## _cr05360

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### Executive summary: state of the economy and short-term outlook
- Real GDP: staff estimates a contraction of 4 percent in 2004 and projects a further decline of 7 percent in 2005.
- Inflation: slowed from a peak of 623 percent in early 2004 to around 130 percent in early 2005, but picked up to 164 percent in June 2005; staff projects inflation to rise to about 320 percent by end-2005.
- Fiscal: fiscal deficit projected to widen to 14 percent of GDP in 2005 (from 4¾ percent of GDP in 2004).
- External sector: current account deficit would widen temporarily to 7½ percent of GDP in 2005 due to higher food imports; non-food imports are constrained.
- Exchange market: official foreign exchange supply to the RBZ met only 4-8 percent of bids in its foreign exchange tender; parallel market premium widened from 45 percent in January 2005 to about 100 percent by early July 2005.
- Food security: maize import requirement 1.2 million tons for April 2005–March 2006; World Food Programme aiming to raise 300,000 tons.
- Social and human development: Zimbabwe ranked 147th out of 177 countries (Human Development Indicator); more than two out of three Zimbabweans are unemployed; HIV/AIDS adult infection rate estimated at about 25 percent; life expectancy declined to below 40 years from around 60 years fifteen years ago; child mortality under 5 rose to 126 (per 1,000 live births) from 90 in 1995.
- Arrears to the Fund: as of June 30, 2005, arrears totaled SDR 199.6 million (US$ 290.7 million). Arrears to the World Bank at end-June 2005 were US$352.8 million and to the African Development Bank US$270.8 million. Authorities began increasing payments to US$9 million per quarter beginning in April 2005.
- Institutional/IMF status: continuous arrears to the Fund since February 2001; Managing Director’s complaint issued 02/06/2004; Executive Board deferred action at its February 16 meeting to provide opportunity for strengthened cooperation.

### Staff-pressed macro stabilization package (immediate priorities)
- Strong fiscal adjustment to limit the 2005 deficit to 5 percent of GDP to ensure a broadly neutral fiscal stance.
- Liberalize the exchange regime and unify the exchange rate, with immediate substantial depreciation.
- Tighten monetary policy to achieve the authorities’ end-year inflation target of 80 percent.
- Curtail the Reserve Bank of Zimbabwe’s quasi-fiscal activity.

### Staff view: medium-term requirements and risks
- Without decisive policy action:
  - Real GDP would continue to contract over the medium term, driven by agriculture difficulties and foreign exchange shortages.
  - Inflation would remain in the 200-300 percent range reflecting substantial fiscal deficits and quasi-fiscal activities.
  - With limited external financing, the current account would be broadly stable in U.S. dollar terms and arrears would accumulate.
- Fundamental structural reforms required:
  - Ensure a stable and efficient financial system.
  - Increase the role of markets.
  - Place fiscal accounts on a strong medium-term footing and reform public enterprises.
  - Improve agricultural productivity, including through further land reform.
  - Strengthen governance.
- Rebuild relations with the international community and formulate a strategy to reduce arrears.

### Risks and vulnerabilities to the outlook
- Food security
  - World Food Programme aiming to raise 300,000 tons of maize out of an import requirement of 1.2 million tons during April 2005-March 2006.
  - Capacity constraints at ports and railways could hamper rapid delivery of large quantities of maize.
  - Authorities indicated they had obtained private external financing to meet grain import needs.
- Squeeze on non-food imports
  - Staff’s balance of payments projection: even with food imports financed externally, non-food imports would decline by some 15 percent in real terms.
  - Vulnerable to deterioration in terms of trade, particularly a further rise in world oil prices.
- Economic consequences of “Operation Restore Order”
  - May reduce informal market activity and real incomes, contributing to lower GDP and upward price pressures.
  - Pressures for additional fiscal spending may result.

### Fiscal policy: performance, projections, and recommended adjustment
- 2004 fiscal outturn: fiscal deficit for 2004 is estimated at 4.7 percent of GDP.
- 2005 projection and drivers
  - Staff projects the fiscal deficit to increase to 14.3 percent of GDP in 2005 due to higher spending.
  - Expenditure drivers: higher-than-budgeted spending on elections; drought-related welfare programs; larger pension payments from unexpectedly large retirements (particularly from the military); higher interest costs from doubling of treasury bill issues in Q1; Z$1 trillion (1½ percent of GDP) unbudgeted spending for “Operation Restore Order”.
  - The actual deficit in January-April, 2005 reached some 14½ percent of GDP.
- Staff recommendations and adjustment path
  - Submit a mid-year supplementary budget to lower the deficit to 5 percent of GDP.
  - Bulk of adjustment to come from spending restraint, particularly on the wage bill.
  - Specific measures urged:
    - An overall hiring freeze and a payroll audit to eliminate ghost workers.
    - Civil service reform over the medium term to reduce the wage bill.
    - Curtailment of capital outlays and transfer payments.
    - Improved cash management practices.
    - Revenue measures: significant narrowing of exemptions and zero rating in the VAT and increase in income tax and VAT rates.
- Authorities’ stance and likely actions
  - Authorities intended to stay within the budget’s deficit limit but acknowledged difficulties; a supplementary budget likely in July; possible drought levy increasing selected taxes by some 5 percent.
  - Even if appropriated expenditure stayed within budget limit, increase in statutory spending on pensions and interest would increase the fiscal deficit to about 10 percent of GDP.

### Monetary policy: drivers of inflation, recommended tightening, and targets
- Recent stance and actions
  - Monetary policy tightened in 2004, then relaxed with interest rates lowered sharply around end-2004 and early 2005 despite rising price pressures.
  - RBZ overnight rate was increased to 390 percent (annualized) in May (reversing earlier cuts).
- Sources of high money growth and inflation
  - High rates of money growth driven mainly by RBZ’s quasi-fiscal activities and mounting losses.
  - Reserve money growth in 2004 attributed to exchange losses from FX purchases from exporters at higher rates than sales to importers and RBZ liquidity support to troubled banks.
  - Early 2005 reserve money growth stemmed mainly from interest payments on RBZ bills issued to mop up liquidity and continued exchange losses; subsidies to gold and tobacco producers also contributed.
- Projections and targets
  - Staff projects broad money growth to pick up to almost 250 percent by end-2005 from over 200 percent at end-April.
  - Staff estimates reserve money growth needs to be brought down sharply to about 60 percent by end-year to ensure broad money growth consistent with the authorities’ inflation target.
  - Staff urged tightening monetary policy to achieve the end-2005 inflation target of 80 percent and limit RBZ activities to core function of achieving low inflation via a money anchor.
  - Recommended that RBZ losses (especially from interest payments on RBZ and PLARP bills) be transferred to the budget.
  - Staff cautioned against issuance of bonds indexed to inflation.

### Exchange rate and external policies
- Recent developments and reserves
  - Official exchange rate depreciated from Z$824/US$ at end-2003 to about Z$6,100/US$ by mid-May 2005; tender rate allowed to depreciate further to some Z$10,500 by early July.
  - Usable international reserves remained essentially constant during 2004 at just US$25 million (0.1 months of imports).
  - Parallel market premium widened from 45 percent in January 2005 to about 100 percent by early July 2005.
- Staff recommendations
  - Fully liberalize the foreign exchange regime for current account transactions and unify the exchange rate by end-year.
  - Eliminate exchange restrictions, multiple currency practices, and abolish surrender requirements.
  - With low international reserves, exchange rate should be determined by the market (via commercial banks).
  - As first step, official exchange rate should be depreciated immediately and substantially (say by 60–65 percent based on June data) while monetary policy is tightened.
  - Foreign exchange tender needs to be operated as a true auction and producer and credit subsidy schemes phased out.
- Compliance and MCPs
  - System results in restrictions on transfers and payments for current international transactions and multiple currency practices inconsistent with Article VIII Sections 2(a) and 3; these restrictions and MCPs have not been Board-approved.

### Debt, external arrears, and relations with the international community
- Debt stock and outlook
  - Approximately 70 percent of external debt is owed to official creditors with half of the total in arrears.
  - Standard low-income DSA indicates NPV-of-debt to export ratio in excess of 225 percent over the medium term.
  - Zimbabwe’s total external public debt was US$5 billion (67 percent of GDP) at end-2004; US$2 billion owed to multilateral creditors.
- Staff recommendations
  - Rebuild relations with the international community, including the Fund, by implementing sound economic and social policies and eliminating arrears.
  - Formulate a strategy to reach understandings with foreign creditors to settle arrears and restructure debt.
  - Obtain external assistance for short-run food imports and to address humanitarian and economic consequences of “Operation Restore Order”; seek longer-term technical and financial assistance to support domestic reforms.
- Payments and commitments
  - Payments to IMF increased from US$1,5 million per quarter to US$9 million per quarter; committed to increase to US$15 million per quarter beginning fourth quarter 2005 and to US$40 million per quarter beginning April, 2006.
  - Zimbabwe paid US$120 million to the GRA, reducing GRA arrears to US$ 51,3 million; Government commits to fully repay remaining outstanding amounts under the GRA and the PRGF by 30 November, 2006.

### Financial system and supervision
- Banking-system structure and resilience
  - Five large banks account for almost 65 percent of deposits.
  - With exit of weak institutions, sector largely populated by banks with high capital adequacy ratios, little foreign exchange risk, and very short-term maturities.
  - Loans account for only about 25 percent of total assets; shift toward short-term low-risk securities (treasury bills).
  - Stress tests indicate resilience to significant shocks, including credit, interest rate, and foreign exchange risks.
  - Troubled banks are known, regularly monitored, have limited interbank trading, and present minimal contagion risk.
- Supervision and recommendations
  - Provision of full powers for banking supervision to the RBZ was instrumental for timely intervention; recent Banking Act revision requiring RBZ to consult Minister of Finance in registering/intervening is regressive.
  - Recommendations:
    - Cease extending liquidity support to insolvent banks and take faster action to intervene.
    - Strengthen bank supervision, governance, and risk-management standards; continue training of supervisory staff and improve off-/on-site analysis.
    - Strengthen deposit insurance scheme mandate to cover receivership and liquidation; increase depositor awareness.
    - Over time, lower statutory reserve requirements (currently 60 percent of demand deposits) and use offsetting open market operations to mop up excess liquidity, with costs transferred to the budget.
    - Regularize holding arrangements for ZABG at the earliest opportunity.
    - Avoid issuing bonds indexed to inflation.
    - Transfer RBZ losses (particularly from interest payments on RBZ and PLARP bills) to the budget.

### Medium-term structural reform agenda and agriculture
- PLARP and public enterprise reform
  - PLARP run by RBZ; RBZ plans to issue medium-term bonds of Z$10 trillion (around 16 percent of GDP) starting in 2005 to finance the program, with debt to be serviced by the budget starting in 2006.
  - Financing only for public enterprises with externally audited financial statements and substantive restructuring plans; privatization possible for some enterprises later.
  - Staff concern that PLARP could prove costly without hard budget constraints and increased transparency.
- Key medium-term reforms urged:
  - Deregulation and liberalization to increase market forces (eliminate price controls; dismantle monopoly positions of public enterprises in distribution).
  - Fiscal reforms, particularly civil service restructuring to achieve a sustainable wage bill.
  - Improving governance to increase investor confidence and reduce corruption; strengthen property rights and reduce threat of nationalization.
- Land and agricultural reforms
  - Most private commercial farms seized under fast-track land reform; resettlement has fallen short of targets and large areas of productive land remain idle.
  - Introduction of 99-year leases delayed and appears not to provide adequate tenure security.
  - Weak technical know-how, equipment and input shortages, deteriorating infrastructure, and lack of extension services impede agricultural recovery.
  - Staff stressed rapid action to provide security of tenure and extension services, followed by coordinated medium-term reform.

- Box 1 — World Bank five-pillar strategy for agricultural recovery and social protection (as summarized)
  - Increase security of tenure and complete the land reform program.
  - Provide strong market-based incentives for production and investment in agriculture.
  - Implement a broader social protection program for poor and marginalized groups.
  - Build/rebuild cohesive policy and institutional framework for land administration and agricultural growth.
  - Mobilize financial resources from taxation, community and private sectors, and external partners.

### Macroeconomic stabilization recommendations (Staff appraisal)
- Immediate priority: implement a comprehensive package of macroeconomic measures to stabilize the economy.
- Package components:
  - Strong fiscal adjustment: submit a supplementary budget without delay to contain this year’s fiscal deficit to no more than 5 percent of GDP.
  - Exchange rate: fully liberalize for current account transactions and establish a unified exchange rate by end-year; tender rate overvalued and needs depreciation of about 60-65 percent without delay.
  - Monetary policy: tighten substantially and immediately; shift to a broad money anchor with reserve money as the operational target; reserve money growth must be brought down sharply to keep broad money growth well below the inflation target.
  - Curtail RBZ quasi-fiscal activities; phase out producer and credit subsidies.
- Social and external considerations:
  - Food security is urgent; staff urges rebuilding relations with international community and seeking donor assistance to finance food imports, address consequences of “Operation Restore Order”, combat HIV/AIDS, and facilitate progress toward the MDGs.
  - Staff does not recommend Fund approval of newly-identified multiple currency practices in the absence of a timetable for elimination.

### Data, trade, and statistical capacity
- Statistical weaknesses
  - Timeliness and coverage weaknesses across national accounts, fiscal, monetary, and external statistics.
  - CPI likely understates inflation due to controlled/administered prices and outdated weights (from 1997).
  - Lag in receiving fiscal and monetary data increased to about 4-6 months from 2-3 months previously.
  - Trade and balance of payments data timeliness poor; latest BOP data for publication were for 1994 and annual data through 2001 are of questionable quality.
  - Comprehensive fiscal data needed on general government, consolidated public sector debt, and public enterprises.
- Real sector and GFS issues
  - National accounts revisions and delays; coverage of informal sector poor.
  - Government Finance Statistics Yearbook latest published data are for 1997.
- Monetary statistics issues
  - Reconciliation difficulties between RBZ balance sheet in MCP and the monetary survey.
  - Example discrepancy: RBZ bills outstanding reported as zero in RBZ liabilities while RBZ bills held in assets of commercial banks reported as 732.2 million Zimbabwe dollars as of December 2004.
- Table of Common Indicators Required for Surveillance: selected latest observations preserved (e.g., Exchange Rates: Date of latest observation July 4 2005; Consumer Price Index: May 2005; Revenue, Expenditure, Balance and Composition of Financing2 – Central Government: Apr. 2005).

### Debt Sustainability Analysis (selected findings and baseline assumptions)
- Under staff baseline, external debt not expected to be sustainable in the absence of a debt rescheduling.
- Baseline macro assumptions: average negative real GDP growth at 4 percent until 2010 and average positive growth of 3 percent thereafter with exports growing at 5 percent.
- Baseline assumes a tentative arrears rescheduling in 2011—outside the medium-term scenario.
- Debt stocks (end-2004): Zimbabwe’s total external public debt US$5 billion (67 percent of GDP); domestic public debt about 7 percent of GDP in 2004.
- Projected post-rescheduling stock: total outstanding debt at end-2011 would be US$2.4 billion (34 percent of GDP).
- Projected long-run indicators: NPV of debt-to-GDP about 50 percent; NPV of debt-to-exports about 130 percent; debt service-to-exports decline to 1 percent in the long-run.
- Vulnerabilities and stress tests:
  - A one-time 30 percent depreciation would push up the NPV of the debt-to-GDP ratio to about 120 percent in 2010.
  - A one-time two standard deviation shock in exports would raise debt service-to-exports to 30 percent compared with 20 percent in 2025 in the baseline.

### Selected macroeconomic indicators and projections (excerpted numeric series)
- Real GDP (market prices; percentage change): -2.7-4.4-10.4-4.2-7.1-4.8
- Real per capita GDP (percentage change): -2.4-4.1-11.3-3.9-7.1-4.8
- Consumer price inflation (annual average): 73.4-133.2-365.0-350.0-190.4-253.1
- Consumer price inflation (end of period): 112.1-198.9-598.7-132.7-320.7-199.0
- 91-day treasury bills (annualized yield; end of period): 25.9-26.6-60.7-105.0-150.0-130.2
- Broad money (M3; percent change, end of period): 102.7-164.8-413.5-222.6-248.0-153.2
- Exports (billions of U.S. dollars): 2.1-1.8-1.7-1.7-1.6-1.7
- Imports (billions of U.S. dollars): -1.8-1.8-1.8-2.0-2.0-1.8
- Current account balance (excluding official transfers; billions of U.S. dollars): -0.1-0.2-0.3-0.4-0.5-0.3
- Usable reserves (millions of U.S. dollars; end of period): 16.0-15.1-15.6-24.8-24.8-24.8
- Total external debt (percent of GDP at world prices; end of period): 45.3-53.0-64.4-67.4-74.4-80.6
- Of which: total external arrears (percent of GDP at world prices; end of period): 9.5-18.4-28.5-35.1-41.5-47.2

### Proposal
- It is proposed that Zimbabwe remain on the standard 12-month consultation cycle.

*IMF staff report text provided in content unit _cr05360 - 12.      Staff noted several risks and vulnerabilities to the outlook. In particular,*

### 2005. The staff met with Finance Minister Murerwa, Reserve Bank of Zimbabwe

### 2005. The staff met with Finance Minister Murerwa, Reserve Bank of Zimbabwe Governor Gono and other senior government officials as well as representatives of the private sector, political parties, trade unions, NGOs, and the diplomatic community.

### Executive summary: state of the economy and short-term outlook
- Real GDP: staff estimates a contraction of 4 percent in 2004 and projects a further decline of 7 percent in 2005.  
- Inflation: slowed from a peak of 623 percent in early 2004 to around 130 percent in early 2005, but picked up to 164 percent in June 2005; staff projects inflation to rise to about 320 percent by end-2005.  
- Fiscal: fiscal deficit projected to widen to 14 percent of GDP in 2005 (from 4¾ percent of GDP in 2004).  
- External sector: current account deficit would widen temporarily to 7½ percent of GDP in 2005 due to higher food imports; non-food imports are constrained.  
- Exchange market: official foreign exchange supply to the RBZ met only 4-8 percent of bids in its foreign exchange tender; parallel market premium widened from 45 percent in January 2005 to about 100 percent by early July 2005.  
- Food security: urgent concern; maize crop well below expectations partly due to low rainfall.  
- Social and human development: Zimbabwe ranked 147th out of 177 countries in the world (Human Development Indicator); more than two out of three Zimbabweans are unemployed; HIV/AIDS adult infection rate estimated at about 25 percent; life expectancy declined to below 40 years from around 60 years fifteen years ago; child mortality under 5 rose to 126 (per 1,000 live births) from 90 in 1995.  
- Millennium Development Goals (MDGs): Zimbabwe is off-track in achieving most MDGs; under current policies only two targets are achievable (immunization of one-year olds against measles and access to safe drinking water).  
- Arrears to the Fund: as of June 30, 2005, arrears totaled SDR 199.6 million (US$ 290.7 million). Arrears to the World Bank at end-June 2005 were US$352.8 million and to the African Development Bank US$270.8 million. The authorities began increasing payments to US$9 million per quarter beginning in April 2005.  
- Institutional/IMF status: Zimbabwe has been in continuous arrears to the Fund since February 2001. Following an Executive Board decision on December 3, 2003, the Managing Director issued a complaint on February 6, 2004 that initiated the procedure on Zimbabwe’s compulsory withdrawal from the Fund. The Executive Board at its February 16 meeting deferred for another six months taking action on the Managing Director’s complaint to provide an opportunity for strengthened cooperation.

### Staff-pressed macro stabilization package (immediate priorities)
- Strong fiscal adjustment to limit the 2005 deficit to 5 percent of GDP to ensure a broadly neutral fiscal stance.  
- Liberalize the exchange regime and unify the exchange rate, with immediate substantial depreciation.  
- Tighten monetary policy to achieve the authorities’ end-year inflation target of 80 percent.  
- Curtail the Reserve Bank of Zimbabwe’s quasi-fiscal activity.  

### Staff view: medium-term requirements and risks
- Without decisive policy action:  
  - Real GDP would continue to contract over the medium term, driven by agriculture difficulties and foreign exchange shortages.  
  - Inflation would remain in the 200-300 percent range reflecting substantial fiscal deficits and quasi-fiscal activities.  
  - With limited external financing, the current account would be broadly stable in U.S. dollar terms and arrears would accumulate.  
- Fundamental structural reforms required:  
  - Ensure a stable and efficient financial system.  
  - Increase the role of markets.  
  - Place fiscal accounts on a strong medium-term footing and reform public enterprises.  
  - Improve agricultural productivity, including through further land reform.  
  - Strengthen governance.  
- Rebuild relations with the international community and formulate a strategy to reduce arrears.

