Zimbabwe and the IMF
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The International Monetary Fund (IMF) today approved a Stand-By credit for Zimbabwe amounting to SDR 141.36 million (about US$193 million), which is designed to support the nation's economic program over the next 14 months. Of the total, SDR 17.67 million (about US$24 million) is available immediately. A further SDR 7.07 million (about US$9.7 million) will be available after August 16. Subsequent quarterly disbursements will be made available on the basis of Zimbabwe's meeting performance targets and the completion of program reviews.
At the conclusion of today's Executive Board's discussion of the Zimbabwe program, Shigemitsu Sugisaki, Deputy Managing Director of the IMF, said:
"Directors emphasized the importance of macroeconomic stabilization and economic reforms. They underscored that the immediate challenge is to stabilize the exchange rate and bring inflation under control through a further tightening of financial policies. Directors stressed that the restoration of market confidence was central to this effort, and thus steps being taken under the program toward the early removal of price controls and trade and exchange restrictions were welcomed. They welcomed the full cabinet's endorsement of the program and the authorities' intention to publish the letter of intent. Directors stressed that strong and sustained commitment and broad consensus on economic reforms will be critical to reestablish the conditions for enhanced growth, address unemployment and poverty issues, and set the stage for the provision of broader support from the international financial community. They also emphasized the importance of strong implementation of the Stand-By Arrangement and significant progress in adopting structural reforms to establish the basis for discussions on an ESAF arrangement.
"Directors underscored the need for sustained fiscal consolidation and emphasized that the realization of the authorities' fiscal consolidation objectives will hinge on early and continued efforts to strengthen revenue collection, cut public expenditure, and reorient spending toward more productive uses. In this regard, preparations under way to establish a National Revenue Authority and to introduce a value-added tax were welcomed. Containing the size of the wage bill limiting support to public enterprises and reducing military spending were highlighted as being essential in order to help refocus budgetary outlays toward key infrastructure items, health, education and social safety nets. Directors noted the risks that Zimbabwe's military involvement in the Democratic Republic of Congo posed to fiscal and balance of payments performance, and the stabilization effort more generally. In this connection, Directors expressed hope that the peace accord would hold. They also encouraged the authorities to publish regularly their defense spending data.
"Directors welcomed efforts by the authorities to tighten monetary policy in order to bring down inflation and their willingness to allow further increases in interest rates if necessary. They observed that a number of smaller financial institutions had experienced difficulties over the past year, and supported actions that were being taken to ensure that the situation remained under control, including a strengthening of the supervisory powers of the central bank, more stringent capital adequacy requirements, and the introduction of explicit guidelines for dealing with troubled banks.
"On structural reforms, Directors encouraged the authorities to continue to implement the land reform program that had been agreed with stakeholders and donors. They attached special importance to liberalization of the trade regime as a means of enhancing Zimbabwe's capability to compete internationally. They also emphasized the need for greater flexibility in the setting of petrol and electricity prices and supported the government's goal of removing price controls on maize-meal. Directors stressed that attracting new foreign investment was crucial for promoting economic growth and poverty alleviation, and suggested that much could be done to improve the environment for private investment. The benefits of privatization of parastatals in strengthening public finances and raising economic efficiency were particularly underscored."
Performance under Zimbabwe's previous 13-month Stand-By credit was mixed. The budget deficit was cut by more than one-half in 1998 and monetary growth was reduced. Additionally, the external current account narrowed and the process of rebuilding foreign reserves began. Zimbabwe's balance of payments situation, however, has remained precarious and inflation has increased to high levels in response to a difficult external environment, a deterioration in the financial position of the parastatal sector, and a series of policy decisions that undermined market confidence. Uncertainties over the government's land reform program and unresolved issues relating to price controls and tariff regimes prevented completion of the first program review under the previous arrangement.
The Program for 1999
The government's economic program1 for 1999 seeks to dampen inflationary pressures, restore a viable external position, and provide a springboard for economic growth. The stabilization effort centers on continued financial restraint, including recent steps to bring monetary growth under control, and price adjustments in the parastatal sector, notably in the oil and electricity sectors. This effort will be reinforced by a package of measures designed to restore market confidence, including implementation of a land reform strategy agreed with stakeholders and donors, public disclosure of military expenditures, and a strengthening of supervision in the financial sector. Other reinforcing measures would involve the removal of maize-meal price controls, a roll-back of emergency trade and capital controls, and an acceleration of the government's divestiture program. The authorities have also taken a number of steps in recent months to put their economic program on a more solid footing. Among the measures have been a 15% increase in electricity tariffs, and increases in retail gasoline and diesel prices of 27% and 32%, respectively. Additionally, the controlled price of maize-meal was raised by 20% in June and a further 20% increase took place in July.
Projected growth in real GDP is 1.2% in 1999, which reflects a significant downward revision from previous expectations because of lower output in the mining and manufacturing sectors. The government's inflation target for end-1999 is 30%, which is to be achieved by containing money supply growth. The exchange rate will be allowed to respond freely to market forces in order to meet international reserve targets. A tight fiscal stance is also expected to support the inflation-fighting effort, although higher than previously envisioned interest rates have required an upward revision in the target for the overall fiscal deficit. Excluding grants, Zimbabwe's fiscal deficit is expected to reach levels around 5.3% of GDP in 1999, which corresponds to a primary budget surplus around 3.2% of GDP.
A fully transparent procedure governing land reform efforts, including fair compensation for land acquired, will be an important part of Zimbabwe's structural reform agenda. Trade and foreign exchange controls implemented on an emergency basis in response to Zimbabwe's balance of payments difficulties will be eased. The authorities will also be taking steps to continue to concentrate their efforts on steps to strengthen the financial position of the banking sector, and to accelerate divestiture of various enterprises with a view to enhance industrial efficiency and reduce the government's domestic debt burden.
Social Safety Nets
Currency depreciation and increases in basic food prices since the early 1990s have had a significant adverse impact on real incomes and employment. Broad-based growth and price stability are therefore critical to underpinning poverty alleviation in Zimbabwe. The current program also envisions a continuation of a high level of investment in human resources, and maintaining social safety nets to foster the reduction in poverty. Improvements in civil service efficiency, and measures to foster private sector development are important goals.
The Challenge Ahead
Macroeconomic stabilization, preserving recent gains in international competitiveness, strong commitment to fiscal consolidation, and the restoration of public confidence represent Zimbabwe's immediate challenges. Sustaining the implementation of economic reforms will be important for securing external financial support from official bilateral and multilateral sources, and will require the authorities to develop a broader social consensus for the reform effort.
Zimbabwe joined the IMF on September 29, 1980, and its quota2 is SDR 353.4 million (about US$483 million). Its outstanding use of IMF financing currently totals SDR 263 million (about US$359 million).
1 Details of the program are available via the IMF website: http://www.imf.org.external/np/loi/mempub.asp
2 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