## _cr09139

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### Executive Summary — Background and Humanitarian Impact
- Hyperinflation and deterioration in the business climate contributed to an estimated 14 percent fall in real GDP in 2008, on top of a 40 percent cumulative decline during the period of 2000–07.
- Almost 70 percent of the population are in need of food assistance and a cholera epidemic claimed more than 4,000 lives.
- Official adoption of hard currencies for transactions in early 2009 recognized de facto virtually complete dollarization; the government announced that the rand would be the reference currency.
- Dollarization helped stabilize prices, improve revenue performance, and impose fiscal discipline, including on the RBZ.

### Spontaneous Stabilization, Prices, Output, and External Position
- Hyperinflation dynamics:
  - Twelve-month CPI inflation is estimated to have peaked in September 2008 at about 500 billion (10^9) percent.
  - Newly compiled U.S. dollar CPI for February 2009 registered a 3 percent month-on-month decline.
- Output and sectoral impacts:
  - Economic disruptions contributed to an estimated 14 percent decline in real GDP in 2008.
  - Agriculture, mining, manufacturing, and other sectors experienced broad-based declines in 2000–08; recovery in 2009 contingent on stabilization.
- External position and reserves:
  - Current account deficit increased to 28 percent of GDP in 2008, from 11 percent in 2007.
  - Donor-financed humanitarian aid amounted to US$490 million and capital grants to US$80 million in 2008.
  - At end-2008, gross international reserves amounted to US$6 million.
  - External debt estimated at US$6.0 billion (189 percent of GDP) with arrears of US$3.8 billion (120 percent of GDP).
  - Overdue financial obligations to the IMF amounted to SDR 89 million (US$133 million) at end-March 2009.

### Money, RBZ Quasi-Fiscal Activities, and Financial Sector
- Monetization of RBZ quasi-fiscal activities produced rapid increases in banks’ deposits with the RBZ and local currency M3; printing could not keep pace, causing cash shortages and divergence between cash and electronic exchange rates.
- At the UN exchange rate of Z$35 quadrillion (10^15) per US$1, reserve money declined to an equivalent of about US$7 million and local currency-denominated M3 to US$6 million by end-2008; foreign currency deposits estimated at about US$300 million at end-2008.
- RBZ quasi-fiscal activities estimated at US$1.1 billion (36 percent of GDP) in 2008 (US$0.8 billion, 23 percent of GDP in 2007); components included election-related expenses, transfers to parastatals, subsidized directed lending, below-cost provision of equipment and fertilizers, and allocation of foreign exchange at subsidized exchange rates.
- RBZ governance weaknesses: Board composition not fully consistent with the RBZ Act, weak oversight, financial reporting not adhering to international standards, inadequate disclosure of subsidiaries, and 2008 financial statements in Zimbabwe dollars may not represent a true and fair view because of hyperinflation and multiple exchange rates.
- Financial sector: appears to have shrunk significantly in 2008; no reliable information on impacts of hyperinflation, confiscation of foreign currency accounts, and dollarization on bank balance sheets.

### Fiscal Collapse, Social Services, and Business Climate
- Central government revenue fell from almost US$1 billion (25 percent of GDP) in 2005 to US$133 million (4 percent of GDP) in 2008.
- Central government expenditure shrank from about US$1.4 billion (37 percent of GDP) in 2005 to US$258 million (8 percent of GDP) in 2008.
- Public sector wages declined to US$2–US$3 a month in many cases; many public schools and hospitals closed; absentee rates among civil servants exceeded 50 percent in many ministries; infrastructure services deteriorated.
- Business climate worsened due to tightening price controls and exchange restrictions, pickup in land invasions, confiscation of foreign currency deposits, and frequent regulatory changes; Zimbabwe ranked poorly on ease of doing business (overall ease of doing business ranking: Zimbabwe 158).

### Authorities’ Emergency Recovery Program (STERP) — Staff Views and Required Actions
- Staff welcomed authorities’ commitment to refrain from quasi-fiscal activities and implement cash budgeting (matching monthly expenditure to monthly revenue) in 2009.
- Implementing cash budgeting while addressing critical social needs:
  - Projected sizable unfilled budget financing gap; necessity to cover critical humanitarian expenses not provided for in the budget.
  - Required government actions: improve revenue performance; contain the wage bill; enhance public financial management; seek donor financial and humanitarian assistance.
- Maintaining official dollarization as the nominal anchor:
  - Agreement that official adoption of hard currencies provided a strong nominal anchor.
  - Recommendations: enable the payments system to process transactions in foreign exchange; attune banking supervision to new risks associated with dollarization.
  - Consideration of reviving the national currency and appropriate preconditions to be considered in late 2009.
- Structural reforms to enhance growth and competitiveness:
  - Authorities committed to maintain price and exchange liberalization and impose hard budget constraints on parastatals.
  - Staff recommended forging political consensus to ensure protection of property rights and the rule of law; avoid trade protectionism and wage increases beyond productivity justification.

### Multi-Currency Transition and Operational Measures (Early 2009)
- Transactions in foreign currency authorized; payments of most taxes mandatory in foreign exchange; trading at the Zimbabwe Stock Exchange conducted in foreign exchange; many foreign exchange restrictions on current account transactions liberalized.
- Zimbabwe dollar remains legal tender but not enforced; economic agents consider it nonfunctional.
- After abolition of all surrender requirements on foreign exchange proceeds on March 19, 2009, there has not been a functioning foreign exchange market for Zimbabwe dollars.
- Transactions in local currency largely limited to payments of government taxes related to 2008 obligations; economic agents virtually abandoned the Zimbabwe dollar in late 2008.
- Implementing cash budgeting:
  - Government revised down initial 2009 budget’s revenue and expenditure estimates by nearly 50 percent and targets a balanced fiscal position on a month-by-month basis.
  - Hard currency budget revenue rose from US$6 million in January 2009 to US$31 million in February 2009, and is expected to reach US$1 billion (29 percent of GDP) as activity picks up.
  - Customs duties, excises, and VAT expected to account for 60 percent of budget revenue.
  - Expenditure, including quasi-fiscal operations transferred to the treasury, budgeted at US$1 billion, representing an expenditure cut of 15 percent of GDP compared with the 2008 outturn for budgetary expenditure and the RBZ’s quasi-fiscal operations.
  - Staff estimate that revenue would be US$100–US$150 million lower than the revised budget estimates.
  - Authorities indicated a need for an increase of US$200–US$300 million in humanitarian assistance compared with the 2008 outturn.
  - Authorities plan a government payroll audit to remove ghost workers and may consider decompression of the civil service wage scale after reassessing revenue forecasts and prospective financial assistance in July 2009.

### Banking Sector, RBZ Governance, and Payments System
- Need to enable the domestic payments system to process payments in foreign exchange and attune banking supervision to the multi-currency system.
- RBZ plans a review of individual banks’ financial conditions based on end-March 2009 balance sheets translated into foreign currency to identify vulnerabilities including capital erosion, currency mismatches, and illiquidity.
- Discussions on liquidity management in a dollarized environment, including introduction of limited lender of last resort operations if funding can be mobilized; authorities seeking technical assistance.
- Strengthening RBZ governance: ensure compliance with RBZ Act’s accountability requirements; minister of finance intends to recommend five non-Executive Board members to be appointed by the President by end-April 2009.
- Board oversight actions include review of 2008 audited financial statements of the RBZ and its subsidiaries and close monitoring of RBZ international reserves management, and borrowing, guaranteeing, and pledging activities.

### Conditions for Revival of the National Currency
- Merits of revival to be considered at end-2009.
- Multi-currency system to be maintained until prerequisites met: track record of sound fiscal policy implementation; sustainable external position; resumption of economic growth; adoption of new central bank legislation focusing on price stability and ensuring central bank credibility and accountability.
- Government considering repurchasing local currency-denominated reserve money, supported by staff.