### Background and key issues (context and social impact)
- Long-term deterioration: Real GDP declined by almost 30 percent from 1997 to 2003; inflation rose from about 20 percent in December 1997 to a peak of 623 percent in January 2004.  
- Exchange rate policy: official exchange rate held constant at Z$55 per U.S. dollar and later at Z$824 per U.S. dollar, contributing to shrinking supply of foreign exchange to the official market, import restrictions, and buildup of external arrears.  
- Agriculture: violent fast-track land reform disrupted agricultural production, causing a collapse in agricultural output.  
- Poverty and health: poverty and emigration rose sharply; HIV/AIDS pandemic largely unchecked; immunizations fell; declining health and education services contributed to worsening social indicators.  
- Political environment: strained relations with international community; targeted sanctions by the United States and European Union on top officials since 2002; external financial support confined to humanitarian assistance; parliamentary elections on March 31, 2005 resulted in a two-thirds majority for ZANU-PF and were criticized by opposition and Western governments as not free nor fair, though regional bodies accepted the results.

### Economic prospects, staff baseline and risks
- 2004: staff estimates real GDP fell by about 4 percent (compared with a contraction of 10½ percent in 2003); inflation decelerated to around 130 percent in early 2005.  
- 2005: staff projects real GDP contraction of 7 percent, inflation to about 320 percent by end-2005, fiscal deficit widening to 14 percent of GDP, current account deficit widening to 7½ percent of GDP temporarily.  
- 2006: output projected to contract again, with less severe decline in agriculture assuming normal rainfall; inflation projected to decelerate to 200 percent by end-2006 as fiscal deficit is held back by erosion of government expenditure in real terms.  
- Medium term: continued output decline absent significant structural reform; fiscal deficits and inflation expected to follow cyclical patterns with inflation fluctuating in the 200-300 percent range.  
- Price controls and administered prices: price controls reinstated; an Income and Price Commission established; CPI likely understates inflation and is probably repressed by publicly-administered prices held artificially low.

### Monetary, exchange rate and external policy issues
- Foreign exchange allocation: RBZ able to meet only 4-8 percent of bids in its foreign exchange tender, contributing to acute shortages of fuel and basic necessities since end-March 2005.  
- Parallel market: premium widened from 45 percent in January 2005 to about 100 percent by early July 2005.  
- Exchange regime: staff recommends liberalization and unification of the exchange rate with immediate substantial depreciation.  
- Article VIII obligations: Zimbabwe has accepted the obligations of Article VIII, Sections 2, 3, and 4, but maintains exchange restrictions and multiple currency practices subject to Fund approval. Zimbabwe has incurred external payments arrears on official debt.

### Fiscal policy and quasi-fiscal activities
- 2004 fiscal balance: fiscal deficit of 4¾ percent of GDP.  
- 2005 fiscal outlook: staff projects widening to 14 percent of GDP absent adjustment; staff calls for limiting the 2005 deficit to 5 percent of GDP.  
- RBZ quasi-fiscal operations: expanding quasi-fiscal activity is contributing to money growth and inflation; staff calls for curtailing these activities.

### Financial system and supervision
- Banking system: staff noted the financial system appeared to be adequately supervised and resilient to significant shocks.  
- Supervision: critical to ensure supervisors remain empowered to take timely action to address identified weak institutions.

### Authorities’ views and policy stance
- Output and inflation: authorities estimated output declined by only 2½ percent in 2004 and expected 2 percent growth in 2005, citing strong performance in tobacco, wheat, and mining and a bottoming out in manufacturing. Authorities noted inflation was much lower than early 2004.  
- Fiscal management: authorities intended to stay within the budget deficit limit by taking offsetting measures for appropriated (discretionary) spending.  
- Exchange rate policy: authorities stated their room for maneuver on the exchange rate was limited, but sufficient flexibility would be maintained to ensure export viability.  
- Monetary targets and subsidies: authorities planned to lower broad money growth to 80 percent by end-2005, in line with their inflation target; they argued producer and credit subsidies were needed given the lack of foreign financing and would be effective in lowering inflation through increases in productivity and output growth; credit subsidies were to be eliminated by end-2006.

*IMF staff report covering developments and policy discussions through mid-July 2005.*

### 12.      Staff noted several risks and vulnerabilities to the outlook. In particular,

### _cr05360 - 12.      Staff noted several risks and vulnerabilities to the outlook. In particular,

### Risks and vulnerabilities to the outlook
- Food security
  - World Food Programme aiming to raise 300,000 tons of maize out of an import requirement of 1.2 million tons during April 2005-March 2006.
  - Capacity constraints at ports and railways could hamper rapid delivery of large quantities of maize.
  - Authorities indicated they had obtained private external financing to meet grain import needs this year.
- Squeeze on non-food imports
  - Staff’s balance of payments projection indicates that even with food imports financed externally, non-food imports would decline by some 15 percent in real terms.
  - Zimbabwe would be highly vulnerable to any deterioration in the terms of trade, particularly a further rise in world oil prices.
- Economic consequences of “Operation Restore Order”
  - Projections do not fully incorporate magnitudes of effects; pressures for additional fiscal spending may result (see paragraph 14).
  - By reducing informal market activity and real incomes, the operation could contribute to lower GDP and upward price pressures.

### Fiscal policy: performance, projections, and recommended adjustment
- 2004 fiscal outturn and composition
  - Fiscal deficit for 2004 is estimated at 4.7 percent of GDP, compared with a projected deficit in the budget of 7½ percent of GDP and an estimated deficit of 3 percent of GDP reported at the February Board meeting.
  - Revenue performance broadly in line with expectations in February; final data indicate statutory spending on pensions and interest payments picked up sharply late in the year.
- 2005 projection and drivers
  - Staff projects the fiscal deficit to increase substantially in 2005 to 14.3 percent of GDP due to higher spending.
  - Expenditure drivers: higher-than-budgeted spending on elections; drought-related welfare programs; larger pension payments from unexpectedly large retirements (particularly from the military); higher interest costs from the doubling of treasury bill issues in the first quarter; as well as Z$1 trillion (1½ percent of GDP) in unbudgeted spending to address the consequences of “Operation Restore Order”.
  - The actual deficit in January-April, 2005 reached some 14½ percent of GDP. Staff’s projections assume that food imports will be financed externally (see paragraph 12).
- Staff recommendations and fiscal adjustment path
  - Staff urged submission of a mid-year supplementary budget to lower the deficit to 5 percent of GDP as part of a comprehensive stabilization package and in line with previous commitments.
  - With the expenditure ratio now close to 50 percent of GDP, the bulk of the adjustment would need to come from spending restraint, particularly on the wage bill.
  - Specific measures urged:
    - An overall hiring freeze and a payroll audit to eliminate possible ghost workers and improve spending efficiency—without compromising the already deteriorating quality of services.
    - Civil service reform over the medium term to obtain a sustained reduction in the wage bill.
    - Curtailment of capital outlays and transfer payments.
    - Improved cash management practices.
    - Some revenue measures such as a significant narrowing of exemptions and zero rating in the VAT and an increase in income tax and VAT rates.
- Authorities’ stance and likely actions
  - Authorities intended to stay within the budget’s deficit limit but acknowledged difficulties given lack of external support and front-loading of expenditure in the first quarter.
  - Implementing a hiring freeze (excluding limited additional posts), limiting capital spending to completing existing projects.
  - A supplementary budget likely to be submitted to Parliament in July; possible drought levy that could augment selected taxes by some 5 percent.
  - Even if appropriated expenditure stayed within the budget limit, the increase in statutory spending on pensions and interest would increase the fiscal deficit to about 10 percent of GDP.

### Monetary policy: drivers of inflation, recommended tightening, and targets
- Recent stance and actions
  - Monetary policy was tightened in 2004, but the stance was relaxed prematurely with interest rates lowered sharply around end-2004 and reduced further in early 2005 despite evidence of rising price pressures.
  - The RBZ’s overnight rate was increased to 390 percent (annualized) in May (reversing earlier cuts).
- Sources of high money growth and inflation
  - High rates of money growth fueling triple-digit inflation mainly due to RBZ’s quasi-fiscal activities and mounting losses on its balance sheet.
  - Much of reserve money growth in 2004 attributed to:
    - Exchange losses from foreign exchange purchases from exporters at a higher exchange rate than sales to importers.
    - RBZ’s initial provision of prolonged liquidity support to troubled banks.
  - Following resolution of troubled banks, reserve money growth in early 2005 stemmed mainly from substantial losses due to interest payments on RBZ bills issued to mop up liquidity, and continued exchange losses.
  - Subsidies paid to gold and tobacco producers also contributed.
- Reserve money and money growth projections
  - Staff projects broad money growth to pick up to almost 250 percent by end-2005 from over 200 percent at end-April (Table 6).
  - Staff estimates that reserve money growth will need to be brought down sharply to about 60 percent by end-year in order to ensure a rate of broad money growth consistent with the authorities’ inflation target.
- Inflation target and policy advice
  - Staff urged authorities to tighten monetary policy and the growth in monetary aggregates sufficiently to ensure achievement of their inflation target of 80 percent by end-2005 and to limit RBZ’s activities to its core function of achieving low inflation via a money anchor.
  - Producer and credit subsidies should be phased out without delay.
  - Losses of the RBZ (especially from interest payments on RBZ and PLARP bills) should be transferred to the budget to reduce money growth and inflation on a sustained basis.
  - Staff cautioned against issuance of bonds indexed to inflation given prospect for continued high inflation and potentially unsustainable debt burden from fiscal and quasi-fiscal activity.
- Authorities’ view
  - Authorities intended to lower broad money growth to 80 percent by end-year and aimed for single-digit inflation by end 2006.
  - They argued limits on government overdraft with the RBZ, elimination of exchange-loss recurrence, and new credit facilities based on recycling banks’ statutory reserves would contain money growth.
  - Staff noted past exceedance of the overdraft limit and that new credit facilities would add to broad money growth even if notionally netted out of statutory reserves.

### Exchange rate and external policies
- Recent exchange rate developments and reserves
  - Official exchange rate depreciated from Z$824/US$ at end-2003 to about Z$6,100/US$ by mid-May 2005; tender rate allowed to depreciate further to some Z$10,500 by early July.
  - Usable international reserves remained essentially constant during 2004 at just US$25 million (0.1 months of imports).
  - Sharp widening of the parallel market premium reflected loosening of monetary policy in early 2005 and declining availability of foreign exchange at the tender.
- Staff recommendations for exchange rate regime
  - Fully liberalize the foreign exchange regime for current account transactions and unify the exchange rate by end-year as part of a comprehensive stabilization package.
  - Eliminate foreign exchange restrictions, multiple currency practices, and abolish surrender requirements.
  - With international reserves low, the exchange rate should be determined by the market (via commercial banks).
  - As a first step toward unification, the official exchange rate should be depreciated immediately and substantially (say by 60–65 percent based on June data) while monetary policy is tightened.
  - The foreign exchange tender needs to be operated as a true auction—with the exchange rate allowed to depreciate to meet all bids—and producer and credit subsidy schemes quickly phased out.
- Authorities’ position and staff observations
  - Authorities indicated limited room for maneuver on the exchange rate because of lack of foreign financing and concerns about inflationary impact, but intended to maintain sufficient flexibility to ensure export viability.
  - Authorities expressed doubts about short-run responsiveness of exports to a more depreciated tender rate for agricultural exports already set for the year.
  - Staff noted an official depreciation could elicit a shift of export earnings to the official market and that producer and credit subsidies were costly, ultimately inflationary, and difficult to target effectively.

