## _cr10186

## Source details

**Canonical URL:** [_cr10186](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10186.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10186.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10186.pdf.json)

---

### Summary and staff appraisal
- Nascent economic recovery in 2009 is very fragile despite policy improvements in 2009 (liberalization of prices, goods markets, and foreign exchange).
- Improvements in tax policy and administration increased available fiscal space, but:
  - Rapid unsustainable government expenditure growth, including wages.
  - Large reduction in capital inflows due to increased uncertainty about the indigenization process.
  - Exuberant credit growth.
  - These factors have negatively affected the macroeconomic outlook and intensified external and banking system vulnerabilities.
- Main policy advice:
  - Curtail approved 2010 budgetary expenditures by about 3 percent of GDP to return to a path toward medium-term fiscal and external sustainability and maintain a fiscal reserve of at least $250 million of SDR holdings (2 months of expenditures).
  - Reduce the wage bill relative to revenues in 2010 and beyond to allow for infrastructure upkeep and to prevent unsustainable buildup of domestic expenditure arrears.
  - Use the recent payroll audit to eliminate ghost workers and build political consensus for further wage-bill reduction measures.
  - Urgent measures for banking-system vulnerabilities: (i) improve Reserve Bank of Zimbabwe (RBZ) governance and downsize/restructure it; (ii) reduce banks’ exposure to the financially distressed RBZ; (iii) contain credit and liquidity risks; (iv) discontinue moral suasion on banks to lend to specific sectors.
  - Maintain the multi-currency system for its intended lifespan (2010–12); reintroduce the Zimbabwe dollar as sole legal tender only after a sustained track record of sound policies and credible central bank governance focused on price stability.
  - Achieve significant improvements in the business climate (property rights and labor legislation enforcement) and secure debt relief to resolve debt distress.

### Macroeconomic outlook and scenarios
- Fragile recovery and 2009 outcomes:
  - Multi-currency system restored price stability, restarted financial intermediation, and prevented budget-deficit monetization.
  - Budget revenue increased significantly; fiscal position broadly balanced in 2009.
  - Maize production increased from 0.6 million tons in 2008 to an estimated 1.1 million tons in 2009.
  - Donors provided off-budget financing equal to 12 percent of GDP in 2009.
- Short-term projection under unchanged policies (2010):
  - Current account deficit adjusts to 23 percent of GDP in 2010 from 30 percent in 2009.
  - Real GDP growth decelerates to about 2 percent in 2010 from 4 percent in 2009.
  - Banks’ foreign assets would decline, exerting stress on the banking system.
  - Import growth would sharply slow.
  - Staff project a cash budget deficit of about $235 million (4.5 percent of GDP) in 2010 largely financed by drawing down part of Zimbabwe’s SDR holdings ($210 million).
- Downside risks (short-term):
  - (i) Liquidity or solvency problems in the fragile banking system due to reduced foreign assets.
  - (ii) Drought with negative spillovers on food security, growth, and banking stability.
  - (iii) Breakdowns of public infrastructure harming key industries.
- Upside potential:
  - Higher-than-expected donor financing and possible additional diamond export and budget receipts.
- Medium-term baseline (limited donor support, slow structural reform):
  - Continued tightening of external financing constraint; imports and investment compressed; growth remains anemic.
  - Current account deficit must adjust from 23 percent of GDP in 2010 to less than 15 percent over the medium term.
- Active policy scenario (improved policies):
  - Conditions: reorient budgetary expenditures toward growth- and socially-oriented projects; improve business climate; contain wage costs; strengthen the financial system.
  - Outcome target: for the economy to grow at 4 to 5 percent in 2010 and the medium term, implement the measures above.
  - Note: Active policy scenario does not include potential effects of debt relief.

### Fiscal policy specifics, cash budgeting, and adjustment needs
- Cash budgeting definition: matching non-interest expenditures to cash revenues and grants.
- Reserve cushion and required adjustments:
  - Maintain remaining reserve cushion of about $250 million or 2 months of expenditures (as of end-February 2010).
  - Cash expenditures would need to be curtailed by about 3 percent of GDP compared with the approved budget beginning from Q2 2010.
- Preferred composition of adjustment:
  - Reduce the wage bill by about 1 percent of GDP, including elimination of ghost workers and reduction in contractual employees.
  - Remaining adjustment from low-priority capital (e.g., cars, furniture, acquisition of buildings, lending to banks) and current (e.g., travel) spending.
- Protect or allocate sufficient resources for:
  - Urgent infrastructure maintenance expenses.
  - Noncompressible current overhead expenses.
  - Elimination of expenditure arrears ($41 million at end-February).
- Medium-term fiscal strategy (2011–2015):
  - Mobilize additional revenues with further Fund TA (1.5–2.0 percent of GDP).
  - Limit employment costs to 15.5 percent of GDP in 2011 and to 13 percent of GDP in 2015 through downsizing and wage increases below nominal GDP growth for most grades.
  - Maintain fiscal reserves at about 2 months of expenditures.
- Authorities’ stance:
  - Agreed fiscal deficit should be reduced in 2010; will seek to refrain from additional withdrawals of SDR holdings in 2010 but noted unexpected expenditure pressures could arise.
  - Will seek additional revenues from diamond exports but compliance with the Kimberley process may delay inflows.
  - Intend to eliminate ghost workers identified in payroll audit.

### Fiscal numerical highlights (selected lines, millions of U.S. dollars and percent of GDP preserved)
- Cash revenues (US$ millions): 975 (2009), 1,440 (Est. Budget 2010), 1,360 (Active Policy Scenario 2010), 1,345 (Unchanged Policies 2010), 1,469 (Unchanged Policies 2011).
- Cash expenditures 2/ (US$ millions): 920 (2009), 1,650 (Est. Budget 2010), 1,508 (Active Policy Scenario 2010), 1,577 (Unchanged Policies 2010), 1,475 (Unchanged Policies 2011).
- Employment costs (US$ millions): 517 (2009), 919 (Est. Budget 2010), 852 (Active Policy Scenario 2010), 913 (Unchanged Policies 2010), 1,080 (Unchanged Policies 2011).
- Cash balance (US$ millions): 55 (2009), -210 (Est. Budget 2010), -148 (Active Policy Scenario 2010), -233 (Unchanged Policies 2010), -5 (Unchanged Policies 2011).
- Cash financing (US$ millions): -55 (2009), 210 (Est. Budget 2010), 148 (Active Policy Scenario 2010), 233 (Unchanged Policies 2010), 5 (Unchanged Policies 2011).
- Change in SDR holdings (US$ millions): 50 (2009), 158 (Est. Budget 2010), 99 (Active Policy Scenario 2010), 158 (Unchanged Policies 2010), 0 (Unchanged Policies 2011).
- Memorandum: Stock of domestic payment arrears (US$ millions): 480 (2009), 0 (Est. Budget 2010), 48 (Active Policy Scenario 2010), 73 (Unchanged Policies 2011).
- Percent of GDP versions:
  - Cash revenues: 22.2 (2009), 28.0 (Est. Budget 2010), 26.6 (Active Policy Scenario 2010), 26.1 (Unchanged Policies 2010), 26.8 (Unchanged Policies 2011).
  - Cash expenditures 2/: 20.9 (2009), 32.1 (Est. Budget 2010), 29.5 (Active Policy Scenario 2010), 30.7 (Unchanged Policies 2010), 26.9 (Unchanged Policies 2011).
  - Employment costs: 11.8 (2009), 17.9 (Est. Budget 2010), 16.7 (Active Policy Scenario 2010), 17.8 (Unchanged Policies 2010), 19.7 (Unchanged Policies 2011).
  - Cash balance: 1.2 (2009), -4.1 (Est. Budget 2010), -2.9 (Active Policy Scenario 2010), -4.5 (Unchanged Policies 2010), -0.1 (Unchanged Policies 2011).
  - Change in SDR holdings: 1.2 (2009), 3.1 (Est. Budget 2010), 1.9 (Active Policy Scenario 2010), 3.1 (Unchanged Policies 2010), 0.0 (Unchanged Policies 2011).

### Banking system vulnerabilities and recommended actions
- Observed developments:
  - Banking deposits tripled and lending increased six-fold between March and December 2009; loans and deposits exhibited growth in 2009.
- Specific risks identified:
  - Counterparty and credit risk: medium to high due to exposure to the financially distressed RBZ (about 70 percent of banks’ capital) and exposure to the drought-prone agricultural sector (20 percent of the loan portfolios).
  - Liquidity risk: high — structural liquidity pressures could arise from a deteriorating balance of payments causing reductions in banks’ foreign assets; no lender of last resort; unavailability of statutory reserves deposited at the RBZ; virtually no interbank lending.
  - Solvency risk: high — liquidity and credit risks and difficulties generating positive incomes could rapidly erode capital.
  - Concern over liquidity ratios below the prudent level of 25 percent at some large banks at end-December 2009.
- Staff recommendations to contain systemic risk:
  - Improve RBZ governance and downsize/restructure the RBZ.
  - Reduce banks’ exposure to the financially distressed RBZ.
  - Contain credit and liquidity risks.
  - Discontinue moral suasion compelling banks to lend to specific sectors.
  - Implement a liquidity requirement of 25 to 30 percent, elevated for banks with weak liquidity management practices; liquidity requirement should exclude, but not extinguish, claims on the RBZ until RBZ negative equity resolved.
  - Intensify identification of banks with weak underwriting skills and monitor remedial actions.
  - Apply the existing resolution framework to ensure orderly exit of non-viable banks; public funds bailouts are not an option.
  - Reduce banks’ exposure to the RBZ via a dedicated RBZ nostro account backing banks’ deposits to the RTGS account and publishing its balance daily; abolish the existing 2.5 percent statutory reserve requirement on new deposits; mobilize resources from disposal of RBZ noncore assets to refund banks’ statutory reserves on pre-March 2010 deposits.
  - Establish effective RBZ oversight: appoint an RBZ governing board; approve a downsized, fully funded RBZ budget; bifurcate the RBZ balance sheet to isolate noncore assets and liabilities; adopt a resolution framework for overdue liabilities and transparently dispose of noncore assets.
  - Continue the multi-currency regime during 2010–12 with improvements to exchange control regulation transparency and consistency.
- Authorities’ commitments:
  - Agreed to implement a liquid asset requirement of 25 percent and ring-fence the RTGS account at the RBZ in the near future.
  - Consider abolishing the 2.5 percent statutory reserve requirement once sufficient resources are mobilized from disposal of noncore assets.
  - Committed to maintaining the multi-currency system until end-2012 and to appoint an RBZ governing Board.

### Key banking and RBZ numerical indicators (preserved)
- Banks’ exposure to the financially distressed RBZ: about 70 percent of banks’ capital.
- Agricultural sector share of loan portfolios: 20 percent.
- Liquidity prudent level cited: 25 percent.
- RBZ used international reserves backing statutory reserves: $80 million.
- RBZ sold shares from its portfolio at the Zimbabwe Stock Exchange: $38 million.
- Statutory reserve requirement: 10 percent of deposits (excluding government’s and SOEs’ deposits) implemented on February 1, 2009; from February 1, 2010, the end-January 2010 stock of deposits still subject to the 10 percent requirement, while any increase in the stock of deposits is subject to a 2.5 percent requirement.

### External position, debt distress, and recommendations
- External position characterized as precarious and unsustainable:
  - Current account deficits funded largely by external arrears and short-term capital inflows.
  - Exports suffered from capacity constraints in 2009; imports increased in 2009 financed by humanitarian aid and resurgent capital inflows.
  - External debt and external arrears rose, contributing to unsustainable external position.
- Debt stance and staff findings:
  - External debt projected at 151 percent of GDP by 2015, with 104 percent of GDP in arrears.
  - Staff estimate end-2009 net foreign asset (NFA) position including optimistic mineral receipts: negative in the order of 63 percent of GDP.
  - Nonmineral primary external current account balance: deficit at over 35 percent of GDP.
  - Arrears to IFIs cited: $1.4 billion.
  - Zimbabwe is in debt distress; debt overhang cannot be resolved without debt relief even with improved policies and increased mineral extraction.
- Staff recommendations:
  - Review Indigenization and Economic Empowerment Act regulations to avoid deterring FDI and to ensure transparent wealth distribution.
  - Expedite resolution of land ownership issues to ensure security of land tenure.
  - Increase labor market flexibility, including regarding wage levels.
  - Pursue sound policies and debt relief within a comprehensive arrears clearance strategy (FO/DIS/09/100).
  - Use a Staff Monitored Program (SMP) as a stepping stone toward debt relief and new IFI lending, conditional on strengthened policies and donor indications of support.
- Authorities’ views:
  - Agreed the country is in debt distress and mineral wealth alone would not ensure sustainability.
  - Working on a comprehensive “hybrid” strategy involving both a request for debt relief under the HIPC Initiative and use of fresh IFI financing and mineral wealth.
  - Expressed strong interest in an SMP and committed to strengthening policies and data reporting.

### Key external and debt numerical statistics (preserved)
- External debt projected: 151 percent of GDP by 2015.
- External arrears: 104 percent of GDP by 2015.
- NFA position including optimistic mineral receipts scenario: negative in the order of 63 percent of GDP (end-2009 estimate).
- Nonmineral primary external current account balance: deficit at over 35 percent of GDP.
- Arrears to IFIs cited: $1.4 billion.

### Structural issues, competitiveness, and reform priorities
- Authorities acknowledged significant structural issues hampering competitiveness and growth.
- Indigenization regulations:
  - Regulations were suspended on April 13, 2010 while Cabinet debates possible revisions.
- Land ownership:
  - Plan to undertake a land audit in the coming months as first step toward security of land tenure.
- Public sector wages and labor legislation:
  - Intent to review wage setting in SOEs and municipalities to stop accumulation of wage arrears and align wages with productivity.
  - Intend to examine labor legislation to ensure arbitration courts do not force wages incompatible with productivity.
- Staff priority recommendations:
  - Return to cash budgeting and reduce the wage bill.
  - Contain rapidly rising risks to the banking system through reduction of banks’ exposure to the financially distressed RBZ and stepped up prudential measures.
  - Strengthen RBZ governance and downsize it.
  - Implement structural measures: enforcement of property rights, security of land tenure, and wage flexibility.

### Key macroeconomic and fiscal indicators (selected figures preserved)
- Real GDP growth (annual percent change):
  - 2008: -14.5
  - 2009: 4.0
  - 2010: 2.2
  - 2011: 0.2
  - 2012: 0.0
  - 2013: 1.0
  - 2014: 1.8
  - 2015: 2.0
- Nominal GDP (US$ millions):
  - 2008: 3,929
  - 2009: 4,397
  - 2010: 5,144
  - 2011: 5,488
  - 2012: 5,845
  - 2013: 6,159
  - 2014: 6,517
  - 2015: 6,892
- GDP deflator (annual percent change):
  - 2008: -1.3
  - 2009: 7.6
  - 2010: 14.4
  - 2011: 6.6
  - 2012: 5.5
  - 2013: 3.5
  - 2014: 3.8
  - 2015: 3.7
- Consumer price inflation (annual average):
  - 2008: 5.56E+106
  - 2009–2015: 5.0 (annual average)
- Central government (percent of GDP, measured in US$):
  - Revenue and grants: 3.4 (2008), 22.2 (2009), 26.1 (2010), 26.8 (2011), 26.4 (2012), 26.3 (2013), 26.3 (2014), 26.3 (2015)
  - Expenditure and net lending: 6.5 (2008), 25.0 (2009), 33.7 (2010), 30.4 (2011), 31.7 (2012), 32.0 (2013), 32.0 (2014), 32.0 (2015)
  - Of which: wages and benefits: 1.3 (2008), 9.5 (2009), 14.1 (2010), 15.7 (2011), 16.8 (2012), 16.7 (2013), 16.7 (2014), 16.8 (2015)
  - Overall balance (including quasi-fiscal activity): -32.1 (2008), -3.3 (2009), -7.6 (2010), -3.6 (2011), -5.3 (2012), -5.7 (2013), -5.7 (2014), -5.7 (2015)
  - Primary balance (including quasi-fiscal activity): -28.5 (2008), 0.1 (2009), -4.4 (2010), -0.4 (2011), -2.0 (2012), -2.5 (2013), -2.5 (2014), -2.5 (2015)
  - Cash balance: 0.3 (2008), 1.2 (2009), -4.5 (2010), -0.1 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014), 0.0 (2015)
- Money and credit (US$ millions), baseline:
  - Broad money (M3): 314 (2008), 1,276 (2009), 1,511 (2010)
  - Net foreign assets: -314 (2008), -256 (2009), -647 (2010)
  - Net domestic assets: 628 (2008), 1,531 (2009), 2,158 (2010)
  - Domestic credit: 140 (2008), 602 (2009), 1,048 (2010)
  - Of which: credit to the private sector: 140 (2008), 684 (2009), 1,055 (2010)
  - Reserve money: 71 (2008), 25 (2009), 145 (2010)
- External trade and current account (US$ millions), baseline:
  - Merchandise exports: 1,633 (2008), 1,625 (2009), 2,083 (2010), 2,048 (2011), 2,076 (2012), 2,128 (2013), 2,160 (2014), 2,154 (2015)
  - Merchandise imports: -2,630 (2008), -3,232 (2009), -3,480 (2010), -3,020 (2011), -3,070 (2012), -3,129 (2013), -3,211 (2014), -3,201 (2015)
  - Current account balance (excluding official transfers): -945 (2008), -1,323 (2009), -1,183 (2010), -724 (2011), -795 (2012), -839 (2013), -885 (2014), -915 (2015)
  - Current account balance (percent of GDP): -24.0 (2008), -30.1 (2009), -23.0 (2010), -13.2 (2011), -13.6 (2012), -13.6 (2013), -13.6 (2014), -13.3 (2015)
- Official reserves and debt:
  - Gross official reserves (US$ millions; end-of-period): 63 (2008), 121 (2009), 141 (2010), 141 (2011), 141 (2012), 151 (2013), 151 (2014), 151 (2015)
  - Gross official reserves (months of imports): 0.0 (2008), 1.0 (2009), 0.3 (2010), 0.4 (2011), 0.4 (2012), 0.4 (2013), 0.4 (2014), 0.4 (2015)
  - Total external debt (US$ millions; end-of-period): 5,794 (2008), 7,145 (2009), 7,662 (2010), 8,140 (2011), 8,709 (2012), 9,268 (2013), 9,838 (2014), 10,430 (2015)
  - Total external debt (percent of GDP): 147.5 (2008), 162.5 (2009), 149.0 (2010), 148.3 (2011), 149.0 (2012), 150.5 (2013), 150.9 (2014), 151.3 (2015)
  - Total external arrears (US$ millions): 3,781 (2008), 4,575 (2009), 5,132 (2010), 5,603 (2011), 6,056 (2012), 6,423 (2013), 6,803 (2014), 7,194 (2015)
  - Total external arrears (percent of GDP): 96.2 (2008), 104.0 (2009), 99.8 (2010), 102.1 (2011), 103.6 (2012), 104.3 (2013), 104.4 (2014), 104.4 (2015)

### Financial soundness indicators (selected, commercial banks only, preserved)
- Regulatory capital to risk-weighted assets: 32.4 (Mar-09), 31.3 (Jun-09), 25.7 (Sep-09), 22.7 (Dec-09)
- Percentage of banks greater or equal to 10 percent: 93.3 (Mar-09), 100.0 (Jun-09), 93.3 (Sep-09), 100.0 (Dec-09)
- Capital to assets: 24.1 (Mar-09), 18.1 (Jun-09), 16.5 (Sep-09), 12.5 (Dec-09)
- Nonperforming loans: 3.5 (Mar-09), 2.4 (Jun-09), 1.8 (Sep-09), 1.8 (Dec-09)
- Provisions as percent of past-due loans: 9.2 (Mar-09), 6.3 (Jun-09), 8.0 (Sep-09), 10.8 (Dec-09)
- Return on assets: -1.1 (Mar-09), 0.7 (Jun-09), 0.5 (Sep-09), 0.9 (Dec-09)
- Loans/deposits: 27.8 (Mar-09), 37.8 (Jun-09), 48.8 (Sep-09), 48.0 (Dec-09)
- Commercial banks lending rate (weighted average): 37.5 (Mar-09), 7.5 (Jun-09), 7.7 (Sep-09), 11.0 (Dec-09)

### RBZ governance and systemic vulnerability matrix (selected vulnerabilities and impacts)
- Vulnerability 1 — RBZ in financial distress and weak governance:
  - Likelihood: High; Overall Level of Concern: High.
  - Expected impact: failure to refund statutory reserves or return RTGS funds may lead to bank runs, contagion, and erosion of capital.
- Vulnerability 2 — No lender of last resort or interbank market:
  - Likelihood: Medium; Overall Level of Concern: High.
  - Expected impact: liquidity shocks could cause bank runs and systemic losses.
- Vulnerability 3 — Weakly capitalized banking system; capital largely revalued premises:
  - Likelihood: Medium; Overall Level of Concern: High.
  - Expected impact: inability to meet losses could force bankruptcies and systemic loss of confidence.
- Vulnerability 4 — Rapid credit growth and eroded underwriting skills:
  - Likelihood: Medium; Overall Level of Concern: Medium.
  - Expected impact: sharp rise in nonperforming loans would lower profitability and strain capital.
- Vulnerability 5 — Precarious external position under multi-currency system:
  - Likelihood: High; Overall Level of Concern: High.
  - Expected impact: balance of payments pressure could force contraction in banks’ liquid foreign assets, trigger liquidity shortages, bank runs, and sharp curtailment of credit.

### Data, Fund relations, and debt sustainability assessment
- Fund relations and SDR holdings (as of March 31, 2010):
  - Quota: 353.40 SDR Million.
  - Net cumulative SDR allocation: 272.18 SDR Million; Holdings: 165.13 SDR Million (60.67 percent).
  - Zimbabwe has been in continuous arrears to the Fund since February 2001; overdue principal: 73.56 SDR Million (as of March 31, 2010).
  - Executive Board restored Zimbabwe’s voting rights and eligibility for general resources on February 19, 2010.
- DSA key findings (approved April 29, 2010):
  - At end-2009, total PPG debt amounted to US$6.9 billion or 157 percent of GDP, of which 102 percent of GDP was in arrears.
  - About 90 percent of total PPG debt is medium- and long-term and about 90 percent owed to official creditors.
  - Zimbabwe’s overdue financial obligations to IFIs include: World Bank US$731 million, African Development Bank US$483 million, and the IMF US$140 million.
  - Conclusion: Zimbabwe is clearly in debt distress; under current policies and donor financing limited to humanitarian assistance, debt stock would remain unresolved and arrears continue to build.
  - Baseline: annual real GDP growth projected to average 1.5 percent for 2010–15 and about 3.0 percent during 2016–30.
  - Baseline projections assume balanced budgets on a cash basis in the medium and long term but increasing domestic payment arrears.
  - Public debt projected to decline gradually from 157 percent of GDP in 2009 to about 119 percent of GDP in 2020; PV of debt-to-revenue ratio projected to remain about 400 to 500 percent through 2020.
  - Debt service-to-revenue ratio projected to decline to about 30 percent by 2020.
- Data shortcomings and reporting:
  - Data have serious shortcomings across major datasets; CSO needs rebuilt capacity.
  - RBZ has not published comprehensive monetary statistics since April 2008.
  - Zimbabwe does not report balance of payments statistics to STA for redissemination; no monetary or fiscal data currently reported to STA for publication in International Financial Statistics.

### Conclusion and priorities
- Core assessment:
  - "Zimbabwe is in debt distress, which is compounded by unresolved economic policy challenges."
  - Achieving debt sustainability requires a significant strengthening of economic policies and improved relations with the international community to secure debt relief.
- Immediate policy priorities:
  - Return to cash budgeting and reduce the wage bill.
  - Protect fiscal reserves (about $250 million or 2 months of expenditures as of end-February 2010).
  - Curtail approved 2010 budgetary expenditures by about 3 percent of GDP beginning Q2 2010.
  - Implement banking-sector measures: strengthen RBZ governance, reduce banks’ exposure to RBZ, implement liquidity requirements, discontinue moral suasion, and step up supervision and resolution frameworks.
  - Maintain the multi-currency system during 2010–12 and consider currency options only after credible central bank governance and price stability track record.
  - Pursue structural reforms: enforce property rights, security of land tenure, labor market flexibility, and clarity on indigenization regulations.
  - Seek debt relief through a comprehensive arrears clearance strategy; consider an SMP as a step toward rebuilding relations and accessing IFI financing.
- Authorities’ intentions and measures (as of May 17, 2010):
  - Committed to cash budgeting and placed a cap on current wage bill; recruitment freeze in non-critical vacant positions.
  - Civil service audit undertaken with report expected by end-May 2010 and to be availed in July 2010.
  - Public Finance Management and Audit Acts passed.
  - Use part of SDR allocation for urgent humanitarian needs and rehabilitation (authorities’ position).
  - New RBZ Board established May 3, 2010; RBZ debt reconstruction legislation in preparation.
  - Working on debt relief and arrears clearance strategy; Debt Management office being set up.
  - Devised a three year macroeconomic policy and budget framework for 2010-2012 (Short Term Emergency Recovery Program II); view an SMP as appropriate to advance reforms.

*Source: IMF staff report, “12.      The government needs to return to cash budgeting.”*

### 1. Selected Economic Indicators, 2008–15 (Baseline) ...............................................................20

### 1. Selected Economic Indicators, 2008–15 (Baseline) ...............................................................20

### Summary and staff appraisal
- Nascent economic recovery in 2009 is very fragile despite policy improvements in 2009 (liberalization of prices, goods markets, and foreign exchange).
- Improvements in tax policy and administration increased available fiscal space, but:
  - Rapid unsustainable government expenditure growth, including wages.
  - Large reduction in capital inflows due to increased uncertainty about the indigenization process.
  - Exuberant credit growth.
  - These factors have negatively affected the macroeconomic outlook and intensified external and banking system vulnerabilities.
- Main policy advice:
  - Curtail approved 2010 budgetary expenditures by about 3 percent of GDP to return to a path toward medium-term fiscal and external sustainability and maintain a fiscal reserve of at least $250 million of SDR holdings (2 months of expenditures).
  - Reduce the wage bill relative to revenues in 2010 and beyond to allow for infrastructure upkeep and to prevent unsustainable buildup of domestic expenditure arrears.
  - Use the recent payroll audit to eliminate ghost workers and build political consensus for further wage-bill reduction measures.
  - Urgent measures for banking-system vulnerabilities: (i) improve Reserve Bank of Zimbabwe (RBZ) governance and downsize/restructure it; (ii) reduce banks’ exposure to the financially distressed RBZ; (iii) contain credit and liquidity risks; (iv) discontinue moral suasion on banks to lend to specific sectors.
  - Maintain the multi-currency system for its intended lifespan (2010–12); reintroduce the Zimbabwe dollar as sole legal tender only after a sustained track record of sound policies and credible central bank governance focused on price stability.
  - Achieve significant improvements in the business climate (property rights and labor legislation enforcement) and secure debt relief to resolve debt distress.

### Fragile recovery following a decade of decline
- 2009 policy improvements and outcomes:
  - Multi-currency system restored price stability, restarted financial intermediation, and prevented budget-deficit monetization.
  - Budget revenue increased significantly; fiscal position broadly balanced in 2009.
  - Price and exchange liberalization improved resource allocation and goods availability.
  - Short-term capital inflows and FDI increased in 2009, financing a widening current account deficit.
  - Maize production increased from 0.6 million tons in 2008 to an estimated 1.1 million tons in 2009.
  - Donors provided off-budget financing for social services and humanitarian assistance equal to 12 percent of GDP in 2009.
- Remaining challenges:
  - Large wage increases, poor financial position of SOEs, rising banking-system vulnerabilities, weak RBZ governance, deteriorating business climate, and a precarious external position.

### Macroeconomic outlook (unchanged policies)
- Short-term (2010) projection under unchanged policies:
  - Current account deficit adjusts to 23 percent of GDP in 2010 from 30 percent in 2009.
  - Real GDP growth decelerates to about 2 percent in 2010 from 4 percent in 2009.
  - Banks’ foreign assets—their main source of liquidity—would decline, exerting stress on the banking system.
  - Import growth would sharply slow.
  - Unsustainable wage-driven fiscal expansion financed by drawing down part of Zimbabwe’s SDR holdings would increase vulnerability and risk abrupt contraction in nonwage expenditures and imports in 2011.
- Short-term downside risks:
  - (i) Liquidity or solvency problems in the fragile banking system due to reduced foreign assets.
  - (ii) Drought with negative spillovers on food security, growth, and banking stability.
  - (iii) Breakdowns of public infrastructure harming key industries.
- Upside potential:
  - Higher-than-expected donor financing and possible additional diamond export and budget receipts.
- Medium-term outlook under illustrative baseline (limited donor support, slow structural reform):
  - Continued tightening of external financing constraint.
  - Imports and investment compressed; growth remains anemic.
  - Current account deficit must adjust from 23 percent of GDP in 2010 to less than 15 percent over the medium term.
  - Tight balance of payments will restrict further increase in financial intermediation.

### Active policy scenario (improved policies)
- Conditions for materially better outlook:
  - Reorient budgetary expenditures toward growth- and socially-oriented projects.
  - Improve business climate.
  - Contain wage costs.
  - Strengthen the financial system.
- Outcome target:
  - For the economy to grow at 4 to 5 percent in 2010 and the medium term, implement the measures above.
- Note:
  - Active policy scenario does not include potential effects of debt relief, which would unlock IFI financing and accelerate progress on Millennium Development Goals.

### Fiscal policy specifics and projections
- Approved 2010 budget:
  - Ramped up wages and capital expenditures expecting significant donor financing and higher revenue.
  - Staff project a revenue shortfall of about $100 million (2 percent of GDP) in 2010.
  - Large employment costs (wages, benefits, pensions) equal 68 percent of budget revenue, crowding out capital expenditures.
  - Staff project a cash budget deficit of about $235 million (4.5 percent of GDP) largely financed by drawing down part of Zimbabwe’s SDR holdings ($210 million).
  - Further accumulation of expenditure arrears is highly likely.
- Medium-term fiscal sustainability concern:
  - Government medium-term budget estimates assume overly optimistic revenue and donor-financing assumptions.
  - In the illustrative unchanged policy scenario, employment costs target rises to $1.1 billion (20 percent of GDP and 74 percent of revenues) in 2011, crowding out capital expenditure and compressing nonwage current expenses, leading to large expenditure arrears and risking use of the remaining SDR allocation ($200 million projected at end-2010).
- Specific numerical table highlights (2010–2012, selected lines; millions of U.S. dollars and percent of GDP preserved):
  - Cash revenues: 975 (2009), 1,440 (Est. Budget 2010), 1,360 (Active Policy Scenario 2010), 1,345 (Unchanged Policies 2010), 1,469 (Unchanged Policies 2011).
  - Cash expenditures 2/: 920 (2009), 1,650 (Est. Budget 2010), 1,508 (Active Policy Scenario 2010), 1,577 (Unchanged Policies 2010), 1,475 (Unchanged Policies 2011).
  - Of which: Employment costs: 517 (2009), 919 (Est. Budget 2010), 852 (Active Policy Scenario 2010), 913 (Unchanged Policies 2010), 1,080 (Unchanged Policies 2011).
  - Cash balance: 55 (2009), -210 (Est. Budget 2010), -148 (Active Policy Scenario 2010), -233 (Unchanged Policies 2010), -5 (Unchanged Policies 2011).
  - Cash financing: -55 (2009), 210 (Est. Budget 2010), 148 (Active Policy Scenario 2010), 233 (Unchanged Policies 2010), 5 (Unchanged Policies 2011).
  - Change in SDR holdings: 50 (2009), 158 (Est. Budget 2010), 99 (Active Policy Scenario 2010), 158 (Unchanged Policies 2010), 0 (Unchanged Policies 2011).
  - Memorandum: Stock of domestic payment arrears: 480 (2009), 0 (Est. Budget 2010), 48 (Active Policy Scenario 2010), 73 (Unchanged Policies 2011).
  - Percent of GDP versions:
    - Cash revenues: 22.2 (2009), 28.0 (Est. Budget 2010), 26.6 (Active Policy Scenario 2010), 26.1 (Unchanged Policies 2010), 26.8 (Unchanged Policies 2011).
    - Cash expenditures 2/: 20.9 (2009), 32.1 (Est. Budget 2010), 29.5 (Active Policy Scenario 2010), 30.7 (Unchanged Policies 2010), 26.9 (Unchanged Policies 2011).
    - Employment costs: 11.8 (2009), 17.9 (Est. Budget 2010), 16.7 (Active Policy Scenario 2010), 17.8 (Unchanged Policies 2010), 19.7 (Unchanged Policies 2011).
    - Cash balance: 1.2 (2009), -4.1 (Est. Budget 2010), -2.9 (Active Policy Scenario 2010), -4.5 (Unchanged Policies 2010), -0.1 (Unchanged Policies 2011).
    - Change in SDR holdings: 1.2 (2009), 3.1 (Est. Budget 2010), 1.9 (Active Policy Scenario 2010), 3.1 (Unchanged Policies 2010), 0.0 (Unchanged Policies 2011).

### Banking system vulnerabilities and recommendations
- Observed developments:
  - The banking system is returning to its size before hyperinflation (assets, deposits, loans, capital measured in billions of U.S. dollars show recovery between 2004 and Q4 2009).
  - Loans and deposits exhibited growth in 2009 with loan-to-deposit ratios and levels of loans/deposits rising across 2009 quarters.
- Staff recommendations to contain systemic risk:
  - Improve RBZ governance and downsize/restructure the RBZ.
  - Reduce banks’ exposure to the financially distressed RBZ.
  - Contain credit and liquidity risks.
  - End moral suasion compelling banks to lend to specific sectors.
  - Implement recommendations speedily to address increasing systemic vulnerabilities.

### External position and vulnerabilities
- External position described as precarious and unsustainable:
  - Current account deficits funded largely by external arrears and short-term capital inflows.
  - Exports suffered from significant capacity constraints in 2009; export volumes depressed despite increases in export price index (2007=100) trends.
  - Imports increased in 2009 and were financed by humanitarian aid and resurgent capital inflows.
  - External debt (percent of GDP) and external arrears rose, contributing to unsustainable external position.
- Debt stance:
  - Zimbabwe is in debt distress; debt overhang cannot be resolved without debt relief even with improved policies and increased mineral extraction.
  - Government needs consensus on a resolution strategy for external debt arrears and to improve relations with the international community to obtain debt relief and rebuild the economy.

_1. Selected Economic Indicators, 2008–15 (Baseline) ...............................................................20_

### 12.      The government needs to return to cash budgeting

### 12.      The government needs to return to cash budgeting

### Cash budgeting and 2010 fiscal adjustment
- Cash budgeting is defined as matching non-interest expenditures to cash revenues and grants.
- To maintain external and domestic stability and preserve the remaining reserve cushion (about $250 million or 2 months of expenditures as of end-February 2010), cash expenditures would need to be curtailed by about 3 percent of GDP compared with the approved budget beginning from the second quarter of 2010.
- Preferred composition of adjustment:
  - Reduce the wage bill by about 1 percent of GDP, including through elimination of ghost workers based on the recently completed payroll audit and a reduction in the number of contractual employees.
  - Remaining adjustment to come from low-priority capital (e.g., cars, furniture, acquisition of buildings, lending to banks) and current (e.g., travel) spending.
- Protect or allocate sufficient resources for:
  - Urgent infrastructure maintenance expenses.
  - Noncompressible current overhead expenses.
  - Elimination of expenditure arrears ($41 million at end-February).
- The government could seek additional donor support for socially important projects to reduce risk of deterioration in the humanitarian situation.

### Short-term vulnerability reduction and public sector reform (2010)
- Budget vulnerabilities could be reduced by:
  - Adopting a contingency plan for expenditure reductions in case of revenue shortfalls.
  - Sustaining public sector reform momentum with World Bank TA (e.g., strengthening the financial position and management of SOEs and public financial management (PFM) systems).
- The government needs to review pricing and billing practices and costs in major utilities to ensure cost-effective service delivery, helping to address high cost of living concerns.

### Medium-term fiscal strategy and fiscal space (2011–2015)
- Re-orient expenditures toward investment and social programs with World Bank advice to support growth and poverty reduction.
- Additional fiscal space needs to be created by:
  - Mobilizing additional revenues with further Fund TA (1.5–2.0 percent of GDP).
  - Limiting employment costs to 15.5 percent of GDP in 2011 and further to 13 percent of GDP in 2015 through further downsizing and wage increases below nominal GDP growth for most grades.
- Maintain fiscal reserves at about 2 months of expenditures given significant risks.

### Authorities’ views on fiscal measures
- Authorities agreed fiscal deficit should be reduced in 2010 to restrain unsustainable domestic demand growth and save remaining SDR holdings ($250 million) as part of fiscal reserves; they will seek to refrain from additional withdrawals of SDR holdings in 2010 but noted unexpected expenditure pressures (e.g., food shortages) could arise.
- Revenue mobilization:
  - Government will seek to mobilize additional revenues from exports of diamonds but acknowledged compliance with the Kimberley process may delay inflows.
  - Some officials optimistic that the active policy scenario would materialize yielding higher revenues than the unchanged policy scenario.
- Expenditure adjustment:
  - Burden likely to fall on nonwage expenditures; political pressures required wage increases in 2010 to ensure social peace and essential services.
  - Government intends to eliminate ghost workers identified in payroll audit, potentially bringing savings in 2010.
  - Authorities recognized political difficulties in reducing low-priority expenditures but argued they could contain nonwage current expenditures by planning monthly cash flow to avoid new arrears.
- Medium-term outlook:
  - Key challenge is to reduce the wage bill relative to revenue to create fiscal space for growth- and social-oriented spending.
  - Wage bill projections in the medium-term budget framework are not firm commitments; further downsizing could follow elimination of ghost workers.
  - Authorities more optimistic on budget revenues than staff and expect to reduce wage bill-to-revenue ratio without large reductions in the wage bill-to-GDP ratio.
  - High-level committees established to formulate measures to reduce cost of living, including utility tariff rationalization and better public utilities management.

### Key fiscal and numerical statistics (preserved as in source)
- Reserve cushion: about $250 million or 2 months of expenditures (as of end-February 2010).
- Required cash expenditure curtailment: about 3 percent of GDP.
- Desired wage-bill reduction: about 1 percent of GDP.
- Expenditure arrears to eliminate: $41 million (at end-February).
- Additional revenue mobilization target with Fund TA: 1.5–2.0 percent of GDP.
- Employment-cost ceilings: 15.5 percent of GDP in 2011; 13 percent of GDP in 2015.

---

### B. Safeguarding Financial Sector Stability in the Multi-Currency Regime — Background and risks
- Adoption of the multi-currency system led to banking deposits tripling and lending increasing six-fold between March and December 2009, supporting activity but contributing to a significant increase in the current account deficit in 2009 and rising banking vulnerabilities.
- Specific banking system risks:
  - Counterparty and credit risk: medium to high due to significant exposure to the financially distressed RBZ (about 70 percent of banks’ capital), exposure to the drought-prone agricultural sector (20 percent of the loan portfolios), and exuberant credit growth.
  - Projected economic slowdown would lead to a significant increase in nonperforming loans.
  - Liquidity risk: high — structural liquidity pressures could arise from a deteriorating balance of payments causing reductions in banks’ foreign assets; system ill-equipped to handle temporary liquidity shocks with no lender of last resort, unavailability of statutory reserves deposited at the RBZ, virtually no interbank lending, and country risk precluding liquidity support from abroad.
  - Concern that credit expansion is occurring at the expense of prudent liquidity management at some large banks, especially those with liquidity ratios below the prudent level of 25 percent at end-December 2009.
  - Solvency risk: high — compounding liquidity and credit risks and difficulties generating positive incomes could lead to rapid erosion of capital.
- RBZ governance and balance sheet weaknesses:
  - RBZ governing board not operating; no approved RBZ budget in 2009; external auditors reported serious weaknesses in internal controls and financial reporting; comprehensive monetary statistics not published since early 2008.
  - RBZ used international reserves backing banks’ statutory reserves ($80 million) and sold shares from its portfolio at the Zimbabwe Stock Exchange ($38 million) to finance activities during January 2009–March 2010, including operating expenses, quasi-fiscal activities, and debt repayments.
  - Parliament passed amendments to the RBZ Act envisaging stronger accountability, but they do not reflect several Fund TA recommendations (e.g., appointment of a nonexecutive chairman of the supervisory Board, greater central bank operational independence, transitional provisions for the multi-currency system, or prohibition of government financing).
- Government stance on the multi-currency regime:
  - Regime considered temporary and to be maintained during 2010–12 while debating medium-term currency options.
  - Authorities revising exchange control regulations to increase transparency and considering options for resolving small change and poor-quality banknotes.

### Staff recommendations for banking supervision and RBZ resolution
- Strengthen supervisory efforts to ensure banking system can withstand projected balance of payments deterioration and possible intensification of credit risk:
  - Implement a liquidity requirement of 25 to 30 percent, elevated for banks with weak liquidity management practices; liquidity requirement should exclude, but not extinguish, claims on the RBZ until RBZ negative equity resolved.
  - Intensify identification of banks with weak underwriting skills and monitor remedial actions.
  - Discontinue moral suasion on banks to lend to specific sectors and avoid perception of regulatory forbearance for government-prioritized lending.
- Apply the existing resolution framework to ensure orderly exit of non-viable banks; public funds bailouts are not an option given insufficient funds for systemic problems.
- Reduce banks’ exposure to the RBZ:
  - Establish a dedicated RBZ nostro account backing banks’ deposits to the RTGS account and publish its balance daily.
  - Abolish the existing 2.5 percent statutory reserve requirement on new deposits.
  - Following disposal of RBZ noncore assets under appropriate governing board supervision, mobilized resources could be used to refund banks’ statutory reserves on pre-March 2010 deposits.
  - Resolve remaining banks’ claims on the RBZ as part of overall resolution of RBZ liabilities.
- Establish effective RBZ oversight to strengthen credibility of the multi-currency system:
  - Appoint an RBZ governing board.
  - Approve a downsized, fully funded RBZ budget.
  - Bifurcate the RBZ balance sheet to isolate noncore assets and liabilities from those essential for core functions.
  - Adopt a resolution framework for overdue liabilities and transparently dispose of noncore assets.
  - The Fund could provide TA in these areas after an effective RBZ governing board is appointed.
- Multi-currency regime guidance:
  - Continue the multi-currency regime during 2010–12 with improvements to exchange control regulation transparency and consistency.
  - Improve supply of coins with assistance from South Africa; minting local coins would be counterproductive until RBZ governance issues are resolved and financial position strengthened.
- Future currency-regime options include full official dollarization with the U.S. dollar or the rand, accession to the rand Common Monetary Area, and longer-term options such as a currency board arrangement or intermediate regimes. Reintroduction of the Zimbabwe dollar as sole legal tender only after a track record of sound policies and credible central bank governance focused on price stability is established and enacted.

### Authorities’ views on financial sector recommendations
- Authorities broadly agreed with staff assessment of banking system risks and indicated they would implement a liquid asset requirement of 25 percent and ring-fence the RTGS account at the RBZ in the near future.
- RBZ actions contemplated:
  - Consider abolishing the 2.5 percent statutory reserve requirement once sufficient resources are mobilized from disposal of noncore assets.
  - High importance attached to speedy resolution of RBZ governance problems; confident an RBZ governing Board will be appointed soon to address governance weaknesses.
  - Agreed to downsize the RBZ and bifurcate its balance sheet under RBZ Board supervision and requested Fund TA in these areas.
- Authorities committed to maintaining the multi-currency system until end-2012 and indicated that beyond 2012 options involving some form of official dollarization or closer monetary cooperation with neighboring countries would be more realistic; they will narrow options in the second half of 2010 and request further Fund TA.

### Key banking and RBZ numerical indicators (preserved as in source)
- Banks’ exposure to the financially distressed RBZ: about 70 percent of banks’ capital.
- Agricultural sector share of loan portfolios: 20 percent.
- Liquidity prudent level cited: 25 percent (liquidity ratios below this at some large banks at end-December 2009).
- RBZ used international reserves backing statutory reserves: $80 million.
- RBZ sold shares from its portfolio at the Zimbabwe Stock Exchange: $38 million.
- Statutory reserve requirement of 10 percent of deposits (excluding government’s and SOEs’ deposits) implemented on February 1, 2009; from February 1, 2010, the end-January 2010 stock of deposits still subject to the 10 percent requirement, while any increase in the stock of deposits is subject to a 2.5 percent requirement.

---

### C. Moving toward External Stability and Sustainable Growth — Background and staff recommendations
- External position and debt:
  - External debt projected at 151 percent of GDP by 2015, with 104 percent of GDP in arrears.
  - Zimbabwe performs poorly on competitiveness measures (governance, investment climate, infrastructure quality, price/wage indicators).
- Mineral wealth and external sustainability:
  - Staff estimate that at end-2009 Zimbabwe’s net foreign asset (NFA) position, including net present value of future mineral receipts under an optimistic extraction scenario, is significantly negative — in the order of 63 percent of GDP.
  - Maintaining this negative NFA would require generating nonmineral primary external current account surpluses whereas this balance stands in deficit at over 35 percent of GDP; closing such a gap without debt relief is not feasible in the foreseeable future.
- Staff recommendations for structural reforms to support growth and exports:
  - Review regulations under the Indigenization and Economic Empowerment Act to ensure indigenous empowerment does not conflict with attracting foreign direct investment and equitable, transparent distribution of wealth.
  - Expedite resolution of land ownership issues to ensure security of land tenure and enable long-term agricultural investment.
  - Increase labor market flexibility, including with regard to wage levels, essential for sustainability of the multi-currency system.
- Debt relief and program sequencing:
  - Sound policies and debt relief in the context of a comprehensive arrears clearance strategy (FO/DIS/09/100) agreed among government coalition partners and official creditors would help achieve external and growth sustainability and increase benefits from mineral wealth if managed transparently.
  - A Staff Monitored Program (SMP) would be a stepping stone toward debt relief and new IFI lending. Progress toward an SMP requires strengthened economic policies (RBZ governance, reporting and financial management, public sector wages) and donors’ indications of support for an eventual Fund financial arrangement, which requires clearance or programming to clear arrears to official creditors, including $1.4 billion to IFIs.

### Authorities’ views on external strategy
- Authorities agreed the country is in debt distress and that mineral wealth alone would not be sufficient for debt sustainability.
- Working on a comprehensive “hybrid” strategy involving both a request for debt relief under the HIPC Initiative to resolve external payments arrears and use of fresh IFI financing and mineral wealth to achieve sustainable development.
- Authorities expressed strong interest in an SMP; will seek to strengthen policies and data reporting and improve relations with the international community.
- Agreed that making timely quarterly payments to the Fund and increasing them over time, as payment capacity improves, will strengthen credibility of commitment to normalizing relations with the Fund.

### Key external and debt numerical statistics (preserved as in source)
- External debt projected: 151 percent of GDP by 2015.
- External arrears: 104 percent of GDP by 2015.
- NFA position including optimistic mineral receipts scenario: negative in the order of 63 percent of GDP (end-2009 estimate).
- Nonmineral primary external current account balance: deficit at over 35 percent of GDP.
- Arrears to IFIs cited: $1.4 billion.

*Source: IMF staff report, “12.      The government needs to return to cash budgeting.”*

### 38.      The authorities acknowledged significant structural issues hampering competitiveness

### _cr10186 - 38.      The authorities acknowledged significant structural issues hampering competitiveness

### Structural issues and planned reforms
- The authorities acknowledged significant structural issues hampering competitiveness and growth.
- Indigenization regulations:
  - Government officials are debating in the Cabinet possible revisions to indigenization regulations to provide sufficient assurances to current and potential investors.
  - Pending this debate, the regulations were suspended on April 13, 2010.
- Land ownership:
  - The authorities plan to undertake, in the coming months, a land audit as the first step toward finding a solution for security of land tenure.
- Public sector wages and labor legislation:
  - The government intends to review wage setting practices in SOEs and municipalities to stop the accumulation of wage arrears and help align wages with productivity.
  - The authorities intend to examine labor legislation to identify steps to ensure that companies are not forced to award wages incompatible with productivity by arbitration courts.

### V. CONCLUSION — Policy recommendations and priorities
- The government urgently needs to forge political consensus for addressing significant policy challenges to support the fragile economic recovery.
- Key staff recommendations include:
  - Returning to cash budgeting and reducing the wage bill.
  - Containing rapidly rising risks to the banking system through a reduction of banks’ exposure to the financially distress RBZ and stepped up prudential measures.
  - Strengthening RBZ governance and downsizing it.
  - Implementing key structural measures, including with respect to enforcement of property rights, security of land tenure, and wage flexibility.
- Political feasibility:
  - Although reaching consensus on the recommended measures is a major political challenge, speedy implementation of the recommendations is essential for reducing significant macrofinancial vulnerabilities and avoiding higher costs of a forced delayed adjustment.

### Key macroeconomic and fiscal indicators (selected figures from Tables)
- Real GDP growth (annual percent change), 2008–15 (Baseline):
  - 2008: -14.5
  - 2009: 4.0
  - 2010: 2.2
  - 2011: 0.2
  - 2012: 0.0
  - 2013: 1.0
  - 2014: 1.8
  - 2015: 2.0
- Nominal GDP (US$ millions), 2008–15 (Baseline):
  - 2008: 3,929
  - 2009: 4,397
  - 2010: 5,144
  - 2011: 5,488
  - 2012: 5,845
  - 2013: 6,159
  - 2014: 6,517
  - 2015: 6,892
- GDP deflator (annual percent change), 2008–15 (Baseline):
  - 2008: -1.3
  - 2009: 7.6
  - 2010: 14.4
  - 2011: 6.6
  - 2012: 5.5
  - 2013: 3.5
  - 2014: 3.8
  - 2015: 3.7
- Consumer price inflation (annual average), 2008–15:
  - 2008: 5.56E+106
  - 2009–2015: 5.0 (annual average)
- Central government (percent of GDP, measured in US$):
  - Revenue and grants: 3.4 (2008), 22.2 (2009), 26.1 (2010), 26.8 (2011), 26.4 (2012), 26.3 (2013), 26.3 (2014), 26.3 (2015)
  - Expenditure and net lending: 6.5 (2008), 25.0 (2009), 33.7 (2010), 30.4 (2011), 31.7 (2012), 32.0 (2013), 32.0 (2014), 32.0 (2015)
  - Of which: wages and benefits: 1.3 (2008), 9.5 (2009), 14.1 (2010), 15.7 (2011), 16.8 (2012), 16.7 (2013), 16.7 (2014), 16.8 (2015)
  - Overall balance (including quasi-fiscal activity): -32.1 (2008), -3.3 (2009), -7.6 (2010), -3.6 (2011), -5.3 (2012), -5.7 (2013), -5.7 (2014), -5.7 (2015)
  - Primary balance (including quasi-fiscal activity): -28.5 (2008), 0.1 (2009), -4.4 (2010), -0.4 (2011), -2.0 (2012), -2.5 (2013), -2.5 (2014), -2.5 (2015)
  - Cash balance: 0.3 (2008), 1.2 (2009), -4.5 (2010), -0.1 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014), 0.0 (2015)
- Money and credit (US$ millions), baseline values:
  - Broad money (M3): 314 (2008), 1,276 (2009), 1,511 (2010)
  - Net foreign assets: -314 (2008), -256 (2009), -647 (2010)
  - Net domestic assets: 628 (2008), 1,531 (2009), 2,158 (2010)
  - Domestic credit: 140 (2008), 602 (2009), 1,048 (2010)
  - Of which: credit to the private sector: 140 (2008), 684 (2009), 1,055 (2010)
  - Reserve money: 71 (2008), 25 (2009), 145 (2010)
- External trade and current account (US$ millions), baseline:
  - Merchandise exports: 1,633 (2008), 1,625 (2009), 2,083 (2010), 2,048 (2011), 2,076 (2012), 2,128 (2013), 2,160 (2014), 2,154 (2015)
  - Merchandise imports: -2,630 (2008), -3,232 (2009), -3,480 (2010), -3,020 (2011), -3,070 (2012), -3,129 (2013), -3,211 (2014), -3,201 (2015)
  - Current account balance (excluding official transfers): -945 (2008), -1,323 (2009), -1,183 (2010), -724 (2011), -795 (2012), -839 (2013), -885 (2014), -915 (2015)
  - Current account balance (percent of GDP): -24.0 (2008), -30.1 (2009), -23.0 (2010), -13.2 (2011), -13.6 (2012), -13.6 (2013), -13.6 (2014), -13.3 (2015)
- Official reserves and debt:
  - Gross official reserves (US$ millions; end-of-period): 63 (2008), 121 (2009), 141 (2010), 141 (2011), 141 (2012), 151 (2013), 151 (2014), 151 (2015)
  - Gross official reserves (months of imports): 0.0 (2008), 1.0 (2009), 0.3 (2010), 0.4 (2011), 0.4 (2012), 0.4 (2013), 0.4 (2014), 0.4 (2015)
  - Total external debt (US$ millions; end-of-period): 5,794 (2008), 7,145 (2009), 7,662 (2010), 8,140 (2011), 8,709 (2012), 9,268 (2013), 9,838 (2014), 10,430 (2015)
  - Total external debt (percent of GDP): 147.5 (2008), 162.5 (2009), 149.0 (2010), 148.3 (2011), 149.0 (2012), 150.5 (2013), 150.9 (2014), 151.3 (2015)
  - Total external arrears (US$ millions): 3,781 (2008), 4,575 (2009), 5,132 (2010), 5,603 (2011), 6,056 (2012), 6,423 (2013), 6,803 (2014), 7,194 (2015)
  - Total external arrears (percent of GDP): 96.2 (2008), 104.0 (2009), 99.8 (2010), 102.1 (2011), 103.6 (2012), 104.3 (2013), 104.4 (2014), 104.4 (2015)

### Financial system vulnerabilities (selected indicators)
- Aggregate financial soundness indicators (2009, commercial banks only):
  - Regulatory capital to risk-weighted assets: 32.4 (Mar-09), 31.3 (Jun-09), 25.7 (Sep-09), 22.7 (Dec-09)
  - Percentage of banks greater or equal to 10 percent: 93.3 (Mar-09), 100.0 (Jun-09), 93.3 (Sep-09), 100.0 (Dec-09)
  - Capital to assets: 24.1 (Mar-09), 18.1 (Jun-09), 16.5 (Sep-09), 12.5 (Dec-09)
  - Nonperforming loans: 3.5 (Mar-09), 2.4 (Jun-09), 1.8 (Sep-09), 1.8 (Dec-09)
  - Provisions as percent of past-due loans: 9.2 (Mar-09), 6.3 (Jun-09), 8.0 (Sep-09), 10.8 (Dec-09)
  - Return on assets: -1.1 (Mar-09), 0.7 (Jun-09), 0.5 (Sep-09), 0.9 (Dec-09)
  - Loans/deposits: 27.8 (Mar-09), 37.8 (Jun-09), 48.8 (Sep-09), 48.0 (Dec-09)
  - Commercial banks lending rate (weighted average): 37.5 (Mar-09), 7.5 (Jun-09), 7.7 (Sep-09), 11.0 (Dec-09)

*Sources: Zimbabwean authorities; IMF staff estimates and projections.*

### 1.   The Reserve Bank of

### 1.   The Reserve Bank of 

### RBZ in financial distress and weak governance (Vulnerability 1)
- Trigger Event:
  - Banks will not be able to obtain a refund of their statutory reserves, for which they are entitled in case of a possible decline in their deposits, because these reserves are not backed by international reserves.
  - The RBZ may not be able to return banks’ RTGS funds. The RTGS account was backed by international reserves at mid-March 2010, but the backing could fall short of 100 percent, as RBZ governance remains weak.
- Likelihood: High
- Reasons / Evidence:
  - The governance issues are long-standing and are unlikely to be fully resolved quickly under the recently enacted amendments to the RBZ Act.
  - There is not any plan in place for downsizing the RBZ to limit its operating expenses. Nor is there a strategy for resolving RBZ’s overdue liabilities.
  - The RBZ could continue quasi-fiscal operations.
  - Gross income is virtually zero.
- Overall Level of Concern: High
- Expected Impact on Financial Stability if Events are Realized:
  - Failure to refund statutory reserves, when required, may lead to loss of confidence in the banking system, resulting in possible bank runs and contagion with spreading liquidity problems. Bank runs may lead otherwise solvent banks to experience large losses, as they struggle to mobilize less liquid assets to meet liquidity needs. These losses could quickly erode the capital position of still weakly capitalized banks.
  - An inability of the RBZ to return RTGS funds to banks may lead to loss of confidence in the payments system, discouraging its use (which negatively affects economic activity) and possibly to liquidity problems in banks, which cannot make payment on behalf of their customers. This may lead to a general loss of confidence in the banking system, with possibly severe effects on the fragile macroeconomic situation.

### No lender of last resort or interbank market, higher liquidity risk (Vulnerability 2)
- Trigger Event:
  - Rapid credit growth has been raising the loan-to-deposit ratio to levels where some banks may start to face liquidity constraints. Unexpected liquidity shocks could be difficult for these banks to manage without a lender of last resort.
- Likelihood: Medium
- Reasons / Evidence:
  - The absence of a lender of last resort or interbank market complicates liquidity management for banks.
  - The liquid asset-to-short-term liabilities ratio of some banks dropped quickly over the course of 2009.
- Overall Level of Concern: High
- Expected Impact on Financial Stability if Events are Realized:
  - Liquidity problems in one or a few banks may lead to bank runs, and contagion to other banks, resulting in a general loss of confidence in the banking system. Bank runs may lead otherwise solvent banks to experience large losses as they struggle to mobilize less liquid assets to meet liquidity needs. These losses could quickly erode the capital position of still weakly capitalized banks.

### Weakly capitalized banking system; capital largely revalued premises (Vulnerability 3)
- Trigger Event:
  - Banks do not have sufficient capital or cannot make the capital they hold quickly available to meet unexpected losses from loan or other assets, including claims on the RBZ.
- Likelihood: Medium
- Reasons / Evidence:
  - Banks are weakly capitalized, with significant exposure to the financially distressed RBZ which is now counted toward capital (70 percent of banks’ capital).
  - The RBZ has required banks to increase their minimum capital and most banks have met the first required tranche in 2009Q4, indicating some ability of the banking system to raise additional capital. However, this ability may have been undermined by increased uncertainties about the indigenization process.
- Overall Level of Concern: High
- Expected Impact on Financial Stability if Events are Realized:
  - If banks are unable to use their existing (notional) capital base to meet losses and are unable to raise additional capital, they may be forced into bankruptcy. Failure of one or more banks may lead to a general loss of confidence in the banking system, with adverse effects on the fragile macroeconomic situation.

### Rapid credit growth and eroded underwriting skills, heightened credit risks (Vulnerability 4)
- Trigger Event:
  - There is a sharp rise in non-performing loans.
- Likelihood: Medium
- Reasons / Evidence:
  - The long history of high- and hyper-inflation is likely to have eroded loan underwriting skills in banks.
  - While reported aggregate NPLs remain low, this is likely mostly a reflection of the immaturity of the loan portfolio, a possible lack of experience in correctly assessing loan quality, and potentially hidden evergreening of mostly short-term loans.
  - High credit growth is usually strongly correlated with future increases in NPLs.
  - Strong credit growth is in part attributable to moral suasion to lend to drought-prone agriculture.
- Overall Level of Concern: Medium
- Expected Impact on Financial Stability if Events are Realized:
  - A sharp increase in nonperforming loans would impact profitability by lowering interest income and requiring loan provisioning. Weakly capitalized banks would have difficulty to withstand significant loan losses.
  - Failure of one or more banks could lead to a general loss of confidence in the banking system, with negative effects on the fragile macroeconomic situation.

### Precarious external position and risks under the multi-currency system (Vulnerability 5)
- Trigger Event:
  - Balance of payments pressure forces a contraction in banks’ liquid foreign assets under the multi-currency system, leading to liquidity difficulties in the banking system.
- Likelihood: High
- Reasons / Evidence:
  - Under the multi-currency system, balance of payments pressure leads to an outflow of funds (i.e., nostro accounts and cash in vaults) from banks.
  - With high credit growth and concomitant domestic creation of U.S. dollar-denominated deposits, the above factor may lead to liquidity shortages for banks.
  - The banking system is unlikely to be able to borrow abroad to resolve these liquidity issues.
- Overall Level of Concern: High
- Expected Impact on Financial Stability if Events are Realized:
  - Without a domestic currency or a lender of last resort, a systemic liquidity shortage may lead to bank runs and a general loss of confidence in the banking system, further exacerbating the demand for liquidity.
  - Faced with a systemic liquidity shortage, banks are likely to respond with a sharp curtailment of credit, with a strong contractionary effect on economic activity.
  - Knock-on effects of the economic contraction through rising NPLs would exacerbate the effects on the financial sector.

### Appendix I. Zimbabwe: Fund Relations — Financial Relations (As of March 31, 2010)
- I. Membership Status:
  - Joined: September 29, 1980;
  - Article VIII
- II. General Resources Account: SDR Million %Quota
  - Quota 353.40 100.00
  - Fund holdings of currency 353.07 99.91
  - Reserve position 0.33 0.09
- III. SDR Department: SDR Million %Allocation
  - Net cumulative allocation 272.18 100.00
  - Holdings 165.13 60.67
  - Note: Excluding SDRs allocated and placed in escrow account under the Fourth Amendment of the IMF’s Articles of agreement (SDR 66,402,156). Such holdings will be available to Zimbabwe upon the settlement of all overdue obligations to the Fund.
- IV. Outstanding Purchases and Loans: SDR Million %Quota
  - ECF arrangements 73.56 20.82
- V. Latest Financial Arrangements:
  - Stand-by Aug 02, 1999 Oct 01, 2000 141.36 24.74
  - Stand-by Jun 01, 1998 Jun 30, 1999 130.65 39.20
  - ECF 1/ Sep 11, 1992 Sep 10, 1995 200.60 151.90
  - 1/ Formerly PRGF
- VI. Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Overdue Principal: 73.56 (as of March 31, 2010)
  - Charges/interest: 15.76
  - Forthcoming (2010) 0.38; (2011) 0.45; (2012) 0.45; (2013) 0.45; (2014) 0.45
  - Total overdue and forthcoming totals: 89.32 0.38 0.45 0.45 0.45 0.45
  - Notes:
    - The projection of charges and interest assumes that overdue principal at the report date (if any) will remain outstanding, but forthcoming obligations will be settled on time.
    - Projected amounts do not include additional interest levied on overdue PRGT interest.
- VII. Implementation of HIPC Initiative: Not Applicable
- VIII. Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable
- IX. Application of Remedial Measures under the Arrears Strategy:
  - Zimbabwe has been in continuous arrears to the Fund since February 2001.
  - On September 24, 2001, the Executive Board declared Zimbabwe ineligible to use the general resources of the Fund and removed it from the list of PRGT-eligible countries.
  - On June 13, 2002, the Board issued a declaration of non-cooperation with respect to Zimbabwe and suspended all technical assistance to the country.
  - On June 6, 2003, the Board suspended Zimbabwe’s voting and related rights in the Fund.
  - A complaint with respect to compulsory withdrawal was issued on February 6, 2004. The Executive Board considered the complaint on July 7, 2004, on February 15, 2005, and again on September 9, 2005 and decided to postpone the recommendation on Zimbabwe’s compulsory withdrawal from the Fund to the Board of Governors so as to give more time for Zimbabwe to improve cooperation with the Fund.
  - On February 15, 2006, Zimbabwe fully settled its arrears to the General Resources Account. As a consequence, the Managing Director withdrew his complaint for compulsory withdrawal. However, the Executive Board decided not to restore Zimbabwe’s voting and related rights, nor did it terminate Zimbabwe’s ineligibility to use the general resources of the Fund. The Executive Board kept in place the decisions taken to address Zimbabwe’s arrears to the PRGT Trust—the declaration of noncooperation, the suspension of technical assistance, and the removal of Zimbabwe from the list of PRGT-eligible countries. Zimbabwe’s arrears to the PRGT Trust remain, amounting to SDR 89.3 million (US$137 million) as of March 31, 2010.
  - On May 4, 2009, the Executive Board lifted the suspension of technical assistance to Zimbabwe in the following areas: (i) tax policy and administration, (ii) payments system, (iii) lender-of-last resort and banking supervision, (iv) central banking governance and accounting (EBS/09/55).
  - The last review of Zimbabwe’s overdue financial obligations to the PRGT Trust was completed in August 2009 (EBS/09/131, 8/27/2009), and the Executive Board decided the Fund should continue its technical assistance in targeted areas but that the other measures to address Zimbabwe’s arrears to the PRGT Trust should remain in place.
  - On February 19, 2010, the Executive Board restored Zimbabwe’s voting rights and its eligibility for general resources.
- X. Exchange Arrangement:
  - Payments and transfers for current international transactions can now be effected without restriction, apart from one remaining exchange restriction subject to IMF jurisdiction arising from unsettled balances under an inoperative bilateral payments agreement with Malaysia.
  - Since 2009, Zimbabwe has adopted hard currencies for transactions (i.e., multi-currency regime) with the U.S. dollar as principal currency; and use of the Zimbabwe dollar as domestic currency was discontinued over the period 2010–12. The de facto exchange regime is classified as exchange arrangement with no separate legal tender.
- XI. Article IV Consultation:
  - Zimbabwe is on the standard 12-month consultation cycle. The Executive Board discussed the staff report for the 2009 consultation on May 4, 2009.
- XII. Technical Assistance (2009):
  - MCM mission on payments systems, lender-of-last resort operations and banking supervision, and central banking governance and accounting
  - FAD mission on tax policy
  - FAD mission on revenue administration
  - FAD follow-up mission on tax policy