### Macroeconomic Outlook, Financing Needs, and Risks
- Illustrative scenario assumes full implementation of staff recommendations and authorities’ intentions; staff view an economic turnaround would not be possible without foreign assistance and private capital inflows.
- Fiscal discipline under the multi-currency system would underpin a reduction in CPI inflation (in U.S. dollar terms) below 10 percent in 2009.
- For real GDP growth to turn positive in 2009, official budget support of at least US$200 million (6 percent of GDP) would need to be mobilized.
- Humanitarian assistance in food relief, health, and education may need to increase by US$200–US$300 million in 2009.
- Despite a brighter short-term outlook, Zimbabwe will not be able to discharge its external debt service obligations in 2009.
- Downside risks:
  - Political disagreements among coalition partners may cause policy reversals.
  - Budget revenue and foreign financing shortfalls could lead to large compression in expenditure and trigger social unrest.
  - Wages exceeding productivity-justified levels could hurt competitiveness, causing output contraction and higher unemployment.
  - Banking system fragility could prevent improvement in intermediation capacity and impede growth.
  - Under virtually complete dollarization, failure of projected external inflows could produce a liquidity squeeze leading to deflation.
  - Significant capacity constraints pose high risk to STERP implementation.
- Medium-term requirements for 5–6 percent annual growth: sound macroeconomic management; substantial strengthening of the investment climate (protection of property rights and rule of law); competitive wage levels; progress in deepening financial intermediation; sizable donor support and debt relief.

### Debt Sustainability Analysis (Appendix I) — Key Findings and Projections
- Caveats: external debt and debt service data are not reconciled with creditors’ data and remain incomplete; DSA projections are highly indicative.
- Overall assessment: Zimbabwe is in debt distress; most debt ratios projected to remain at unsustainable levels even under relatively optimistic assumptions.
- Public and publicly guaranteed (PPG) external debt:
  - Estimated nominal medium- and long-term PPG external debt at end-2008: US$5.1 billion (166 percent of GDP).
  - Scheduled service of PPG external debt in 2009: equivalent to 14 percent of projected exports and 28 percent of projected government revenue.
- Baseline scenario assumptions:
  - Annual real GDP growth projected at 6 percent during 2010–15 and 5.5 percent thereafter.
  - Noninterest external current account deficit assumed to fall from 25 percent of GDP in 2010 to 14 percent of GDP in 2015.
  - No commitments of concessional financing or debt relief (external financing gaps identified and assumed financed on highly concessional terms for illustrative purposes).
- Baseline outcomes:
  - PPG external debt indicators projected to remain far in excess of LIC weak-performer thresholds (PV of PPG external debt thresholds — 200 percent of revenue; 100 percent of exports; 30 percent of GDP).
  - Debt ratios begin some three to five times above thresholds and would decline only gradually, approaching thresholds after 20 to 30 years if gaps filled with concessional financing.
- Public debt trajectory:
  - Overall public debt projected to decline gradually from a peak of over 200 percent of GDP in 2010 to about 150 percent a decade later.
  - PV public debt-to-revenue ratio remains above 400 percent through 2018.
  - Debt service-to-revenue ratio falls below 20 percent in 2014.

### Data, Transparency, and Statistical Issues (Appendix III)
- Data have serious shortcomings across all major datasets; significant technical assistance required.
- National accounts: most recent publication covers developments until 2005 using 1990 base year; benchmark data for industrial production based on 1999 survey; services based on 1981 survey; last reliable income, consumption, and expenditure survey in 2001.
- Price statistics and labor: CSO published a new CPI based on U.S. dollar prices with December 2008 base on March 24, 2009; employment and wages data no longer published.
- Government finance statistics: MoF does not report general government fiscal developments including local governments and RBZ quasi-fiscal activities; last reliable consolidated quarterly bulletin published in Q1 2007.
- Monetary statistics: RBZ produces monthly monetary and financial statistics with a lag of three to six months; quality deteriorated due to hyperinflation, weak accounting, multiple exchange rates, and quasi-fiscal activities.
- External sector statistics: balance of payments and external debt statistics incomplete and not reconciled; labor income and remittances underreported; financial account incomplete; RBZ submissions often require substantial adjustments.
- Reporting and standards: Zimbabwe not a GDDS participant (at time of report) and does not report balance of payments statistics to STA; no monetary or fiscal data reported to STA for publication.

### Executive Board Assessment and Recommendations (Public Information Notice No. 09/53)
- Directors considered Zimbabwe at a critical juncture and welcomed STERP and authorities’ policy commitments.
- Emphasized: establish fiscal discipline; eliminate quasi-fiscal activities; maintain a multi-currency monetary framework; accelerate structural reforms; strengthen RBZ governance and transparency; improve payments system and banking supervision; restore data quality and timeliness.
- Directors noted persistent debt distress and large financing gaps over the medium term even if policies improve.
- Recommended that reintroduction of national currency awaits credible institutional framework focused on price stability.
- Urged rapid progress on public financial management and workable budget aid delivery mechanisms with donors.
- Track record of sound policy implementation and targeted technical assistance seen as critical to securing donor support and regularizing arrears.

### Selected Key Statistics and Projections (selected figures reproduced exactly)
- Real GDP growth (annual percent change): 2007 -6.9; 2008 -14.1; 2009 2.8.
- Nominal GDP (US$ millions): 2007 3,553; 2008 3,180; 2009 3,498.
- Consumer price inflation (annual average): 2007 10,452.6; 2008 556*10^8; 2009 6.9.
- Consumer price inflation (end-of-period): 2007 108,844.1; 2008 489*10^9.
- Central government (percent of GDP, measured in US$) — Revenue: 2007 5.7; 2008 4.2; 2009 25.2.
- Central government — Expenditure and net lending: 2007 10.8; 2008 8.1; 2009 35.7.
- Quasi-fiscal activity by RBZ (percent of GDP): 2007 22.9; 2008 35.7; 2009 0.0.
- Broad money (M3, US$ millions): 2007 603.1; 2008 313.9; 2009 513.0.
- Net foreign assets (US$ millions): 2007 61.0; 2008 -707.0; 2009 -650.7.
- Gross official reserves (US$ millions; end-of-period): 2007 58.0; 2008 5.8; 2009 5.8.
- Current account balance (excluding official transfers, US$ millions): 2007 -383; 2008 -906; 2009 -666.
- Current account balance (Percent of GDP): 2007 -10.8; 2008 -28.5; 2009 -19.1.
- Total external debt (US$ millions; end-of-period): 2007 5,285; 2008 6,027; 2009 6,719.
- External arrears (US$ millions; end-of-period): 2007 3,319; 2008 3,771; 2009 4,608.
- Medium-term projections (Real GDP growth): 2010 6.0; 2011 6.0; 2012 6.0; 2013 6.0.
- Millennium Development Goals (selected): Poverty headcount (latest data 2003) 55.0; MDG target 2015 12.9. Undernourished people (% of total population) latest 45.0 (2004); MDG target 2015 21.5.

*IMF staff report excerpt (content unit: _cr09139).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background
- Hyperinflation and deterioration in the business climate contributed to an estimated 14 percent fall in real GDP in 2008, on top of a 40 percent cumulative decline during the period of 2000–07.
- Unemployment, poverty, malnutrition, and incidence of infectious diseases rose sharply; almost 70 percent of the population are in need of food assistance and a cholera epidemic claimed more than 4,000 lives.
- The official adoption of hard currencies for transactions in early 2009 recognized the de facto virtually complete dollarization of Zimbabwe’s economy; the government announced that the rand would be the reference currency.
- Dollarization has helped stabilize prices, improve revenue performance, and impose fiscal discipline, including on the RBZ.

