Zimbabwe and the IMF
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The International Monetary Fund (IMF) today approved a Stand-By credit for Zimbabwe, authorizing drawings of up to SDR 130.75 million (about US$175 million) over the next 13 months in support of Zimbabwe’s 1998 economic reform program. Of the total, SDR 39.2 million (about US$52 million) is available immediately. Subsequent disbursements, on a quarterly basis, will be made available subject to Zimbabwe’s meeting performance targets and program reviews.
Zimbabwe encountered intense balance of payments pressures during November-December 1997. The value of the Zimbabwe dollar fell by nearly 50 percent in local currency terms and foreign reserves were reduced to dangerously low levels. The payment of large compensation benefits to war veterans and an accommodating monetary policy exposed serious underlying weaknesses in Zimbabwe’s external competitiveness arising from large and protracted fiscal deficits. Trade performance was also hurt by a poor tobacco crop and falling gold prices, while uncertainties over land reform and fears of a drought further weakened market sentiment for the currency. Toward the end of 1997, the government adopted a package of corrective policy measures, which included fiscal measures to cover fully the cost of veterans’ payments and increases in interest rates. Adoption of the package, together with clarification of the government’s intentions on land reform restored a measure of stability to the foreign exchange market.
The Program for 1998
The fundamental goal of the economic program is to ensure that the recent depreciation of the exchange rate is translated into a substantial improvement in competitiveness. The primary instruments for achieving this goal are fiscal consolidation and monetary restraint. The 1998 program therefore targets a reduction in the budget deficit, excluding grants and privatization proceeds, to 5.5 percent of GDP. The government will reduce its stock of domestic debt, which will enable the Reserve Bank to tighten domestic credit and build up its foreign reserves without constraining the availability of bank credit to the private sector. Fueled by the recent exchange rate depreciation, the 12-month rate of inflation rose markedly to 26 percent during the first four months of 1998 on an end-of-period basis, but is projected to decline to 19 percent by the end of the year. This inflation profile would still enable Zimbabwe to retain much of recent gains in international competitiveness and achieve a significant narrowing in the external current account deficit in 1998.
Privatization of public enterprises began in earnest in 1997 when several of the larger parastatals were sold. The divesture program is being accelerated by advancing the sale of government shares in public and private companies; proceeds are expected to total the equivalent of nearly 2 percent of GDP in 1998. The government has also decided to partially privatize the Post and Telecommunications Corporation at a later date. While the land reform program is still in the early design stages, the redistribution of land will proceed within the confines of the law and the pace of land acquisition will be governed by the availability of budgeting resources. Moreover, the land redistribution will be undertaken in an orderly and transparent manner to protect agricultural output and the welfare of workers on the farms to be acquired.
Social Safety Net
The social impact of the fall in real incomes and employment since the early 1990s has been exacerbated by the recent sharp depreciation of the Zimbabwe dollar and the large price increases for basic food items. Broad-based economic growth and price stability are, of course, the key to effective poverty alleviation in the medium term. In the meantime, the government is taking a number of steps to protect the most vulnerable groups and has released additional maize from the strategic grain reserve to help alleviate immediate price pressures. Provision has been made in the current budget for the transfer of food to the most needy, and the budgetary contingency reserve would be drawn to meet emergency requirements. Allocations for social spending were raised in the current budget and have been protected from the recent round of budgetary cuts. Looking ahead, the implementation of a more comprehensive land reform program will directly assist the poorest and most deprived members of society, particularly those in high-density rural areas.
The Challenge Ahead
The immediate task of the economic program is to replenish Zimbabwe’s foreign exchange reserves to at least 1.5 months of imports by the end of 1998. Further reserve accumulation is planned in 1999 and beyond. Despite the improved prospects, a substantial financing gap remains in 1998, which could be partially filled by disbursements from multilateral sources. The rest would be mobilized through bilateral donor support, the bulk of which would be sought from Zimbabwe’s bilateral donors in the context of the Consultative Group.
Zimbabwe joined the IMF on September 29, 1980, and its quota1 is SDR 261 million (about US$349 million). Its outstanding use of IMF financing currently totals SDR 270 million (about US$361 million).
1 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT