increased vulnerabilities in the financial sector.
The real effective exchange rate in the official market has appreciated sharply since October 2000, when the RBZ effectively returned to a fixed exchange rate regime. The continued shortage of foreign exchange, lack of official reserves, and limited access to foreign financing, have led to widespread import scarcities that are crippling economic activity as well as to the accumulation of external payments arrears, which rose to about US$722 million at the end of October 2001. Zimbabwe has been in arrears to the Fund since February 2001; and these had accumulated to SDR 53.7 million at the end of October. On September 24, 2001, the Executive Board declared Zimbabwe ineligible to use the general resources of the Fund and removed it from the list of countries eligible to borrow resources under the Poverty Reduction and Growth Facility (PRGF) Trust.
Executive Board Assessment
Executive Directors expressed deep concern about the sharp decline in economic activity and per capita income, the rise in poverty and human suffering, the acceleration of inflation, and the accumulation of domestic and external payments arrears, all of which gathered pace in 2001. Directors noted that the deteriorating situation is the result of inappropriate economic policies aggravated by violence and disruptions to productive activity related to the government's fast-track land reform program. Directors expressed concern that Zimbabwe's economic and social problems are having adverse spillover effects on neighboring countries, which adds to the urgency of taking decisive corrective action.
Directors agreed that significant changes in the government's economic policies, together with improvements in governance and the adoption of a transparent and orderly land reform program, are urgently needed to prevent a worsening of the economic crisis. They stressed, in particular, that the land reform program should minimize disruptions to the productive sectors and to domestic food supply, and urged the authorities to honor commitments made in Abuja and to work closely with the United Nations Development Program in formulating a program that will receive broad domestic and international support.
Directors stressed that bringing the fiscal deficit under control will be crucial to restoring macroeconomic stability. They acknowledged the limited progress achieved in 2001 to reduce the fiscal deficit, but noted that the targeted reduction in noninterest expenditure has not been achieved, and that most of the budgetary savings are attributable to a decline in interest outlays due to the forced restructuring of the government's domestic debt. They welcomed the progress made in putting in place expenditure controls and in establishing the Zimbabwe Revenue Authority, and looked forward to prompt action to make the Authority fully operational.
Directors noted with concern that, in the run-up to the presidential election, a substantial rise in government expenditure is expected to result in a widening of the fiscal deficit in 2002 and will undermine the modest progress achieved thus far. They urged the authorities to redouble, without delay, their efforts toward fiscal consolidation and improving the efficiency of government operations. Directors stressed the need to retrench recurrent expenditures, in particular on wages and defense, and to shift government resources toward protecting health and addressing pressing social needs, especially the problems associated with the HIV/AIDS pandemic. They encouraged the authorities to accelerate the privatization of public enterprises, as this would improve efficiency and reduce the burden on the government's finances, and to eliminate price controls and supply monopolies that undermine food security and intensify economic imbalances.
Directors noted that loose monetary policy has aggravated economic imbalances and fueled inflation, and has increased the vulnerability of the banking system. They urged the authorities to take immediate corrective measures to mop up excess liquidity, allow interest rates to become positive in real terms, and dismantle the distortionary subsidized credit facilities. Directors also stressed the need to ensure the health of the banking system by dealing promptly with nonviable institutions, and to fully enforce prudential regulations and capital adequacy requirements.
Directors noted with concern that the overvaluation of the Zimbabwe dollar has seriously hampered the country's competitiveness, and has resulted in a shortage of foreign exchange, the exhaustion of usable foreign reserves, a large accumulation of external payment arrears, and a wide spread between the official and the parallel market exchange rates. They agreed that an adjustment in the official exchange rate to a more realistic level, supported by tight monetary and fiscal policies, is urgently needed to restore external viability and reduce the rent seeking associated with foreign exchange rationing. While this adjustment could be achieved by a substantial up-front devaluation, followed by a return to the previous crawling peg arrangement, several Directors considered that a unified, floating exchange rate should be the ultimate objective.
Directors underscored the importance of sustained structural reforms aimed at liberalizing the economy to improve Zimbabwe's competitiveness. In this connection, they regretted the recent changes in import tariffs, which have increased protection. Noting that Zimbabwe has much to gain from trade liberalization and closer economic ties with neighboring countries and the global trading system, they urged the authorities to take steps to fulfill Zimbabwe's trade liberalization commitments in the context of several regional arrangements. Directors called for early elimination of exchange restrictions.
Directors reviewed the status of Zimbabwe's overdue financial obligations to the Fund. While acknowledging the authorities' intention to make quarterly payments, they regretted that such payments would not be sufficient to eliminate, or even stabilize, Zimbabwe's arrears to the Fund. Directors observed that Zimbabwe's arrears to the PRGF Trust could reduce the availability of PRGF resources to other eligible countries. Directors urged the authorities to cooperate with the Fund on the preparation of appropriate economic policies and to promptly settle overdue financial obligations to the Fund.
Directors urged the authorities to improve the coverage and timeliness of economic data, which are needed to facilitate the implementation of economic policies and for purposes of Fund surveillance.
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. This PIN summarizes the views of the Executive Board as expressed during the Executive Board discussion based on the staff report.
IMF EXTERNAL RELATIONS DEPARTMENT