### Spontaneous Stabilization
- Hyperinflation dynamics:
  - Twelve-month CPI inflation is estimated to have peaked in September 2008 at about 500 billion (10^9) percent.
  - Since October–November 2008, the local currency virtually disappeared from circulation and pricing shifted to foreign currencies (mostly the U.S. dollar and rand).
  - The newly compiled U.S. dollar CPI for February 2009 registered a 3 percent month-on-month decline.
- Output and humanitarian impact:
  - Economic disruptions contributed to an estimated 14 percent decline in real GDP in 2008.
  - Agriculture, mining, manufacturing, and other sectors experienced broad-based declines in 2000–08, with projections of recovery in 2009 contingent on stabilization.
- External position and reserves:
  - The current account deficit increased to 28 percent of GDP in 2008, from 11 percent in 2007.
  - Donor-financed humanitarian aid amounted to US$490 million and capital grants to US$80 million in 2008.
  - At end-2008, gross international reserves amounted to US$6 million.
  - External debt is estimated at US$6.0 billion (189 percent of GDP), of which arrears accounted for US$3.8 billion (120 percent of GDP).
  - Overdue financial obligations to the IMF amounted to SDR 89 million (US$133 million) at end-March 2009.
- Money and quasi-fiscal dynamics:
  - The monetization of the RBZ’s quasi-fiscal activities led to rapid increases in banks’ deposits with the RBZ and local currency M3; printing could not keep pace, producing cash shortages and divergence between cash and electronic exchange rates.
  - At the UN exchange rate of Z$35 quadrillion (10^15) per US$1, reserve money declined to an equivalent of about US$7 million and local currency-denominated M3 to US$6 million by end-2008; foreign currency deposits are estimated at about US$300 million at end-2008.
  - RBZ quasi-fiscal activities are estimated at US$1.1 billion (36 percent of GDP) in 2008 (US$0.8 billion, 23 percent of GDP in 2007). Components included election-related expenses, transfers to parastatals, subsidized directed lending, below-cost provision of equipment and fertilizers, and allocation of foreign exchange at subsidized exchange rates.
  - The expansion of quasi-fiscal activities was financed by surrender requirements on export proceeds, retention of foreign exchange earnings in excess of mandatory surrender requirements, confiscation of most foreign currency deposits, external borrowing, purchases at parallel market exchange rates, and monetization.
- RBZ governance and financial sector:
  - RBZ governance weaknesses: Board composition not fully consistent with the RBZ Act, weak oversight, financial reporting not adhering to international standards, inadequate disclosure of subsidiaries’ operations, and 2008 financial statements in Zimbabwe dollars may not represent a true and fair view because of hyperinflation and multiple exchange rates.
  - The financial sector appears to have shrunk significantly in 2008; no reliable information on impacts of hyperinflation, confiscation of foreign currency accounts, and dollarization on bank balance sheets.
- Fiscal collapse and public services:
  - Central government revenue fell from almost US$1 billion (25 percent of GDP) in 2005 to US$133 million (4 percent of GDP) in 2008.
  - Central government expenditure shrank from about US$1.4 billion (37 percent of GDP) in 2005 to US$258 million (8 percent of GDP) in 2008.
  - Public sector wages declined to US$2–US$3 a month in many cases; many public schools and hospitals were closed, absentee rates among civil servants exceeded 50 percent in many ministries, and infrastructure services (electricity, water, railways) deteriorated.
- Business climate:
  - A tightening of price controls and exchange restrictions, pickup in land invasions, confiscation of foreign currency deposits, and frequent regulatory changes worsened the business climate.
  - Zimbabwe ranked poorly on ease of doing business compared with regional peers (e.g., overall ease of doing business ranking: Zimbabwe 158).

### Discussions of the Authorities’ Emergency Recovery Program
- General staff view:
  - Staff welcomed the authorities’ commitment to refrain from quasi-fiscal activities and implement cash budgeting (matching monthly expenditure to monthly revenue) in 2009.
- A. Implementing Cash Budgeting While Addressing Critical Social Needs
  - Staff projected a sizable unfilled budget financing gap and noted the necessity to cover critical humanitarian expenses that are not provided for in the budget.
  - Required government actions:
    - Improve revenue performance.
    - Contain the wage bill.
    - Enhance public financial management.
    - Seek donor financial and humanitarian assistance.
- B. Maintaining Official Dollarization as the Nominal Anchor
  - Broad agreement that official adoption of hard currencies provided a strong nominal anchor.
  - To improve functioning of the new monetary framework, staff recommendations and authorities’ intentions include:
    - Enable the payments system to process transactions in foreign exchange.
    - Attune banking supervision to new risks associated with dollarization.
  - Consideration of reviving the national currency and appropriate preconditions (e.g., macroeconomic stability and a credible legal framework) will be considered in late 2009.
- C. Pressing Ahead with Structural Reforms to Enhance Growth Potential and Competitiveness
  - Authorities committed to maintain recently adopted critical measures including price and exchange regime liberalization and imposition of hard budget constraints on parastatals.
  - Staff recommendations and cautions:
    - Forge a political consensus over reforms aimed at ensuring protection of property rights and the rule of law.
    - Avoid trade protectionism.
    - Avoid wage increases beyond levels justified by productivity.

### Macroeconomic Outlook and Risks
- Outlook summary:
  - Reversing output decline and improving social conditions require determined efforts to maintain sound macroeconomic policies, attract domestic and foreign investors, and secure significant donor support.
  - In the absence of cash budget support, higher humanitarian assistance, and wage restraint, the economic and social situation could deteriorate significantly in 2009.
- Debt sustainability:
  - Zimbabwe’s external debt burden is unsustainable even if policies are improved and medium-term financing gaps are filled by concessional financing.

### Other Issues
- Public and private sector considerations raised during consultations include addressing quasi-fiscal liabilities, restoring RBZ governance and financial reporting standards, and assessing the state of the banking sector given limited reliable information after 2008 disruptions.

### Staff Appraisal (Summary of Staff Position)
- Support for authorities’ commitments to:
  - Refrain from quasi-fiscal activities.
  - Implement cash budgeting in 2009.
  - Maintain the use of hard currencies as a nominal anchor while improving payments system and banking supervision.
- Emphasis on urgent needs to:
  - Close the projected budget financing gap through revenue measures, wage restraint, improved public financial management, and donor assistance for humanitarian needs.
  - Pursue structural reforms to restore confidence, protect property rights, strengthen the rule of law, and enhance competitiveness without resorting to protectionism or unjustified wage increases.

*IMF staff executive summary as provided in the source document.*

### 12.      In early 2009, the authorities announced a transition to a multi-currency system.

### 12.      In early 2009, the authorities announced a transition to a multi-currency system.

### Multi-currency transition and currency use
- Transactions in foreign currency are authorized; payments of most taxes are mandatory in foreign exchange; trading at the Zimbabwe Stock Exchange is conducted in foreign exchange; many foreign exchange restrictions on current account transactions are liberalized.
- The Zimbabwe dollar remains legal tender, but this provision is not enforced, and economic agents consider that the currency is not functional.
- Transactions in local currency are mainly limited to payments of government taxes related to 2008 obligations.
- Following the abolition of all surrender requirements on foreign exchange proceeds on March 19, 2009, there has not been a functioning foreign exchange market for Zimbabwe dollars.
- Zimbabwe dollars have been used only for tax payments, public servants' salaries, customer payments, and pension payments since late 2008.
- Transaction volume conducted through RTGS and checks: economic agents virtually abandoned the Zimbabwe dollar in late 2008 (chart timeframe: Jan-06 through Jan-09; source: Reserve Bank of Zimbabwe).

