IMF Executive Board Concludes 2012 Article IV Consultation with ZimbabweDraft Public Information Notice (PIN) No. 12/113
September 25, 2012
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.
On September 21, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zimbabwe.1
After a prolonged period of economic and political crisis, Zimbabwe’s economic stabilization and recovery began with the end of hyperinflation in 2009, supported by the formation of a coalition government, a favorable external environment, the adoption of the multicurrency system and cash budgeting, and the discontinuation of quasi-fiscal activities by the Reserve Bank of Zimbabwe (RBZ).
The economic rebound is moderating following a period of robust growth, with real gross domestic product (GDP) growth averaging some 9½ percent during 2010–11, sustained by strong external demand for key mineral exports and continued recovery in domestic demand. Real GDP growth in 2012 is projected to slow to 5 percent, reflecting the impact of adverse weather conditions on agriculture, erratic electricity supply, and tight liquidity conditions. Mining production is expected to benefit from the lifting of restrictions on diamond exports from the Marange fields as a result of certification by the Kimberley process. Inflation slowed to 4 percent in June 2012 from 4.9 percent in December 2011, reflecting in part some moderation in imported goods inflation.
The external position remained precarious, albeit with some recent moderation in the current account deficit. Despite higher exports, the current account deficit widened to 36 percent of GDP in 2011 (from 29 percent of GDP in 2010), due in part to a spike in imports associated with some one-off factors. The deficit was financed by debt-related flows, arrears, and a drawdown of SDR holdings, as uncertainties regarding policy implementation continued to affect foreign investment flows. Usable international reserves remained very low at 0.3 months of imports at end-2011, amplifying the country’s vulnerability to shocks. The current account deficit is projected to narrow to 20½ percent of GDP in 2012, as the 2011 import spike is reversed and exports continue to expand. Zimbabwe remains in debt distress with total external debt estimated at $10.7 billion (113½ percent of GDP) at end-2011, of which 67 percent of GDP are in arrears. The large debt overhang remains a serious impediment to medium-term fiscal and external sustainability.
The public finances came under pressure in 2011 and early-2012. Despite better-than-expected revenue performance, central government operations recorded a cash deficit of 0.6 percent of GDP in 2011 and domestic arrears accumulation of about 1 percent of GDP, due mainly to two salary increases that raised employment costs by 22 percent, crowding out social and capital investment. The effect of the salary hikes was compounded in early-2012 by an increase in employee allowances and unbudgeted recruitment. Fiscal pressures were exacerbated by significant underperformance of diamond revenues during the first half of 2012. In response to the fiscal slippages, in July the government announced expenditure and revenue measures, as well as a reassessment of diamond revenue flows. The measures include a hiring freeze, suspension of a number of diamond-revenue-financed projects, increases in excises on fuel, and enhanced monitoring of the mineral resources.
The financial regulatory framework is being enhanced after a long period of forbearance, but financial system vulnerabilities persist. The banking system is recovering from a recent liquidity crunch, following a period of rapid credit growth funded by unstable short-term deposits, but liquidity remains relatively low and unequally distributed across banks. The RBZ raised the prudential liquidity ratio from 25 percent to 30 percent by end-June 2012. Some banks, particularly the small ones, show weak capitalization, insufficient liquidity, and low asset quality, reflecting unsound lending practices and poor risk management. The situation of three troubled banks came to a head in mid-2012, with the RBZ placing one in recuperative curatorship and two surrendering their licenses. In August 2012, the RBZ announced steep increases in the minimum capital requirements to be phased over a two-year period.
The medium-term outlook, under an unchanged policy scenario, is for growth to moderate to average some 4 percent, although constraints on energy supply and weak competitiveness may pose a challenge to achieving these rates. Foreign investment is likely to be hampered by a poor business climate, uncertainties over the implementation of the indigenization policy and political instability, while domestic investors may face difficulties accessing long-term credit. A vigorous program of structural reform and strengthened macroeconomic management would allow the country to sustain higher rates of growth.
Executive Board Assessment
Executive Directors welcomed Zimbabwe’s economic recovery and stabilization in recent years. Progress has however been uneven, and the impact of adverse weather conditions on agriculture, an uncertain political situation ahead of elections, and a difficult global environment pose further risks to the outlook. To achieve sustained and inclusive growth, Directors stressed the importance of full commitment to policies focusing on strengthening fiscal management, reducing financial sector vulnerabilities, and improving the business climate.
Directors urged the authorities to fully implement the measures announced in the mid-year fiscal policy review, and take additional measures if necessary, to address earlier slippages and close the financing gap. They underscored the need to rebalance the expenditure mix, especially by containing the growth of the wage bill, to create the fiscal space needed for increased social spending and public investment. Improving public financial management would help reinforce expenditure control. Directors emphasized that enhancing transparency in the diamond sector, including timely finalization and implementation of the Diamond Act, is key to strengthening revenues and reducing fiscal pressures. They noted that a prudent medium-term fiscal framework remains critical for restoring fiscal sustainability.
Directors welcomed actions taken to strengthen the financial regulatory framework and address systemic liquidity. Noting recent bank failures and persistent vulnerabilities in the banking system, they called for more proactive banking supervision and enforcement of prudential regulations, focusing on banks with low liquidity buffers and high risk exposures. Directors urged the authorities to fast-track the restructuring of the financially distressed Reserve Bank of Zimbabwe. They also underscored the importance of increasing the level of reserves, over time.
Directors agreed that addressing Zimbabwe’s large debt overhang and achieving external sustainability will require strong macroeconomic policies and a comprehensive arrears clearance framework supported by donors. They urged the authorities to refrain from further nonconcessional borrowing and avoid selective debt servicing as these may complicate reaching agreement with creditors on a debt resolution strategy. Directors also cautioned against further use of SDR holdings to finance expenditures.
Directors underscored that improving the business climate is necessary to strengthen competitiveness, build investor confidence, and boost the growth potential. In particular, they stressed the importance of ensuring that the indigenization and empowerment policies are implemented in accordance with transparent rules and preserving property rights.
Directors welcomed Zimbabwe’s continued improvement in cooperating with the Fund on policies and payments to the Poverty Reduction and Growth Trust (PRGT) as this will allow the lifting of relevant technical assistance restrictions, making it possible to advance toward negotiation of a staff-monitored program (SMP) to support the country’s reform efforts. Most Directors indicated their readiness to support such a lifting. Directors commended the authorities on meeting the outstanding marker on steps towards removing irregularly hired workers from the payroll, which allowed the initiation of a stock-taking on the feasibility of the SMP. In this regard, Directors welcomed the authorities’ renewed commitment to make regular payments to the PRGT. They concurred that strong implementation of recently announced measures to address policy slippages would be an important demonstration of policy cooperation. Some Directors particularly stressed that a credible government commitment to comprehensive reforms will be necessary before embarking on an SMP.