## 1zweea2020001 ## Source details **Canonical URL:** [1zweea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1zweea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1zweea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1zweea2020001.pdf.json) --- ### Context, long-term outcomes, and recent shocks - Economic activity trended downward since the 1980s; sharp fall in early 2000s after agricultural collapse and deterioration in international relations. - Income per capita declined from roughly 20 percent of the global average in the early 1980s to less than 10 percent today. - Human development indicators barely changed since independence while most Sub-Saharan Africa peers improved. - Export and FDI concentration and weakness: - During 2009–18, gold, platinum, and tobacco accounted for about 60 percent of total export earnings. - About 66 percent of exports were to South Africa. - Annual FDI was 1.6 percent of GDP during 2004–2017 (SSA average 2.6 percent; Zambia 6 percent during 2004–2017). - Recent shocks and output: - Real GDP growth: 3.5 percent in 2018; output estimated to have contracted by over 8 percent in 2019. - Cyclone Idai (March 2019) damage estimated at about US$1.2 billion (6 percent of GDP). - WFP (December 2019): about 8 million people (approximately 60 percent of the population) food insecure. - Donors committed US$240 million of US$468 million requested under the UN Flash Appeal (as of January 2020). ### Fiscal policy, public finances, and quasi-fiscal activity - Historical drivers: - Large fiscal deficits financed by the Reserve Bank of Zimbabwe (RBZ) led to hyperinflation and collapse of the original Zimbabwe dollar; full dollarization in late 2008 followed by fiscal restraint until 2016. - 2016–18 deviations and TSP: - Off-budget quasi-fiscal activities, unbudgeted agricultural programs, and wage overruns resulted in actual and budgeted expenditure deviating on average by about 45 percent. - Transitional Stabilisation Programme (TSP) adopted October 2018 focused on macro stabilization, institutional reforms, governance. - Fiscal adjustment under current administration: - Cash deficit of the central government estimated to have declined to 3.5 percent of GDP in 2019 (budget target 4 percent; 2018 outcome 7.5 percent). - Revenues in 2019 driven by higher inflation, a new financial intermediation tax, and higher fuel excises. - Agriculture spending spiked to nearly 5 percent of GDP in 2018. - Wage bill dynamics: - Real wage bill increased from 42 to 85 percent of tax revenue between 2010 and 2016. - Public sector real compensation eroded by more than 80 percent, from about US$5,000 per year in 2016 to less than US$1,000 in 2019. - Wage bill as share of revenue: 90 percent in 2017, 72 percent in 2018, estimated 37 percent in 2019 (authorities’ medium-term target: 35 percent of tax revenue). ### Monetary developments, exchange rate, and inflation - RBZ quasi-fiscal operations and reserve money: - Reserve money estimated at ZWL$9 billion at year-end 2019 vs ZWL$3.3 billion as of end-June 2019. - Quasi-fiscal operations included discounting in July 2019 of a 0.8 percent of GDP USD Treasury Bill; provision of FX to fuel importers at below market rates (discontinued since October); export incentive for gold purchases financed by reserve money expansion of about ZWL$400 million/month (introduced September). - Inflation: - Inflation jumped to 521 percent at end-2019. - CPI (annual average): 255.3 (2019); CPI (end-of-period): 521.1 (2019). - CPI projections: 221.1 (2020 annual average); CPI (eop) 52.0 (2020). - Exchange rate and FX market distortions: - Parallel exchange rate end-January 2020 around 25 ZWL$/US$ (compared to 10–11 during July 2019 and 3.5 at currency introduction in February 2019). - Parallel market premium increased to over 30 percent (from about 10 percent before mid-2019). - International reserves: gross international reserves about US$111 million in 2019 (about one week of imports); reserves projected 109 (2020). - Current account: recorded a US$148 million surplus in first half of 2019 (vs a US$1.2 billion deficit in 2018), driven by import compression. - Monetary framework weaknesses: - New quantitative monetary targeting framework announced has not been operationalized; domestic interest rates remain well below inflation. ### Banking sector, credit, and financial stability - Currency conversion and banking sector contraction: - Banking sector assets fell from 58 percent of GDP at end-2018 to 24 percent at end-September 2019. - Bank deposits converted into US$ fell from US$6 billion to US$1.6 billion over that period. - Credit and liquidity: - Private sector credit contracted for five consecutive years; commercial bank credit to private sector (percent of GDP) declined 2013–19. - RBZ’s negative NOPs emerged after February 2019 currency reform (up to 45 percent of sector capital). - Reported liquidity is ample but largely illiquid long-term government bonds; prudential ratios may overstate banks’ ability to provide credit absent withdrawal restrictions. - Financial soundness indicators (selected, various dates): - Regulatory capital to risk-weighted assets: 16.9 (Dec-2014); 30.1 (Sep-2019). - Return on equity: 44.3 (Sep-2019). - Liquid assets/total assets: 27.3 (Dec-2014); 54.0 (Sep-2019). - Past-due loans to gross loans: 45.8 (Dec-2014); 21.7 (Sep-2019). - Nonperforming loans (>90 days): 16.3 (Dec-2014); 3.2 (Sep-2019). - Note: liquidity differs across banks and consists largely of illiquid long-term government securities. ### Mobile payments, financial inclusion, and payments infrastructure - Electronic transfers not subject to restrictions; mobile payments became preferred vehicle for payments due to cash shortages and entrepreneurship. - Value of mobile payments during 2019H1 accounted for 25 percent of consolidated transaction activities vs 3 percent for cash (Bank transfers 57%; Mobile payments 25%; Cash 3%; Other 15%). - RBZ supervisory developments: - RBZ finalized review of banks’ first recovery planning and methodology for designation of domestic systemically important banks. - Since June 2019, the Credit Registry receives daily credit data from all banking institutions. - Collateral Registry for movable assets expected operational in 2020. - RBZ drafted plans for Basel III migration; with IMF TA preparing legal framework changes for supervision and financial safety net. ### SMP status, program performance, and projections - SMP approved May 2019 is off track. - Performance satisfactory through end-June 2019 but most end-September 2019 performance criteria missed due to large RBZ quasi-fiscal operations. - Structural benchmarks largely satisfactory; SMP due to expire end-March 2020. - SMP quantitative targets (selected outcomes): - Floor on primary budget balance (ZWL$ million): End-June 2019 actual -1,203 (Prog. 38) Status: met; End-September 2019 actual -1,604 (Prog. -2,502) Status: not met. - Ceiling on changes in net domestic assets of the RBZ (ZWL$ million): End-June 2019 Prog. 300 Act. -240 Status: met; End-September 2019 Prog. 350 Act. 1,057 Status: not met. - Continuous ceiling on new non-concessional external debt (US$ million) cumulative from Apr 30, 2019: Prog. 0 Act. 108 Status: not met. ### 2020 outlook, medium-term constraints, and risks - 2020 outlook: near-zero growth and gradual disinflation; economy expected to remain basically flat in 2020 due to: - agriculture failing to rebound, - electricity generation affected by low rainfall, - continued fiscal adjustment. - Baseline assumption: identified fiscal gaps in 2020-23 closed through fiscal measures and/or additional external financing. - Staff projection highlights (Table 1 & projections): - Real GDP growth: -8.3 (2019), 0.8 (2020), 2.5 (2021), 2.5 (2022), 2.2 (2023). - Nominal GDP (US$ millions): 20,703 (2019), 20,563 (2020), 21,339 (2021), 22,607 (2022), 23,588 (2023). - Money supply (M2) annual change: 127.5 (2019), 24.4 (2020). - Credit to private sector annual change: 174.1 (2019), 56.7 (2020). - Exchange rates (ZWL:USD annual average): 8.5 (2019), 21.5 (2020); end-of-period: 16.8 (2019), 24.5 (2020). - Major risks: - Social backlash from stabilization policies and exogenous shocks. - High risk of another drought in 2020. - If no additional donor support materializes in first half of 2020, pressures for large central bank financing would increase, leading to further depreciation and high inflation. ### 2020 budget, financing gaps, and social spending - 2020 budget approved by Parliament in December anchored on zero RBZ financing but based on ambitious revenue and financing assumptions. - Budget and staff estimates: - Total spending allocated in the budget: ZWL$63.6 billion. - Additional spending (gold incentives and maize subsidies) estimated by staff at ZWL$6 billion in 2020. - IMF staff project revenue of ZWL$49.9 billion vs ZWL$58.6 billion in approved budget. - Staff estimate fiscal financing gap of about ZWL$14.9 billion in 2020 (about 3.8 percent of GDP or ¼ of spending in 2020 budget). - Social spending: - Budget includes social spending of ZWL$6.2 billion (about US$286 million or 1½ percent of GDP), compared to ZWL$750 million (about US$75 million) in 2019. - Staff supports upward nominal salary adjustment in 2020; budgeted increase in wages for 2020 approximately 50 percent relative to end-2019. - Preliminary estimates suggest a social spending gap of about US$545 million; minimum additional humanitarian financing needs about US$300 million for first half of 2020. ### Policy implications and IMF staff recommendations - Fiscal and RBZ operations: - Contain monetary financing of the deficit and halt unsterilized quasi-fiscal operations by the RBZ. - Advance transparency on all borrowings (including collateralized borrowing against future gold and platinum receipts) and pursue debt reconciliation with creditors to develop affordable solutions to debt overhang. - Eliminate gold incentive (annual cost about 1 percent of GDP); incentivize gold sales via FX market liberalization instead. - If assuming private losses related to currency reform (at least US$1.9 billion; nearly 10 percent of GDP and half of exports), ensure Parliamentary oversight and assess macro/arrears implications. - Monetary policy and operationalization: - Reserve money targeting (RMT) recommended as best feasible anchor now; RBZ plans to target a moderate (10-15 percent) increase in reserve money in 2020. - Operational requirements: introduce short-term, market-rate-determined repo instruments and other OMOs; stop direct lending to RBZ subsidiaries (e.g., Fidelity Printers and Homelink). - Publish daily RBZ balance sheet with a short lag and full monetary statistics no later than 4 weeks after month-end. - FX liberalization and de-dollarization: - Develop schedule for removal of FX allocation via priority list. - Allow exporters to sell more of surrender amount (from 50 percent currently) in the interbank market and remove restrictions on banks’ trading margins. - Eliminate restrictions on current account transactions as soon as possible. - Promote incentives for holding local currency over FX—require all of government’s domestic transactions be in ZWL$. - Financial sector and governance: - Finalize legal reforms to strengthen prompt corrective action and bank resolution regimes; update secondary legislation and prudential standards. - Improve banking supervision resources; conduct thematic on-site credit review for DSIBs. - Consider Asset Quality Review (AQR) with international experts covering loan books, real assets, NOPs and sovereign risk. - Develop resolution planning alongside recovery planning; update national payment system legal/supervisory framework. - Substantial progress needed in AML/CFT supervision, beneficial ownership transparency, and targeted financial sanctions to support exit from FATF list. - Structural reforms: - Strengthen governance, clarify land rights in agriculture, and improve targeting and governance of agricultural support programs. - Reorient agricultural spending from untargeted subsidies toward skills, R&D, infrastructure, irrigation and contract farming to raise productivity. - Improve SOE oversight and publish resource contracts; enact privatization law with clear roles for MoFED, line ministries, and agencies. ### Debt situation, DSA findings, and debt sustainability - Debt distress status: - Zimbabwe remains in debt distress with long-standing external arrears to IFIs, official, and commercial creditors. - Public and publicly guaranteed (PPG) external and total debt unsustainable; PV of external debt-to-GDP above 30 percent threshold throughout projection horizon. - Key public debt figures (Text Table 1 as of end-2018, USD millions): - External Debt: DoD 2,563; Arrears 6,109; Total 8,672; 38% of GDP. - Bilateral Creditors: DoD 1,519; Arrears 3,687; Total 5,206; 23% of GDP. - Multilateral Creditors: DoD 899; Arrears 2,359; Total 3,258; 14% of GDP. - Commercial Creditors: DoD 145; Arrears 63; Total 208; 1% of GDP. - Domestic debt (ZWL$ millions, end-2018): DoD 6,875; Arrears 108; Total 6,984; 16% of GDP. - DSA baseline projections (selected): - Consolidated public sector debt (% GDP): 50.1 (2019); 53.9 (2020); 56.1 (2021); 56.0 (2022); 55.9 (2023). - Public and publicly-guaranteed external debt (% GDP): 47.6 (2019); 51.5 (2020); 52.7 (2021); 52.1 (2022); 51.5 (2023). - Reserves (months of imports): 0.2 (2019); 0.2 (2020) continuing at 0.2 through 2023. - Contingent liabilities and scenarios: - Authorities considering assuming currency reform losses (initial estimate at least US$1.9 billion; staff mention US$1.2 billion initial estimate and indications could reach US$2 billion). - Staff simulated a farmers compensation and legacy-debt absorption scenario using valuation US$6.25 billion and commercial-like financing (5 percent interest, 1 year grace, 10 year maturity); result: jump in PV of debt in 2020 of approximately 30 percent of GDP. - Stress test calibrations: default shock 5 percent of GDP; financial market shock 5 percent of GDP; additional private-sector bailout shock 10 percent of GDP; total calibration used 20.0 percent of GDP. - Policy implications to restore sustainability: - Conduct comprehensive debt reconciliation exercise. - Reach creditor agreement on clearing arrears at IFIs and develop a comprehensive debt restructuring plan with burden sharing. - Sustained fiscal prudence and cessation of quasi-fiscal activities required. ### Agriculture: trends, constraints, and policy recommendations - Agricultural value-added: - Value added about half of its peak; cereal production: 1.9 million tons in 1990s → 1.6 million in 2000s → ~1.1 million since 2010. - Land reform phases and tenure issues: - A1 and A2 tenure models; A2: 99-year lease contracts; A1: statutory permits; security of property claims uncertain; land not widely usable as collateral. - About 21 percent of beneficiaries reported problems accessing credit due to inadequate land tenure documents. - Productivity and infrastructure: - Maize yields: Zimbabwe 1980s = 1,471 (kgs/ha); 2010s = 830; % change = -44%. - Tobacco yields: Zimbabwe 1980s = 2,064; 2010s = 1,881; % change = -9%. - Irrigation-equipped agricultural land: about 1 percent. - Per capita public capital stock approximately half the SSA average. - Command Agriculture and fiscal costs: - Presidential Input Scheme scaled from US$42 million in 2016 to US$263 million in 2018. - Nearly 20 percent of GDP worth of fiscal and quasi-fiscal expenditures spent on agriculture between 2015-2018. - Example: marginal cost of extra ton of maize under Command Agriculture estimated at US$2,900 in one comparison. - Policy recommendations for agriculture: - Shift spending away from untargeted subsidies toward skills development, R&D, infrastructure, irrigation. - Reduce loan guarantees from 100 percent; consider partial guarantees subject to caps. - Remove inefficient maize price subsidy and replace with expanded social safety net. - Catalyze private and donor resources via joint partnerships; promote contract farming and cooperatives. - Improve land tenure security, standardize leasing, and pursue compensation agreements for past expropriations to unlock investment. ### Governance and anti-corruption vulnerabilities and recommendations - Governance weaknesses pervasive across fiscal governance, financial sector, central bank governance, market regulation, rule of law, and AML/CFT. - Specific vulnerabilities: - Command Agriculture: lack of eligibility criteria, low take-up, corruption vulnerabilities, round-tripping. - ZIMRA governance: board roles weaken government oversight; law gives board powers normally provided to a Minister and Commissioner General. - RBZ governance: convoluted mandate; quasi-fiscal operations; lack of full autonomy; AOC composition and conflict-of-interest rules weak; lending operations not transparent. - SOEs and extractive industries: opaque agreements, exclusive rights for certain SOEs (MMCZ, ZCDC, FPR), weak reporting and non-compliance with PECG Act in board nominations. - Border management: up to 26 agencies at 18 border posts; recommendation to enact coordinated border management law. - Key governance recommendations: - Publish final diagnostic assessment of governance vulnerabilities and a high-level anti-corruption plan. - Amend RBZ Act to clarify objectives/functions and remove provisions allowing undue political influence; prohibit quasi-fiscal operations. - Enact whistleblower protection, asset declaration regime for PEPs, and improve beneficial ownership transparency. - Publish resource contracts, strengthen SOE reporting and oversight, and enact privatization law with clear roles and procedures. - Conduct external audit/review of legacy debt transfers and Command Agriculture program. ### Statistical, capacity development, and TA priorities - Statistical issues and priorities: - ZIMSTAT progressing on rebasing/redenomination; quarterly national accounts work underway; CPI rebased in 2019 (Feb/2019 = 100). - GFS: MoFED publishes monthly consolidated financial statements, but coverage and timeliness need improvement. - MFS: RBZ reporting improved using SRFs; classification issues after end of multi-currency regime under discussion. - External sector: migrated to BPM6 in Dec 2016; does not report IIP, CDIS, or CPIS; gaps in financial accounts. - Capacity development (TA) priorities: - Public Financial Management (PFM): budgeting, reporting, fiscal forecasting, cash management. - Revenue policy and administration: broaden tax base, reduce tax incentives, modernize administration. - Debt management: strengthen capacity for fiscal sustainability and budgeting. - Monetary policy framework: design and operationalize framework; reduce exchange control distortions. - Financial supervision and crisis management: legal reforms, update crisis management plan, review bank asset quality. - Macroeconomic statistics: enhance analysis, forecasting, and compilation of national accounts, BOP, CPI. ### Risk Assessment Matrix — key risks and policy responses - Delay in fiscal consolidation: - Likelihood: High/Short to Medium Term; Expected Impact: High. - Policy response: build political consensus to contain current spending, improve revenue collection, increase spending efficiency, reduce government footprint. - Stalled reengagement from delays in reforms: - Likelihood: Medium/Short to Medium Term; Expected Impact: High. - Policy response: advance political and economic reforms to unlock IFI financing and restore market access. - Worsened drought conditions: - Likelihood: Medium/Short to Medium Term; Expected Impact: High. - Policy response: create fiscal space for grain imports and social spending. - Weaker global growth or rising protectionism: - Likelihood: Medium/Short to Medium Term; Expected Impact: High. - Policy response: advance structural reforms and re-engage with international community. - Sharp rise in risk premia: - Likelihood: High/Short term; Expected Impact: High. - Policy response: implement structural reforms to improve business climate and competitiveness. ### Staff appraisal and concluding priorities - Progress since September 2018: significant fiscal consolidation, introduction of new domestic currency, creation of interbank FX market, establishment of Monetary Policy Committee, restructuring of command agriculture toward public-private partnership. - Key near-term imperative: coordinated fiscal, FX, and monetary policies to stabilize exchange rate and inflation while addressing food insecurity. - Top priorities reiterated: - Contain RBZ monetary financing and halt quasi-fiscal operations. - Operationalize credible monetary framework (reserve money targeting) with OMOs and repo instruments. - Liberalize FX controls and remove MCPs with clear exit strategy and timetable. - Strengthen transparency, governance, PFM reforms, and comprehensive debt restructuring and arrears clearance. - Staff recommendation: hold next Article IV consultation on the standard 12-month cycle. *Source: IMF staff report excerpt and Zimbabwean authorities (content unit 1zweea2020001).