### Implementing cash budgeting while addressing critical social needs
- The Short-Term Emergency Recovery Program (STERP) for 2009 focuses on macroeconomic policy and supply-side measures aimed at achieving low inflation, arresting economic decline, and improving social conditions.
- The RBZ has been mandated to stop quasi-fiscal activities; cash budgeting (matching monthly expenditure to monthly revenue) to be implemented in 2009.
- The government revised down the initial 2009 budget’s revenue and expenditure estimates by nearly 50 percent.
- The revised 2009 budget targets a balanced fiscal position on a month-by-month basis.
- Hard currency budget revenue rose from US$6 million in January 2009 to US$31 million in February 2009, and is expected to reach US$1 billion (29 percent of GDP) as economic activity picks up.
- Customs duties, excises, and VAT are expected to account for 60 percent of budget revenue.
- Expenditure, including quasi-fiscal operations transferred to the treasury, is budgeted at US$1 billion, representing an expenditure cut of 15 percent of GDP compared with the 2008 outturn for budgetary expenditure and the RBZ’s quasi-fiscal operations.
- Staff estimate that revenue would be US$100–US$150 million lower than the revised budget estimates.
- Authorities may consider revenue measures at a planned July 2009 budget revision, including increasing royalties on mineral resources and broadening the VAT and customs tax bases.
- Government intends to enhance Zimbabwe Revenue Authority capacity to assess taxes in foreign exchange and automate recording of tax payments in multiple currencies.
- Staff estimate that overhead expenses of public institutions and essential transfers to key parastatals were understated by at least US$80 million.
- Authorities indicated a need for an increase of US$200–US$300 million in humanitarian assistance compared with the 2008 outturn, required for food relief, cholera containment, and critical needs in health and education sectors.
- Authorities plan a government payroll audit to remove ghost workers; after reassessing revenue forecast and prospective financial assistance in July 2009, they would consider decompressing the civil service wage scale while maintaining the wage bill within a fully financed budgetary envelope.

### Public financing gaps and donor support
- Authorities seek donor budget support to cover the unfilled front-loaded budget financing gap for 2009; the financing gap is particularly large in the first half of 2009 when budget revenue can only cover the wage bill, public sector pensions, and a fraction of overhead costs.
- In the absence of donor financial support, the government would be bound to reduce expenditures on social programs, postpone public investment projects, and incur payments arrears.
- Large unfilled budget financing gaps are expected in the first half of 2009 (chart components: Wages and pensions; Grants and transfers; Other current expenditure; Social protection; Capital expenditure; Revenues (IMF Proj); Revenues (Mar'09 Budget); timeframe Jan–Dec; units: millions of U.S. dollars).

### Public financial management improvements
- Government working on technical and legal issues related to transition to a multi-currency treasury account in the banking system.
- Improving procedures for budgetary cash management and expenditure control with World Bank advice.
- Authorities concurred that sound public financial management is essential for unlocking donor support.

### Maintaining official dollarization as the nominal anchor
- Authorities view the multi-currency system with the rand as the reference currency as the essential element of their stabilization strategy.
- Authorities justify choosing the rand as reference currency by optimal currency area considerations and potential benefits of closer regional integration.
- Authorities concurred with staff recommendations to present the next budget in rands, mandate tax assessments in rands, and adopt the rand as the sole unit of account for the public and private sectors in the near future.

### Banking sector issues and RBZ governance
- Need to enable the domestic payments system to process payments in foreign exchange and attune banking system supervision to the needs of the multi-currency system.
- RBZ plans a thorough review of individual banks’ financial conditions based on end-March 2009 balance sheets translated into foreign currency to address vulnerabilities, which may include capital erosion due to hyperinflation and increased risks of currency mismatches and illiquidity under the multi-currency system.
- Discussions on improving liquidity management in a dollarized environment, including introduction of limited lender of last resort operations if funding can be mobilized.
- Authorities seeking technical assistance in these areas.
- Strengthening RBZ governance: ensure compliance with RBZ Act’s accountability requirements; minister of finance intends to recommend five non-Executive Board members to be appointed by the President by end-April 2009.
- Board oversight actions: thorough review of 2008 audited financial statements of the RBZ and its subsidiaries; submission to the minister of finance of the 2009 budget consistent with RBZ’s refocused responsibilities; close monitoring of RBZ international reserves management, and borrowing, guaranteeing, and pledging activities.

### Conditions for revival of the national currency
- Merits of a revival of the national currency to be considered at end of 2009.
- Multi-currency system to be maintained until prerequisites for revival are met: establishment of a track record of sound fiscal policy implementation, achievement of a sustainable external position, resumption of economic growth, and adoption of new central bank legislation focusing on price stability and ensuring central bank credibility and accountability.
- Government considering repurchasing local currency-denominated reserve money, which staff supported.

### Structural reforms to enhance growth potential and competitiveness
- Government committed to maintaining policies already implemented: price liberalization, removal of surrender requirements and most exchange restrictions, imposition of hard budget constraints on parastatals, elimination of the Grain Marketing Board monopoly.
- Authorities consider tax incentives, subsidies, preferential treatment of specific sectors, and trade protection measures on a limited basis; staff cautioned against protectionism and unaffordable tax incentives and highlighted need to improve business climate to make producers competitive in foreign markets.
- STERP recognizes urgency of addressing property rights and rule of law; calls for drafting, adopting, and implementing necessary legislative acts to ensure protection of property rights in close cooperation with stakeholders.
- Comprehensive review of parastatal enterprises initiated; commitment to impose hard budget constraints by eliminating quasi-fiscal subsidies previously extended by the RBZ.
- Staff encouraged restructuring, privatizing, or liquidating nonviable parastatals in the medium term; authorities seeking technical advice from the World Bank and African Development Bank.

### Macroeconomic outlook and risks
- Mission prepared an illustrative macroeconomic scenario assuming full implementation of staff recommendations and authorities’ policy intentions.
- Staff view: an economic turnaround would not be possible without foreign assistance and private capital inflows, even with sound policy implementation.
- Fiscal discipline under the multi-currency system would underpin a reduction in CPI inflation (in U.S. dollar terms) below 10 percent in 2009.
- For real GDP growth to turn positive in 2009, official budget support of at least US$200 million (6 percent of GDP) would need to be mobilized.
- Humanitarian assistance in food relief, health, and education may need to increase by US$200–US$300 million in 2009.
- Despite a brighter short-term outlook, Zimbabwe will not be able to discharge its external debt service obligations in 2009.
- Downside risks identified:
  - Political disagreements among coalition partners may emerge, potentially resulting in policy reversals.
  - Budget revenue and foreign financing shortfalls could lead to large compression in expenditure and trigger social unrest.
  - Wages exceeding productivity-justified levels could hurt competitiveness, causing output contraction and higher unemployment.
  - Banking system fragility from hyperinflation creates new risks under the multi-currency system; if unaddressed, intermediation capacity would not improve and growth would suffer.
  - If projected external private and official inflows did not materialize, under virtually complete dollarization, resulting liquidity squeeze could lead to deflation.
  - Significant capacity constraints pose a high risk to STERP implementation.
- Medium-term financing: for real GDP growth to reach 5–6 percent per year over the medium term, requirements include sound macroeconomic management, substantial strengthening of the investment climate (ensuring protection of property rights and rule of law), competitive wage levels, further progress in deepening financial intermediation, and sizable donor support and debt relief.
- Debt distress: under the baseline Debt Sustainability Analysis scenario assuming relatively optimistic assumptions, present value of external debt-to-exports ratio is expected to persist above 250 percent for almost a decade.

### Other issues
- Authorities intend to improve timeliness of data reporting and transparency of government and RBZ operations; ensure timely compilation, reporting, and publication of standard monthly monetary and fiscal statistics in foreign currency terms.
- Government attaches significant importance to normalization of relations with external creditors; acknowledged that sound policy implementation and bilateral donors’ support are key preconditions for resolution of overdue financial obligations to official creditors.
- Authorities intend to start reconciling external debt numbers with creditors as a step toward comprehensive assessment of repayment capacity.

*Source: IMF staff report (content unit: _cr09139 - 12.      In early 2009, the authorities announced a transition to a multi-currency system.)*

### 36.       Zimbabwe is at a critical juncture. Following years of high inflation, economic

### _cr09139 - 36.       Zimbabwe is at a critical juncture. Following years of high inflation, economic

### Overview
- Zimbabwe faces a historic opportunity to improve prospects for economic growth and poverty reduction following years of high inflation, economic decline, and rising poverty.
- Strong policies, better governance, and donor support are identified as critical for successful reconstruction.

### Short-term macroeconomic outlook and risks
- The short-term macroeconomic outlook has improved but is subject to significant downside risks.
- The government's STERP and the revised 2009 budget contain macroeconomic policy and structural measures to support a private sector-led turnaround in a low-inflation environment in 2009.
- Downside risks include:
  - Potential political instability and implementation capacity constraints.
  - A large unfilled financing gap in the 2009 revised budget that can grow larger if civil service wages are raised.
  - Private capital inflows and donor support may not materialize as expected.

### Fiscal policy, donor support, and public financial management
- The STERP’s principles include eliminating quasi-fiscal activities and implementing cash budgeting (matching monthly expenditure to monthly revenue).
- Maintaining the multi-currency system reinforces credibility by making deficit monetization infeasible.
- Priority actions for fiscal stability:
  - Improve tax administration and review the tax regime to increase budget revenues.
  - Maintain the wage bill within the budgeted amount.
  - Improve public financial management systems.
  - Allocate sufficient resources to critical social and infrastructure needs.
  - Resist pressures from parastatals to finance nonessential activities.
- Given a sizable unfilled budget financing gap and uncovered critical humanitarian expenses, the government needs to intensify efforts to mobilize donor budget support and increased humanitarian assistance.

### Monetary policy and the Reserve Bank of Zimbabwe (RBZ)
- The decision to maintain the multi-currency system with the rand as the reference currency is appropriate under current circumstances.
- Recommended actions to strengthen monetary credibility:
  - Repurchase the remaining amount of local currency-denominated reserve money.
  - Strengthen accountability and transparency of RBZ operations in conformity with the RBZ Act.
- Reintroduction of the national currency can only succeed after establishing a sound track record of policy implementation and a credible institutional framework focused on price stability.

### Banking system and financial reintermediation
- Urgent banking system actions:
  - Enable the payments system to process transactions in foreign exchange.
  - Identify and address vulnerabilities in the banking system.
  - Implement a sound liquidity management framework to catalyze financial reintermediation.

### Private sector, investment climate, and competitiveness
- Revival of the economy depends on quickly attracting private domestic and foreign investors and improving competitiveness.
- Key policy measures to support competitiveness:
  - Ensure protection of property rights.
  - Maintain the rule of law.
  - Guard against trade protectionism.
  - Pursue prudent wage and income policies.
  - Sustain efforts to reestablish market signals through price liberalization and elimination of many exchange restrictions.

### External position, debt sustainability, and arrears
- Even with improved policies and increased private inflows, large external financing gaps would persist and external debt would remain unsustainable over the medium term.
- Establishing a track record of sound policy implementation is a critical first step to resolving overdue financial obligations to official creditors, including the IMF, and securing donor financial support.
- The authorities are urged to resume payments to the Fund as soon as Zimbabwe’s payment capacity improves.

### Data, transparency, and institutional reforms
- Significant improvement is needed in all areas of economic statistics and transparency of government and RBZ operations.
- Priorities:
  - Timely compilation, reporting, and dissemination of standard monthly monetary and fiscal statistics.
  - Publication of financial soundness indicators for the banking system.
  - Reconciliation of debt data with external creditors.
  - Publish the 2008 audited financial statements of the RBZ and all its subsidiaries.
- It is proposed that Zimbabwe remain on the standard 12-month consultation cycle.

### Key statistics and projections (selected figures from tables)
- Real GDP growth (annual percent change): 2007 -6.9; 2008 -14.1; 2009 2.8.
- Nominal GDP (US$ millions): 2007 3,553; 2008 3,180; 2009 3,498.
- Consumer price inflation (annual average): 2007 10,453; 2008 5.56E+10; 2009 6.9.
- Consumer price inflation (end-of-period): 2007 8,844; 2008 4.89E+11.
- Central government (percent of GDP, measured in US$) — Revenue: 2007 5.7; 2008 4.2; 2009 25.2.
- Central government — Expenditure and net lending: 2007 10.8; 2008 8.1; 2009 35.7.
- Quasi-fiscal activity by RBZ (percent of GDP): 2007 22.9; 2008 35.7; 2009 0.0.
- Primary balance (including quasi-fiscal activity): 2007 -24.5; 2008 -35.2; 2009 -5.9.
- Overall balance (including quasi-fiscal activity): 2007 -28.0; 2008 -39.6; 2009 -10.5.
- Broad money (M3, US$ millions): 2007 603; 2008 314; 2009 513.
- Net foreign assets (US$ millions): 2007 61; 2008 -707; 2009 -651.
- Gross official reserves (US$ millions; end-of-period): 2007 58.0; 2008 5.8; 2009 5.8.
- Current account balance (excluding official transfers, US$ millions): 2007 -383; 2008 -906; 2009 -666.
- Current account balance (Percent of GDP): 2007 -10.8; 2008 -28.5; 2009 -19.1.
- Total external debt (US$ millions; end-of-period): 2007 5,285; 2008 6,027; 2009 6,719.
- Total external debt (percent of GDP; end-of-period): 2007 149; 2008 189; 2009 192.
- External arrears (US$ millions; end-of-period): 2007 3,319; 2008 3,771; 2009 4,608.
- Central government operations (US$ millions, selected): Total revenue 2007 94; 2008 25; 2009 Budget 1,000 (Budget column labeled 2009 shows 1,000); Total expenditure and net lending (2009 Budget) 1,248.
- Medium-term projections (Real GDP growth): 2010 6.0; 2011 6.0; 2012 6.0; 2013 6.0.
- Medium-term projections (Nominal GDP, US$ millions): 2010 4,074; 2011 4,719; 2012 5,412; 2013 6,090.
- Medium-term projections (Total external debt, US$ millions; end-of-period): 2010 7,781; 2011 8,764; 2012 9,651; 2013 10,461.
- Millennium Development Goals (selected): Poverty headcount (latest data 2003) 55.0; MDG target 2015 12.9. Undernourished people (% of total population) latest 45.0 (2004); MDG target 2015 21.5.

*Source: IMF staff report excerpt (_cr09139).*

### Appendix I. Debt Sustainability Analysis

### Appendix I. Debt Sustainability Analysis

### Caveats and data limitations
- External debt and debt service data are not reconciled with creditors’ data and remain incomplete.
- Data deficiencies are compounded by difficulty in making medium- and long-term projections because of the country’s poor policy record.
- The DSA projections and simulations are described as highly indicative.

### Overall assessment
- Zimbabwe is in debt distress.
- Even under relatively optimistic assumptions on policies and the external environment, most debt ratios are projected to remain at unsustainable levels over the medium and long term.
- Under the historical sensitivity analysis, debt ratios are projected to increase over the long term from current unsustainable levels.

### Public and publicly guaranteed (PPG) external debt — starting position and service burden
- Estimated nominal medium- and long-term PPG external debt at end-2008: US$5.1 billion (166 percent of GDP).
- Scheduled service of PPG external debt in 2009: equivalent to 14 percent of projected exports and 28 percent of projected government revenue.

### Baseline scenario assumptions (external and macro)
- Assumes implementation of sound macroeconomic policies and essential structural reforms.
- Annual real GDP growth projected at 6 percent during 2010–15 and 5.5 percent thereafter.
- Noninterest external current account deficit assumed to fall from 25 percent of GDP in 2010 to 14 percent of GDP in 2015 and then decline more gradually.
- Assumes private capital inflows can cover only a fraction of gross external financing requirements.
- No commitments of concessional financing or debt relief; for illustrative purposes, external financing gaps are identified and assumed to be financed on highly concessional terms.
- Assumes some real effective exchange rate appreciation reflecting positive productivity differentials with trading partners.

### Baseline scenario outcomes for external debt
- PPG external debt indicators are projected to remain far in excess of corresponding thresholds for a LIC that is a poor performer.
  - Policy-based thresholds (for this LIC DSA, weak policy performer): PV of PPG external debt thresholds — 200 percent of revenue; 100 percent of exports; and 30 percent of GDP.
- Debt ratios begin at levels some three to five times above the thresholds and would decline only gradually, approaching threshold levels after 20 to 30 years, assuming external gaps are filled with concessional financing.

### Sensitivity analysis
- Historical scenario (reflecting poor past macroeconomic performance): all external debt indicators are projected to increase continuously over the long term, demonstrating extreme fragility of Zimbabwe’s external debt position.

### Public debt sustainability (fiscal assumptions and outcomes)
- Fiscal assumptions:
  - Budget revenue projected to increase from 25 percent of GDP in 2009 to 30 percent in 2014 and beyond due to better tax policy and administration.
  - Wage bill is assumed to be contained, but large humanitarian and infrastructure rehabilitation needs justify a significant increase in expenditure over the medium term.
  - Projected budget gross financing requirements are large over the medium term; unidentified financing is reflected in budget financing gaps for illustrative purposes.
- Domestic debt:
  - Local currency–denominated domestic debt was fully repaid in late January 2009.
  - RBZ’s foreign currency–denominated domestic debt estimated at US$457 million (13 percent of GDP) at end-December 2008; this is added to total domestic public debt for the purpose of the DSA.
  - Baseline assumes modest government domestic borrowing in 2009 and over the medium term; domestic government debt-to-GDP ratios projected to decline gradually.
- Overall public debt outcome:
  - Under the baseline, Zimbabwe’s overall public debt is unsustainable.
  - Public debt projected to decline gradually from a peak of over 200 percent of GDP in 2010 to about 150 percent a decade later.
  - The PV of the public debt-to-revenue ratio remains above 400 percent through 2018.
  - The debt service-to-revenue ratio only falls below 20 percent in 2014.

### Key statistics and projections (selected figures from the DSA)
- End-2008 nominal medium- and long-term PPG external debt: US$5.1 billion (166 percent of GDP).
- RBZ foreign currency–denominated domestic debt at end-December 2008: US$457 million (13 percent of GDP).
- Scheduled 2009 PPG external debt service: 14 percent of projected exports; 28 percent of projected government revenue.
- Projected annual real GDP growth: 6 percent (2010–15), 5.5 percent (thereafter).
- Noninterest external current account deficit: 25 percent of GDP in 2010; 14 percent of GDP in 2015.
- Public debt trajectory: peak over 200 percent of GDP in 2010; about 150 percent of GDP a decade later.
- PV public debt-to-revenue: remains above 400 percent through 2018.
- Debt service-to-revenue: falls below 20 percent in 2014.
- LIC DSA policy-based thresholds used for Zimbabwe (treated as weak performer): PV PPG external debt thresholds — 200 percent of revenue; 100 percent of exports; 30 percent of GDP.

*Source: IMF staff simulations and DSA text in Appendix I. Debt Sustainability Analysis.*

### APPENDIX III. ZIMBABWE—STATISTICAL ISSUES

### APPENDIX III. ZIMBABWE—STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance — General
- Data have serious shortcomings that significantly hamper surveillance.
- There are serious shortcomings in all major datasets.
- Given the deterioration in technical capacity and quality of institutions, Zimbabwe will need substantial technical assistance across a broad front to improve data quality and timeliness.
- The Central Statistics Office (CSO) needs to rebuild its capacity and acquire new equipment.
- Zimbabwe participates in the General Data Dissemination System (GDDS) project for Anglophone African countries.
- All technical assistance from the Fund has been suspended since June 13, 2002, when the Executive Board issued a declaration of noncooperation regarding Zimbabwe.

### I. Assessment of Data Adequacy for Surveillance — National Accounts
- The most recent publication of national accounts data includes developments until 2005 and uses 1990 as the base year for constant prices.
- Production of national accounts is constrained by both insufficient input data and processing capacity.
- Benchmark data for industrial production is based on a survey made in 1999 and services are based on a survey made in 1981.
- The last income, consumption, and expenditure survey of any reasonable quality was made in 2001 (a survey made in 2007/08 collected data that is distorted due to hyperinflation).
- Some input data, for example a recent agriculture and livestock survey, remains unprocessed due to insufficient capacity.
- Following the abandonment of the Zimbabwe dollar, the CSO needs to change the accounting of economic activity into Rand (the chosen reference currency).

### I. Assessment of Data Adequacy for Surveillance — Price statistics and labor
- The CSO published a new consumer price index (CPI) based on prices in U.S. dollars, with December 2008 as the base, for the first time on March 24, 2009.
- Data on employment and wages are no longer published.
- A new labor force and child labor survey will be needed to revive the publication of comprehensive labor statistics.

### I. Assessment of Data Adequacy for Surveillance — Government finance statistics
- The Ministry of Finance (MoF) does not report on fiscal developments at the general government level, including local governments and the Reserve Bank of Zimbabwe’s (RBZ) quasi-fiscal activities.
- Hyperinflation and staff absences have rendered the collection and reporting of public finance statistics for the central government very challenging during the past 18 months.
- The MoF has continued to collect data on revenue, expenditure, and debt through this period, but the last reliable consolidated quarterly bulletin on fiscal developments was published in the first quarter of 2007.

### I. Assessment of Data Adequacy for Surveillance — Monetary statistics
- The RBZ produces monthly monetary and financial statistics with a lag of three to six months.
- The quality of the data has deteriorated substantially over the years because of hyperinflation, weak accounting practices, multiple exchange rates, growing quasi-fiscal activities, and a series of re-denominations of the Zimbabwe dollar.
- It is difficult to reconcile the RBZ’s data with the government’s reports on bank financing.
- Discrepancies often reflect numerous changes in the classification of various quasi-fiscal activities and different exchange rates used for various operations.
- Financial institutions currently use historical cost accounting for their financial statements, which in combination with hyperinflation makes it difficult to detect true vulnerabilities in the financial system.
- The 2009 Article IV mission advised the authorities on the compilation of net international reserves data, including identification of encumbered assets and the need to ensure completeness of foreign currency liabilities.

### I. Assessment of Data Adequacy for Surveillance — External sector statistics
- Balance of payments and external debt statistics are subject to a number of data issues.
- Labor income and workers’ remittances do not include estimates of cash and in-kind transfers from Zimbabweans working abroad.
- Interest payments are not reconciled with creditors’ records and do not contain accrued interest on overdue financial obligations.
- Current and capital transfers to nongovernmental organizations and to the government are not fully reconciled with donors’ data.
- The financial account is incomplete, as it does not record substantial transactions in assets that are reported by central banks that are members of the Bank for International Settlements.
- The RBZ’s initial submission of flows and stocks of gross international reserves and its net foreign assets position often require substantial adjustments.
- Exceptional financing does not fully capture the flow of overdue financial obligations.
- External sector data are reported to the staff irregularly with significant delays.

### II. Data Standards and Quality
- Not a General Data Dissemination System participant.
- No data ROSC is available.

### III. Reporting to STA
- Zimbabwe does not report balance of payments statistics to STA for redissemination in the International Financial Statistics or the Balance of Payments Statistics Yearbook.
- No monetary or fiscal data are currently reported to STA for publication in the International Financial Statistics.

### Public Information Notice (PIN) No. 09/53 — Background and key points
- PIN issued: May 6, 2009. IMF Executive Board concluded the Article IV consultation with Zimbabwe on May 4, 2009.
- Economic and social indicators in Zimbabwe worsened significantly in 2008.
  - Real Gross Domestic Product (GDP) is estimated to have fallen by about 14 percent in 2008 (on top of a 40 percent cumulative decline during the period of 2000–07).
  - Poverty and unemployment have risen to catastrophic levels, with 70 percent of the population in need of food assistance.
  - A cholera epidemic claimed more than 4,000 lives.
- Quasi-fiscal activities undertaken by the RBZ are estimated at US$1.1 billion (36 percent of GDP) in 2008; activities included election-related expenses, transfers to parastatals, subsidized directed lending, subsidized provision of equipment and fertilizers to farmers, and allocation of foreign exchange at subsidized exchange rates.
- Financing of these activities included surrender requirements on export proceeds, retention of foreign exchange earnings of the gold and agricultural sectors in excess of mandatory surrender requirements, a freeze of most foreign currency deposits, external borrowing, and purchases of foreign exchange at the parallel market exchange rates.
- These large operations unrelated to central bank core activities were conducted in the context of weak oversight of RBZ operations.
  - Key governance weaknesses include lack of enforcement of the RBZ Act’s accountability requirements and noncompliance with the International Financial Reporting Standards.
- The central government’s revenue and expenditure effectively collapsed in 2008.
  - Budget revenue fell from almost US$1 billion (25 percent of GDP) in 2005 to US$133 million (4 percent of GDP) in 2008.
  - Expenditure shrank from about US$1.4 billion (37 percent of GDP) in 2005 to US$258 million (8 percent of GDP) in 2008.
  - Resulted in almost complete collapse in provision of public services, including reduction in electricity generation capacity, collapse of water supply, and major disruptions in railway services.
- Hyperinflation and financial system contraction in 2008:
  - Twelve-month CPI inflation is estimated to have peaked in September 2008 at almost 500 billion (10^9) percent.
  - Since October–November 2008, the local currency has virtually disappeared from circulation and dollarization has gained momentum.
  - Banking system deposits declined from almost US$1 billion at end-2005 to about US$300 million (of which local currency-denominated deposits amounted to an equivalent of US$6 million) at end-2008.
- Transition to multi-currency system and reference currency:
  - De facto dollarization recognized by official transition to use of hard currencies for transactions and adoption of the rand as the reference currency in early 2009.
  - Under this system: transactions in hard currencies are authorized; payments of most taxes are mandatory in foreign exchange; trading at the Zimbabwe Stock Exchange is conducted in foreign exchange; many foreign exchange restrictions on current account transactions are liberalized.
  - During January–February 2009, the CPI in U.S. dollar terms experienced a decline.
- Short-term outlook:
  - The government’s short-term emergency recovery program and the revised 2009 budget contain important macroeconomic and structural policy commitments which, if fully implemented and supported by donor assistance, could lay the foundation for a private sector-led economic recovery in a low-inflation environment.
  - Significant downside risks to the economic recovery exist due to potential policy reversals.

### Executive Board Assessment — Findings and recommendations
- Directors considered Zimbabwe at a critical juncture after a decade of high inflation, severe economic decline, and rising poverty culminating in an acute humanitarian crisis.
- Directors welcomed efforts by the government of national unity to pursue ambitious reforms and forge political consensus.
- Directors welcomed authorities’ Short-Term Emergency Recovery Program (STERP) based on sound macroeconomic principles.
  - Underscored importance of establishing fiscal discipline, eliminating quasi-fiscal activities, maintaining a multi-currency monetary framework, and accelerating structural reforms to achieve economic turnaround in a low-inflation environment.
- Directors cautioned about significant downside risks:
  - Potential political instability and limited implementation capacity may undermine reform and stabilization efforts, weakening prospects for mobilizing donor financial support and attracting private capital inflows.
- Fiscal policy guidance:
  - Establish fiscal discipline while ensuring delivery of essential public services.
  - Improve tax administration and review the tax regime to increase budget revenues.
  - Maintain the budgeted wage bill and resist spending pressures from parastatals to finance nonessential activities to leave sufficient resources for critical social needs and infrastructure.
  - Rapid progress needed in strengthening the public financial management system.
  - Intensify efforts to establish workable budget aid delivery mechanisms in close cooperation with the donor community.
  - Directors noted Zimbabwe is in debt distress and large financing gaps would persist over the medium term even if policies were improved.
- Monetary and RBZ governance guidance:
  - Support for anchoring inflation expectations by introducing a multi-currency system with the rand as the reference currency.
  - Significant strengthening of governance and transparency, including through an independent audit, at the RBZ is urgently needed.
  - Reintroduction of the national currency should await the establishment of a credible institutional framework focused on price stability.
- Financial sector guidance:
  - Address banking system issues to improve payment services and access to credit.
  - Payments system, banking supervision, and liquidity management need alignment with the multi-currency monetary framework.
- Structural and investment guidance:
  - Revival of the economy depends critically on attracting private domestic and foreign investors and improving competitiveness.
  - Ensure protection of property rights, maintain rule of law, guard against protectionism, and pursue prudent wage and income policies.
  - Sustain liberalization of prices and exchange restrictions for current account transactions.
  - Improve the quality and timeliness of data.
- Directors observed that a track record of sound policy implementation, supported by targeted technical assistance (including related statistics) from the Fund and other international financial institutions, is a critical first step to securing donor financial support for reconstruction and regularizing arrears to official creditors.

### Zimbabwe: Selected Economic Indicators, 2007–09 (Estimated / Proj.)
- Real GDP growth (annual percent change)
  - 2007: -6.9
  - 2008: -14.1
  - 2009: 2.8
- Nominal GDP (US$ millions)
  - 2007: 3,553
  - 2008: 3,180
  - 2009: 3,498
- Inflation (annual percent change)
  - Consumer price inflation (annual average) 1/
    - 2007: 10,452.6
    - 2008: 556*10^8
    - 2009: 6.9
  - Consumer price inflation (end-of-period) 2/
    - 2007: 108,844.1
    - 2008: 489*10^9
    - 2009: ...
- Central government (percent of GDP, measured in US$)
  - Revenue
    - 2007: 5.7
    - 2008: 4.2
    - 2009: 25.2
  - Expenditure and net lending
    - 2007: 10.8
    - 2008: 8.1
    - 2009: 35.7
  - Quasi-fiscal activity by RBZ
    - 2007: 22.9
    - 2008: 35.7
    - 2009: 0.0
  - Primary balance (including quasi-fiscal activity)
    - 2007: -24.5
    - 2008: -35.2
    - 2009: -5.9
  - Overall balance (including quasi-fiscal activity)
    - 2007: -28.0
    - 2008: -39.6
    - 2009: -10.5
- Money and credit (US$ millions) 3/
  - Broad money (M3)
    - 2007: 603.1
    - 2008: 313.9
    - 2009: 513.0
  - Net foreign assets
    - 2007: 61.0
    - 2008: -707.0
    - 2009: -650.7
  - Net domestic assets
    - 2007: 542.1
    - 2008: 1,020.9
    - 2009: 1,163.7
  - Reserve money
    - 2007: 51.7
    - 2008: 6.8
    - 2009: 58.1
  - Velocity (M3)
    - 2007: 5.9
    - 2008: 10.1
    - 2009: 6.8
- External trade (US$ millions; annual percent change)
  - Merchandise exports (annual percent change)
    - 2007: 4.8
    - 2008: -8.5
    - 2009: -8.1
  - Merchandise imports (annual percent change)
    - 2007: -3.8
    - 2008: 24.4
    - 2009: 0.4
- Balance of payments (US$ millions; unless otherwise indicated)
  - Merchandise exports
    - 2007: 1,804
    - 2008: 1,651
    - 2009: 1,518
  - Merchandise imports
    - 2007: -2,113
    - 2008: -2,630
    - 2009: -2,641
  - Current account balance (excluding official transfers)
    - 2007: -383
    - 2008: -906
    - 2009: -666
    - (Percent of GDP)
      - 2007: -11
      - 2008: -28
      - 2009: -19
  - Overall balance
    - 2007: -647
    - 2008: -612
    - 2009: -1,090
- Official reserves
  - Gross official reserves (US$ millions; end-of-period)
    - 2007: 58.0
    - 2008: 5.8
    - 2009: 5.8
  - Gross official reserves (months of imports of goods and services)
    - 2007: 0.3
    - 2008: 0.2
    - 2009: 0.2
- Debt
  - Total external debt (US$ millions; end-of-period) 4/
    - 2007: 5,285
    - 2008: 6,027
    - 2009: 6,719
  - Total external debt (percent of GDP; end-of-period) 4/
    - 2007: 149
    - 2008: 189
    - 2009: 192

Notes:
- Sources: Zimbabwean authorities; IMF staff estimates and projections.
- 1/ For 2008, annual average January–September 2008.
- 2/ For 2008, inflation at end-September 2008.
- 3/ Zimbabwe dollar values converted into U.S. dollars at the UN exchange rates at end-2007 and end-2008.
- 4/ Including arrears and estimated interest charges on arrears.

### Statement by Samuel Itam, Executive Director for Zimbabwe — Introduction and background (selected points)
- The Zimbabwean authorities appreciate the encouragement and support of the Fund and broadly agree with the analyses and recommendations in the 2009 Article IV consultation reports.
- In the ten years prior to emergence of a government of national unity in February 2009:
  - GDP growth declined by about 40 percent.
  - Hyperinflation, fueled largely by excessive money growth, resulted in macroeconomic instability and the demise of the national currency.
  - External debt was estimated at US$6 billion (189 percent of GDP) at end-2008.
  - Central government’s spending capacity collapsed in 2008 as economic decline and rapid erosion of the real value of accrued tax liabilities contributed to a drastic drop in revenues.
  - RBZ’s quasi-fiscal activities increased.
  - Tightening of price controls and exchange restrictions exacerbated deterioration in the business climate and economic decline.
  - Collapse in public sector capacity to provide basic services accentuated unemployment, poverty, and incidence of infectious diseases.

*Source: _cr09139 - APPENDIX III. ZIMBABWE—STATISTICAL ISSUES (As of April 13, 2009) and IMF Public Information Notice No. 09/53 (May 6, 2009).*

### 3.      Against the background of the economic and humanitarian crisis, the new

### _cr09139 - 3.      Against the background of the economic and humanitarian crisis, the new

### Macroeconomic objectives and STERP
- The Short-Term Emergency Recovery Program (STERP) articulates actions to: maintain low inflation, halt and reverse the economic decline, and improve social conditions.
- Macroeconomic stability is to be restored and inflation contained through strict fiscal discipline and appropriate monetary policy.

### Fiscal policy — actions, targets, and contingencies
- Introduced a cash budgeting system in 2009.
- Revised the 2009 budget and targeted a balanced fiscal position.
- Projected hard currency revenue to increase to US$ 1 billion in 2009 (29 percent of GDP).
- Customs and excise duties as well as value-added tax (VAT) are expected to account for 60 percent of budget revenue.
- Expenditure is budgeted at US$ 1 billion, representing a cut of 15 percentage points of GDP relative to the 2008 outturn.
- Contingency measures in case of revenue shortfalls (to be considered in July 2009) include:
  - increasing royalties on mineral resources;
  - broadening the VAT and customs tax bases;
  - measures intended to ensure provision of critical public services (including food relief, education and health).
- Wage policy pressures and measures:
  - Current flat civil service allowance of US$ 100 per month is politically challenging to maintain.
  - Some decompression of the wage scale in 2009 is deemed justified to improve motivation and retention of skilled civil servants, but should be preceded by a payroll audit to remove “ghost workers”.
  - For any unfilled 2009 financing gap, the government is vigorously seeking donor financing support to avoid drastic reductions in social programs or incurring payments arrears.

### Monetary policy — dollarization, liberalization, and central bank reforms
- Adoption of hard currencies (especially the US dollar and the South African Rand), with the Rand as the reference currency, has assisted in addressing hyperinflation.
- Abolition of exchange controls and liberalization of trade and payments for all transactions in foreign currency to help restore confidence.
- The Reserve Bank of Zimbabwe (RBZ) has been directed to stop quasi-fiscal activities, which previously included:
  - subsidized direct lending and allocation of foreign exchange;
  - below-cost provision of equipment and fertilizers to farmers;
  - transfers to parastatals.
- Financing sources for past quasi-fiscal activities that have been abolished included:
  - surrender requirements on export proceeds;
  - retention of foreign exchange earnings of the gold and agricultural sectors in excess of mandatory surrender requirements;
  - confiscation of most foreign exchange deposits;
  - external borrowing;
  - purchases of foreign exchange at the parallel market exchange rate.
- Agreed and planned measures with Fund staff:
  - Urgently enable the domestic payments system to process payments in foreign exchange.
  - Attune banking system supervision to the needs of the multi-currency system.
  - Examine ways to improve liquidity management in the new multi-currency system, including through limited lender-of-last-resort operations.
  - Consider measures for strengthening the RBZ’s governance and accountability framework, including the appointment of five non-Executive Board members.
  - Plan to explore the merits of possible re-introduction of a national currency at end-2009, taking into account all requisite conditions.

### Structural reforms to enhance growth and competitiveness
- Reforms implemented or underway include:
  - price liberalization;
  - discontinuation of the foreign exchange surrender requirements and restrictions;
  - abolition of the Grain Marketing Board;
  - imposition of hard budget constraints on parastatal enterprises.
- The government is seeking technical advice from the World Bank on other aspects of the reform agenda, including privatization.
- The STERP recognizes urgency of addressing property rights and the rule of law; staff call for drafting, adopting and implementing necessary legislative acts while noting that enacting such legislation requires strong political consensus among coalition partners.
- The government intends to continue confidence-boosting measures to elicit necessary political consensus.

### Challenges, risks, and need for external support
- Identified challenges and risks include:
  - possible strain in political cohesion;
  - shortfalls in budget revenue and foreign financing;
  - issues related to wage, productivity, employment and competitiveness;
  - capacity constraint;
  - data limitations;
  - debt burden;
  - normalization of relations with the Fund.
- Authorities consider these challenges and risks not insurmountable and note progress on several through policy actions and reforms.
- Authorities emphasize reliance on firm support from the Fund, other IFIs and development partners: “economic turnaround would not be possible without foreign assistance and private capital flows, even assuming sound policy implementation”.
- The authorities request targeted provision of Fund TA in critical areas highlighted in the “Proposed Decision”, and state that provision of Fund TA to strengthen statistics should be an integral component of the TA package which should not require a formal listing or ‘Decision’.
- Authorities acknowledge and appreciate World Bank policy advice and thank Botswana, the Republic of South Africa and other members of SADC for commitments of financial support.
- The authorities call on other IFIs and donors to aid Zimbabwe during the opening created by the new administration and express readiness to:
  - strengthen cooperation with the Fund and other partners;
  - continue building a credible record of strong policy implementation to ensure macroeconomic stability, entrench reforms, collaborate on debt sustainability work, and meet financial obligations to the Fund and other creditors under mutually agreed terms;
  - seek Zimbabwe’s full integration into the Fund, with all rights restored in the not too distant future.

### Conclusion
- Authorities have established an encouraging record of economic policy implementation and reform during the short period of the new government’s existence.
- They are committed to continued implementation of necessary policies and structural reforms to maintain macroeconomic stability essential for reversing economic deterioration and tackling poverty.
- They value the Fund’s policy advice and engagement and look forward to continued strong support from the international community, including the Fund.

*Source: _cr09139 - 3. Against the background of the economic and humanitarian crisis, the new*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09139.pdf_