### Debt, external arrears, and relations with the international community
- Debt stock and outlook
  - Available data indicate approximately 70 percent of external debt is owed to official creditors with half of the total in arrears.
  - Standard low-income debt sustainability analysis indicates a NPV-of-debt to export ratio in excess of 225 percent over the medium term.
- Staff recommendations
  - Authorities should rebuild relations with the international community, including the Fund, by implementing sound economic and social policies and eliminating arrears.
  - Formulate a strategy to reach understandings with foreign creditors to settle arrears and restructure debt.
  - Improve social policies to facilitate progress toward the MDGs, particularly by combating the HIV/AIDS pandemic.
  - Make greater efforts to obtain external assistance to support food imports in the short run and to address humanitarian and economic consequences of “Operation Restore Order”.
  - Staff noted domestic policy reforms would be better sustained if they receive external support, including technical and financial assistance.
- Authorities’ representation
  - Authorities stressed that lack of external assistance made a turn-around strategy doubly difficult and noted they had been repaying the Fund in accordance with their December commitment despite foreign exchange shortages.

*Source: IMF staff report text provided in content unit _cr05360 - 12.      Staff noted several risks and vulnerabilities to the outlook. In particular,*

### 26.      Zimbabwe’s financial system has shown remarkable resilience to the very

### _cr05360 - 26.      Zimbabwe’s financial system has shown remarkable resilience to the very

### Banking-system soundness and recent interventions
- Five large banks account for almost 65 percent of deposits.
- With the exit of weak institutions, the sector is now largely populated by banks with high capital adequacy ratios, little foreign exchange risk, and very short-term maturities for both assets and liabilities.
- Loans account for only about 25 percent of total assets, reflecting a shift toward short-term low-risk securities (treasury bills).
- Stress tests indicate resilience to significant shocks, including credit, interest rate, and foreign exchange risks.
- The few remaining troubled banks are known, regularly monitored, have limited interbank trading, and present minimal contagion risk.
- The provision of full powers for banking supervision to the RBZ was instrumental in ensuring timely intervention in problem banks; a recent revision to the Banking Act requiring the RBZ to consult with the Minister of Finance in registering banks and intervening in troubled banks is described as a regressive step.
- Decisive action by the RBZ in late 2004 to place institutions in curatorship or liquidation is broadly in line with recommended international practice; however, liquidity assistance previously extended to insolvent banks is questioned and holding arrangements for the ZABG need to be regularized at the earliest opportunity.
- Recoveries by curators and liquidators have been impressive in nominal terms, but restructuring costs were financed by an inflation tax on depositors and creditors (including the RBZ) whose claims fell sharply in real terms.

### Recommendations for financial-sector policy and regulation
- Cease the practice of extending liquidity support to insolvent banks and take faster action to intervene in identified troubled banks.
- Strengthen bank supervision, governance, and risk-management standards; continue training and development of supervisory staff and improve off- and on-site analysis.
- Strengthen the adequacy and effectiveness of the deposit insurance scheme by giving it a broader mandate dealing with receivership and liquidation; current mandate allows payout only when a bank is in liquidation and depositor awareness is limited.
- Over time, lower the very high statutory reserve requirements (60 percent of demand deposits), which impede intermediation, contribute to high lending rates and low deposit rates, and divert RBZ supervisory resources to policing non-prudential restrictions.
- Lower statutory reserve requirements over the medium term and use offsetting open market operations to mop up excess liquidity, with the costs transferred to the budget.
- Regularize holding arrangements for ZABG at the earliest opportunity.
- Avoid issuing bonds indexed to inflation given the prospect for continued high inflation and potentially unsustainable public debt burden.
- Transfer RBZ losses (particularly from interest payments on RBZ and PLARP bills) to the budget to lower money creation durably and increase transparency.

### Medium-term structural reform agenda
- The authorities have launched a medium-term public enterprise reform program (PLARP) run by the RBZ to address poor performance and high costs in that sector.
- The RBZ plans to issue medium-term bonds of Z$10 trillion dollars (around 16 percent of GDP) starting in 2005 to finance the program, with the debt to be serviced by the budget starting in 2006.
- Financing would be provided to public enterprises that present externally audited financial statements and substantive restructuring plans aimed at commercial viability; privatization could be an option for some enterprises later.
- Staff concern: PLARP could prove costly without hard budget constraints on public enterprises, including the option to wind down nonviable enterprises; increased transparency of auditing and evaluation standards and access to public funds is important.
- Key medium-term reform areas urged by staff:
  - Deregulation and liberalization to increase market forces (eliminate price controls, dismantle monopoly positions of public enterprises in distribution, particularly fuel and grains).
  - Fiscal reforms, particularly civil service restructuring to achieve a sustainable wage bill and strengthen the medium-term fiscal position; improve expenditure and cash management systems.
  - Improving governance to increase investor confidence, reduce corruption, and encourage private business activity; strengthen protection of property rights and reduce threat of nationalization.
- Land and agricultural reforms:
  - Most private commercial farms have been seized under fast-track land reform; resettlement has fallen short of targets and large areas of productive land remain idle.
  - Introduction of 99-year leases has been delayed and appears not to provide adequate tenure security.
  - Weak technical know-how, equipment and input shortages, deteriorating infrastructure, and lack of extension services impede agricultural recovery.
  - Staff stressed rapid action to provide security of tenure and extension services, followed by coordinated medium-term reform.
  - Authorities indicated President Mugabe’s commitment to investment protection and desire to compensate investors inadvertently harmed; solutions for allowing land to be mortgaged without banks ending up owning land are being explored (for instance, increasing role of state-owned Agribank).

Box 1 — World Bank five-pillar strategy for agricultural recovery and social protection (as summarized in the source)
- Increase security of tenure and complete the land reform program.
- Provide strong market-based incentives for production and investment in agriculture, especially by restoring and enhancing profitability in the sector.
- Implement a broader social protection program for poor and marginalized groups of the population.
- Build and/or rebuild a cohesive policy and institutional framework for land administration and management, and for agricultural growth and development.
- Mobilize financial resources from taxation, community and private sectors, and external partners.

### Macroeconomic stabilization recommendations (Staff appraisal)
- Immediate priority: implement a comprehensive package of macroeconomic measures to stabilize the economy.
- Components of a stabilization package:
  - Strong fiscal adjustment.
  - Liberalize the exchange rate regime and unify the exchange rate.
  - Tighten monetary policy.
  - Curtail the quasi-fiscal activity of the RBZ.
- Fiscal measures:
  - Submit a supplementary budget without delay to contain this year’s fiscal deficit to no more than 5 percent of GDP, ensuring a broadly neutral stance in support of stabilization.
  - Given high spending ratios, the bulk of adjustment should come from spending cuts—especially in the wage bill, subsidy/transfer payments, and capital outlays.
  - Improve cash management and consider revenue measures such as significant narrowing of VAT exemptions and zero rating and an increase in income tax and VAT rates.
- Exchange-rate measures:
  - Fully liberalize for current account transactions and establish a unified exchange rate by end-year.
  - The tender rate is highly overvalued and needs to be depreciated substantially (by about 60-65 percent) without delay while monetary policy is tightened.
  - Operate the tender as a true auction; subsequently eliminate exchange controls on current payments and all surrender requirements and leave rate determination to the market.
- Monetary policy:
  - Tighten substantially and immediately.
  - To achieve the end-2005 inflation target of 80 percent, reserve money growth must be brought down sharply to keep broad money growth by end-2005 well below the inflation target given the likely reduction in the demand for real money balances.
  - Shift to a broad money anchor with reserve money as the operational target, in conjunction with a freely floating exchange regime.
  - Phase out RBZ quasi-fiscal activities that fuel money growth and inflation; a unified exchange rate would obviate costly producer and credit subsidies.
- Social and external considerations:
  - Without bold policy change, the outlook is bleak with likely prospects of continued triple-digit inflation and further output declines; food security is an urgent concern.
  - Staff urges rebuilding relations with the international community, including the Fund, by implementing sound policies and seeking understandings with external creditors to settle arrears and restructure debt.
  - Donor assistance could be sought in the short term to finance food imports, address consequences of “Operation Restore Order”, combat HIV/AIDS, and facilitate progress towards the MDGs; longer-term technical and financial assistance could support domestic reform efforts.
- Multiple currency practices:
  - In the absence of a timetable for its elimination, staff does not recommend Fund approval of newly-identified multiple currency practices in the form of a preferential exchange rate for inward remittances and the surrender of export receipts from international gold sales.

### Data, trade, and other structural-data issues
- Zimbabwe’s statistical base has important weaknesses for surveillance purposes, including timeliness and coverage.
- CPI likely understates inflation due to use of controlled/ administered prices and outdated weights (from 1997), which may understate importance of items such as rent and transportation.
- Coverage and timeliness of balance of payments and external data could be improved.
- Comprehensive fiscal data needed on general government, consolidated public sector debt, and operations and financial position of public enterprises.
- Monetary data need reconciliation with fiscal accounts.
- Lag in receiving fiscal and monetary data has increased to about 4-6 months from 2-3 months previously.
- On trade policy, conflicting obligations arise from SADC and COMESA membership and recent bilateral trade agreements with Botswana, Zambia and Malawi; participation continues in regional discussions toward an Economic Partnership Agreement with the European Union.
- The authorities have continued to lower intra-regional tariffs, reducing the average tariff to about 10 percent.

*Italic: IMF staff appraisal and analysis drawn from the provided chapter content.*

### 50.      It is proposed that Zimbabwe remain on the standard 12-month consultation cycle.

### 50. It is proposed that Zimbabwe remain on the standard 12-month consultation cycle.

### Proposal
- It is proposed that Zimbabwe remain on the standard 12-month consultation cycle.

### Selected macroeconomic indicators and projections (excerpted from source tables and figures)
- Real GDP (market prices; percentage change): -2.7-4.4-10.4-4.2-7.1-4.8
- Real per capita GDP (percentage change): -2.4-4.1-11.3-3.9-7.1-4.8
- Consumer price inflation (annual average): 73.4-133.2-365.0-350.0-190.4-253.1
- Consumer price inflation (end of period): 112.1-198.9-598.7-132.7-320.7-199.0
- 91-day treasury bills (annualized yield; end of period): 25.9-26.6-60.7-105.0-150.0-130.2
- Total revenue (percent of GDP): 19.2-17.9-24.9-28.0-32.9-33.9-38.3-34.9-35.6
- Total expenditure and net lending (percent of GDP): 26.6-20.7-25.3-35.3-35.4-41.0-45.8-46.7-51.7
- Overall balance, commitment basis (excluding grants): -7.5-2.8-0.4-7.1-16.1-9.4
- Broad money (M3; percent change, end of period): 102.7-164.8-413.5-222.6-248.0-153.2
- Domestic credit (percent change, end of period): 79.1-130.0-433.8-179.0-205.9-95.2
- Exports (billions of U.S. dollars): 2.1-1.8-1.7-1.7-1.6-1.7
- Imports (billions of U.S. dollars): -1.8-1.8-1.8-2.0-2.0-1.8
- Current account balance (excluding official transfers; billions of U.S. dollars): -0.1-0.2-0.3-0.4-0.5-0.3
- Usable reserves (millions of U.S. dollars; end of period): 16.0-15.1-15.6-24.8-24.8-24.8
- Total external debt (percent of GDP at world prices; end of period): 45.3-53.0-64.4-67.4-74.4-80.6
- Of which: total external arrears (percent of GDP at world prices; end of period): 9.5-18.4-28.5-35.1-41.5-47.2

### Fiscal and monetary context (selected excerpts)
- Central government: revenue and expenditure dynamics (percent of GDP):
  - Revenue: 19.2 (2001), 17.9 (2002), 24.9 (2003), 28.0 (2004), 32.9 (2005), 33.9 (staff)
  - Expenditure and net lending: 26.6 (2001), 20.7 (2002), 25.3 (2003), 35.3 (2004), 35.4 (2005), 41.0 (staff)
  - Interest payments (percent of GDP): 7.4-2.9-1.3-4.1-2.4-5.5 (selected years)
  - Budget balance, excl. grants (commitment basis): -7.5-2.8-0.4-7.4-2.5-7.1 (selected years)
- Monetary aggregates and inflation (selected indicators):
  - Reserve money (percent change; end of period): 164.9-171.2-394.8-217.6-284.3-369.1-453.1-411.5-232.2 (selected monthly/annual entries)
  - Broad money (M3) growth (annual percentage change): 102.7-164.8-413.5-222.6-177.6-218.5-210.4-207.6-248.0 (selected monthly/annual entries)
  - CPI inflation (12 months end-of-period; percent): 112.1-198.9-598.7-132.7-133.6-127.2-123.7-129.1-320.7 (selected entries)

### External sector and debt (selected excerpts)
- Balance of Payments (2001-2005; selected flows, US$ millions):
  - Exports, f.o.b.: 2,114-1,802-1,670-1,680-1,644 (2001-2005)
  - Imports, f.o.b.: -1,791-1,821-1,778-1,989-2,003 (2001-2005)
  - Current account (excluding official transfers; US$ millions): -82-213-346-421-534 (2001-2005)
  - Gross official reserves (usable; US$ millions, end of period): 16-15-16-24-25 (selected years)
- External debt and arrears (selected totals):
  - External debt outstanding (total debt): 4,466-4,321-4,014-3,845-4,370-4,843-4,960 (selected years)
  - Arrears on public and publicly guaranteed debt: 912-340-480-3,152-2,141-2,584 (selected years)

*Source: IMF staff presentation materials and tables contained in the cited document.*

### APPENDIX                                                                        I

### APPENDIX I

### I. Membership Status
- Joined: 09/29/1980
- Article VIII obligations accepted 2/5/1995

### II. General Resources Account (SDR Million)
- Quota: 353.40 (100.0 percent)
- Fund holdings of currency: 462.47 (130.86 percent)
- Reserve position in Fund: 0.33 (0.09 percent)

### III. SDR Department (SDR Million)
- Net cumulative allocation: 10.20 (100.0 percent)
- Holdings: 0.00 (0.0 percent)

### IV. Outstanding Purchases and Loans (SDR Million)
- Stand-By Arrangements: 63.94 (18.09 percent of quota)
- Extended Arrangements: 46.45 (12.86 percent of quota)
- Poverty Reduction Growth Facility (PRGF) Arrangements: 75.23 (21.29 percent of quota)

### V. Financial Arrangements (SDR Million)
- Stand-By Arrangement approved 08/02/1999, expiration 10/01/2000: Amount Approved 141.36; Amount Drawn 24.74
- Stand-By Arrangement approved 06/01/1998, expiration 06/30/1999: Amount Approved 130.65; Amount Drawn 39.20
- Extended Fund Facility (EFF) approved 09/11/1992, expiration 09/10/1995: Amount Approved 114.60; Amount Drawn 86.90

### VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs) — Overdue as of 05/31/2005; Forthcoming 2005–2009
- Overdue total: 184.63 principal
- Charges/interest:
  - Overdue: 20.03
  - 2005 forthcoming: 2.54
  - 2006 forthcoming: 4.67
  - 2007 forthcoming: 4.67
  - 2008 forthcoming: 4.67
  - 2009 forthcoming: 4.66
- Total:
  - Overdue total: 204.66
  - 2005 forthcoming: 2.54
  - 2006 forthcoming: 4.67
  - 2007 forthcoming: 4.67
  - 2008 forthcoming: 4.67
  - 2009 forthcoming: 4.66
- Note: The projection of charges and interest assumes that overdue principal at the report date will remain outstanding, but forthcoming obligations will be settled on time.

### VII. Application of Remedial Measures under the Arrears Strategy
- Continuous arrears to the Fund since February 2001.
- Key Board actions:
  - 09/24/2001: Declared ineligible to use general resources and removed from PRGF-eligible list.
  - 06/13/2002: Issued a declaration of non-cooperation and suspended all technical assistance.
  - 06/06/2003: Suspended Zimbabwe’s voting and related rights.
- Compulsory withdrawal complaint issued 02/06/2004; Executive Board considered it on 07/07/2004 and 02/16/2005 and postponed recommendation due to increased payments and some policy improvements.
- The Board will again consider the Managing Director’s complaint no later than August 16, 2005.

### VIII. Exchange Rate Arrangement
- Current regime: Rationed multiple exchange regime (3 "official" rates); most transactions at main auction ruling rate Z$10,150/US$ on July 4, 2005.
- Foreign exchange controls on current account transactions; active parallel exchange market exists.
- Secondary rate: Z$9,000/US$ for inward remittances.
- Surrender exchange rate: Z$824/US$ (eliminated for export remittances).
- Subsidies/incentives used to compensate for overvalued exchange rate (gold, tobacco, cotton; exporter incentives).
- Reclassification: Effective January 30, 2005, reclassified to managed floating with no preannounced path from conventional pegged arrangement.
- Tender system:
  - RBZ sells foreign exchange three times a week (US$100 million per month for main auction; US$2 million per month for SMEs and individuals).
  - Authorized dealers submit detailed bids with intended use and RBZ approval number; RBZ committee filters non-priority bids; allocation on price basis.
  - Main auction rate heavily managed; increasing number of bids not met.
- Export retention/surrender scheme:
  - Exporters allowed to retain 55 percent in FCAs if repatriated before 30 days for a maximum period of 21 days; remainder sold to tender at ruling rate.
  - Surrender requirement increases up to 80 percent for proceeds repatriated after 90 days.
  - Stricter foreign currency retentions for horticulture.
- Tobacco:
  - Auction prices quoted in US dollars; producers receive local currency equivalent at tender exchange rate.
  - Direct subsidy of Z$5,000 per kilogram (from May 19, 2005) for tobacco sold on auction; subsidy invariant to auction price.
  - From February 2005 tobacco producers treated as direct exporters and surrender export proceeds at prevailing tender rate.
- Gold:
  - Producers sell 60 percent at fixed support price (raised to Z$175,000/gram on May 19, 2005) and 40 percent on international market.
  - Proceeds from international sales deposited in FCAs subject to same retention periods.
- Cotton:
  - New subsidy of Z$3,500/kg introduced on July 1, 2005.
- Parallel market:
  - Depreciated since mid-2004; trading at about Z$20,000/US$ in early July 2005.
- Official statements:
  - Authorities stated RBZ no longer allocates foreign currency at Z$824/US$ for Treasury operations, NOCZIM, ZESA and GMB imports, and Afreximbank debt service, but documentary evidence not provided.
- Tender rate history:
  - Appreciated from Z$4,197/US$ in mid-January 2004 to Z$3,520/US$ in early February 2004, then depreciated to about Z$10,500/US$ by early July 2005.
  - Tender managed so rate does not fully reflect market forces.
- Compliance assessment:
  - System results in restrictions on transfers and payments for current international transactions and multiple currency practices (MCP), inconsistent with Article VIII Sections 2(a) and 3 of the Fund’s Articles of Agreement.
  - MCPs identified due to lack of mechanism preventing divergence of more than 2 percent between:
    - (i) exchange rates in official and parallel markets,
    - (ii) exchange rates for private sector imports and government imports,
    - (iii) exchange rates paid by successful bidders in same tender,
    - (iv) exchange rate used for surrender of export receipts (including international gold sales weighted average) and other market rates,
    - (v) exchange rate for inward remittances.
  - Exchange restrictions also arise from:
    - (i) limitations on foreign exchange availability via priority lists subject to RBZ approval,
    - (ii) private sector external payment arrears inconsistent with Article VIII Section 2(a).
  - These restrictions and MCPs have not been Board-approved.
- Additional issues:
  - Staff informed of bilateral payments arrangements with Fund members that may raise Article VIII compliance issues; staff seeking information from authorities.
  - Exchange restrictions from certain outstanding contracts under discontinued RBZ foreign exchange cover scheme have been discontinued.

### IX. Article IV Consultation
- Standard 12-month consultation cycle.
- Last Article IV consultation concluded on July 7, 2004 (Country Report No. 04/297).

### X. Technical Assistance
- Executive Board suspended Fund technical assistance to Zimbabwe in June 2002.
- Past assistance highlights:
  - Long-term MFD advisor on banking supervision: August 1996 – October 1999.
  - MFD expert on monetary operations: October 1998 – October 2000 (open market operations, repurchase agreements).
  - MFD payments system expert: one-year assignment completed October 1999 (monetary instruments, liquidity management).
- Summary table of technical assistance (since inception of PRGF/EFF in September 1992):
  - November 1992 (STA): Revise monetary statistics — Revision initiated.
  - April 1993 (MFD): Liberalize foreign exchange system — Comprehensive reforms launched; completed in July 1994.
  - Spring 1994 (LEG): Revise the Reserve Bank Act and the Banking Act — Completed.
  - Spring 1995 (FAD): Improve budgeting and public expenditure control — Initial steps taken.
  - Spring 1995 (STA): Harmonize reporting system for monetary statistics — Harmonization completed.
  - Winter 1995 (STA): Training in balance of payments methodology — Seminar provided.
  - January 1996 (STA): Improve foreign trade statistics — Advice being implemented.
  - August 1996 (MFD, long term): Strengthen banking supervision — Some advice being implemented.
  - October 1996 (STA): Improve national accounts — Some advice being implemented.
  - January 1996, November 1996 (MFD): Improve monetary and foreign exchange operations — Some advice being implemented.
  - November 1997 (MFD): Improve monetary operations — Some advice being implemented.
  - May 1999 (MFD): Review and advise on monetary operations, payments system, supervision; assess vulnerability of financial sector — Report recommendations being reviewed.
  - July 2001 (MFD): Deposit insurance scheme — Report recommendations being reviewed.