* ### 1. Capital Flow Management Measures __________________________________________________________ 20 ### 1. Capital Flow Management Measures ### Context and long-term outcomes - Economic activity has trended downward since the 1980s, with a sharp fall in the early 2000s after agricultural production collapsed and international relations deteriorated. - Income per capita declined from roughly 20 percent of the global average in the early 1980s to less than 10 percent today. - Since independence, human development indicators have barely changed while most Sub-Saharan Africa peers made steady improvements. - Policy uncertainty, weak institutions, and fiscal indiscipline have limited export diversification and FDI: - During 2009–18, gold, platinum, and tobacco accounted for about 60 percent of total export earnings. - About 66 percent of Zimbabwe’s exports were to South Africa. - Annual FDI was 1.6 percent of GDP during 2004–2017, compared to the SSA average of 2.6 percent and Zambia’s 6 percent during 2004–2017. ### Fiscal policy, public finances, and quasi-fiscal activity - Large fiscal deficits financed by the Reserve Bank of Zimbabwe (RBZ) led to hyperinflation and the demise of the original Zimbabwe dollar; full dollarization in late 2008 was followed by fiscal restraint until 2016 when large deficits returned. - During 2016–18, off-budget quasi-fiscal activities, unbudgeted agricultural programs, and wage bill overruns led to budget outcomes significantly worse than approved budgets; actual and budgeted expenditure deviated on average by about 45 percent. - The government adopted a Transitional Stabilisation Programme (TSP) in October 2018 focused on macro stabilization, institutional reforms, and governance reforms. - Fiscal adjustment under the current administration: - The cash deficit of the central government is estimated to have declined to 3.5 percent of GDP in 2019 (budget target was 4 percent; 2018 outcome was 7.5 percent). - Revenues in 2019 were driven by higher inflation, a new financial intermediation tax, and higher fuel excises. - Agriculture spending spiked to nearly 5 percent of GDP in 2018 (grain subsidies and input schemes), with risks remaining due to government guarantees on bank-financed agricultural inputs. - Government wage bill dynamics: - The government’s real wage bill increased from 42 to 85 percent of tax revenue between 2010 and 2016. - Despite nominal adjustments, high inflation eroded public sector real compensation by more than 80 percent, from about US$5,000 per year in 2016 to less than US$1,000 in 2019. - The wage bill as a share of revenue declined from 90 percent in 2017 to 72 percent in 2018 and is estimated at 37 percent in 2019 (authorities’ medium-term target: 35 percent of tax revenue). ### Monetary developments and inflation - The resumption of RBZ quasi-fiscal operations in the second half of 2019 led to reserve money nearly tripling: - Reserve money estimated at ZWL$9 billion at year-end 2019 compared to ZWL$3.3 billion as of end-June 2019. - Quasi-fiscal operations included discounting in July 2019 of a 0.8 percent of GDP USD Treasury Bill, provision of FX to fuel importers at below market rates (discontinued since October), and an export incentive for gold purchases financed by reserve money expansion of about ZWL$400 million/month (introduced September). - Inflation: - Inflation jumped to 521 percent at end-2019 (from low single digits through September 2018). - Monetary framework weaknesses: - The new quantitative monetary targeting framework announced at currency reform has not been operationalized, leaving the market without a credible nominal anchor. - Domestic interest rates remain well below inflation. ### Exchange rate, FX market distortions, and external sector - Currency reform and market pressures: - Parallel exchange rate at end-January 2020 around 25 ZWL$/US$, compared to 10–11 during July 2019 and 3.5 at the time of the new currency introduction in February 2019. - The parallel market premium increased to over 30 percent (from about 10 percent before mid-2019). - Distortions reflect restrictions by RBZ (e.g., on trading margins for authorized FX dealers), policy uncertainty, and limited public statistics. - External balances and reserves: - Current account recorded a US$148 million surplus in the first half of 2019 (vs a US$1.2 billion deficit in 2018), driven by import compression from higher fuel prices, FX shortages, and a sharp decline in real disposable income. - International reserves have fallen to about one week of imports. - Terms of trade have been declining since 2016. ### Banking sector, credit, and financial stability - Conversion to ZWL$ at a 1:1 rate in February 2019 caused sharp shrinkage in banking sector size and liquidity: - Banking sector assets fell from 58 percent of GDP at end-2018 to 24 percent at end-September 2019. - Bank deposits converted into US$ fell from US$6 billion to US$1.6 billion over the same period (ZWL$ deposits converted at parallel market rate where applicable). - Private sector credit contracted for five consecutive years (commercial bank credit to the private sector in percent of GDP declined 2013–19). - The capacity of the banking sector to support growth and external operations (e.g., maintaining correspondent lines) has been significantly reduced. ### Recent economic developments, output, and social impact - Growth and shocks: - Real GDP growth was 3.5 percent in 2018. - Output is estimated to have contracted by over 8 percent in 2019 (severe drought affected agriculture and electricity generation). - Social impact and humanitarian needs: - WFP estimates (December 2019) that about 8 million people (approximately 60 percent of the population) are food insecure. - As of January 2020, donors committed US$240 million of the US$468 million requested under the UN Flash Appeal for Zimbabwe. - Climate shocks: - Cyclone Idai (March 2019) caused damage estimated at about US$1.2 billion (6 percent of GDP). - Poverty, prices, and services: - Rising inflation adversely affects the poor, notably maize prices; fuel and electricity price increases are also harmful. - Education and health indicators are deteriorating as economic hardship erodes human capital. ### Policy implications highlighted in the chapter - Fiscal consolidation has reduced the cash deficit but continued quasi-fiscal RBZ operations and lack of a credible monetary anchor undermine stabilization. - Key priorities implied by the analysis include: - Containing monetary financing of the deficit and halting unsterilized quasi-fiscal operations by the RBZ. - Operationalizing a credible monetary framework and restoring confidence in the FX market. - Advancing transparency on all borrowings (including collateralized borrowing against future gold and platinum receipts) and pursuing debt reconciliation with creditors to develop affordable solutions to Zimbabwe’s debt overhang. - Strengthening governance and structural reforms to improve the business climate, clarify land rights in agriculture, and improve targeting and governance of agricultural support programs. *Source: Zimbabwean authorities and IMF staff estimates.* ### 13. Cash shortage in conjunction with Zimbabwean entrepreneurship has turned mobile ### 13. Cash shortage in conjunction with Zimbabwean entrepreneurship has turned mobile payments into the preferred vehicle for payments ### Mobile payments, financial inclusion, and transactional activity - Electronic transfers are not subject to restrictions and Zimbabwe has achieved one of the highest usage levels of innovative payment products (mobile payments, cards, etc.) in the region. - This has spurred a significant increase in financial inclusion of underserved communities (unbanked population). - The value of mobile payments during 2019H1 accounted for 25 percent of the consolidated transaction activities, compared to just 3 percent for cash. (Text Figure 13 breakdown: Bank transfers 57%; Mobile payments 25%; Cash 3%; Other 15%.) ### Financial supervisory and stability framework - The RBZ has finalized its review of banks’ first recovery planning and developed a methodology for designation of domestic systemically important banks. - Since June 2019, the Credit Registry receives daily credit data from all banking institutions, supporting financial sector credit risk management. - A Collateral Registry for movable assets is expected to become operational in 2020 and facilitate SME and individual access to credit. - RBZ has drafted plans for migration to the Basel III regulatory framework. - With IMF technical assistance, RBZ is preparing changes to the legal framework for bank supervision and the financial safety net in line with international standards and best practice. ### SMP (Staff-Monitored Program) status - The SMP for Zimbabwe approved by IMF management in May 2019 is off track. - Performance against quantitative program targets was satisfactory through end-June, but most end-September 2019 performance criteria were missed owing to large quasi-fiscal operations by the RBZ. - Performance against the SMP’s structural benchmarks has been largely satisfactory. - The SMP is due to expire at end-March 2020. ### Macroeconomic outlook and risks (2020 and medium term) - 2020 outlook: near-zero growth and gradual disinflation. For 2020 the economy is expected to remain basically flat due to: - agriculture failing to rebound from the previous drought year, - electricity generation enduring another year of low rainfall, - fiscal adjustment continuing. - Grain stocks are already depleted; a weak agriculture harvest would put additional pressures on the balance of payments for food imports. - Medium-term constraints: continued external arrears, lack of access to external finance constraining investment and real growth. - Baseline assumption: identified fiscal gaps in 2020-23 are closed through fiscal measures and/or additional external financing. - Without resolution of unsustainable external debt, the economy will not grow at or near potential and cannot reach SDG targets. - Inflation expectations: - Inflation is expected to decline but remain relatively high through mid-2020 as exchange rate depreciation pass-through runs its course. - Inflation could fall in the latter part of 2020 if the RBZ successfully contains money growth. - Risk factors: - Social backlash as stabilization policies and exogenous shocks affect vulnerable populations. - Fiscal retrenchment and currency reform, followed by sharp depreciation, have cut real wages, wiped out domestic savings, increased poverty in rural and urban areas, and generated fiscal drag. - High risk of another drought in 2020, which would weigh on recovery and exacerbate food shortages and BOP pressures. - If no additional donor support materializes in the first half of 2020, pressures for large central bank financing of the budget will increase further. A return to excessive money printing would result in further depreciation, high inflation, and further erosion in confidence of the new currency. ### Authorities’ views on outlook and policy - Authorities broadly share staff’s assessment of risks but are more optimistic on 2020 real GDP growth, citing prospects in agriculture, tourism, mining, and expected investment from rebound in confidence. - Authorities emphasize commitment to stabilization policies and structural reforms to pave the way for strong and inclusive growth over the medium term. - Vision 2030 guides medium-term policies: making Zimbabwe an upper middle-income country with sound macroeconomic policies anchored on fiscal discipline and a business-friendly environment. ### Fiscal policy, 2020 budget, and social spending - The 2020 budget approved by Parliament in December is anchored on zero RBZ financing but is based on ambitious revenue and financing assumptions and needs to integrate additional expenditures (e.g., gold incentives scheme and maize meal subsidies). - Budget and staff estimates: - Total spending allocated in the budget is ZWL$63.6 billion. - Additional spending based on policies existing at January 2020 (gold incentives and maize subsidies) estimated by staff at ZWL$6 billion in 2020. - Latest projections of revenue and financing fall short: IMF staff project revenue of ZWL$49.9 billion, compared to ZWL$58.6 billion in the approved budget. - Staff estimates a fiscal financing gap of about ZWL$14.9 billion in 2020 (about 3.8 percent of GDP or ¼ of spending in the 2020 budget). - Financing gap considerations: - The gap does not include additional funding to close the humanitarian funding gap. - Resorting to RBZ money creation to fully close the gap would nearly triple reserve money and further stoke hyperinflation pressures. - Staff recommendations on fiscal measures: - Contain spending on inefficient subsidies and transfers while bolstering more effective social transfers (e.g., harmonized cash transfer). - Prioritize capital expenditure if financing does not materialize. - Undertake coordinated outreach to external and domestic stakeholders to maximize chances for financing the deficit. - Salaries and social protection: - Staff supports an upward nominal salary adjustment in 2020. - Budgeted increase in wages for 2020 is approximately 50 percent relative to their level at end-2019. - Budget includes social spending of ZWL$6.2 billion (about US$286 million or 1½ percent of GDP), compared to ZWL$750 million (about US$75 million) in 2019. - Preliminary estimates suggest a social spending gap of about US$545 million (Text Table 2). - Humanitarian financing: - Even with increased budget allocations and existing commitments from development partners (estimated to increase by US$70 million relative to 2019), preliminary estimates suggest minimum additional financing needs of about US$300 million for the first half of the year (covering through the 2020 agriculture season). - Quasi-fiscal activities and gold incentive: - Staff urged authorities to increase fiscal transparency and eliminate quasi-fiscal activities by the RBZ. - The gold incentive introduced in September 2019 is a quasi-fiscal activity aimed at encouraging gold sales by small producers to Fidelity Printers. - Staff urged removal of the gold incentive (annual cost about 1 percent of GDP) and instead incentivize gold sales via FX market liberalization reforms to reduce the parallel market premium. - Authorities have decided to terminate the gold incentive, but timing and fiscal impact are unclear. - Assumption of private losses related to currency reform: - Authorities are considering assuming losses related to the currency reform (at least US$1.9 billion; nearly 10 percent of GDP and half of exports). - Staff raised concerns about compensation methods, lack of Parliamentary oversight, litigation risk, and macroeconomic impact given a weak external position and non-existent FX reserves. - Staff cautioned authorities to explore how this would affect prospects for normalization of external arrears with official creditors. - Public debt management reforms: - Reforms needed regarding pricing, predictability, and transparency of issuance of government securities. - Strengthening domestic currency debt market would support de-dollarization and establish a local currency yield curve. - Staff recommends RBZ use government securities as collateral for monetary operations to facilitate market-rate repo instruments, enhance marketability, mitigate fragmentation of issuance, and improve pricing. - Authorities’ fiscal anchors: - Twin fiscal anchors: public debt level under 60 percent of GDP and an overall fiscal deficit under 3 percent of GDP (consistent with SADC commitments). - Authorities believe the annual revenue target of ZWL$58.6 billion approved by Parliament can be achieved and commit to delay execution of some allocations until clarity on revenue outcomes, while protecting social spending. - Any non-concessional borrowing will be limited to critical food imports and essential infrastructure projects. - Debt assumption for losses related to currency reform will be approved by Parliament through a Debt Assumption Act. ### Monetary and exchange rate policies - Reserve money targeting (RMT) recommended as the best feasible anchor for the new currency at this time. - Very low level of international reserves and poor inflation track record make other nominal anchors (fixed exchange rate or inflation targeting) not viable in the near term. - Money-based stabilizations, when consistently applied and supported by fiscal policy, have quickly reduced inflation in high-inflation countries. - Targeting a moderate increase in reserve money in 2020 would help anchor movements in broad money growth, exchange rate and inflation, given their correlation with reserve money growth (Text Figure 15). - Operational requirements for RMT: - Introduction of short-term, market-rate-determined repo instruments to allow the RBZ to conduct open market operations. - RBZ currently lacks instruments—the only instrument is the savings bond offered weekly at a fixed interest rate of 7 percent. - Take-up by banks has been minimal despite excess reserves of about ZWL$ 7 billion (about 2 percent of GDP) at end-December 2019. - Market-determined interest rates will be higher and possibly volatile initially, but could boost demand for the new domestic currency, put upward pressure on the exchange rate, and help establish credibility of the new currency. - RBZ should stop direct lending to its subsidiaries (e.g., Fidelity Printers and Homelink). - Transition to alternative frameworks: - Once structurally-low inflation levels are reached, authorities could consider replacing RMT with a price-based framework relying on interest rate signals (policy interest rate as operational target). - FX liberalization and de-dollarization measures: - Continued liberalization of FX controls is key to moving towards a market-clearing FX rate. - Staff urges authorities to: - develop a schedule for removal of FX allocation via the priority list; - allow exporters to sell more of the surrender amount (from 50 percent currently) in the interbank market while removing restrictions on the rate at which banks can transact in the market; - eliminate as soon as possible all restrictions on current account transactions. - Measures to de-dollarize the economy include promoting incentives for holding local currency over FX—particularly, requiring that all of government’s domestic transactions be carried out in ZWL$. *Source: IMF staff report excerpt (chapter content provided).* ### 32. Enhanced disclosure by the RBZ will be indispensable for the success of the ### 32. Enhanced disclosure by the RBZ will be indispensable for the success of the ### Monetary policy and disclosure - Minutes of the meetings of the newly established Monetary Policy Committee are being published in a timely manner. - Monetary statistics and central bank balance sheet data are provided with long lags. - Staff proposal for minimum disclosure: - Publish the daily RBZ balance sheet on the RBZ website with a short (e.g., one-week) lag from the reference date. - Publish full monetary statistics no later than 4 weeks after the end of the month. - RBZ plans and targets: - RBZ plans to target a moderate (10-15 percent) increase in reserve money in 2020. - Any lending to RBZ subsidiaries to be made consistent with the overall reserve money targets. - Authorities’ concern and approach: - Authorities favor a gradualist approach to liberalize the FX market to help contain inflation given large import needs (fuel, essential food imports, raw materials, machinery). - Authorities are not requesting Fund approval of the exchange restrictions and MCPs and plan to gradually relax them depending on economic developments and potential impact on FX conditions and market confidence. ### Exchange measures, restrictions, and capital flow management measures (CFMs) - Certain exchange measures create exchange restrictions and multiple currency practices (MCPs): - Prioritization of FX sales. - RBZ’s application of the prior date’s interbank rate when allocating FX to finance certain imports and when purchasing FX from exporters subject to surrender requirement. - Some past capital account measures aimed at preventing reserve losses constitute CFMs under the Fund’s Institutional View (IV) on capital flows; staff encouraged relaxing these measures as soon as economic conditions permit. - Box 1 — Capital Flow Management Measures (CFMs identified): - Capital account transfers started to be subject to approval (2016): outflow CFM. - Cash withdrawal and related measures tightened (2016): all outflow CFMs. - Cash exports limit lowered to $1000 from $5000, slightly eased to $2000 (2017). - Limits on credit card use, cash withdrawal, and bond withdrawal introduced. - Surrender requirement for FX introduced in 2016 and further tightened during 2018-19: outflow CFM. - Since 2016, limits on foreign investments and on external borrowing have been generally eased (though repayment for external borrowing, other than for productive activities, were restricted): easing of inflow CFMs. ### Financial sector policies and financial stability - Banking sector resilience and vulnerabilities: - Banking sector showed resilience supported by administrative measures and government commitment to compensate banks for FX losses (Figure 5 referenced). - Exchange controls and deposit withdrawal restrictions provided stable low-cost funding and ability to keep lending rates relatively low on existing customer loans. - Loan performance improved aided by sale of nonperforming loans to ZAMCO during 2015-2018 and declining debt payments in real terms in 2019. - Strength of capital supported by government commitment, following currency conversion, to assume large losses related to banks Net Open FX Positions (NOP) and revaluation of real assets. - Reported liquidity is ample but largely illiquid long-term government bonds that could generate large valuation losses if discounted or sold; reported prudential ratios therefore overstate banks’ ability to provide credit and meet deposit withdrawals absent withdrawal restrictions. - Staff emphasis and risks: - Urgency of implementing financial sector reforms stressed. - RBZ measures to support bank credit to productive sectors raise government contingent liabilities (e.g., liquidity facility introduced in September 2019 at preferential rates and against collateral in corporate loans with minimum maturity of 12 months). - Collateralization of corporate loans transfers credit risk to RBZ, raises contingent liabilities, and reduces banks’ incentives for effective credit risk management. - Priority: ensure banks have healthy balance sheets to improve transmission of market confidence and intermediation. - Staff recommended actions (enumerated): - Legal and regulatory framework: - Finalize ongoing legal reforms, strengthen prompt corrective actions and bank resolution regimes. - Update secondary legislation and prudential standards to implement primary legislation. - Strengthening banking supervision: - Dedicate more resources to core banking supervision systems and processes, focusing on DSIBs and problem institutions. - Conduct immediately a thematic on-site credit review for DSIBs to assess loan classification and provisioning, large exposures, lending to related parties and credit risk policies and practices. - Improve supervisory data and reconcile with the monetary survey to support systemic risk analysis and financial sector policy formulation. - Asset quality reviews (AQR): - Consider conducting an AQR to gauge banks’ capital position following assessment of the impact of the new currency. - AQR should include participation by international reputable experts and scope include banks’ loan books, real assets, NOPs and risk from sovereign exposure. - Resolution and contingency planning: - Develop resolution planning alongside recovery planning and prepare contingency plans should capital shortfalls be detected in the AQR. - National payment system: - Update legal and supervisory framework for payment and settlement systems to international standards to catch up with rapidly growing electronic payments. - Use forums with public authorities and private stakeholders to facilitate development. - AML/CFT: - Substantial progress needed in AML supervision effectiveness, transparency of beneficial ownership information, and targeted financial sanctions to support exit from FATF list and mitigate pressures on correspondent banking relationships. ### Banks’ Net Open FX Positions (Box 2) - Following currency reform of February 2019: - Negative NOPs arose in banks (up to 45 percent of sector capital) because assets and liabilities were only partially redenominated from US$ into ZWL$. - Mandatory currency redenomination from US$ into ZWL$ applied only to bank assets and liabilities subject to Zimbabwean legislation; assets kept abroad or registered with RBZ as “off-shore” customer loans, and liabilities contracted under foreign legislation were excluded. - Deposits of FX earners were by law exempt from currency conversion; banks instructed in October 2018 to ringfence such deposits in “Nostro Foreign Currency Accounts (FCA)” which included “free funds” (diaspora remittances and international organizations’ remittances), portfolio investment flows, loan proceeds, and export retention proceeds. - RBZ announced a “Nostro Stabilisation Guarantee Facility” (NSGF) of US$500 million to ensure FX availability when required by account holders. - Authorities announced in February 2019 they would compensate banks for FX losses related to NOPs at the time of currency conversion; size and form of compensation yet to be determined and Financial Soundness Indicators reflect banks’ own expectations. ### Structural policies: growth, agriculture, governance - External position and REER: - External position in 2019 assessed as broadly consistent with medium-term fundamentals and desirable policies. - Current account (CA) gap assessed at -0.5 percent, translating into a two percent real effective exchange rate (REER) gap. - Sharp depreciation of Zimbabwe dollar in 2019, over and above concurrent sharp rise in inflation, helped reduce the large REER observed in 2018. - Business environment and competitiveness: - Zimbabwe’s global competitiveness declining since 2015 and below sub-Saharan African average. - Zimbabwe ranks 124th (out of 137) in the Global Competitiveness Index (GCI). - Key constraints: political instability, foreign currency regulations, inefficient government bureaucracy, and corruption. - Progress noted: relaxation of indigenization policy, merger of investment-promoting institutions into Zimbabwe Investment and Development Agency, SOE reforms underway. - Remaining challenges: electricity shortages and inability to use agricultural land as collateral. - Agriculture: - Agriculture is a key driver of the economy with highest employment and, outside extractive industries, contributes most to GDP. - Agricultural productivity declined significantly over two decades; Zimbabwe moved from one of the most productive to one of the least in sub-Saharan Africa. - Main causes: dilapidated irrigation infrastructure, lack of skills development for new farmers, land rights uncertainty, challenging regulatory framework. - Recent government price and input subsidies have not sustainably improved productivity as they did not address root causes. - Staff recommendation: reorient and rationalize fiscal agricultural support programs and implement legal and policy reforms to restore sector and help Zimbabwe resume agricultural exports. - Governance and anti-corruption: - Zimbabwe scores well below regional average on governance, transparency and corruption indicators. - TSP identified strengthening governance and tackling corruption as key reform priorities. - Authorities, with IMF and World Bank staff assistance, conducted diagnostic assessment of governance vulnerabilities covering public financial management, revenue administration, oversight of SOEs, extractive industries, public procurement, RBZ operations, financial sector oversight, rule of law, and AML/CFT. - Authorities committed to publish final assessment of governance vulnerabilities and their high-level anti-corruption plan in the next few months to feed into a comprehensive anti-corruption strategy. ### Other issues: debt and capacity development - Debt situation: - Zimbabwe remains in debt distress with long standing external arrears to IFIs, official, and commercial creditors (see attached DSA referenced). - Domestic debt grew due to large fiscal deficits and negligible access to external finance; recent currency conversion and high inflation significantly eroded its real value. - If Government assumes liabilities from currency reform losses, external debt situation would worsen. - Staff warned that this and continued recourse to collateralized external commercial borrowing may complicate future arrears clearance operations. - Restoring debt sustainability will require fiscal prudence across public sector and support for a debt arrangement by creditors. - Capacity development: - Zimbabwe has large capacity development needs and has benefitted from significant TA from the Fund and other stakeholders. - Post-2016 arrears clearance, IMF provided substantial TA focused on revenue mobilization, expenditure controls/efficiency, monetary and exchange market operations, and governance concerns. - World Bank support noted on social safety net, agriculture subsidies, PFM and SOE reforms. ### Staff appraisal (key points) - Administration since September 2018 has embarked on reforms addressing large macroeconomic imbalances and distortions: - Significant fiscal consolidation helped reduce, though not entirely eliminate, monetary financing of the deficit. - Introduction of new domestic currency in February 2019 and creation of an interbank FX market. - Establishment of a new monetary policy committee at the RBZ with outside members broadened consultative process and increased transparency through regular publication of minutes. - Restructuring of the command agriculture financing model to a public-private partnership with commercial banks. *Source: IMF staff report on Zimbabwe (excerpt).* ### 46. Progress has not been balanced, implemented smoothly, or without cost, and has been ### Progress has not been balanced, implemented smoothly, or without cost, and has been ### Macroeconomic context and recent shocks - Progress has been severely hampered by climatic shocks. - Uneven implementation, notably delays and missteps in FX and monetary reforms, have failed to restore confidence in the new currency despite the sharp tightening in fiscal policy. - Continued rapid money growth for quasi-fiscal operations has resulted in a significant exchange rate depreciation and very high inflation. - A deep economic contraction from weather shocks and unavoidable fiscal adjustment contributed to a sharp decline in living standards, with more than half of the population now expected to be food insecure in 2019–20. ### Near-term macroeconomic imperative: coordinated fiscal, FX, and monetary policies - Objective: stabilize the exchange rate and inflation while addressing food insecurity. - Fiscal policy - Observation: Approved spending in the 2020 budget exceeds realistic revenue mobilization and commercial bank financing. - Commitment required: no RBZ financing of the budget. - Measures recommended to scale back spending: - eliminate export gold incentives; - contain low-priority current and capital spending. - On assumption of losses related to the currency reform: - limit such assumptions using transparent criteria; - require that any such debt takeover be approved by the MOFED, and eventually Parliament, consistent with the provisions in the Constitution and Public Debt Management Act; - use long-dated government securities for any assumption of such liabilities to limit the impact on liquidity and FX market in the near term. - Warning: Continued recourse to collateralized external borrowing on commercial terms may potentially complicate any future arrears clearance operation for Zimbabwe and should be avoided. - FX reforms - More determined implementation of currency reform is needed to create a market. - Continued liberalization of FX controls is key, including: - removal of FX allocation via the priority list; - allowing exporters to sell more of the surrender amount; - eliminating restrictions set on the rate at which banks can transact in the market. - Measures to de-dollarize the economy are essential, including increasing incentives to hold local currency over FX—especially requiring that all of government’s domestic transactions be carried out in ZWL$. - Staff welcomes the discontinuation of providing FX at a preferential rate, and urges that any subsidies for specific goods should not be done through preferential FX rates and be included transparently in the budget. - Monetary policy - Recommendation: reserve money targeting is the most appropriate anchor for the new currency, given the paucity of international reserves and lack of credibility on inflation management. - Rationale: rapid growth in money supply is driving the sharp exchange rate depreciation and high inflation. - Operational steps: - RBZ should achieve moderate reserve money growth; - introduce short-term instruments to allow the RBZ to conduct open market operations to operationalize the reserve money targeting framework; - RBZ should stop direct lending to its subsidiaries. - Social protection - The cyclone and prolonged drought, combined with high inflation and exchange rate depreciation, have produced a humanitarian crisis. - The budget has significantly increased allocations for social spending, but even with pledged international assistance these fall short of projected needs. - Closing the gap will require further reprioritization of budgetary resources and further engagement with the international community. ### Exchange restrictions and MCPs - Staff urges the authorities to eliminate the exchange restrictions and MCPs described in paragraph 34. - Staff does not support the policies that have given rise to these exchange restrictions and MCPs. - Although authorities indicate plans to gradually relax them, there is presently no timetable; staff urges articulation of an exit strategy for their removal as economic conditions permit to improve FX market functioning. ### Financial sector stability measures - Given financial sector risks and vulnerabilities, supporting financial sector stability is a priority. - Key steps: - Close monitoring of weakly capitalized banks with elevated levels of NPLs; - RBZ should initiate a review of banks’ asset quality and develop a strategy to address capital shortfalls; - RBZ should urgently allocate resources to update and operationalize its framework for managing weak banks, including their exit; - Strengthen legal and regulatory requirements to support bank supervision and enhance crisis preparedness; - Advance efforts to increase the effectiveness of the AML/CFT framework to support the exit from the FATF list. ### Structural reforms for medium-term growth and poverty reduction - Focus: address governance vulnerabilities and improve the business environment. - Priority actions: - Combating corruption and improving governance to reduce the cost of doing business; - Steadfast implementation of the recently adopted action plan aimed at addressing governance vulnerabilities as a critical signal of authorities’ commitment. - Agricultural reforms (key for medium-term growth and poverty reduction): - improve irrigation infrastructure; - expand skills development for new farmers; - facilitate the leasing of farms to productive farmers; - make the 99-year leases truly bankable so they can be used as collateral to secure needed financing. ### Other recommendations - Staff recommends that the next Article IV consultation with Zimbabwe be held on the standard 12-month consultation cycle. *Source: IMF staff report excerpt (Zimbabwe).* ### 48.0 percent ### 1zweea2020001 - 48.0 percent ### Revenue and Expenditure Patterns - Revenue: Zimbabwe and SSA (in percent of GDP) — chart shows Zimbabwe relative to 25th - 75th percentile and average for 2009–2019p (figure heading: "Revenue: Zimbabwe and SSA (in percent of GDP)"). - Change in Central Government Expenditure (in percent of GDP, 2010-2017) — chart components: Capital Spending, Current spending, Total. - Subsidies in Sub Saharan Africa (percent of GDP) — Zimbabwe (2018) compared to 25th percentile, Median, 75th percentile, SSA Average. - Social Assistance Spending, % of GDP — Social Assistance Spending in 2015 (percent of GDP): Zimbabwe, SSA, LIDCs. - Table 3b (in percent of GDP) key aggregates: - Revenue and grants: 16.8 (2016), 14.1 (2017), 12.9 (2018), 13.5 (2019), 15.0 (2020 Est.), 12.8 (2020 Budget), 12.7 (2021 Proj.), 12.6 (2022 Proj.), 12.7 (2023 Proj.) - Total expenditure & net lending: 23.9 (2016), 24.0 (2017), 18.6 (2018), 16.9 (2019), 16.3 (2020 Est.), 17.8 (2020 Budget), 15.0 (2021 Proj.), 14.7 (2022 Proj.), 14.8 (2023 Proj.) - Overall balance (commitment basis): -7.1 (2016), -9.9 (2017), -5.7 (2018), -3.4 (2019), -1.3 (2020 Est.), -5.0 (2020 Budget), -2.3 (2021 Proj.), -2.1 (2022 Proj.), -2.1 (2023 Proj.) ### Financial Soundness Indicators (2013–Sep-2019) - Capital adequacy and profitability: - Regulatory capital to risk-weighted assets: 16.9 (Dec-2014), 19.9 (Dec-2015), 24.5 (Dec-2016), 27.6 (Dec-2017), 28.1 (Dec-2018), 30.1 (Sep-2019) - Return on equity (chart and Table 5): Return on equity reported rising to 44.3 (Sep-2019) in Table 5; charts show "Return on equity, (RHS)" with rising trend through Q3 2019. - Liquidity: - Liquid assets/total assets: 27.3 (Dec-2014), 36.1 (Dec-2015), 44.1 (Dec-2016), 52.9 (Dec-2017), 56.4 (Dec-2018), 54.0 (Sep-2019) - Liquid assets/short-term liabilities: 35.6 (Dec-2014), 46.8 (Dec-2015), 55.9 (Dec-2016), 65.5 (Dec-2017), 69.1 (Dec-2018), 60.0 (Sep-2019) - Commercial banks' liquidity reported ample at 76 percent of short-term liabilities (chart note). - Liquidity differs across banks and consists largely of illiquid long-term government securities in several banks (chart: T-bonds/liquid assets). - Asset quality: - Past-due loans to gross loans: 45.8 (Dec-2014), 43.2 (Dec-2015), 37.5 (Dec-2016), 35.6 (Dec-2017), 34.8 (Dec-2018), 21.7 (Sep-2019) - Nonperforming loans (past due > 90 days): 16.3 (Dec-2014), 12.0 (Dec-2015), 7.9 (Dec-2016), 7.1 (Dec-2017), 7.2 (Dec-2018), 3.2 (Sep-2019) - Watch-listed loans (past due < 90 days): 29.4 (Dec-2014), 31.2 (Dec-2015), 29.6 (Dec-2016), 28.6 (Dec-2017), 26.4 (Dec-2018), 18.5 (Sep-2019) - Provisions as percent of past-due loans: 15.5 (Dec-2014), 13.2 (Dec-2015), 14.1 (Dec-2016), 14.7 (Dec-2017), 24.3 (Dec-2018), 20.6 (Sep-2019) - Profit drivers: - Banks reported high profitability and increasing capital ratios in the first half of 2019; profits mostly from FX income and non-interest income (income and expenses chart showing components: Net interest income, FX income, Other non-interest income, Fees and Commission, Loan loss provisions, Salaries, Other non-interest expenses, Net income before taxation). - Loan performance by sector: - Past-due loan share noted: 99 percent of loans to agriculture classified as past due (chart note). - Past-due loans remain high at 22 percent of total loans (chart annotation). ### Macroeconomic Indicators and Projections (Table 1: 2016–23) - Output and prices: - Real GDP growth (at constant 2012 prices): 0.7 (2016), 4.7 (2017), 3.5 (2018), -8.3 (2019), 0.8 (2020), 2.5 (2021 Proj.), 2.5 (2022 Proj.), 2.2 (2023 Proj.) - Nominal GDP (US$ millions): 20,549 (2016), 22,041 (2017), 22,946 (2018), 20,703 (2019), 20,563 (2020), 21,339 (2021), 22,607 (2022), 23,588 (2023) - CPI (annual average): -1.6 (2016), 0.9 (2017), 10.6 (2018), 255.3 (2019), 221.1 (2020), 3.7 (2021), 3.0 (2022), 3.0 (2023) - CPI (end-of-period): -0.9 (2016), 3.4 (2017), 42.1 (2018), 521.1 (2019), 52.0 (2020), 3.0 (2021), 3.0 (2022), 3.0 (2023) - Money and credit: - Money supply (M2) annual change: 18.8 (2016), 39.0 (2017), 24.0 (2018), 127.5 (2019), 24.4 (2020) - Credit to the private sector annual change: -3.9 (2016), 5.9 (2017), 9.1 (2018), 174.1 (2019), 56.7 (2020) - Credit to the central government annual change: 51.6 (2016), 74.5 (2017), 59.2 (2018), 62.3 (2019), 27.5 (2020) - Exchange rates (ZWL:USD): - Annual average: 1.0 (2016), 1.3 (2017), 2.0 (2018), 8.5 (2019), 21.5 (2020), 24.7 (2021), 25.1 (2022), 25.4 (2023) - End-of-period: 1.0 (2016), 1.3 (2017), 3.5 (2018), 16.8 (2019), 24.5 (2020), 24.9 (2021), 25.2 (2022), 25.6 (2023) - Fiscal aggregates (percent of GDP, Table 3b highlights): - Employment costs: 15.5 (2016), 12.7 (2017), 9.3 (2018), 4.9 (2019), 4.3 (2020 Est.), 4.3 (2020 Budget), 4.5 (2021 Proj.), 4.9 (2023 Proj.) - Capital expenditure and net lending: 4.6 (2016), 6.3 (2017), 6.3 (2018), 8.3 (2019), 6.3 (2020 Est.), 7.9 (2020 Budget), 4.2 (2021 Proj.), 3.9 (2022 Proj.), 3.7 (2023 Proj.) ### Balance of Payments (Table 2: 2016–20) - Current account (US$ millions): -718 (2016), -284 (2017), -1,229 (2018), 148 (2019 Est./Proj. row shows 487? — table shows "1487" in heading column concatenation; entry row shows 1487 in 2020 column header formatting ambiguity), overall balance entries: Overall Balance -92 (2016), -374 (2017), -320 (2018), -175 (2019), -139 (2020). - Exports of goods and services (US$ millions): 4,060 (2016), 4,734 (2017), 5,304 (2018), 4,634 (2019), 5,038 (2020), with annual percentage changes: 1.5 (2016), 16.6 (2017), 12.1 (2018), -12.6 (2019), 8.7 (2020). - Imports of goods and services (US$ millions): 6,427 (2016), 6,555 (2017), 7,617 (2018), 5,455 (2019), 6,417 (2020), with annual percentage changes: -14.4 (2016), 2.0 (2017), 16.2 (2018), -28.4 (2019), 17.7 (2020). - Gross international reserves (US$ millions): 310 (2016), 293 (2017), 87 (2018), 111 (2019), 109 (2020); months of imports cover: 0.6 (2016), 0.5 (2017), 0.1 (2018), 0.2 (2019), 0.2 (2020). ### Central Government Operations (Tables 3a and 3b; nominal ZWL$ and percent of GDP) - Selected nominal ZWL$ figures (Table 3a): - Revenue and grants: 3,502 (2016), 3,870 (2017), 5,491 (2018), 21,042 (2019), 58,640 (2020 Budget), 49,908 (2021 Proj.), 56,109 (2022 Proj.), 60,024 (2023 Proj.), 64,020 (later column) - Expenditure and net lending: 4,970 (2016), 6,573 (2017), 7,895 (2018), 26,403 (2019), 63,640 (2020 Budget), 69,601 (2021 Proj.), 66,303 (2022 Proj.), 70,086 (2023 Proj.), 74,571 (later column) - Employment costs (nominal): 3,231 (2016), 3,495 (2017), 3,935 (2018), 7,700 (2019), 17,751 (2020 Budget), 16,740 (2021 Proj.), 19,096 (2022 Proj.), 21,635 (2023 Proj.), 24,513 (later column) - Interest payments (nominal): 127 (2016), 233 (2017), 368 (2018), 669 (2019), 704 (2020 Budget), 1,574 (2021 Proj.), 3,708 (2022 Proj.), 3,198 (2023 Proj.), 3,340 (later) - Overall balance (commitment basis, nominal ZWL$): -1,468 (2016), -2,703 (2017), -2,403 (2018), -5,360 (2019), -5,000 (2020 Budget), -19,693 (2021 Proj.), -10,194 (2022 Proj.), -10,062 (2023 Proj.), -10,551 (later) - Financing composition (Table 3a): - Domestic financing (net): 1,354 (2016), 2,658 (2017), 3,082 (2018), 5,566 (2019), 8,170 (2020 Budget), 4,851 (2021 Proj.), 5,662 (2022 Proj.), 5,921 (2023 Proj.), 6,317 (later) - RBZ financing (nominal): 950 (2016), 1,727 (2017), 3,038 (2018), 5,178 (2019), 0 (2020 Budget), 0 (2021 Proj.), 0 (2022 Proj.), 0 (2023 Proj.) - Foreign financing (net): 0 (2016), -73 (2017), -231 (2018), -1,379 (2019), -3,170 (2020 Budget), -3,463 (2021 Proj.), -4,805 (2022 Proj.), -4,478 (2023 Proj.), -4,553 (later) - Change in arrears (nominal): 46 (2016), 46 (2017), 335 (2018), 1,177 (2019), 0 (2020 Budget), 3,393 (2021 Proj.), 4,642 (2022 Proj.), 4,159 (2023 Proj.), 4,174 (later) ### Monetary Survey (Table 4: 2016–20; Millions of ZWL$ unless otherwise indicated) - Reserve Bank of Zimbabwe (RBZ) balances: - Net foreign assets: -574 (2016), -1,126 (2017), -1,758 (2018), -50,741 (2019 Est.), -66,576 (2020 Proj.) - Net domestic assets: 2,047 (2016), 3,794 (2017), 5,016 (2018), 60,141 (2019 Est.), 77,386 (2020 Proj.) - Claims on central government: 2,338 (2016), 3,986 (2017), 7,025 (2018), 14,182 (2019 Est.), 14,182 (2020 Proj.) - Monetary base: 1,473 (2016), 2,668 (2017), 3,258 (2018), 9,400 (2019 Est.), 10,810 (2020 Proj.) - Banks and monetary aggregates: - Credit to private sector: 3,497 (2016), 3,694 (2017), 4,037 (2018), 11,038 (2019 Est.), 17,355 (2020 Proj.) - Deposits: 5,567 (2016), 7,448 (2017), 9,491 (2018), 32,172 (2019 Est.), 46,980 (2020 Proj.) - Broad money (M3): 5,638 (2016), 7,817 (2017), 10,010 (2018), 33,309 (2019 Est.), 48,269 (2020 Proj.) - Memorandum (annual percentage changes and ratios): - Credit to private sector (annual % change): -3.9 (2016), 5.9 (2017), 9.1 (2018), 174.1 (2019), 56.8 (2020) - Net credit to central government (percent of GDP): 51.6 (2016), 74.5 (2017), 59.2 (2018), 62.3 (2019), 27.4 (2020) - Monetary base (annual % change): 161.5 (2016), 81.2 (2017), 22.1 (2018), 88.5 (2019), 15.0 (2020) - M2 (annual % change): 18.8 (2016), 39.0 (2017), 24.0 (2018), 127.5 (2019), 24.4 (2020) ### SMP Quantitative Targets (Table 6) and Program Performance - Selected quantitative target outcomes (Dec., End-June 2019, End-September 2019 columns): - Floor on the primary budget balance of the central government (ZWL$ million) — End-June 2019: -1,203 actual, Prog. 38, Status: met; End-September 2019: -1,604 actual, Prog. -2,502, Status: not met. - Floor on protected social spending (ZWL$ million) — End-June 2019: 225 actual, Prog. 268, Status: met; End-September 2019: 500 actual, Prog. 561, Status: met. - Floor on the stock of net official international reserves (in US$ million) — Dec. Prog. 56, Act. -1,267 (noted SMP error), End-June 2019: 186 actual, Prog. -1,267, Status: met; End-September 2019: 66 actual, Prog. -1,267, Status: met (table notes clarify correction). - Continuous ceiling on new non-concessional external debt contracted or guaranteed by the public sector (in US$ million) — Cumulative from April 30, 2019: Prog. 0, Act. 108, Status: not met (both End-June and End-September columns). - Ceiling on changes in net domestic assets of the RBZ (ZWL$ million) — End-June 2019: Prog. 300, Act. -240, Status: met; End-September 2019: Prog. 350, Act. 1,057, Status: not met. - Ceiling on credit to the nonfinancial public sector from the RBZ (ZWL$ million) — End-June 2019: Prog. 0, Act. -191, Status: met; End-September 2019: Prog. 0, Act. 1,572, Status: not met. - Notes: - Program performance monitored based on quantitative targets for June, September, and December 2019. - SMP targeted an unchanged level of NIR relative to end-December stock (US$56 million), but numbers erroneously reflected NFA (US$-1,267 million); corrected for end-September and end-December 2019 targets. ### SMP Structural Benchmarks and Reform Actions (Table 7) - Prior Actions Done (Restore macroeconomic stability; Improve PFM, budget execution, and fiscal discipline; Improve governance, PFM, and budget monitoring/execution): - Cabinet to approve a revised 2019 budget consistent with a deficit of RTGS$2.8 billion — Prior Action: Done. - Issue instructions to ensure that no payments shall be made by the RBZ on behalf of Government without explicit and case-by-case authorization by the MoFED — Prior Action: Done. - Issue an instruction to disallow any future acquisitions of non-performing loans by ZAMCO — Prior Action: Done. - Adopt regulations implementing the Public Financial Management (PFM) Act, including ensuring all expenditure commitments are recorded in IFMIS — Completion: June 2019; Done – Gazetted on the 14th of June 2019 (SI 135 of 2019). - Benchmarks completed by September 2019: - Complete a comprehensive stock-take of domestic expenditure arrears across the central government as of end-2018 — Completion: September 2019; Done – The report has been produced. - Complete a review of agricultural support programs and develop an action plan — Completion: September 2019; Done – Smart Agriculture introduced in 2020 National Budget. Financing for Agriculture will be from the private sector with Government providing guarantees. - Extend the coverage of IFMIS to 37 Districts by establishing 31 additional kiosks — Completion: September 2019; Done. - Outstanding/completion-by-December-2019 items: - Submit to Parliament draft amendments to the Banking Law to address gaps identified by the FSSR — Objective: Maintain financial stability; Completion Date: December 2019. Comment: After the FSSR Mission, RBZ requested Technical Assistance; proposed TA has not yet commenced. - Complete, with IMF assistance, and publish the report of a diagnostic assessment of Zimbabwe’s governance vulnerabilities — Objective: Strengthen governance and combat corruption; Completion Date: December 2019. Comment: Authorities agreed to publish their own assessment shortly, which will feed into a comprehensive anti-corruption strategy. *Source: Zimbabwean authorities; IMF staff estimates and projections.* ### Annex I. Progress Against IMF Recommendations ### Annex I. Progress Against IMF Recommendations ### Fiscal Policy — Recommendations and Actions since 2017 Article IV Consultations - Fiscal consolidation to achieve fiscal surplus over the medium term - Fiscal deficits in 2017 and 2018 were much higher than targeted under the budget. Significant fiscal consolidation in 2019. - Contain wage bill - Significant progress despite high inflation that has made containing the wage bill very challenging. - Streamline the civil service - No action taken. Authorities agreed with staff assessment, but disagreed with policy recommendations. - Eliminate the agricultural command program - Financing of inputs under the program has been transferred to the banking system. Risks to the budget remain high as the government provided full guarantee against credit default. - Implement PFM Reforms - Authorities adopted regulations to implement the Public Financial Management Act, gazetted on the 14th of June 2019. ### Monetary and Financial Policies — Recommendations and Actions - Refrain from monetary financing - Although direct financing of the central government deficit has stopped, large quasi-fiscal activities by the RBZ have continued. - Lift the interest rate cap - All caps on interest rate have been removed following the June 2019 increase in overnight interest rate from 15 to 50 percent. - Strengthen AML/CFT framework - Steps taken since the 2016 ESAAMLG assessment were insufficient to prevent a grey listing of Zimbabwe by the FATF in October 2019. ### Structural Policies — Recommendations and Actions - Improve governance - A comprehensive governance assessment was undertaken by Fund staff, and the authorities will adopt shortly an anti-corruption strategy. - Improve the management of SOEs - The government has approved a reform framework for 43 SOEs and parastatals. Targeting 5 key SOEs for privatization/divestiture and preparing turnaround strategies for at least 20 SOEs with technical assistance from various development partners. - Provide clarity to land rights - The first phase of the National Agricultural Land Audit was undertaken in 2018. The second phase is planned for 2020. - Improve business climate - The indigenization policy has been relaxed, investment-promoting institutions merged into a single Zimbabwe Investment and Development Agency, and a policy established to collapse multiple licensing requirements into single omnibus licenses in the tourism and transportation sectors. --- ### Annex II. Risk Assessment Matrix — Key Risks, Likelihood, Impacts, and Policy Responses - Delay in fiscal consolidation - Likelihood/Time Horizon: High/Short to Medium Term - Expected Impact: High. Absent expenditure rationalization or continued quasi-fiscal activities by the RBZ, financing needs would remain high. Given limited external financing, resorting to large monetary financing would lead to continued depreciation, threatening price and financial sector stability. - Policy Response: Create domestic political consensus to contain current spending, improve revenue collection, and increase spending efficiency. Reduce the footprint of the government in the economy by leveraging the private sector. - Stalled reengagement from delays in political and economic reforms - Likelihood/Time Horizon: Medium/Short to Medium Term - Expected Impact: High. Failure to advance reforms would maintain the status quo, exacerbate economic imbalances and worsen policy confidence. - Policy Response: Advance political and economic reforms to gain support of international community and pave the way for arrears’ clearance. This would unlock financing from IFIs and help restore access to international financial markets. - Worsened drought conditions - Likelihood/Time Horizon: Medium/Short to Medium Term - Expected Impact: High. Most of the agricultural sector is rainfed and highly susceptible to rainfall, and hydropower provides much of electricity generation. - Policy Response: Create fiscal space for grain imports and social spending to support the most vulnerable parts of the population. - Weaker-than-expected global growth, and/or rising protectionism - Likelihood/Time Horizon: Medium/Short to Medium Term - Expected Impact: High. Impact mainly through trade channel, especially from South Africa. Financing and remittances would suffer, increasing BOP pressures. - Policy Response: Advance structural reforms to improve productivity and competitiveness, and re-engage with the international community to gain access to financial support. - Sharp rise in risk premia - Likelihood/Time Horizon: High/Short term - Expected Impact: High. Tighter global financial conditions could hit competitiveness through an appreciation of the U.S. dollar, and raise the cost of Zimbabwe’s external borrowing. - Policy Response: Renew efforts to implement structural reforms to improve the business climate and reduce the cost of doing business, to increase productivity and strengthen competitiveness. --- ### Annex III. External Sector Assessment — Key Findings and Policy Implications A. Current Account and Real Effective Exchange Rate - Overall Assessment: The external position of Zimbabwe in 2019 was broadly consistent with the medium-term fundamentals and desirable policies. - The current account (CA) gap is assessed at -0.5 percent, translating into a two percent real effective exchange rate (REER) gap. - Contributions to 2019 current account outcome: - Exports declined by 12.8 percent mainly because of drought, energy shortages, and exchange rate issues. - Imports fell by 28.4 percent. - Stable remittance inflows contributed to a positive current account balance. - REER movement: - The Real Effective Exchange Rate (REER) depreciated by about 70 percent at end-2019 relative to end-2018. - Domestic prices accelerated sharply by about 500 percent at end-2019. - The domestic currency lost more than 4/5 of its value during 2019. B. Balance of Payments, 2017-2019 (Percent of GDP) - Current Account: 2017: -1.3; 2018: -5.4; 2019: 0.7 - Trade balance on goods and services: 2017: -8.3; 2018: -10.1; 2019: -3.9 - Exports of goods and services: 2017: 21.5; 2018: 23.1; 2019: 22.0 - Imports of goods and services: 2017: 29.7; 2018: 33.2; 2019: 25.9 - Income: 2017: 7.0; 2018: 4.7; 2019: 4.6 - Primary Income: 2017: -0.7; 2018: -1.4; 2019: -1.6 - Secondary Income: 2017: 7.7; 2018: 6.1; 2019: 6.3 - Capital Account: 2017: 1.3; 2018: 1.3; 2019: 0.3 - Financial Account: 2017: 4.5; 2018: 3.1; 2019: -1.8 C. External Sustainability and Capital Flows - External position broadly consistent with fundamentals and policies: - EBA-lite current account model suggests a current account gap of -0.5 percent of GDP, implying a 2 percent REER gap. - The REER model suggests a slight undervaluation, about 3 percent, on account of a fifteen-fold depreciation of the domestic currency while prices increased by five-fold by end-2019. - Multiple breaks in historical REER data could distort model results. - CA adjustment achieved through significant import compression that cannot be sustained over the medium term. - Financial account: turned to a net lending position due to huge repayments for offshore facilities; Non-debt creating inflows, notably FDI, were subdued; private capital flows depressed due to high perceived country risk premium. - Reserves: - Gross international reserves stood at US$ 109 million by end-2019, covering about a week of imports. - IMF template for reserve adequacy in low income countries suggests 2.7 to 3.3 months of imports as adequate for Zimbabwe. - The low end of the estimate assumes high cost of holding reserves as Zimbabwe is struggling to finance essential imports. Policy implications - Accelerate foreign exchange market, monetary market, and structural reforms to boost investor confidence and attract private capital flows. - Allow the interbank FX market to play its role of price discovery for private investors to price exchange rate risks. - Stabilize inflation through restrictive fiscal and monetary policies; fiscal policy was significantly tightened in 2019 but must be in tandem with tight monetary policy to bring inflation down. - Structural reforms including strengthening property rights and improving the business climate could help unlock private capital flows. --- ### Annex IV. Governance and Corruption Challenges — Diagnostic Findings and Specific Vulnerabilities A. Overview and Institutional Response - Governance weaknesses are pervasive and have proliferated corruption, dampening prospects for sustained long-term growth of fiscal revenue and output. - Government actions: - Established a high-level working group chaired by MoFED and OPC. - Requested IMF staff assistance to conduct a diagnostic assessment of governance and corruption challenges. - Plans to publish final assessment of governance vulnerabilities by the first quarter of 2020 to feed into a comprehensive anti-corruption strategy. - Diagnostic assessment focuses on six areas per IMF’s 2018 Framework: fiscal governance, the financial sector, central bank governance and operations, market regulation, the rule of law, and the AML-CFT framework; IMF staff also assessed Zimbabwe’s overall anti-corruption framework. B. Fiscal Management — Public Financial Management (PFM) - Subsidies - Subsidies are extensively used across agriculture, electricity, fuel, FX allocation at preferential rates, and to gold and platinum exporters. - Subsidies included in the budget are recorded as capital expenditures and cover subsidized grain imports and agricultural support programs. - Command Agriculture Program - Introduced in 2016; created governance vulnerabilities due to lack of clarity, transparency and accountability. - Program components: (i) input scheme (Special Maize Production Program); (ii) price subsidy scheme via the Grain Marketing Board (GMB). - Governance issues: lack of strict eligibility criteria, low take-up of subsidies, no transparent selection criteria for designated input suppliers, and corruption vulnerabilities in the price subsidy scheme (round-tripping). - From the 2019/20 agriculture season financing of inputs transferred to the banking system; government provided a full guarantee against credit default—risks to the budget remain high and it is too early to assess impact on governance challenges. - Debt management - Weak; debt statistics are not systematically compiled and published. - No debt data disseminated on MoFED web site except limited data in annual budget documentation. - No public debt report submitted to Parliament despite constitutional and legislative provisions. - PFMS utilization and expenditure controls - Lack of full utilization of expenditure controls in the automated PFMS. Many transactions occur outside PFMS despite PFMA and Treasury Instructions. - Expenditure arrears have started accumulating due to weak expenditure controls and worsened fiscal conditions. - MDAs pay some arrears without transparent prioritization, creating governance vulnerability. - Fiscal reporting and internal audit - Government publishes budget execution reports and monthly consolidated financial statements, but limited or no regular information on extrabudgetary funds or SOEs. - Slow progress in improving fiscal reporting; improved compliance with IMF’s Government Finance Statistics Manual, 2014. - Internal control and internal audit systems are weak. Internal audit functions established in all line ministries, but implementation of Auditor General’s recommendations for 2014-2017 has been very limited; MoFED and line ministries have in some cases not complied with legal requirements. C. Revenue Administration — ZIMRA - ZIMRA has many elements of an integrity strategy, with good procedural and operational practices, but governance gaps and inefficiencies have negatively impacted perceptions of the tax system. - ZIMRA governance framework under the Revenue Authority Act: - Act states ZIMRA will act as “an agent of the state in assessing, collecting and enforcing payment of all revenues.” - The Act states ZIMRA will be “controlled and managed by the board” but is silent on the specific role of the board. - The law assigns far-reaching roles to the board that weaken government oversight, enabling the board to control and manage ZIMRA operations with potential access to taxpayer information without secrecy constraints. - The law gives the board powers normally provided to a Minister and Commissioner General; the Minister must consult the Board before making regulations related to contraventions and penalties. *Source: Annexes I–IV from IMF staff report (Zimbabwe).* ### 13. The existence and lack of coordination among multiple (up to 26) government ### 13. The existence and lack of coordination among multiple (up to 26) government ### Coordinated border management - Finding: Multiple (up to 26) government agencies operate at the 18 border posts in Zimbabwe, promoting disorder and fraudulent transactions. - Recommendation: Enact new legislation to coordinate the management of border controls and reduce fraud. - Comparative note: Drawing on the experience of neighboring countries such as Zambia, a coordinated border management law would reduce governance vulnerabilities by clearly defining the role and responsibility of ZIMRA and other government agencies operating at the border. ### State-Owned Enterprises (SOEs) and Extractive Industries - Findings: - Management of SOEs remains challenging and raises governance concerns related to weak governance and failure to implement announced government policies. - Despite reforms launched in the 2011 budget and subsequent budgets, the SOE sector continues to operate with losses and increasing liabilities. - The government has outlined a comprehensive program to reform state enterprises and parastatals and has earmarked 43 enterprises for privatization, liquidation, or merger. - Milestones achieved include approval of the Public Entities Corporate Governance (PECG) Act in November 2018 and establishment of a Corporate Governance Unit under the OPC. - Remaining governance challenges include: - Nominations of SOE board members do not comply with the PECG Act and its regulations. - Publishing of annual financial statements by SOEs is not yet standard practice; information is limited and untimely. - Many SOEs do not submit required quarterly and annual reports to MoFED as required by public finance law. - Lack of clarity in inter-ministerial arrangements for managing the privatization of 25 SOEs announced in November 2018 creates risks of rent-seeking. - Extractive industries vulnerabilities: - Lack of scrutiny of agreements with investors (including fiscal concessions). - Undue discretion in the award of mining licenses. - Inefficient or conflicted SOE performance. - Lack of monitoring of production leading to theft and/or smuggling of minerals. - Inefficient allocation/spending of natural resource revenues. - Several investment incentive regimes available to investors; SOEs also enter into agreements with investors with little public disclosure of fiscal terms. - Several SOEs (Minerals Marketing Corporation of Zimbabwe—MMCZ, Zimbabwe Consolidated Diamond Company—ZCDC and Fidelity Printing and Refining—FPR, which is an RBZ subsidiary) have exclusive rights to essential market functions, creating substantial governance vulnerabilities. - Recommendation highlights: - Increase capacity for enforcing the provisions and regulations of the PECG Act and publish data on appointments to the boards of SOEs. - Build capacity in MoFED to provide effective oversight of SOE financial performance; issue PFMA-based instructions requiring SOEs to submit quarterly and annual financial statements. - Prepare and enact a law on the privatization process with clear criteria and guidance on the roles of MoFED, line ministries and other agencies. - Publish all resource contracts with investors including those signed by SOEs as a first step towards implementation of the Extractive Industries Transparency Initiative (EITI). ### Reserve Bank (RBZ) governance and financial sector oversight - Findings: - The RBZ’s mandate is convoluted and weak by international standards; the RBZ Act blurs the distinction between objectives and functions. - The monetary system is overly complex and non-transparent; despite a Regulation defining the ZWL$ as sole legal tender, the concept of legal tender remains unclear with cases where payments due after the introduction of the ZWL$ have been allowed in the old currency and exchange rates. - The framework for RBZ lending operations to the banking sector (standard monetary policy operations and Emergency Liquidity Assistance (ELA)) is not communicated transparently, despite steps to differentiate them. - RBZ conducts quasi-fiscal operations outside typical central bank activities, including via subsidiaries (e.g., financial support to gold miners via the FPR). - A significant example: RBZ’s preferential exchange rates for fuel imports (discontinued since October 2019) provided fuel subsidies estimated to have amounted to over US$ 300 million in 2019. - All gold mined in Zimbabwe must be sold to the FPR; RBZ needs to ensure its subsidiary follows the Gold Trade Act to purchase gold only from authorized persons. - RBZ’s broad discretion in applying foreign exchange regulations creates governance vulnerabilities; allocation criteria are opaque and open to mismanagement. - The RBZ directive for authorized dealers to transfer legacy debt to the RBZ has an unclear legal basis. - Decision-making concentration at the executive level; Audit and Oversight Committee (AOC) composition not aligned with leading practices on independence and experience. - Rules on conflicts of interest have major weaknesses: Codes of Conduct for managerial and non-managerial staff do not apply to the Governor, Deputy Governors, and Board members. - ZAMCO (RBZ subsidiary managing non-performing loans) lacks specific provisions describing its powers and governance. - RBZ does not have full autonomy from the government; RBZ Act contains provisions allowing direct undue political influence over policies and operations. Leading practices require a double veto procedure for appointments/dismissals. - RBZ legal framework for bank supervision is weak; significant MOFED role undermines RBZ operational independence and creates governance vulnerabilities. The Banking Act involves MOFED in final decision-making, approvals, or authority to reverse supervisory actions. - Recommendations: - Amend the RBZ Act to distinguish clearly between the Bank’s objectives, functions and powers and simplify wording on legal tender. - Remove provisions that allow for undue political influence over RBZ operations, including on prudential supervision. - Prohibit in law and discontinue RBZ’s quasi-fiscal operations, with measures to mitigate potentially adverse social impacts, and operationalize the RBZ’s financial stability mandate. - Consolidate RBZ’s subsidiaries in its financial statements and clarify ZAMCO’s powers, including fit and proper rules and strict conflict of interest requirements for its board of directors. - Verify the basis and feasibility for the transfer of legacy debt (noting approval by the MoFED and the Parliament) and engage an external audit firm to certify the process of validating the legacy debt. ### Rule of Law - Findings: - Corruption vulnerabilities in administration of land resources due to: - Lack of clarity in criteria for administering land resources (ambiguous conditions for granting land use permits and leases, permission to sublease or use land in joint investment ventures, and for government retaking of the land). - Lack of transparency in decision-making. - Lack of proper control over the process (role of an independent and capable agency and judiciary). - These weaknesses increase opportunity for arbitrary decisions and risk of official abuse. - The government is undertaking reforms to enhance the judiciary’s capacity and efficiency. - The relative efficiency of the judiciary appears to have improved significantly in recent years, mainly due to a performance management system for judges and magistrates launched by the Judicial Service Commission in 2014. - Recommendations: - Develop clear criteria for granting and cancelling land permits and leases, and for authorizing different forms of land use (e.g., sublease or investment partnership), and publish these criteria. - Publish decisions related to land use. - Establish an independent agency to handle complaints relating to land administration. ### AML/CFT - Findings: - Corruption and laundering of its proceeds present a significant threat in Zimbabwe. - Authorities are working to address AML/CFT deficiencies identified in the recent FATF listing and the 2016 ESAAMLG report. - Legislative amendments addressed some weaknesses, including an obligation on financial institutions to identify and verify their customers’ beneficial owners. - Further efforts are needed on capacities for conducting financial investigations and public access to beneficial ownership information. - Recommendations: - Develop and implement a risk-based approach to AML/CFT supervision, focusing on compliance with fit and proper controls, customer due diligence requirements for politically exposed persons and suspicious transaction reporting. - Introduce a robust online asset declaration system for politically exposed persons. - Effective implementation of risk-based AML/CFT supervision to ensure financial institutions’ compliance with fit and proper controls, enhanced customer due diligence for PEPs, and dynamic suspicious transaction reporting. ### Broader governance and anti-corruption recommendations - Observations on anti-corruption enforcement: - Despite a fairly adequate legal framework, enforcement has been relatively ineffectual and perceived as selective and highly politicized. - Contributing factors include lack of a top-down overall anti-corruption strategy, secrecy or lack of transparency in critical areas (e.g., fiscal information in mining contracts or central bank financial statements), no formal system/protocol for conflicts of interest when government is both regulator and operator, non-transparent appointments to public entity boards, and poorly coordinated enforcement agencies. - High-level measures to implement immediately or in the short term: - Develop an anti-corruption strategy consistent with international good practice principles. - Enact whistleblower legislation and protection in line with international good practice. - Introduce an asset declaration regime. - Enhance transparency and formalize clear procedural guidance on the government’s anti-corruption strategy and policies, and strengthen capacity and coordination of enforcement agencies. - Public Financial Management recommendations: - Conduct a comprehensive review of the Command Agriculture Program by the Auditor General or an external audit firm, taking account of the need to protect vulnerable citizens. - Tighten enforcement of legal provisions on submission of public debt reports. - Accelerate roll-out of the PFMS to local governments and extrabudgetary units. - Enforce constitutional and legal requirements for financial reports and internal controls. - Enforce sanctions on MDAs and/or officials who fail to submit fiscal reports. - Introduce data dissemination dates and adhere to them for publishing regular and timely fiscal information. - Publish public procurement plans, introduce e-procurement, and establish an online procurement database. - Revenue Administration (ZIMRA) recommendations: - Continue reforms to increase taxpayer compliance through improved IT systems, dispute resolution procedures, compliance risk management, and taxpayer support services. - Clearly specify the role of the board to include oversight of administrative functions and reporting, while removing management of operations by the board. - Prohibit disclosure of taxpayer information to board members and issue a specific tax secrecy requirement for Board members should they receive such information. - Remove the authority of the board to appoint Commissioners and staff, but allow vetting of candidates for board membership by a sub-committee of the board. - Remove the involvement of the Board in policy matters considered by the Minister of Finance. ### Capacity Development Strategy for 2020 (Annex V — selected points) - Context: - Fund TA to Zimbabwe restarted after removal of remedial measures effective November 14, 2016. - Initial TA focused on public financial management (PFM), revenue administration, and macroeconomic statistics (BOP, GDP, and CPI). - Extensive TA more recently on national accounts, price, balance of payments, and public sector debt statistics. - A Financial Sector Financial Stability Review (FSSR) conducted in November 2018; authorities and staff tentatively agreed a TA Road Map to address key gaps and vulnerabilities. - Assessment: - Implementation track record of TA recommendations has been mixed, partly due to need for legislative changes and political uncertainty around the July 2018 elections. - Forward-looking priorities: - TA remains crucial for Zimbabwe’s transition toward a functioning economy and restoring macroeconomic stability given capacity gaps after hyperinflationary era and brain drain. - Near-term TA focus areas: - PFM reforms to strengthen expenditure management, budget preparation and execution, and fiscal reporting. - Further development of the debt management framework. - Review of tax system design. - Enhancing tax and customs administrations. - Strengthening the financial stability framework and assessing banks’ asset quality once macroeconomic situation stabilizes. - Providing financial modelling and forecasting training for supervisors. *Source: IMF staff report (excerpt).* ### 5. TA priorities include: ### 1zweea2020001 - 5. TA priorities include: ### Technical assistance (TA) priorities and objectives - Public Financial Management (PFM) - Strengthen budgeting, reporting, fiscal forecasting, cash management, and fiscal oversight. - Revenue policy and administration - Broaden the tax base, mostly by reducing tax incentives (which reduce collections and make the economy less efficient). - Modernize revenue administration to improve its efficiency and effectiveness by addressing taxpayer segmentation and strengthening audit and risk management capacity. - Debt management - Strengthen government’s debt management capacity for achieving fiscal sustainability and effective budgeting. - Monetary policy framework - Support the authorities in designing and operationalizing a monetary policy framework to deliver macroeconomic stability. - Reduce the distortions from exchange controls. - Financial supervision and crisis management - Legal reforms to strengthen bank supervision and resolution, and payment system oversight. - Update, adopt, and operationalize the 2014 draft Crisis Management Plan. - Review banks’ quality once the macro economic situation has stabilized. - Macroeconomic statistics - Enhance macroeconomic analysis, budget preparation, and policy design. ### Fund relations — key institutional and financial data (as of December 31, 2019) - Membership status - Joined: September 29, 1980; Article VIII - General Resources Account (SDR Million; %Quota) - Quota: 706.80 100.00 - IMF's Holdings of Currency (Holdings Rate): 706.47 99.95 - Reserve Tranche Position: 0.33 0.05 - SDR Department (SDR Million; %Allocation) - Net cumulative allocation: 338.58 100.00 - Holdings: 2.35 0.69 - Outstanding Purchases and Loans: None - Latest financial arrangements (Date of Expiration; Amount Approved (SDR Million); Amount Drawn (SDR Million)) - Stand-By: Aug 02, 1999 — Oct 01, 2000 — 141.36 — 24.74 - Stand-By: Jun 01, 1998 — Jun 30, 1999 — 130.65 — 39.20 - EFF: Sep 11, 1992 — Sep 10, 1995 — 114.60 — 86.90 - Overdue Obligations and Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Charges/Interest: 2.52 2.49 2.49 2.49 2.49 (Forthcoming 2020–2024) - Total: 2.52 2.49 2.49 2.49 2.49 - Implementation of HIPC, MDRI, CCR: Not Applicable - Lifting of remedial measures following clearance of arrears to the PRGT - On October 20, 2016, Zimbabwe fully settled overdue PRGT obligations amounting to SDR 78.3 million (overdue PRGT principal SDR 61.7 million; total interest obligations SDR 16.6 million). - Effective November 14, 2016, the Executive Board approved removal of remedial measures; eligibility to the PRGT restored. ### Exchange arrangement and foreign exchange practices - Key dates and changes - February 20, 2019: introduced RTGS dollar and adopted a de jure floating exchange rate arrangement; de facto reclassified to floating effective February 20, 2019. - June 2019: RTGS dollar renamed as the Zimbabwean dollar (ZWL$). - Exchange restrictions and multiple currency practices (MCPs) identified - Commercial banks required to prioritize FX sales for specified international transactions, limiting FX availability for non-priority transactions and creating MCPs via diversion to bureau market with rates more than 2 percent in excess of interbank market. - RBZ allocates FX to finance certain necessity imports and purchases repatriated FX proceeds at the prior business date’s interbank rate, constituting MCPs when that rate deviates by more than 2 percent from prevailing FX rates. - Longstanding exchange restriction from unsettled balances under an inoperative bilateral payment agreement with Malaysia. ### Joint World Bank—IMF work program, 2020–21 (selected items) - IMF work program (next 12 months) — Technical assistance (ongoing) - Establishing a money targeting framework - Public financial management - Revenue administration - Public debt management - Financial supervision and regulation - National account statistics - Bank work program (next 12 months) — Technical assistance (ongoing) - SOE Reform; Doing Business and Investment Policy; Mineral Sector Reform; Climate Change; Energy Sector; Transport Sector; Health and Nutrition Sector; Education Sector; Social Protection and Safety Nets; Land Policy and Administration; Poverty Monitoring and Analysis - Joint product in next 12 months - DSA for 2021 Article IV — Q1 2021 - Information sharing (ongoing) - Bank provides to Fund: updates on policy reform work; timing, scope, conclusions of missions; update on arrears clearance. - Fund provides to Bank: updates on medium-term macroeconomic framework; updates on program discussions; updates on policy reform work: PFM, tax and financial sector reforms; timing, scope, conclusions of missions. ### Statistical issues — assessment and priorities (As of December 31, 2019) - General assessment - Data provision has some shortcomings but is broadly adequate for surveillance. - ZIMSTAT largely complies with international standards but reintroduction of the Zimbabwe dollar caused delays in national accounts publication; action plan with external support underway. - National accounts - Progress in following 2008 SNA guidelines; scope expanding including quarterly national accounts. - Redenomination and rebasing of national accounts to ZWL$ will require extensive resources and additional data, particularly for 2019 outturns. - ZIMSTAT working on quarterly GDP; ZIMRA agreed to share tax data to support quarterly/annual national accounts compilation. - PICES 2017 underway to provide data on income distribution, consumption, CPI weights, production account of agriculture, and poverty mapping. - Price statistics - Generally good quality; CPI rebased in 2019 (Feb/2019 = 100) and reweighted basket. - Government Finance Statistics (GFS) - MoFED publishes monthly consolidated financial statements and budget outturns; reports annual GFS consistent with GFSM 2014 to STA. - Dissemination limited: transactions only; lacks COFOG expenditure and stock positions in financial assets and liabilities. - Need to improve timeliness, frequency, and coverage of GFS. - Monetary and Financial Statistics (MFS) - RBZ began reporting MFS using SRFs in late 2015; approved for IFS publication in May 2018. - Consultations ongoing on classification issues following end of multi-currency regime. - Zimbabwe does not compile data for Other Financial Corporations (OFCs). - Financial sector surveillance - Zimbabwe does not report Financial Soundness Indicators (FSIs) for external dissemination; RBZ advanced in compilation but needs to finalize action plan for submission. - External sector statistics - Migrated to BPM6 in December 2016; submits balance of payments data to STA per BPM6. - Does not report IIP, CDIS, or CPIS data; does not report quarterly external sector data (QEDS) to World Bank debt database. - Gaps remain in financial accounts: reinvested earnings and trade credit. - Receiving TA from IMF and DFID’s EDDI-2 to strengthen ESS compilation; recent TA assisted on Foreign Private Capital survey response rates and preliminary IIP database. - International Investment Position (IIP) - Progress on IIP compilation with EDDI-2 assistance; missing stock data on FDI and portfolio investments to be obtained from planned Foreign Private Sector Survey. - Data standards and reporting - Zimbabwe participates in e-GDDS from November 2002; e-GDDS metadata last updated May 2013. - Reporting to STA: MFS, external sector statistics (mainly BOP), and currency composition of foreign reserves. Does not report national accounts and price statistics to STA for dissemination in IFS and BOP Yearbook. Reports GFS included in GFS yearbook but no sub-annual data for IFS. ### Selected data reporting table highlights (Date of latest observation; Date received; Frequency of data; Frequency of reporting; Frequency of publication) - Exchange rates - Jan. 30, 2020; Jan. 31, 2020; D; D; D - International reserve assets and reserve liabilities of the monetary authorities - Dec. 2019; Jan. 2020; W; W; M - Reserve/base money; Broad money; Central bank balance sheet - Nov. 2019; Jan. 2020; M; M; M - Consolidated balance sheet of the banking system - Nov. 2019; Jan. 2020; M; M; NA - Interest rates; Consumer price index - Dec. 2019; Jan. 2020; M; M; M - Revenue, expenditure, balance and composition of financing — Central government - Nov. 2019; Jan. 2020; M; M; M - Stocks of central government and central government-guaranteed debt - Sep. 2019; Dec. 2019; Q; I; A - External current account balance; External capital and financial account; Exports and imports of goods - Q3 2019; Dec. 2019; A/Q/M; I; I - GDP/GNP - 2018; Jun. 2019; A; A; A - Gross external debt - Sep. 2019; Dec. 2019; A; I; I - Note: Table reflects data submission as of January 31, 2020. ### Debt sustainability analysis — summary findings and implications - Risk ratings - Risk of external debt distress: In debt distress - Overall risk of debt distress: In debt distress - Granularity in the risk rating: Unsustainable - Application of judgement: No - Key findings - Zimbabwe is classified as “in debt distress”, with unsustainable public and publicly guaranteed (PPG) external and total debt and large external arrears. - External and total public debt breach thresholds in both baseline and shock scenarios. - Large and longstanding external arrears to IFIs, official, and commercial creditors. - Domestic debt has grown in recent years due to large fiscal deficits and negligible access to external finance; recent currency conversion and high inflation have significantly eroded its real value. - Policy implications and requirements for restoring sustainability - Sustained implementation of a significant fiscal consolidation. - Cessation of quasi-fiscal activities that lead to debt increases. - Reaching agreement with creditors on a comprehensive treatment of Zimbabwe’s external debt and arrears. - Country capacity indicator - Zimbabwe’s Composite Indicator (CI) index is calculated at 1.8 based on the October 2019 WEO and the 2018 CPIA data, indicating that the country’s debt-carrying capacity is ‘weak’. *Prepared By The IMF’s African Department (in collaboration with other Departments) — February 12, 2020.* ### 1. Zimbabwe’s public ### 1. Zimbabwe’s public ### Summary of debt dynamics and composition - Public debt has increased since the last published DSA (2017) due to unsustainable fiscal deficits and quasi-fiscal activities of the RBZ, including further arrears accumulation. - With negligible access to external financing, deficits were financed domestically through the banking system, the RBZ (until recently), and arrears. - Domestic debt, negligible 5 years ago, reached ZWL$ 6.98 billion by end-2018. - External debt is dominated by official creditors—both bilateral and multilateral—with the bulk of the debt in arrears. - In 2019 the authorities secured additional external loans, including almost-concessional borrowing for infrastructure and expensive commercial loans securitized by future mineral exports. ### Text Table 1 — Key public and publicly guaranteed debt figures (USD millions; as of end-2018) - External Debt: DoD 2,563; Arrears 6,109; Total 8,672; 38% of GDP - Bilateral Creditors: DoD 1,519; Arrears 3,687; Total 5,206; 23% of GDP - Paris Club: DoD 210; Arrears 3,258; Total 3,469; 15% of GDP - Non Paris Club: DoD 1,309; Arrears 428; Total 1,737; 8% of GDP - Multilateral Creditors: DoD 899; Arrears 2,359; Total 3,258; 14% of GDP - World Bank: DoD 219; Arrears 1,270; Total 1,489; 6% of GDP - African Development Bank: DoD 35; Arrears 657; Total 692; 3% of GDP - European Investment Bank: DoD 19; Arrears 290; Total 309; 1% of GDP - Afreximbank: DoD 489; Arrears 67; Total 556; 2% of GDP - Others: DoD 137; Arrears 74; Total 211; 1% of GDP - Commercial Creditors: DoD 145; Arrears 63; Total 208; 1% of GDP - Domestic debt (ZWL$ millions; as of end-2018): DoD 6,875; Arrears 108; Total 6,984; 16% of GDP - Government Bonds: DoD 4,785; Total 4,785; 11% of GDP - RBZ loans: DoD 2,049; Total 2,049; 5% of GDP - Domestic Arrears: Arrears 108; Total 108; 0% of GDP - Other: DoD 42; Total 42; 0% of GDP ### Coverage, reporting, and SOE issues - Public debt coverage includes external and domestic obligations of the central government, central bank, and some SOEs, but SOE coverage remains incomplete. - Authorities are improving SOE monitoring; 2019 policy led by SERA adopts a broad SOE overhaul: privatizations, mergers, and standardized reporting to the Ministry of Finance and Accountant General. - Domestic central government arrears to non-governmental entities are ZWL 108 million (0.8 percent of GDP), but this excludes some non-governmental arrears (e.g., accounts payable) and significant intra-public-sector cross-debts. - IMF TA in Q1/2019 recommended reviving a ‘from whom-to-whom’ tracking system to facilitate clearing intra-government arrears. - Recommendation: Update the Public Debt Management Act (PDMA) to clarify reporting of public sector gross debt in terms of consolidation. ### Debt-carrying capacity and indicative thresholds - Zimbabwe’s debt-carrying capacity is classified as “weak” under the revised DSF Framework (2017). - Composite Indicator (CI) index: 1.80 (based on October 2019 WEO and World Bank’s latest (2018) CPIA). - Relevant indicative PV of total public debt benchmark for “weak” category: 35 percent of GDP. - External debt burden thresholds for “weak”: - PV of debt in % of Exports: 140 - PV of debt in % of GDP: 30 - Debt service in % of Exports: 10 - Debt service in % of Revenue: 14 ### Macro baseline, outlook and realism - Data and outlook are subject to considerable uncertainty due to redenomination, high inflation, and ZIMSTAT’s ongoing rebasing/redenomination of national accounts. - 2019 contraction and 2020 near-zero growth: - Real GDP growth: 2019 -8.3; 2020 0.8; 2021 2.5; 2022 2.5; 2023 2.2 - Inflation (%, average): 2019 255.3; 2020 221.1; 2021 3.7; 2022 3.0; 2023 3.0 - Inflation (%, eop): 2019 521.1; 2020 52.0; 2021 3.0; 2022 3.0; 2023 3.0 - Overall Fiscal balance (% GDP): 2019 0.0; 2020 -5.0; 2021 -1.0; 2022 -4.0; 2023 -2.9 - Consolidated public sector debt (% GDP): 2019 50.1; 2020 53.9; 2021 56.1; 2022 56.0; 2023 55.9 - Public and publicly-guaranteed external debt (% GDP): 2019 47.6; 2020 51.5; 2021 52.7; 2022 52.1; 2023 51.5 - Current account (% GDP): 2019 0.7; 2020 -1.0; 2021 -1.4; 2022 -1.3; 2023 -2.3 - FDI (% GDP): 2019 0.6; 2020 1.1; 2021 0.7; 2022 1.6; 2023 1.9 - Reserves (months of imports): 2019 0.2; 2020 0.2; 2021 0.2; 2022 0.2; 2023 0.2 - Inflation spiked to 521 percent (y-o-y) in December 2019. - Medium-term constraints: protracted external arrears, lack of external finance, limited investment. Baseline assumes financing gaps filled by domestic debt issuance. ### Specific contingent liabilities, legacy debts, and customized shock - RBZ commitments: issue FX-dominated domestic debt securities in 2020 to compensate stakeholders for currency reform losses. Initial estimate then was US$1.2 billion; indications that debt to be assumed could reach US$2 billion. - Staff simulated a farmers compensation and legacy-debt absorption scenario: - Assumed agreement crystallizes in 2020. - Valuation used for simulation: US$6.25 billion in total (middle-range of ongoing discussions). - Assumed financing on commercial-like terms: 5 percent interest, 1 year grace, 10 year maturity. - Result: jump in the PV of debt in 2020 of approximately 30 percent of GDP. - Staff concern: assuming these debts would significantly deteriorate the Government’s balance sheet, worsen debt distress, and affect prospects for arrears normalization. ### Contingent liability stress test calibration (Text Table 5) - Default shock (to capture incomplete SOE coverage): modified from 2 percent of GDP to 5 percent of GDP. - Financial market shock (including potential liabilities from domestic banking system and RBZ measures): 5 percent of GDP. - PPP shock: 0 percent (World Bank estimate of PPP capital stock < 3 percent). - Additional private-sector bailout shock: 10 percent of GDP. - Total calibration used in analysis (2+3+4+5): 20.0 percent of GDP. ### Risks, recommendations and policy implications - Risks to baseline are multi-dimensional: currency regime change, high/volatile inflation, exchange rate and interest rate volatility, drought and cyclone impacts, and losses to bank depositors after currency reform—disproportionately affecting the most vulnerable. - Downside risks to 2020: below-average rainfall and mining sector distortions. - Upside potential: successful resolution of arrears leading to normalization of financial relationships and stronger growth-investment-poverty reduction outcomes. - Practical starting actions: - Conduct a comprehensive debt reconciliation exercise. - Reach creditor agreement on clearing arrears at IFIs. - Develop affordable solutions for arrears clearance. - Improve public sector debt reporting and consolidation rules via PDMA update. - Revive a “from whom-to-whom” arrears tracking system to clear intra-public-sector cross-debts. *Source: Zimbabwean authorities and IMF staff calculations.* ### 14. Zimbabwe’s public and publicly-guaranteed external debt burden indicators are high, ### Zimbabwe’s public and publicly-guaranteed external debt burden indicators are high ### Key findings on external debt burden and risks - The PV of external debt-to-GDP ratio is above the 30 percent threshold for the entire projection horizon under the baseline and the stress tests. - The PV of debt-to-exports breaches the 140 percent threshold over the projection horizon. - The debt service-to-revenue ratio also breaches the policy-relevant threshold over the relevant forecast period under the baseline and the stress tests. - The stress tests with the most severe impacts: - Combination shock — largest impact on the PV of external debt-to-GDP. - Exports shock — largest impact on the PV of external debt-to-exports and debt service-to-exports. - Commodity price shock — largest impact on debt service-to-revenue. - The increase in the stock of external debt has been modest because of Zimbabwe’s almost non-existent access to financing, not because of a lower financing need. - Constraints worsening external debt risks: lack of foreign exchange, weak external position, weak export competitiveness, withdrawal of foreign investment, and FX precautionary hoarding limiting debt service capability. - The existence of substantial external arrears supports the determination that Zimbabwe is in external debt distress. ### Public sector debt dynamics and domestic debt - Driven by rising government spending—especially quasi-fiscal activities of the RBZ to support agriculture and other activities—the stock of domestic debt increased since the last DSA. - Very high recent inflation has radically reduced the real value of domestic debt; domestic debt has fallen in real terms because of currency conversion and the lack of ability of banks to absorb new sovereign debts. - Previous recapitalization and debt assumptions of the SOEs, subsidies to agriculture, and expansion in RBZ obligations have pushed public debt well beyond the indicative threshold of 35 percent of GDP (PV terms) under both the baseline and the stress tests. - Even with fiscal consolidation, the amount of public debt will carry a heavy burden on the Government of Zimbabwe. - Domestic debt obligations, external arrears, and large contingent liabilities support the assessment that the Zimbabwean government is in debt distress. - Contingent liabilities (related to a compensation agreement for displaced farmers and additional fiscal costs from debt assumptions for losses following the currency conversion) could sharply increase domestic debt, further aggravating the debt overhang. ### Projected public sector debt time series (selected figures as presented) - Time series header (shock year): 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 - Public Sector Debt: 45.3 51.8 101.6 99.6 98.3 97.2 95.7 94.1 91.7 89.3 87.0 83.8 - of which: foreign-currency denominated: 37.8 47.6 64.4 65.9 65.9 65.1 63.8 62.8 61.2 59.4 57.5 55.6 - PV of public debt-to-GDP ratio 2/: 43.7 49.0 98.1 95.6 94.2 93.2 91.8 90.4 88.3 86.1 84.0 81.0 ### Restoring debt sustainability — required measures - Restoring debt sustainability will require a combination of: - Fiscal adjustment. - A comprehensive debt restructuring plan with appropriate burden sharing. - Authorities have announced intention to redouble efforts to find an agreeable debt restructuring plan with external creditors, beginning with clearance of arrears at the IFIs, but timelines and modalities remain undetermined. - Absent stronger growth, monetary policy normalization, access to concessional financing, and some form of debt relief, Zimbabwe has little chance of escaping its debt trap. ### Fragility ratios and distance to thresholds (Text Table 7 as presented) - Indicator layout and values (preserving original formatting): - (1) Applicable LIC-DSA Thresholds: Weak - (2) Zim. end-2019 - Distance above applicable DSF threshold (2) - (1) - PV of debt in % of Exports14020161 - GDP304515 - Debt service in % of Exports10122 - Revenue143319 - Public Debt Benchmark385113 ### Conclusion - Zimbabwe is in debt distress. - The external debt burden is excessive and the country is incurring arrears. - The real value of domestic debt has fallen significantly given the high inflation, but contingent liabilities and fiscal costs from debt assumptions could sharply increase domestic debt and further aggravate the debt overhang. *Source: IMF staff analysis, “Zimbabwe’s public and publicly-guaranteed external debt burden indicators are high,” chapter/section content from the provided PDF content unit.* ### 23. Steady implementation of the reform strategy outlined in the TSP is critical for ### 23. Steady implementation of the reform strategy outlined in the TSP is critical for ### Reform strategy and policy recommendations - Steady implementation of the reform strategy outlined in the TSP is critical for Zimbabwe to emerge from its current difficulties. - Prudent fiscal and monetary polices are necessary. - Bold structural reforms are necessary to restore growth and attract investment. - External support and debt relief from the international community must be part of the strategy. - Supported by a robust reform program, the envisaged reengagement process could bear fruit and restore growth and sustainability. ### External Debt Sustainability — baseline indicators and projections (selected) - External debt (nominal) (In percent of GDP): 2016: 56.1; 2017: 55.8; 2018: 53.0; 2019: 64.5; 2020: 68.5; 2021: 69.1; 2022: 66.7; 2023: 65.6; 2024: 64.2; 2029: 55.5; 2039: 39.4; Average: 53.3; Projections: 63.1 - Of which: public and publicly guaranteed (PPG) (In percent of GDP): 2016: 38.9; 2017: 40.1; 2018: 37.8; 2019: 47.6; 2020: 51.5; 2021: 52.7; 2022: 52.1; 2023: 51.5; 2024: 50.1; 2029: 41.5; 2039: 25.4; Average: 41.5; Projections: 48.3 - Change in external debt: 2016: -1.0; 2017: -0.2; 2018: -2.8; 2019: 11.5; 2020: 4.0; 2021: 0.7; 2022: -2.4; 2023: -1.1; 2024: -1.5; 2029: -1.9; 2039: -1.4 - Identified net debt-creating flows: 2016: 0.5; 2017: -3.4; 2018: 2.3; 2019: -1.3; 2020: -0.6; 2021: -1.4; 2022: -1.4; 2023: -0.2; 2024: -0.2; 2029: -0.4; 2039: 1.0; Average: 2.6; Projections: -0.7 - Non-interest current account deficit: 2016: 2.8; 2017: 0.7; 2018: 5.0; 2019: -1.2; 2020: 0.4; 2021: 0.7; 2022: 0.6; 2023: 1.6; 2024: 1.5; 2029: 1.2; 2039: 1.5; Average: 8.6; Projections: 0.9 - Deficit in balance of goods and services: 2016: 11.5; 2017: 8.3; 2018: 10.1; 2019: 4.0; 2020: 5.7; 2021: 6.1; 2022: 5.7; 2023: 6.7; 2024: 6.4; 2029: 6.1; 2039: 6.1; Average: 19.3; Projections: 5.9 - Exports (percent of GDP): 2016: 19.8; 2017: 21.5; 2018: 23.1; 2019: 22.4; 2020: 24.5; 2021: 24.4; 2022: 24.1; 2023: 24.5; 2024: 24.6; 2029: 24.6; 2039: 24.6 - Imports (percent of GDP): 2016: 31.3; 2017: 29.7; 2018: 33.2; 2019: 26.3; 2020: 30.2; 2021: 30.5; 2022: 29.8; 2023: 31.2; 2024: 31.0; 2029: 30.7; 2039: 30.7 - Net current transfers (negative = inflow) (percent of GDP): 2016: -9.5; 2017: -8.7; 2018: -8.4; 2019: -9.2; 2020: -9.1; 2021: -8.7; 2022: -8.1; 2023: -7.6; 2024: -7.2; 2029: -6.3; Average: 0.0; Projections: -11.0; Further average: -7.5 - Net FDI (negative = inflow) (percent of GDP): 2016: -1.3; 2017: -0.9; 2018: -0.9; 2019: -1.0; 2020: -1.1; 2021: -1.1; 2022: -1.1; 2023: -1.1; 2024: -1.1; 2029: -1.1; Average: 0.0; Projections: -1.6; Final: -1.1 - Endogenous debt dynamics (contribution, percent): 2016: -1.0; 2017: -3.2; 2018: -1.8; 2019: 0.9; 2020: 0.0; 2021: -1.0; 2022: -0.9; 2023: -0.6; 2024: -0.6; 2029: -0.6; 2039: -0.5 - Contribution from nominal interest rate: 2016: 0.7; 2017: 0.6; 2018: 0.4; 2019: 0.4; 2020: 0.5; 2021: 0.7; 2022: 0.7; 2023: 0.7; 2024: 0.7; 2029: 0.6; 2039: 0.3 - Contribution from real GDP growth: 2016: -0.4; 2017: -2.5; 2018: -1.9; 2019: 0.5; 2020: -0.5; 2021: -1.7; 2022: -1.6; 2023: -1.4; 2024: -1.3; 2029: -1.2; 2039: -0.8 - Residual (includes exceptional financing) (percent): 2016: -1.5; 2017: 3.2; 2018: -5.1; 2019: 12.8; 2020: 4.6; 2021: 2.0; 2022: -1.0; 2023: -0.9; 2024: -1.2; 2029: -1.4; 2039: -2.4; Average: -3.8; Projections: 0.9 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio (percent): 36.2; 44.9; 48.0; 48.8; 48.2; 47.6; 46.4; 38.9; 24.3 (presented without full year mapping) - PV of PPG external debt-to-exports ratio: 156.7; 200.6; 196.1; 199.7; 200.1; 194.7; 188.7; 158.3; 98.8 - PPG debt service-to-exports ratio: 48.6; 41.4; 12.4; 12.2; 10.3; 10.4; 9.0; 9.1; 8.7; 8.3; 5.9 - PPG debt service-to-revenue ratio: 59.2; 63.5; 33.0; 22.9; 22.3; 23.8; 20.5; 20.9; 20.5; 19.5; 13.9 - Gross external financing need (Million of U.S. dollars): 2016: 2388.5; 2017: 2037.1; 2018: 3190.2; 2019: 1699.0; 2020: 1950.5; 2021: 2026.6; 2022: 1871.9; 2023: 1736.2; 2024: 1574.2; 2029: 1430.2; 2039: 1299.3 ### Public Sector Debt — baseline indicators and projections (selected) - Public sector debt (percent of GDP): 2016: 49.7; 2017: 52.5; 2018: 45.3; 2019: 51.8; 2020: 65.3; 2021: 65.6; 2022: 64.6; 2023: 64.3; 2024: 63.2; 2029: 54.4; 2039: 33.5; Average: 46.1; Projections: 60.7 - Of which: external debt (percent of GDP): 2016: 38.9; 2017: 40.1; 2018: 37.8; 2019: 47.6; 2020: 51.5; 2021: 52.7; 2022: 52.1; 2023: 51.5; 2024: 50.1; 2029: 41.5; 2039: 25.4; Average: 41.5; Projections: 48.3 - Change in public sector debt: 2016: 3.8; 2017: 2.8; 2018: -7.2; 2019: 6.5; 2020: 13.5; 2021: 0.3; 2022: -1.0; 2023: -0.3; 2024: -1.1; 2029: -2.5; 2039: -1.8 - Identified debt-creating flows: 2016: 8.4; 2017: 9.1; 2018: -2.4; 2019: 6.3; 2020: 12.3; 2021: -0.1; 2022: -1.2; 2023: -0.4; 2024: -1.1; 2029: -2.4; 2039: -1.5; Average: -0.5; Projections: 0.7 - Primary deficit (percent of GDP): 2016: 6.0; 2017: 9.1; 2018: 4.0; 2019: 4.6; 2020: 3.0; 2021: 2.0; 2022: 1.2; 2023: 0.9; 2024: 0.8; 2029: -1.0; 2039: -0.8; Average: 2.3; Projections: 1.1 - Revenue and grants (percent of GDP): 2016: 16.2; 2017: 14.0; 2018: 8.7; 2019: 11.9; 2020: 11.3; 2021: 10.7; 2022: 10.6; 2023: 10.7; 2024: 10.4; 2029: 10.4; 2039: 10.4; Average: 16.6; Projections: 10.7 - Primary (noninterest) expenditure (percent of GDP): 2016: 22.3; 2017: 23.2; 2018: 12.7; 2019: 16.5; 2020: 14.3; 2021: 12.7; 2022: 11.7; 2023: 11.6; 2024: 11.3; 2029: 9.4; 2039: 9.6; Average: 18.9; Projections: 11.8 - Automatic debt dynamics (percent): 2016: -0.6; 2017: -4.0; 2018: -8.2; 2019: 1.1; 2020: 2.5; 2021: -2.3; 2022: -2.5; 2023: -1.4; 2024: -2.0; 2029: -1.4; 2039: -0.7 - Contribution from interest rate/growth differential: 2016: -0.2; 2017: -3.8; 2018: -8.9; 2019: -0.5; 2020: 0.6; 2021: -2.7; 2022: -1.8; 2023: -1.3; 2024: -1.4; 2029: -1.0; 2039: -0.5 - Other identified debt-creating flows: 2016: 3.0; 2017: 3.9; 2018: 1.8; 2019: 0.6; 2020: 6.8; 2021: 0.1; 2022: 0.1; 2023: 0.1; 2024: 0.1; 2029: 0.1; 2039: 0.0; Average: 1.2; Projections: 0.7 - Recognition of contingent liabilities (e.g., bank recapitalization): 2016: 2.2; 2017: 0.6; 2018: 0.7; 2019: 0.0; 2020: 6.7; 2021: 0.0; 2022: 0.0; 2023: 0.0; 2024: 0.0; 2029: 0.0; 2039: 0.0 - Residual (percent): 2016: -4.6; 2017: -6.3; 2018: -4.8; 2019: 1.8; 2020: 3.2; 2021: 0.9; 2022: -0.5; 2023: 0.0; 2024: -0.6; 2029: -0.5; 2039: -0.5; Average: -1.0; Projections: 0.2 - Sustainability indicators (selected): - PV of public debt-to-GDP ratio: 43.7; 49.0; 61.8; 61.8; 60.7; 60.4; 59.5; 51.9; 32.4 (presented without full year mapping) - PV of public debt-to-revenue and grants ratio: 502.4; 411.0; 547.0; 579.7; 572.5; 566.3; 570.1; 496.7; 310.2 - Debt service-to-revenue and grants ratio: 34.2; 36.2; 62.5; 34.8; 23.8; 100.5; 70.8; 71.6; 75.0; 78.4; 34.7 - Gross financing need: 14.6; 18.2; 11.2; 9.3; 12.5; 12.9; 8.8; 8.6; 8.7; 7.2; 2.8 ### Scenarios, stress tests and sensitivity analysis — key points - Stress tests and sensitivity analyses are presented for indicators of public and PPG external debt under alternative scenarios for 2019–29. - The most extreme stress test is defined as the test that yields the highest ratio in or before 2029. - Stress tests include shocks such as commodity price shocks, export shocks, growth shocks, combined shocks, and tailored tests (e.g., combined contingent liabilities). Specific numeric outcomes are reported across tables and figures (see tables for year-by-year values). - Table 3: Sensitivity analysis for key indicators of public and PPG external debt, 2019–29, reports baseline and multiple scenarios (values presented in percent for various indicators across years; bold values indicate breaches of thresholds). - Table 4: Sensitivity analysis for public debt, 2019–2029, reports baseline and alternative scenarios (including Farmer's and Legacy Debts Compensation) with numeric outcomes in percent and absolute terms (e.g., PV and debt service figures). ### Key macroeconomic and fiscal assumptions (selected) - Real GDP growth (in percent): 2016: 0.7; 2017: 4.7; 2018: 3.5; 2019: -8.3; 2020: 0.8; 2021: 2.5; 2022: 2.5; 2023: 2.2; 2024: 2.2; 2029: 2.2; 2039: 2.2; Average: 11.5; Projections: 1.2 - GDP deflator in US dollar terms (change in percent): 2016: 2.2; 2017: 2.4; 2018: 0.6; 2019: -1.6; 2020: -1.5; 2021: 1.2; 2022: 3.3; 2023: 2.1; 2024: 3.2; 2029: 3.0; 2039: 3.0; Average: 5.5; Projections: 2.0 - Effective interest rate (percent): 2016: 1.2; 2017: 1.1; 2018: 0.7; 2019: 0.7; 2020: 0.8; 2021: 1.0; 2022: 1.1; 2023: 1.1; 2024: 1.1; 2029: 1.1; 2039: 0.9; Average: 1.3; Projections: 1.0 - Growth of exports of G&S (US dollar terms, in percent): 2016: 1.5; 2017: 16.6; 2018: 12.1; 2019: -12.6; 2020: 8.7; 2021: 3.5; 2022: 4.5; 2023: 6.0; 2024: 6.0; 2029: 5.2; 2039: 5.2; Average: 14.1; Projections: 3.9 - Growth of imports of G&S (US dollar terms, in percent): 2016: -14.4; 2017: 2.0; 2018: 16.2; 2019: -28.4; 2020: 14.0; 2021: 4.7; 2022: 3.4; 2023: 9.3; 2024: 4.9; 2029: 5.2; 2039: 5.2; Average: 12.1; Projections: 3.0 - Grant element of new public sector borrowing (in percent): 2019 onward sample values include 16.6; 21.0; 20.3; 18.0; 17.7; 17.0; 15.3; 15.3; Average: 17.1 - Government revenues (excluding grants, in percent of GDP): 2016: 16.2; 2017: 14.0; 2018: 8.7; 2019: 11.9; 2020: 11.3; 2021: 10.7; 2022: 10.6; 2023: 10.7; 2024: 10.4; 2029: 10.4; 2039: 10.4; Average: 16.6; Projections: 10.7 - Grant-equivalent financing (in percent of GDP) (projections sample): 1.2; 1.0; 0.9; 0.6; 0.4; 0.4; 0.2; 0.1; Average: 0.5 - Nominal GDP (Million of US dollars): sample values: 20,549; 22,041; 22,946; 20,703; 20,563; 21,339; 22,607; 23,588; 24,876; 32,183; 53,556 - Nominal dollar GDP growth: 2.9; 7.3; 4.1; -9.8; -0.7; 3.8; 5.9; 4.3; 5.5; 5.2; 5.2; Average: 18.5; Projections: 3.2 ### Analytical framing and authorship - Selected issues section authored and prepared by a team led by Gene Leon with individual chapters authored by Niko Hobdari, Trevor Lessard, and Frederico Lima. - Topics include "ELUSIVE QUEST FOR MACRO STABILITY IN ZIMBABWE," a brief monetary history, developments since the introduction of the new currency, appropriate monetary policy framework, how to operationalize the monetary targeting framework, and conclusions. *Source: Zimbabwe — staff estimates and projections as presented in the provided IMF chapter content.* ### References _______________________________________________________________________________ 14 ### ELUSIVE QUEST FOR MACRO STABILITY IN ZIMBABWE ### A. Brief monetary history and causes of instability - Pre-1980 arrangements tied to pound sterling and later to the rand; successive currency changes culminated in the Zimbabwe dollar after independence (1980). - Monetary financing and policy instability during the 1990s–2000s contributed to depreciation and accelerating inflation, culminating in hyperinflation in 2008 (prices doubling almost every day by November 2008). - Full dollarization began in early 2009: multiple foreign currencies were recognized as legal tender and surrender requirements of foreign currency were abolished in March 2009. - Post-dollarization recovery: real GDP growth averaged 25 percent per year between 2009 and 2012. - From 2014, monetary financing resumed via RBZ overdraft and central bank purchases of government bonds; quasi-currency instruments (RTGS dollars, bond coins, bond notes) emerged and traded at a discount versus the US dollar. ### B. Developments since the February–June 2019 currency reforms - February 2019: introduction of an interbank FX market where domestic quasi-currency instruments could be traded against the U.S. dollar; new Zimbabwean dollar (RTGS dollar) introduced and later renamed Zimbabwean dollar (ZWL$) in June 2019. - Reform intent: support by prudent fiscal policy and discontinuation of monetary financing; RBZ announced a reserve money targeting framework (not publicly detailed). - Key observed outcomes and dynamics: - Monetary financing peaked at 7.1 percent of GDP in 2018. - Quasi-currencies that started at parity traded in the parallel market at 3.5 to 1 against the US dollar by February 2019, implying a de facto nearly 80 percent loss in RTGS‑denominated assets. - By end-January 2020 the parallel exchange rate was around 25 ZWL$ per US$, compared to 3.5 less than one year before. - Inflation reached 521 percent in December 2019. - Reserve money nearly tripled during the second half of 2019 as the RBZ resumed quasi-fiscal operations. - Bank deposits converted in US$ shrank from about 6 billion in mid-2018 to 1½ billion at end-2019 (conversion affected by depreciation and a 1:1 conversion decision in February 2019). - The parallel market premium dropped from about 70 percent prior to the reform to about 10 percent in mid-2019, and exceeded 30 percent as of end-2019. - Domestic interest rates remained well below inflation, implying deeply negative real interest rates. - FX market functioning was constrained by informal guidance and formal restrictions (e.g., mid-point determination and announcement), preventing real two-way trades and open price discovery. ### C. Institutional responses and operational shortfalls - RBZ actions: - Established a Monetary Policy Committee (MPC) in September 2019 composed of nine members (six from private sector and academia, plus RBZ governor and two deputy governors). - MPC holds monthly meetings with minutes made public and has been developing a Reuters System for Foreign Exchange Trading. - MPC committed to prudent monetary policy and requested technical assistance to operationalize the money targeting framework. - Operational shortfalls: - The announced monetary (reserve money) targeting framework was not operationalized and specific base money targets were not publicly disclosed. - Reserve money volatility persisted, leaving the economy without a credible nominal anchor. - Sales in the interbank market appeared to be almost exclusively from official sources or forced by administrative requirements. ### D. Appropriate monetary policy frameworks: options, constraints, and assessment - Preconditions for any successful monetary framework: fiscal sustainability and central bank independence to avoid fiscal dominance and permit the RBZ to pursue price stability. - Three main monetary frameworks considered: - Monetary targeting - Pros: flexibility in setting inflation target; ability to deal with transitory output fluctuations. - Cons: does not work well in a low inflation environment (unstable money‑inflation relationship); fiscal discipline required; central bank independence and transparency needed. - Hard pegs (dollarization, currency board, fixed exchange rate) - Pros: easily understood; no FX volatility; low inflation; little/no currency risk if credible; low interest rates if credible. - Cons: no independent monetary policy; limited/no lender of last resort; loss of seigniorage (dollarization); needs higher level of international reserves. - Inflation targeting - Pros: flexibility in setting inflation target; ability to respond to real domestic and external shocks; central bank accountability. - Cons: weak transmission if interbank market underdeveloped; FX and inflation volatility (especially at start). - Feasibility assessment for Zimbabwe: - Exchange rate peg is not feasible near term because Zimbabwe’s international reserves are currently below one week of imports; reserve metrics indicate much higher needs: - Reserve adequacy metric (ARA) for low‑income countries suggests about 5 months of imports under a fixed exchange rate regime. - Traditional rules of thumb: 3 months of imports or 20 percent of M2. - Currency board reserve requirement would be between 1-8 months of imports (depending on aggregate used). - Reverting to dollarization would require about 6 months of imports. - Inflation targeting is not feasible near term because Zimbabwe lacks: a prudent fiscal policy and fiscal sustainability, a sound and stable financial system with a functioning interbank market, and a strong track record of delivering low inflation. ### E. Policy implications and priorities - Stabilization requires: - Fiscal restraint to reduce the need for monetary financing and to re-establish fiscal sustainability. - Institutional reforms at the Reserve Bank of Zimbabwe to restore central bank credibility and operational independence. - Introduction and operationalization of short‑term monetary instruments and a credible liquidity management framework (including publicly disclosed base money targets) to better manage market liquidity conditions. - Development of a functioning interbank market to improve monetary policy transmission and enable consideration of broader frameworks in the future. *Source: 1zweea2020001 — IMF PDF (https://www.imf.org/-/media/files/publications/cr/2020/english/1zweea2020001.pdf).* ### 15. Monetary targeting is the most appropriate monetary policy regime for Zimbabwe for ### 15. Monetary targeting is the most appropriate monetary policy regime for Zimbabwe for now. ### Rationale for monetary targeting - Monetary targeting gives the authorities flexibility in setting the inflation target and the ability to deal with transitory output fluctuations. - Monetary targeting is based on a theoretical and observed long-run correlation between broad money aggregates and nominal output, and similarly between broad money and base money. - Quantitative targeting postulates that controlling base money will ultimately have an impact on price stability. - The theoretical framework assumes: - stable links between base money (the operational target) and broad money (the intermediate target) through a stable money multiplier, and - a predictable relationship between broad money and prices, for a given rate of real growth. - In Zimbabwe, rapid base money growth in recent years was the driver of the increase in broad monetary aggregates, with the money multiplier remaining broadly stable during 2016-18. - Growth in broad money had been a key contributor to the rise in the parallel market premium. ### Evidence from high-inflation stabilizations - Countries with high inflation have successfully used money-based stabilizations to bring inflation under control (example: Peru in the early 1990s used base money as the main intermediate target). - Successful stabilizations typically tightened monetary policy early and sharply and did not ease until stability was restored. - Even where monetary targeting was successful, implementation was often flexible and discretionary in practice (examples cited: Germany in the 1970s–1980s; Peru in the 1990s). ### Implementation considerations and required discretion - Money targets can provide a clear nominal anchor, but implementation is complicated by fluctuations in money demand and unstable relations between base money and broader aggregates. - Meeting money targets does not necessarily imply an adequate monetary policy stance; exchange rate and interest rate volatility can persist even when money targets are met. - Authorities should implement monetary targets flexibly, taking into account high-frequency indicators such as expected inflation, economic activity, wage growth, and exchange rate developments. ### Operational target and monitoring - The operational target under monetary targeting is base money (reserve money), defined as the sum of currency in circulation and banks’ reserves at the central bank. - Monetary targeting frameworks rely on daily operations and constant monitoring: - Velocity of money = nominal GDP / broad money. - Money multiplier = broad money / base money. - Projections should be updated regularly; base money targets adjusted at a lower frequency—quarterly or semi-annually—to balance new information and anchoring expectations. - A daily calculation of the monetary base and current and expected liquidity conditions is required to calibrate OMOs. - Reserve money target may be set as a monthly average to accommodate unexpected liquidity fluctuations; day-to-day deviations feed into future operations to achieve the targeted average by month-end. ### Open market operations (OMOs), reserve requirements, and maturities - OMOs should be used to align base money with targets. In an environment of surplus liquidity, the RBZ may need to absorb reserves in sufficient quantity to contain broad money growth and inflationary pressures. - As of end-2019, banks held about ZWL$7 billion in excess reserves relative to a monetary base of about ZWL$9 billion. - To encourage participation, RBZ should allow true price discovery through OMOs and in government debt markets, acknowledging this will likely increase interest rate volatility and raise interest rate levels to align with expected inflation/depreciation. - OMOs should be limited to depository institutions (those subject to reserve requirements) and initially focus on short maturities (e.g., up to seven days). - Liquidity-absorbing OMOs could be carried out through repurchase agreement (“repo”) transactions using T-bills as collateral, with potential advantages including: - improving secondary market transactions in T-bills and interbank liquidity; - avoiding direct competition with the Ministry of Finance in short-term security issuance; - permitting T-bills as collateral for standing facilities; and - efficient use of existing settlement infrastructure. - A one-month liquidity absorbing operation with a fixed size could be considered once interest rates in daily OMOs stabilize; such longer-term operations should be at variable rates and the central bank acting as a rate taker. - The size of these operations should ideally not be larger than half of the outstanding OMOs. - Coordination with the MoF is needed to avoid overlaps in issuance timetables. ### Reserve requirements and complementarity with OMOs - Adjusting reserve requirements on bank deposits can complement OMOs to affect market liquidity conditions. - The establishment in October 2018 of a reserve requirement of 5 percent of all corporate and retail domestic currency deposits reduced some of the liquidity surplus. - Given significant excess reserves, a temporary increase in the reserve requirement ratio could be considered to absorb additional excess liquidity and increase demand for base money. - Risks of higher reserve requirements (affecting banks’ working balances and causing excessive interest rate volatility) can be mitigated by allowing averaging of required reserves. ### Liquidity forecasting and autonomous factors - A daily evaluation of current liquidity conditions and a short-term forecast of autonomous factors covering the period of outstanding OMOs should be based on: - the previous day’s RBZ balance sheet, - outstanding OMOs, - standing facilities usage, and - a short-term forecast of factors affecting liquidity conditions. - Autonomous factors include: - (i) net foreign exchange reserves; - (ii) net claims on government; - (iii) net other items; and - (iv) currency in circulation. ### Complementary FX and debt market reforms - Effectiveness of monetary targeting depends on reforms in FX and debt markets: - The interbank FX market remains dominated by the RBZ, with surrender requirements, strict exchange controls, tight margin limits and moral suasion affecting price discovery and creating a large parallel market premium. - These inefficiencies lower the FX available in the interbank market and create rent-seeking behavior. - Attempts to cap interest rates on government bonds or RBZ savings bonds limit private-sector interest in government debt and encourage demand for foreign assets, fueling depreciation pressures. - Prices in the FX, money, and public debt markets should ultimately be determined in a framework that ensures a consistent outcome. ### Communication, transparency, and publication - Communication and transparency on monetary conditions are critical for credibility: - RBZ should publish a weekly balance sheet on its website and daily information on the current month’s monetary base target, the previous day’s monetary base, and the rate and volume of OMOs and standing facilities. - The RBZ should ensure the website contains all rules and regulations pertaining to its monetary policy and exchange rate policy. - High-frequency public observation of reserve money targets and day-to-day levels helps anchor expectations. ### Conclusions and policy recommendations - Stabilizing the economy requires fiscal discipline and a moderation of base money growth. - The monetary targeting framework announced by the authorities can deliver a stable exchange rate and low inflation, but key for macro stability is having sound and sustainable fiscal policy, encompassing all relevant public sector operations. - In particular, this requires containing quasi-fiscal operations of the RBZ consistent with a moderate increase in base money. - Operational steps required to implement the framework: - set reserve money targets and introduce OMOs to steer reserve money toward established targets; - implement monetary targets flexibly, taking into account high-frequency indicators (expected inflation, economic activity, wage growth, exchange rate developments) when assessing the stance of monetary policy; - ensure clear communication on performance against monetary targets and their link with price stability objectives, accompanied by regular and timely publication of RBZ balance sheets. - Authorities are encouraged to further liberalize the FX market: - Despite introduction of the new Zimbabwean dollar and an interbank FX market, a spread between the parallel market and interbank market rates persists. - At nearly 30 percent, the premium remains too high; authorities are encouraged to gradually relax margin limits on trading in the interbank FX market and gradually eliminate surrender requirements and exchange controls so that the exchange rate is determined freely as a function of supply and demand. - Consistently delivering on moderate base money growth, effective communication, and timely dissemination of monetary statistics will help reduce exchange rate volatility. *Source: 1zweea2020001 - 15. Monetary targeting is the most appropriate monetary policy regime for Zimbabwe for now.* ### 2. Adjusted for inflation, agricultural value-added remains below what it was in the ### 2. Adjusted for inflation, agricultural value-added remains below what it was in the 1990s, and roughly 50 percent below its peak. ### Historical trends and headline findings - Agricultural value-added reached its peak in 2000 after nearly 20 years of sustained growth, but has fallen precipitously since then. - Value added figures include agriculture, forestry and fishing, and are expressed in constant 2010 US dollars. - Value added is about half of its peak. - Cereal production fell from an annual production of 1.9 million tons in the 1990s, to 1.6 million in the 2000s, and closer to 1.1 million since 2010. - While most agricultural products experienced a trend decline, the reduction was most pronounced in non-irrigated crops such as cereals. - Agricultural land in production has been stable while employment in the sector essentially doubled. ### Phases of land reform and their effects - 1980-1992: ‘Willing Buyer, Willing Seller’ - Lancaster Agreement of 1980 protected white farmers from compulsory land acquisition for 10 years. - By 1989, the number of commercial farms decreased from 6,000 to 4,300 and the share of land from 42 to 30 percent. - It is estimated that more than 80 percent of beneficiaries of land transfer were those with the greatest need. - 1992-2000: National Land Policy of 1992 / Land Reform and Resettlement Program (LRRP) - Land Acquisition Act (1992) allowed compulsory acquisition of land with limited compensation and limited rights of appeal. - British Government stopped financing land acquisition/compensation. - Government announced it would take no action to remove war veterans (or other communities) occupying white-owned land. - 2000s: Fast Track Land Reform Process (FTLRP) - Constitutional amendment 16: clause assigning responsibility for compensating evicted farmers to the UK; removed requirement for ‘fair and adequate’ compensation; prohibited judicial challenges to fairness of compensation. - Revised Land Acquisition Act: government to pay only for improvements on land but not the land itself in absence of UK fund. - Creation of A1 (smallholder/family plots) and A2 (medium-to-large commercial) models; introduction of land leases of between 25-99 years. - By 2008, FTLRP redistributed 6.8 million hectares versus 3.7 million hectares from all previous schemes combined. - The FTLRP phase coincided with the severe worsening of agricultural output and productivity due to shifts from technical to politically-driven land allocations and drying up of donor support. ### Decline in production volumes and value chain effects - Declining agricultural production and macroeconomic instability affected agribusiness, leading to closure and scaling back of many firms. - Some grains (sorghum and millet) increased mostly due to changing incentives as farm size decreased, access to credit evaporated, and farmer skills declined. - Cash crops, such as tobacco, experienced a sharp decline in the 2000s but tobacco productivity rebounded since 2010. ### Productivity trends and peer comparisons - Fundamental driving force for the collapse in agriculture was the steep decline in productivity since 2000. - Productivity measured as output per hectare declined for staple crops (e.g. maize) and key cash crops (e.g. tobacco). - Zimbabwe moved from being above the average of its peers to significantly underperforming in both maize and tobacco. - Text Table 1 (kgs per hectare) excerpts: - Maize: Zimbabwe 1980s = 1,471; 2010s = 830; % change = -44% - Tobacco: Zimbabwe 1980s = 2,064; 2010s = 1,881; % change = -9% - Selected peers (Maize/Tobacco shown where provided): - South Africa Maize: 1,922 → 4,653; 142% - Tanzania Maize: 1,336 → 1,438; 8% - Malawi Maize: 1,154 → 2,000; 73% - Zambia Maize: 1,907 → 2,666; 40% - Mozambique Maize: 419 → 1,004; 140% - Angola Maize: 398 → 935; 135% - China Tobacco: 1,796 → 2,167; 21% - USA Tobacco: 2,313 → 2,375; 3% - India Tobacco: 1,142 → 1,688; 48% - Brazil Tobacco: 1,390 → 2,018; 45% - Indonesia Tobacco: 555 → 874; 57% - Zambia Tobacco: 1,037 → 1,683; 62% - A bright spot: rebound in tobacco productivity since 2010, attributable to sector developments including the start of contract farming in the mid-2000s. ### Determinants of low agricultural productivity - Structural and institutional constraints: - Reforms led to extinguishing most private property rights through socially differentiated land tenure for A1 and A2 beneficiaries. - A2: 99-year lease contracts providing land use rights. - A1: statutory permits to occupy and use land in perpetuity as a family land right. - Due to governance challenges, rent seeking, and political headwinds, holders of A1 and A2 claims often could not access their land for several years (and sometimes never). - Security of property claims is uncertain: claims can be revoked through ministerial authority; owners generally cannot transfer land titles, preventing use of land as collateral. - About 21 per cent of beneficiaries reported problems with access to credit because they did not have adequate land tenure documents; the majority of these were A2 landholders. - Division of seized farms prioritized social and political outcomes over profitability, resulting in many plots no longer economically viable as standalone entities. - Access to finance: - Most agricultural credit is short-term credit for fertilizer and seed backed by a government guarantee. - Private lenders have been able to receive a risk-free return on these agricultural loans despite default rates in excess of 90 percent in recent years. - Interest rate caps, risk perceptions, and unclear property rights make access to medium-term capital for investment or land acquisition basically non-existent through private domestic channels. - Input effectiveness and farmer capacity: - Fertilizer use is relatively high but ineffective at meaningfully increasing output due to: - Lower and less predictable maize response to fertilizer on rainfed plots. - Need to couple irrigation with fertilizer as rainfall becomes more erratic due to climate change. - Strong learning-by-doing effects: younger and less experienced farmers average lower yields for the same amount of fertilizer per hectare. - Diversion and re-selling of fertilizer; anecdotal evidence of recipients selling inputs and defaulting on loans due to a 100 percent government guarantee for agricultural input loans. - Therefore, the real amount of fertilizer used may be less than estimated figures. - Regulatory and business environment (Enabling the Business of Agriculture, 2017): - Zimbabwe scores similar or better than the average SSA country and a close peer (Zambia) across topics such as fertilizer, machinery, market access, transportation and seed. - Zimbabwe scores poorly in water, ICT and especially finance. - Property rights, credit registry and availability of collateral score particularly low. ### Infrastructure constraints - Per capita public capital stock: Zimbabwe’s per capita public capital stock is approximately half the average for sub-Saharan Africa (Text Figure 4). - Irrigation: Only about 1 percent of agricultural land is equipped for irrigation. - Transport: Deficient transportation network (roads, rail, airports) impedes getting agricultural products to market. - Electricity shortages decrease the effectiveness of irrigation equipment. - Cyclone Idai caused damage to transport infrastructure, exacerbating challenges. ### Government support programs (Command Agriculture) and impacts - From 2015, Government emphasis on agriculture increased through fiscal and quasi-fiscal activities under Command Agriculture, the medium-term Transition and Stabilization Plan (TSP), and Vision 2030. - Recent interventions have focused primarily on income support and other subsidies rather than financing long-term productivity-enhancing investments. - Command Agriculture components (introduced starting during the 2016/2017 season and scaled up): - i. Presidential Input Scheme (PIS) - In place since 2011; distributes seeds and fertilizer to small-scale and impoverished rural farmers. - PIS scaled from US$42 million in 2016 to US$263 million in 2018. - Anecdotal evidence indicates governance, cost, and distribution challenges. - ii. Special Maize Program - Government provides a full 100 percent guarantee of the loan to encourage private companies to extend inputs on credit. - Contract stipulates farmer commits to producing a minimum of 5 tons per hectare and repays via delivery of grains to the Grain Marketing Board (GMB). - Increased production but at significant fiscal cost. - iii. Tobacco and Cotton Input Funds - Revolving fund for tobacco established via an RBZ quasi-fiscal activity in 2017; the fund has had to be recapitalized since its establishment. - Similar input support scheme put in place for cotton with public support in 2016 and 2017. - iv. Price Subsidies for inputs and outputs - Purchase price offered to farmers set well above import parity and production costs to incentivize sale to the GMB. - GMB sells grain at a steep discount compared to import parity prices to avoid price increases for consumers. - Resulted in income gains for producers and consumers but large losses at the GMB that needed to be covered by fiscal transfers. - Policy uncertainty, FX shortages, land rights and transfer issues, environmental shocks, and macroeconomic instability have choked off external and domestic private investment in the sector. ### Insights and implications for reform - Zimbabwe has enormous untapped agricultural potential: abundance of fertile land, an educated labor force, good weather, and access to large export markets. - Weak infrastructure, market distortions, structural barriers and policy mistakes are formidable headwinds to improving productivity. - Reforms that improved tenure security, restored effective property rights, improved access to medium-term finance, increased irrigation coverage, and focused on productivity-enhancing investments (rather than mainly on income support/subsidies) are implied as necessary to restore growth. - The rebound in tobacco productivity since 2010 provides insights on how sector-specific reforms (e.g., contract farming) can inform broader agricultural-sector reform to restore growth. *Prepared by Frederico Lima and Trevor Lessard (both AFR).* ### 15. Zimbabwe has a long ### 15. Zimbabwe has a long ### Central government subsidies and fiscal costs - Zimbabwe has a long history of central government subsidies, which are large relative to other sub-Saharan countries. - Subsidies historically targeted SOEs and private-sector bailouts; in recent years they increasingly targeted farmer incomes and agribusinesses. - The fiscal costs of Command Agriculture escalated substantially in 2016 with the start of the program. - Nearly 20 percent of GDP worth of fiscal and quasi-fiscal expenditures were spent on agriculture between 2015- 2018. - Preliminary indications are for the 2019-2020 crop season to also incur significant fiscal costs. - These reported fiscal costs understate true economy-wide costs because they omit: - costly subsidies for fuel imports via RBZ quasi-fiscal activities; - the full cost of repayment of defaulted farmer loans; - destabilizing macroeconomic consequences of RBZ money creation to finance unexpected, off-budget, agricultural expenses. ### Impact on agricultural output and productivity - Government programs had limited impact on agricultural output and no discernable impact on productivity. - Comparing three-year averages before and after Command Agriculture shows little to no change in maize output or yield per hectare; fluctuations are almost entirely attributable to rain variance. - Example comparison: 2014 versus 2018 - 2014 had very little government intervention; 2018 saw public support reaching more than 4 percent of GDP. - Maize output increased by just 15 percent (from approximately 1,500 tons to 1,700 tons). - Under this scenario, the marginal cost of an extra ton of maize produced with Command Agriculture support was US$2900, nearly nine times the cost of importing the maize and selling it at prevailing subsidized rates. - 2018 and 2014 were both “good weather years” with above-average rainfall across most regions cited, underscoring irrigation needs to improve output and climate resilience. ### Policy recommendations to improve sustainable growth in agriculture - Shift spending away from income support, input subsidies, and price controls toward skills development, R&D, and infrastructure spending; move fiscal resources from private goods provision to public goods provision. - Public support for agriculture should be brought to a sustainable level and respect fiscal constraints. - Specific reforms recommended: - Reduce the guarantee on loans from 100 percent to avoid moral hazard and high default rates; consider partial guarantees subject to a cap, or committing to pay a portion of the interest bill so farmers receive concessional support; establish and enforce penalties for farmer loan defaults. - Remove inefficient and untargeted maize price subsidy and replace it with an expanded social safety net. - The recently announced subsidy for maize millers is uncapped and untargeted and is expected to cost, at prevailing prices, ZWL 1.2 billion in 2020, but could likely rise depending on the future inflation path. - Catalyze resources from private sector and donors through joint partnerships with appropriate burden-sharing to address bottlenecks in electricity generation, storage and transportation, market access, and skills development. - Reduce distortionary effects of price controls; better tailor income support to small farmers through insurance-based instruments (e.g., crop insurance) and improved social safety nets (e.g., cash transfers). - Improve and increase use of contract farming by simplifying legal structures and encouraging small and communal farmers to form cooperatives to facilitate contract farming at scale (tobacco cited as a successful precedent). ### Land tenure, regulatory environment, and broader constraints - Improve regulatory environment and legal clarity of land titles, especially land tenure security for A1 and A2 farmers. - Standardize and de-politicize the leasing of agricultural land as an immediate improvement. - To unlock foreign investment and remove perceived sector risk, a formal agreement for compensation of previous farmers who had their land expropriated is indispensable. - Many barriers to sustainable agricultural growth are shared economy-wide: - Macroeconomic stability, reliable electricity supply, and a functional transportation network are essential. - Achieving TSP, Vision 2030, and SDGs will require an increase and reprioritization of fiscal spending. - Additional spending needs for Zimbabwe are less than the average for sub-Saharan Africa but remain substantial. - Securing resources requires mobilizing domestic revenues, commitment to macroeconomic stability, and normalization of financial relations with the external community. ### Authorities’ summary of recent macroeconomic developments and reforms - Macroeconomic deterioration in 2019 was driven by severe drought and tropical cyclones; an estimated 8.5 million people (more than half the population) expected to be food insecure in 2020. - Economic growth declined from 3.5 percent in 2018 to an estimated -8.3 percent in 2019. - Inflation rose from 42 percent in December 2018 to an estimated 521 percent by end 2019, amplified by exchange rate depreciation, broad money supply growth, and removal of fuel and electricity subsidies. - Current account balance projected to improve from -4.5 percent of GDP in 2018 to -2.5 percent of GDP in 2019, but reserve buffers remain below 1 month of import cover. - Fiscal actions since September 2018: - Strict cash budgeting delivered cash surpluses for much of 2019 and improved domestic revenue performance through ZIMRA reforms. - Expenditure containment measures included a 5 percent pay cut in salaries of senior government officials, rationalization of civil service, limiting the 13th cheque to basic salary, biometric verification of civil servants, and halting expenditure overruns. - Agricultural financing model reset in 2019 away from direct government budget allocations toward lending by private banks; subsidies on fuel and electricity removed in the last quarter of 2019. - Terminated the gold export incentive scheme and replaced it with a Treasury-established Gold Fund at a much lower cost. - Central bank borrowing reduced from the 20 percent statutory limit to 5 percent of the previous year’s revenue, with advances confined to smoothing short-term cashflow mismatches. - Plans to resume Treasury Bill auctions to promote competitive bidding and market pricing of government securities. - Authorities plan to compensate banks’ net operating positions from the February 2019 currency conversion, subject to resource availability and Parliamentary approval. - Monetary and financial sector policy intentions: - Adoption of reserve money targeting (RMT) to anchor inflation expectations and stabilize the exchange rate; Monetary Policy Committee to establish monthly reserve money targets consistent with low inflation. - RBZ to operationalize RMT using open market tools including Treasury Bills, Savings Bonds, Corporate Bonds, and reserve requirements. - Introduced interbank market for foreign exchange in February 2019 and launched the Reuters Electronic Trading Platform (RETP) to improve price discovery and market-determined exchange rates. *Source: IMF staff report chapter on Zimbabwe (excerpts).* ### 12. The banking sector remains generally stable with sustained earnings performance, fairly ### 12. The banking sector remains generally stable with sustained earnings performance, fairly ### Banking sector condition and policy actions - The banking sector is described as generally stable with sustained earnings performance, fairly liquid positions, and reasonably good asset quality. - Authorities directed banks to increase their minimum capital requirements in light of emerging vulnerabilities. - The RBZ is developing guidance on the implementation of the Basel III capital and liquidity framework to support measures to enhance stability and resilience. - The central bank is operationalizing the macro-prudential policy framework to improve identification of financial vulnerabilities. ### Supervision, regulatory improvements, and FSSR follow-up - Authorities have advanced implementation of recommendations from the 2019 Financial Sector Stability Review (FSSR). - Progress includes: - Strengthening off-site examinations. - Capacitating the financial stability unit of the RBZ. - Revamping the supervisory toolkit. - Ongoing review of the regulatory and supervisory framework aims to strengthen consolidated supervision, cross-border cooperation, and crisis management. ### Credit registry, collateral, climate risk, and financial inclusion - Satisfactory progress has been made in improving the coverage and usage of the web-based Credit Registry. - Work is advancing to establish a collateral registry for movable assets, expected to promote access to credit including by SMEs. - The RBZ has directed banks to appropriately review their risk management systems to mitigate financial stability risks stemming from adverse climate events. - Implementation of the National Financial Inclusion Strategy (NFIS), launched in 2016, is continuing with efforts to promote: - Product diversification, innovation and human centered design of financial services and delivery channels. - Financial literacy and consumer protection. - Micro-insurance and support for SMEs. - As a result, access to financial services has more than doubled between 2016 and 2019, underpinned by increased access by women, the youth, and SMEs, and the opening of low-cost accounts. ### Structural reforms and state-owned enterprises (SOEs) - Authorities are implementing comprehensive structural reforms to promote private sector development and improve the business environment. - Work to identify, evaluate, and determine appropriate restructuring models for various SOEs is underway. - Specific restructuring actions commenced for: - The Grain Marketing Board. - Re-bundling the power utility company (ZESA). - Reviewing government’s shareholding in the telephone and mobile phone SOEs. - Government has earmarked 43 out of 107 enterprises for privatization, liquidation, or merger. - The Public Entities Corporate Governance (PECG) Act was approved in November 2018, and the Corporate Governance Unit was established in the President’s office. - Authorities are at an advanced stage of establishing the Zimbabwe Investment Development Authority (ZIDA) to integrate investment-supporting institutions into a one-stop investment shop. - Work is advancing to review about 40 pieces of legislation aimed to improve the business climate and enhance the country’s investment appeal. - On AML/CFT, authorities are addressing deficiencies identified in the 2016 Mutual Evaluation Report. ### Governance, legal reforms, and anti-corruption - Authorities plan to develop a roadmap for implementing recommendations from the Governance and Vulnerabilities Assessment conducted jointly by the IMF and the World Bank. - Progress on governance reforms includes improvements in individual and media freedoms. - The Public Order and Security Act (POSA) has been repealed and replaced with the Maintenance of Peace and Order Act (MOPA). - Work to review the Access to Information and Privacy Protection Act (AIPPA) has advanced. - The Zimbabwe Anti-Corruption Commission (ZACC) has been reconfigured and capacitated to intensify the fight against corruption. ### Social spending, safety nets, and external support needs - Authorities attach great importance to ensuring adequate social spending to cushion vulnerable households and create fiscal space for growth-enhancing public investment. - External support is deemed essential to complement government efforts to strengthen social safety nets and mitigate adjustment pain on vulnerable households. - Factors underscoring the need for stronger social safety nets: - Compression of real wages over the recent past. - Extreme poverty levels. - Adverse impact of weather shocks. - Although government has increased budgetary allocations for social assistance, remaining financing requirements are significant, highlighting the need for donor support to avoid further impoverishment of vulnerable segments. - Drought conditions are expected to persist into 2020. ### Conclusion and authorities' policy stance - Authorities acknowledge pressures from high money supply growth on inflation and the exchange rate in the past year. - They are determined to rein-in monetary expansion while pursuing further fiscal consolidation. - Authorities remain committed to reforms under a Fund supported SMP, viewed as critical for amicable resolution of the country’s debt arrears and re-engagement with the international community. - Planned corrective measures include sustained fiscal consolidation and supportive monetary and structural reforms. - Authorities require support from the international community to sustain reforms, alleviate poverty, and ensure food security. - Authorities express optimism that the Fund can help explore more innovative ways to assist them overcome attendant challenges and look forward to continued Fund engagement and technical support to sustain the reform momentum. *Source: IMF content unit 1zweea2020001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1zweea2020001.pdf_