### XI. Resident Representative
- Resident representative office opened July 1993.
- Mr. G. G. Johnson’s term as Senior Resident Representative expired end-September 2003.
- Office remained open with local staff until September 2004 when it was closed.

*Source: APPENDIX I (Zimbabwe: Relations with the Fund), as of May 31, 2005.*

### 2004. Despite reminder letters, no confirmation or update has been received. However, in the

### _cr05360 - 2004. Despite reminder letters, no confirmation or update has been received. However, in the

### Overall assessment of statistical capacity
- In the absence of technical assistance and funding, progress in improving the quality, coverage, and timeliness of Zimbabwe’s statistical base is likely to be slow.
- Despite reminder letters, no confirmation or update has been received.

### Real sector statistics
- National accounts
  - CSO published revised national accounts in late 1997, covering the period 1985-96, with 1990 as the base year for constant price estimates.
  - STA provided a peripatetic advisor in 2001; efforts discontinued because of the deteriorating security situation.
  - Coverage of economic activity in the informal sector remains poor.
  - National accounts data for 2001 were not published until March 2004 and had inconsistencies between sectoral developments and other activity indicators, and are being reviewed.
  - Historical data is constantly revised.
- Prices, production, labor
  - CSO produces a CPI; in 2001 the base year changed from 1990 to 1995 with expenditure weights based on a 1995-96 household survey.
  - A number of prices in the index are either controlled or administered.
  - A manufacturing production index with a base year of 1990 is reported with a significant delay.
  - Data on employment and wages, which had very limited coverage, are no longer published.
  - A comprehensive labor market survey is long overdue.

### Government finance statistics (GFS)
- Key weaknesses impair fiscal analysis and policy formulation:
  - Monthly revenue and expenditure data for the central government’s budgetary accounts are generally available with a lag of 6 to 8 weeks.
  - Discrepancies between the budget financing need (computed from the income/expenditure side) and financing data from banking and other sources.
  - Significant part of donor-financed development expenditure is off budget.
  - Economic classification of expenditure is insufficiently disaggregated; a functional classification of expenditure is not available.
  - Large quasi-fiscal operations by the RBZ and significant contingent liabilities, including loan guarantees, are not systematically reported.
  - Authorities do not provide Fund staff with budget data according to an organizational classification on a regular basis and provide limited access to source data.
  - Operations of the social security fund and several self-financing funds under central government purview are not included in reported data.
  - Financial operations of public enterprises are neither reported nor regularly audited, preventing reliable consolidated accounts for the nonfinancial public sector.
  - Accounts of local governments become available only with a lag of several years; consolidated general government accounts are not compiled.
- Publication status
  - The latest published data in the Government Finance Statistics (GFS) Yearbook are for 1997.
  - No recent fiscal data have been provided for publication in International Financial Statistics (IFS).

### Monetary and financial statistics
- Progress and issues
  - Significant progress made in developing a unified system for reporting monetary statistics to the Fund based on international standards and in improving collection and reporting of financial data.
  - Difficulties reconciling the RBZ balance sheet in the monetary control program (MCP) with the monetary survey (MS).
  - Accounting for treasury bills issued by the RBZ has emerged as an issue in monetary data.
  - Historical timeliness: MCP used to be available within two weeks; MS within six-eight weeks. Recently delays increased to 2 to 3 months.
  - Serious discrepancies frequently detected in data reported to STA (examples below).
- Examples of discrepancies (preserve figures as reported)
  - RBZ bills outstanding in liabilities of RBZ accounts is always reported as zero while RBZ bills held in assets of commercial banks, discount houses, accounting houses and merchant banks are reported in a significant amount (e.g., 732.2 million Zimbabwe dollars in total as of December 2004).
  - IMF No. 1 Account is not systematically reported in same location in the RBZ balance sheet, thereby affecting gross international reserves.
  - Discrepancies among the different components of reserve money figures between the MS and MCP were recorded since early 2004.

### External sector statistics
- Timeliness and coverage problems
  - Pressing need for authorities to compile and provide comprehensive external sector data on a more timely basis.
  - Trade balance in goods is still being reported with lags of more than 4 to 5 months, despite ASYCUDA providing customs data to the CSO within seven days of the end of each month.
  - Private remittance inflows have become significant; authorities report only the small proportion of remittances made through official channels.
  - Compilation of capital and financial account transactions suffers from considerable delays.
  - Significant lag in reporting balance of payments data to the Fund; balance of payments data published in the IFS and Balance of Payments Yearbook are even less timely—the latest data are for 1994, as annual data through 2001 provided for publication are of questionable quality.
  - Data on short-term external debt are reported to the Fund by the RBZ with a one- to two-month lag.
  - External debt data (by debtor/creditor) are reported with a considerable delay; information on terms and maturity profile of external debt is not systematically available.
  - Authorities have provided staff only with partial information on the extent of their collateralized external borrowing.
  - No data available on Zimbabwe’s international investment position.

### Sociodemographic statistics
- CSO produces population, health, education, and poverty indicators.
- Data are usually collected through infrequent surveys and population censuses, so information is somewhat dated.

### Table of Common Indicators Required for Surveillance (as of July 7, 2005) — selected entries (dates preserved exactly)
- Exchange Rates: Date of latest observation July 4 2005; Date received 7/4/2005; Frequency of Data D; Frequency of Reporting M; Frequency of publication M
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Apr. 2004; Date received 6/13/2005; Frequency M M M
- Reserve/Base Money: Apr. 2004; Date received 6/13/2005; Frequency M M M
- Broad Money: Apr. 2004; Date received 6/13/2005; Frequency M M M
- Central Bank Balance Sheet: Apr. 2004; Date received 6/13/2005; Frequency M M M
- Consolidated Balance Sheet of the Banking System: Apr. 2004; Date received 6/13/2005; Frequency M M M
- Interest Rates1: Mar. 2004; Date received 6/13/2005; Frequency M M M
- Consumer Price Index: May 2005; Date received 6/20/2005; Frequency M M M
- Revenue, Expenditure, Balance and Composition of Financing2 – Central Government: Apr. 2005; Date received 6/15/2005; Frequency M I NA
- Stocks of Central Government and Central Government-Guaranteed Debt4: Jan. 2005; Date received 6/13/2005; Frequency M M M
- External Current Account Balance: 2004; Date received 6/13/2005; Frequency A V A
- Exports and Imports of Goods and Services: 2004; Date received 6/13/2005; Frequency A V A
- GDP/GNP: 2004; Date received 6/13/2005; Frequency A V A
- Gross External Debt: 2004; Date received 6/13/2005; Frequency A V A

(Notes in table preserved: 1 Officially-determined, including discount rates, money market rates, and rates on treasury bills. 2 Domestic bank, and domestic nonbank financing. 3 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. 4 Including currency and maturity composition. 5 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); on mission or staff visits (V); Not Available (NA).)

### Debt Sustainability Analysis — key findings and baseline assumptions
- Under the staff’s baseline scenario, Zimbabwe’s external debt is not expected to be sustainable in the absence of a debt rescheduling.
- Baseline macro and fiscal assumptions
  - Average negative real GDP growth at 4 percent until 2010 and an average positive growth of 3 percent thereafter with exports growing at 5 percent.
  - Budgetary consolidation is not expected in the near future although deficit declines after 2009.
  - Baseline assumes a tentative arrears rescheduling in 2011—outside of the medium-term scenario.
- Debt stocks (end-2004)
  - Zimbabwe’s total external public debt was US$5 billion (67 percent of GDP) at end-2004, of which US$2 billion were owed to multilateral creditors.
  - Domestic public debt denominated in local currency accounted for about 7 percent of GDP in 2004.
- Projected post-rescheduling stock
  - Total stock of outstanding debt at the end of 2011 would amount to US$2.4 billion (34 percent of GDP).
- Projected debt indicators (baseline, long-run)
  - NPV of the debt-to-GDP ratios are expected to fall to about 50 percent.
  - NPV of the debt-to-exports ratios to fall about 130 percent.
  - Debt service-to-exports would decline to 1 percent in the long-run.
  - Private external debt is projected to increase from 2010.
- Vulnerabilities and stress tests
  - A one-time 30 percent depreciation would push up the NPV of the debt-to-GDP ratio to about 120 percent in 2010.
  - A one-time two standard deviation shock in exports would raise the debt service-to-exports to 30 percent compared with 20 percent in 2025 in the baseline scenario, and the NPV of the debt-to-exports ratio would rise to 217 percent compared with 122 percent in the baseline scenario in 2015.
- Methodological note
  - Public debt sustainability analysis could not be conducted in national currency due to difficulty in choosing applicable exchange rates given a highly overvalued official exchange rate and multiple exchange rate system.
  - External DSA uses nominal U.S. dollar GDP calculated using national real growth and international inflation (1996 base year) since analysis is undertaken in U.S. dollars.
- Additional projected and historical numerical excerpts (preserved as reported)
  - Zimbabwe’s total external public debt (nominal) series and projections: 53.0, 64.4, 67.4, 74.4, 80.6, 85.9, 91.0, 95.8, 100.5, 33.0, 28.1 (selected entries as reported in the table).
  - NPV of external debt series: 68.8, 75.1, 80.8, 85.9, 90.8, 95.6, 100.5, 57.2, 60.1 (selected entries as reported).
  - Exports series (selected): 24.5, 24.7, 27.1, 28.0, 30.7, 32.4, 34.6, 36.5, 38.2, 38.2, 40.0 (preserved).
  - Imports series (selected): 26.9, 29.0, 32.8, 35.6, 33.7, 36.0, 38.2, 40.4, 43.4, 42.4, 42.4 (preserved).
  - Net FDI (negative = inflow) series (selected): -0.3, 0.0, -0.1, -0.9, 1.4, -0.2, 0.0, 0.0, 0.0, 0.0, 0.0, -1.0, -1.0, -1.0.
  - Key macroeconomic assumptions (selected):
    - Real GDP growth (in percent) series: -4.4, -10.4, -4.2, -2.1, 5.5, -7.1, -4.8, -3.6, -2.9, -2.4, -0.8, -3.6, 3.0, 3.0, 2.7.
    - GDP deflator in US dollar terms (change in percent) series: 1.5, 1.8, 2.0, 3.0, 3.2, 2.0, 1.9, 2.0, 2.1, 2.1, 2.2, 2.0, 1.9, 1.5, 2.0.
    - Effective interest rate (percent) series: 3.5, 2.8, 2.2, 3.7, 0.8, 2.0, 3.4, 3.5, 3.6, 3.8, 3.9, 3.4, 2.3, 1.5, 2.0.
    - Growth of exports of G&S (US dollar terms, in percent) series: -14.8, -8.1, 7.6, -1.1, 11.0, -2.1, 6.2, 4.0, 5.6, 5.4, 5.9, 4.2, 5.0, 5.0, 5.0.
    - Growth of imports of G&S (US dollar terms, in percent) series: -0.6, -1.7, 10.7, 0.6, 13.6, 2.8, -8.3, 5.1, 5.2, 5.4, 8.8, 3.2, 4.5, 4.5, 4.5.
  - Memorandum item: Nominal GDP (billions of US dollars): 8.2, 7.5, 7.4, 7.0, 6.8, 6.7, 6.6, 6.6, 6.7, 8.5, 13.2 (selected entries as reported).

### Sensitivity and stress scenarios (summary of outcomes reported)
- Baseline scenario: external debt indicators improve only slowly following debt rescheduling; long-run NPV debt-to-GDP ~50 percent; NPV debt-to-exports ~130 percent; debt service-to-exports ~1 percent.
- Shock examples reported:
  - One-time 30 percent nominal depreciation relative to the baseline in 2006: large increases in NPV of debt-to-GDP and NPV of debt-to-exports (specific table entries preserved in source).
  - Combination stress tests (B1–B5) and alternative financing scenarios (A1–A2) shown in sensitivity tables with reported numeric outcomes (preserved in source tables).

*Source: IMF staff report excerpts as provided in the supplied content.*

### Introduction

### _cr05360 - Introduction

### Overview and context
- Zimbabwe faced several socio-economic challenges over the past seven years: high inflation, foreign exchange shortages, decline in overall economic output, rising unemployment, low savings and investment levels.
- Setbacks were exacerbated by recurrent droughts, absence of Balance of Payments (BOP) support, rising fuel prices.
- The Government’s Land Reform Program began in 1997 and is described as largely completed; challenges inhibiting smooth implementation are being addressed to bring redistributed land to full and viable production.

### Relations with the IMF
- Over the past five years relations with the IMF "have not been as they should be," with divergence of views and accumulation of arrears.
- Over the past 20 months the Government has worked to address three main IMF Management concerns:
  - (a) non-payment of arrears;
  - (b) need for implementation of a comprehensive macroeconomic package of measures to stabilize the economy;
  - (c) cooperation with the IMF in respect of communication and data exchange.

### Payments to the IMF and external creditors
- Payments to the IMF increased from an initial US$1,5 million per quarter to US$9 million per quarter; committed to increase to US$15 million per quarter, with effect from the fourth quarter of 2005, and to US$40 million per quarter beginning April, 2006.
- Zimbabwe made a payment of US$120 million to the General Resources Account (GRA) out of its own resources, reducing GRA arrears to US$ 51,3 million.
- Government commits to fully repay remaining outstanding amounts under the GRA and the PRGF accounts by 30 November, 2006.
- Government attaches importance to repaying other international creditors and "commits to maintaining the momentum of these external debt repayments."

Selected sample repayments (as presented)
- IMF: 2004 — 22.57; 2005 Jan-Sept — 134,0; Growth — 449%
- World Bank: 2004 — 3,0; 2005 Jan-Sept — 6,1; Growth — 100%
- AfDB: 2004 — 4,3; 2005 Jan-Sept — 6,4; Growth — 49%
- DFID: 2004 — 1,17; 2005 Jan-Sept — -
- Govt. of Botswana: 2004 — 6,05; 2005 Jan-Sept — -
- ZESA Trade Creditors (Electricity): 2004 — 48,2; 2005 Jan-Sept — 9,1
- NOCZIM (Trade Creditors (Fuel)): 2004 — 80,0; 2005 Jan-Sept — 25,5
- Note: "Commitment to pay by end-September 2005."

### Macroeconomic policies implemented
- Export performance improved over January, 2004 to August, 2005; export volumes expected to register a positive growth of 12.5% in 2005.
- Removal of subsidies (dates preserved):
  - Lending to productive sectors at concessional rates discontinued with effect from 30 June, 2005.
  - A 5% credit facility to exporters discontinued with effect from 21 July, 2005.
  - A 25% bonus scheme to exporters discontinued with effect from 21 July, 2005.
  - Subsidies paid to gold, cotton and tobacco exports abolished with effect from 21 July, 2005.
  - Exchange rates to exporters and importers were converged.
  - Preferential exchange rates for priority Government payments abolished; with effect from May 2005 all Government payments are effected at the Auction rate.
- Exchange rate adjustment:
  - Exchange rate moved from Z$824/US$ at start of 2004 to Z$24500/US$ (stated as "current level"), representing a cumulative adjustment of 2873%.
  - At current levels, the exchange rate is described as "now in line with recent submissions by exporters and consistent with the purchasing power parity (PPP) thresholds."
- Monetary policy, interest rates and nominal anchor:
  - Interest rates realigned to levels above inflation, except for support to the agricultural sector.
  - Central bank implementing a tighter monetary program, supported by adept liquidity management and positive real interest rates.
  - Monetary targeting designated as the nominal anchor in the refocused anti-inflation strategy (see Inflation targets below).
- Curtailment of Central Bank quasi-fiscal operations:
  - Parastatals and Local Authorities Reorientation Program (PLARP) scaled down from the original Z$12 trillion to no more than Z$3 trillion.
  - Central Bank will tail off further disbursements and work to manage down the under Z$3 trillion exposure through a sinking fund framework with beneficiary parastatals and local authorities.

### Financial stability
- Despite transitory problems at a few institutions in 2004, the banking sector is described as "generally stable and sound" in terms of liquidity and solvency.
- Problems affected institutions that accounted for less than 10% of market share.
- Government commits to maintaining stability through swift surveillance and supervision.

### Fiscal consolidation measures
- Fiscal pressures in 2005 arose from drought, HIV/AIDS pandemic, SADC election code compliance, increases in interest and pension payments, supporting supply response, and cooling social pressures amid high unemployment.
- Revenue base undermined by difficult environment; Government maintained tight expenditure control.
- Fiscal budget deficit for 2005 expected to be no more than 8,6% of GDP, inclusive of drought-induced obligations.
- Fiscal measures undertaken:
  - Deferment of salary reviews for the public service to the 2006 budget.
  - Adoption of a strict cash budgeting framework across all line ministries.
  - Redeployment of existing public service staff to new ministries to minimize cost effects.
  - Expenditure cuts across line ministries, saving Z$3 trillion.
  - Civil service audit and public service restructuring to enhance cost-effectiveness.
  - Employment freeze across all ministries.
  - Tighter control on usage of Government assets.
  - Shift from a defined benefit to a defined contribution pension system for Government employees.
  - Enhancement of revenue buoyancy via improved tax administration and broadening the tax base, increase in VAT tax from 15 percent to 17.5 percent, broadening the VAT base and other tax measures.

### Privatization program
- State Enterprise Restructuring program key features:
  - Commercialization of targeted enterprises.
  - Entering joint ventures with strategic partners through an articulate divestiture program.
  - Privatization of non-strategic state enterprises.
  - Winding down price controls.
  - Targeting subsidies to the most vulnerable groups.

### Economic outlook and targets
- Real GDP:
  - Government estimates a moderate real GDP decline of -1,5% in 2005 (citing drought, rising global fuel prices, SADC election compliance costs, and lower-than-anticipated absorptive capacity of non-agricultural sectors).
  - Rebound to positive growth of 4,5 – 5% in 2006 expected if policy regime stabilizes economy and normal rainy season occurs for 2005/2006.
- Inflation:
  - Temporary resurgence in inflation to around 260% by end of 2005 (factors: drought, oil price increases, short-run knock-on effects of exchange rate depreciation, supply constraints, high monetary expansion).
  - Targeted decline to 50-70% by end of 2006.
  - Targeted to reach single digit by March 2007.
- Agricultural productivity measures expected to support growth and disinflation:
  - Finalization and implementation of the 99-year lease framework.
  - Comprehensive redress of any infringements on investments protected under Bilateral Investment Protection Agreements (BIPAs).
  - Irrigation rehabilitation to reduce dependence on dry-land production.
  - Creation of the Agricultural Marketing Authority (AMA) to coordinate marketing and pricing of produce and guarantee farmers' viability.

### Cooperation with IMF and appeals
- Government emphasizes persistent cooperation with IMF over past 20 months, including high-level meetings (President and Director of African Department in November, 2004) and numerous IMF Staff Missions.
- Authorities commit to continue cordial and cooperative engagement as turnaround program is consolidated.
- Government appeals to IMF Board:
  - To support the process of adjustment and allow measures to take full effect within the time frame to December, 2006.
  - Warns that expulsion from the IMF would erode confidence, worsen the economy, and destroy public faith in self-imposed adjustment.
  - Requests recognition of efforts in single-handedly resolving a potential catastrophic financial crisis and asks to be granted technical assistance to strengthen macroeconomic framework, nominal anchor design, liquidity forecasting, fiscal consolidation, financial sector strengthening and other areas.
  - Argues that denial of technical assistance under the Fund’s Strengthened Arrears Strategy "does more harm than good."

### Public Information Notice (PIN) No. 05/139 — Executive Board Article IV consultation (4 October 2005) — Key staff findings
- Staff estimates real GDP fell by about 4 percent in 2004, compared with a contraction of 10½ percent in 2003.
- Year-on-year inflation decelerated from a peak of 623 percent in January 2004 to stabilize around 130 percent in early 2005, before surging to 254 percent in July 2005.
- Staff projects real GDP to contract by some 7 percent in 2005.
- Staff projects inflation to exceed 400 percent by end-2005, driven by widening fiscal deficit and quasi-fiscal activities contributing to money growth.
- Monetary policy observations:
  - Monetary policy tightened at times but not consistently.
  - Overnight rate was raised sharply in early 2004, then lowered as inflation declined; real interest rates remained high for most of the year (with credit subsidies for selected borrowers).
  - Rates were lowered sharply around end-2004 and early 2005 despite monthly data showing rising price pressures.
  - In late August (2005) the overnight rate was raised to the equivalent of 1,373 percent (on a compounded annualized basis) from 394 percent in June.
- High rates of money growth mainly attributed to sharp increase in Reserve Bank of Zimbabwe’s (RBZ) quasi-fiscal activities during 2004 and first half of 2005, resulting in mounting losses.
- Some quasi-fiscal activities have recently been reduced or discontinued:
  - All official foreign exchange transactions now conducted at a unified tender rate.
  - Tobacco and gold price supports discontinued.
  - Producer price support for cotton to be discontinued effective January 2006.
- Staff projects the fiscal deficit to widen substantially in 2005 to 11½ percent of GDP (text truncated at that point in the supplied content).

*Source: _cr05360 - Introduction (IMF country materials, October 2005).*

### 4.7 percent of GDP in 2004 due to higher spending. While much of this increase is due to

### _cr05360 - 4.7 percent of GDP in 2004 due to higher spending. While much of this increase is due to

### Fiscal outlook and public finances
- Overall fiscal deficit projected to rise to 4.7 percent of GDP in 2004 due to higher spending.
- Primary deficit (excluding interest payments) projected to increase by almost 2½ percent of GDP compared with the outcome in 2004.
- Sharp increase in the government wage bill from 15½ percent of GDP in 2004 to about 20 percent of GDP in 2005.
- Higher spending is projected to be only partially offset by higher revenue, in part from measures in the August 2005 supplementary budget:
  - Increase in the VAT rate to 17½ percent from 15 percent.
  - Broadening of the VAT base.
- Authorities announced public service and pension reforms, with details to be unveiled in the 2006 budget.
- Executive Directors: decisive fiscal adjustment essential in the near term; sharp fiscal tightening required in the 2006 budget.
  - Bulk of adjustment should come from spending cuts, especially in the wage bill and subsidy and transfer payments.
  - Public service and pension reforms aimed at cutting the wage bill while improving public service delivery.
  - Cash management could be improved.
- Directors cautioned against issuance of bonds indexed to inflation given continued high inflation and potentially unsustainable public debt burden.
- Directors urged delay in operation of the Infrastructure Development Bank of Zimbabwe pending further review, given risk of new quasi-fiscal activity and potential contingent public liabilities.
- Key tabulated fiscal statistics (percent of GDP):
  - Revenue: 17.9 24.9 33.9 36.7
  - Expenditure and net lending: 20.7 25.3 41.0 51.0
  - Of which: interest on central government debt: 2.9 1.3 5.5 10.1
  - Overall balance, (excluding grants, including interest arrears): -2.8 -0.4 -7.1 -14.2
  - Primary balance, excluding grants: 0.1 0.9 -1.7 -4.1
  - Overall balance, (including grants, excluding interest arrears): -2.2 -0.2 -4.7 -11.6
  - Domestic financing (including privatization): 2.3 0.2 4.7 11.6
  - Combined government and RBZ balance 1/: ...... -24.4 -30.6

### Exchange rate, foreign exchange policy, and external shortages
- Official exchange rate effectively devalued in 2004 and allowed to depreciate during the first eight months of 2005; parallel market premium widened.
- De facto depreciation of the official rate:
  - From Z$824/US$ at end-2003 to about Z$6,100/US$ by end-May 2005.
  - Tender rate allowed to depreciate further to some Z$24,500/US$ by early September 2005.
- Parallel market premium:
  - Narrowed markedly in Q1 2004.
  - Widened sharply from 45 percent in January 2005 to about 100 percent by early September 2005.
- Foreign exchange tender system introduced early in 2004; gradual relaxation of surrender requirements on exporters.
- Exchange rate regime remains highly restricted:
  - Proportion of bids met at the foreign exchange tender declined to about 10 percent.
  - Reflected in acute shortages of basic goods, particularly fuel and food.
- Directors urged full liberalization of the exchange rate regime for current account transactions:
  - Eliminate exchange controls on current payments and all surrender requirements.
  - Leave determination of the exchange rate to the market in conjunction with establishment of a strong, credible monetary anchor.
  - Note: Zimbabwe continues to maintain exchange restrictions and multiple currency practices not approved by the Fund under Article VIII, Section 2 (a) and 3; Directors urged elimination as soon as possible.

### Monetary policy, inflation, and monetary anchor
- Prospects of continued triple-digit inflation, further output declines, and increased poverty noted by Executive Directors.
- Directors welcomed recent tightening of monetary policy; further sustained tightening and establishment of a monetary anchor urgently needed to bring inflation under control.
- Given likely reduction in demand for real money balances, reserve money growth will need to be brought down sharply to keep broad money growth in 2005-06 well below the inflation target.
- Recommendation: RBZ should shift to a broad money anchor with reserve money as the operational target.
- Directors welcomed RBZ announcements to discontinue cotton, tobacco, and gold subsidies that were fueling money growth and inflation.
- To lower money creation durably and increase transparency, Directors suggested RBZ losses need to be absorbed by the budget, with fiscal measures to offset these costs.
- Directors recommended delaying issuance of inflation-indexed bonds.
- Directors recommended that, over time, the RBZ should lower the very high statutory reserve requirements that impede financial intermediation.
- Key monetary and price statistics (percent / levels as presented):
  - Consumer price inflation (annual average): 133.2 365.0 350.0 219.2
  - Consumer price inflation (end of period): 198.9 598.7 132.7 404.6
  - 91-day treasury bills (simple annual, end of period): 26.6 60.7 105.0 186.1
  - Broad money (M3) percent change, end of period: 164.8 413.5 222.6 275.8
  - Reserve money (percent change; end of period): 171.2 394.8 217.6 258.8
  - Velocity (M3): 3.4 4.1 2.9 3.6

### Financial system stability and banking supervision
- Zimbabwe’s financial system showed remarkable resilience despite difficult macroeconomic environment in 2004.
- Despite collapse of a number of insolvent institutions in 2004, stability of the banking system was not threatened.
- Sector now largely populated by banks with high capital adequacy ratios, little foreign exchange risk, and very short-term maturities for assets and liabilities.
- Provision of full powers for banking supervision to the RBZ was instrumental in ensuring timely intervention in problem banks.
- Banking Act amended to require the Governor of the RBZ to consult with the Minister of Finance in registering and intervening in troubled banks; Directors regretted this amendment and underlined importance of keeping supervisors empowered to take timely action.
- Directors commended measures taken by RBZ to strengthen banking supervision and governance and risk management.
- Directors recommended, over time, lowering very high statutory reserve requirements to improve financial intermediation.
- Banking-sector related table entries (money and credit, percent change):
  - Domestic credit: 132.7 426.4 180.6 195.6
  - Of which: real credit to the private sector: -6.6 -10.6 1.5 -40.5

### Structural reforms, public enterprises, and land reform
- Progress limited on structural reforms.
- Authorities embarked on reform of public enterprises but noted difficulties imposing hard budget constraints.
- Authorities decided to privatize non-strategic public enterprises and enter into joint ventures; intention to remove price controls indicated.
- Directors urged:
  - Deregulation to increase market forces.
  - Public enterprise reform with hard budget constraints, including option to wind down nonviable entities.
  - Increased transparency of restructuring process.
  - Fiscal reforms, particularly civil service reform to achieve a sustainable fiscal position.
  - Land and agricultural reform: restore orderly conditions, stronger security of land tenure and transferability, provision of extension services to farmers.
  - Improvements in governance to increase investor confidence, reduce corruption, and encourage private business activity.
- Private sector concerns: recent constitutional amendment and lack of transferability and protection from cancellation of the 99-year leases could adversely affect economic activity.

### Social situation, food security, and humanitarian concerns
- Social situation remains difficult; prospects of increased poverty.
- United Nations Special Envoy’s report “Operation Restore Order” (issued in late July) findings:
  - The government’s drive to remove unauthorized dwellings and structures has left some 700,000 people across the country either homeless, or without any source of livelihood, or both.
  - A further 2.4 million people indirectly affected in varying degrees.
- Food security urgent given drought and slow progress in mobilizing food assistance.
- Directors emphasized providing adequate social safety nets and food security for vulnerable groups, particularly those affected by “Operation Restore Order” and HIV/AIDS, as critical priorities contributing to Millennium Development Goals.

### External position, payments to the IMF, and cooperation with the Fund
- Zimbabwe’s recent payments to the IMF compare favorably with past record.
- On August 29, Zimbabwe paid the Fund US$120 million (SDR 82 million) to settle arrears to the General Resource Account (GRA).
- With this payment, Zimbabwe’s total arrears to the Fund stand at SDR 119 million (about US$175 million):
  - Arrears to the GRA: SDR 37 million (about US$54 million).
  - Arrears to the PRGF Trust: SDR 82 million (about US$121 million).
- Directors welcomed the payment which substantially reduced arrears but sought clarification regarding source of funds for the payment.
- Directors called for strengthened cooperation with the Fund, including a satisfactory track record on payments and timely disclosure of information.
- Executive Board decision: give Zimbabwe more time to demonstrate commitment to improving cooperation before considering a recommendation to the Board of Governors on the Managing Director’s complaint for compulsory withdrawal; Board to review overdue obligations and complaint again in six months.
- Balance of payments and external statistics (billions of U.S. dollars / percent of GDP as presented):
  - Exports: 1.8 1.7 1.7 1.6
  - Imports: -1.8 -1.8 -2.0 -1.9
  - Current account balance (excluding official transfers): -0.2 -0.3 -0.4 -0.5
  - (In percent of GDP at the official exchange rate) 3/: -0.7 -3.1 -7.2 -9.7
  - (In percent of GDP at world prices) 4/: -2.6 -4.6 -5.7 -7.5
  - Usable reserves (US$ millions, end of period) 5/: 15.1 15.6 24.8 24.8
  - (months of imports of goods and services): 0.1 0.1 0.1 0.2
  - (percent of reserve money): 10.2 1.8 5.3 11.7

### Data and surveillance
- Directors agreed considerable scope exists for improving provision of data for surveillance:
  - Particularly on balance of payments, international reserves, and external debt.
  - Comprehensive data on general government, consolidated public debt, public enterprises, and reconciliation of fiscal and monetary accounts needed.
- Notes to tables:
  - 1/ Combines central government overall balance, including grants and excluding interest arrears, and the RBZ's net losses, including from subsidies, exchange rate losses, and net interest expense.
  - 2/ Velocity calculated using end-period stock of money and real GDP valued at end-period prices.
  - 3/ Foreign currency units converted into Zimbabwean dollars at the official exchange rate.
  - 4/ GDP at world prices using real GDP growth and trading partner countries' inflation (base year is 1996).
  - 5/ These data are not consistent with data on the RBZ's inflows and outflows of foreign exchange.

*IMF Executive Board discussion and staff report summary as presented in the supplied content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05360.pdf_