*Prepared by the African Department (In collaboration with other departments); Approved by Sharmini Coorey; April 28, 2010*

### Appendix II. Zimbabwe: Relations with the Fund and the World Bank Group

### Appendix II. Zimbabwe: Relations with the Fund and the World Bank Group (As of April, 2010)

### Areas of collaboration — Bank and Fund (thematic areas)
- Macroeconomic stabilization / Policies to stabilize the economy
  - Bank: Complement Fund’s macroeconomic policy advice with structural work, focused on fiscal issues in parastatals, public sector management, and civil service payroll. TA in building technical capacity to develop a medium-term fiscal framework.
  - Fund: Lead the policy dialogue in macroeconomic policies, including fiscal and monetary policies, and the medium-term macroeconomic framework.
- Arrears clearance / Strategy for arrears clearance
  - Process for arrears clearance with respective Fund/Bank roles agreed in a joint IMF/WB/AfDB note (June 2009).
  - Fund background paper on competitiveness and external sustainability.
- Growth recovery
  - Bank: Prepare policy notes on issues in growth recovery on themes, such as competitiveness, and sector notes to support the preparation of the government medium-term plan.
- Taxation
  - Bank: TA in tax policy and revenue administration.
- Public financial management (PFM) and governance / Strengthen PFM and reduce fiduciary risks
  - Bank: TA in PFM systems.
  - Bank: Benchmarking assessment of PFM and procurement systems.
  - Payroll audit: Finalize payroll audit and follow-up with TA in human resource systems.
  - Public spending: Prepare analytical notes on public expenditure issues.
  - Capacity building: Funding by World Bank managed analytical Multi-Donor Trust Fund (MDTF).
- Monetary policy and financial sector / Monetary policy operations
  - Bank: Background paper on options for a future currency regime.
  - Bank: Exchange restrictions reviewed.
  - Bank: TA in RBZ governance, accounting, and restructuring.
- Monetary policy and financial sector / Financial sector reform
  - Bank: Analytical work on financial sector development issues.
  - Bank: TA in banking supervision and payment systems.
  - Bank: Background paper on developments in the banking system.
- Infrastructure / Investment to rehabilitate SOEs
  - Bank: Mobilize donor support through the programmatic MDTF.
  - Bank: Analytical support for implementation of capital budget.
  - Bank: Financial support for water and sanitation rehabilitation.
- Poverty reduction
  - Bank: Support collection and analysis of socio-economic data.
  - Bank: Financial support for fertilizer subsidy.
- Statistics / Capacity building
  - Bank: Building capacity at the Central Statistical Office.

### Statistical issues — Assessment of data adequacy for surveillance (As of April, 2010)
- General
  - Data have serious shortcomings that significantly hamper surveillance; serious shortcomings in all major datasets.
  - The Central Statistics Office (CSO) needs to rebuild capacity and acquire new equipment.
  - All technical assistance from the Fund was suspended on June 13, 2002, when the Executive Board issued a declaration of noncooperation. On May 4, 2009, the Executive Board lifted the suspension of technical assistance in targeted areas, including assistance in some areas of monetary and fiscal statistics.
  - Data on employment and wages are no longer published; a new labor force and child labor survey will be needed to revive comprehensive labor statistics.
- National Accounts
  - Most recent publication includes developments until 2008 in Zimbabwe dollars and U.S. dollars and uses 1990 as the base year for constant prices.
  - Production constrained by insufficient input data (low survey response rates) and insufficient processing and resource capacity.
  - Benchmark data: industrial production based on a 1999 survey; services based on a 1981 survey.
  - Last income, consumption, and expenditure survey of reasonable quality was in 2001; a 2007/08 survey is distorted due to hyperinflation.
  - Some input data (e.g., recent agriculture and livestock survey) remain unprocessed due to insufficient capacity.
  - Staff produced provisional estimates of value added in U.S. dollars for 2009 based on a sector-by-sector production approach; authorities reviewing staff estimates and plan to produce official estimates in the near future.
- Price statistics
  - 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.
- Government finance statistics
  - Ministry of Finance (MoF) does not report on fiscal developments at the general government level (including local governments and all other government units).
  - Reporting for central government has improved significantly over the past twelve months.
  - MoF collects data on revenue and expenditure and publishes them on its website on a bi-annual basis, along with budget statements.
  - MoF is reconciling its data on external debt, in particular interest payments on principal and arrears, with external creditors.
- Monetary statistics
  - RBZ produces monthly monetary and financial statistics with an irregular lag of three to six months.
  - Data quality has deteriorated due to previous hyperinflation, transition to accounting in U.S. dollars, weak accounting practices, and quasi-fiscal activities.
  - Auditors provided an adverse opinion of the 2008 RBZ financial statement based on the hyperinflationary environment in 2008 and failures within RBZ’s financial reporting systems (inability to account for foreign currency purchases and internal control deficiencies).
  - MCM technical assistance in 2009 and Article IV missions in 2009 and 2010 recommended central bank accounting and compilation of net international reserves data improvements, including identification of encumbered assets and ensuring completeness of foreign currency liabilities.
  - RBZ has not published comprehensive monetary statistics since April 2008.
- External sector statistics
  - Balance of payments and external debt statistics suffer from multiple 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.
    - Financial account is incomplete; it does not record substantial transactions in assets reported by central banks that are members of the Bank for International Settlements.
    - RBZ’s initial submission of flows and stocks of gross international reserves and 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 staff irregularly with significant delays.

### Data Standards, Reporting, and the Table of Common Indicators
- Data Standards and Quality
  - Not a General Data Dissemination System participant.
  - No data ROSC is available.
- Reporting to STA
  - Zimbabwe does not report balance of payments statistics to STA for redissemination in International Financial Statistics or the Balance of Payments Statistics Yearbook.
  - No monetary or fiscal data are currently reported to STA for publication in International Financial Statistics; annual fiscal data are not reported for inclusion in the Government Finance Statistics Yearbook.
  - National accounts data have not been reported since 2005 and no data are being reported for the new CPI.
- Selected items from the Table of Common Indicators Required for Surveillance (exact entries as listed)
  - International reserve assets and reserve liabilities of the monetary authorities — Date of latest observation: 31/12/09 — Date received: 15/03/10 — Frequency of data: M — Frequency of reporting: I — Frequency of publication: NA
  - Reserve/base money — 31/12/09 — 11/03/10 — M — I — NA
  - Broad money — 31/12/09 — 11/03/10 — M — I — NA
  - Central bank balance sheet — 31/12/09 — 11/03/10 — M — I — NA
  - Consolidated balance sheet of the banking system — 31/12/09 — 11/03/10 — M — I — NA
  - Interest rates — 31/12/09 — 03/03/10 — Q — I — NA
  - Consumer price index — 02/10 — 24/03/10 — M — M — M
  - Revenue, expenditure, balance and composition of financing — Central government — 31/01/10 — 03/03/10 — M — M — NA
  - Stocks of central government and central government-guaranteed debt — 31/01/10 — 03/03/10 — M — I — NA
  - External current account balance — 2009 — 03/03/10 — NA — I — NA
  - Exports and imports of goods and services — 2009 — 03/03/10 — NA — I — NA
  - GDP/GNP — 2008 — 15/10/09 — A — I — NA
  - Gross external debt — 2009 — 03/03/10 — A — I — NA

### Debt Sustainability Analysis (prepared by African and Strategic Policy and Review Departments; approved April 29, 2010)
- Key factual findings
  - At end-2009, total public- and publicly-guaranteed (PPG) debt amounted to US$6.9 billion or 157 percent of GDP, of which 102 percent of GDP was in arrears.
  - About 90 percent of total PPG debt is medium- and long-term debt and about 90 percent of total PPG is owed to official creditors.
  - Zimbabwe’s overdue financial obligations to IFIs include: World Bank US$731 million, African Development Bank US$483 million, and the IMF US$140 million.
  - The projected use of the SDR allocation of $210 million is not included in external debt, but related net interest charges are included in debt service and present value calculations.
- Caveats and data limitations
  - The DSA is based on nonreconciled debt numbers and staff estimates of accrued interest and penalties on arrears; authorities are reconciling their debt stock and debt service data with creditors but process not completed.
  - Significant uncertainties regarding policy direction and poor long-term policy track record make medium- and long-term projections tentative.
- Conclusion on debt position
  - Zimbabwe is clearly in debt distress; under current policies and medium-term donor financing largely confined to humanitarian assistance, the large debt stock would remain unresolved and arrears would continue to build up.
  - Most debt ratios are projected to decline gradually but would remain at unsustainable levels over the medium and long term.
  - Historical sensitivity analysis shows most debt ratios could increase over the long term from current unsustainable levels.
- Box: Key medium-term macroeconomic assumptions for the DSA
  - Real GDP is projected to grow at 1.5 to 3 percent in the medium and long term.
  - Donor support is assumed to be largely confined to humanitarian assistance.
  - FDI, portfolio investment, and private sector borrowing would remain limited in the medium and long term.
  - Import growth would be constrained by sluggish export performance and low capital inflows and nonhumanitarian official financing.
  - Owing to lack of access to foreign and domestic financing, the government is projected to run balanced budgets on a cash basis in the medium and long term, but the stock of domestic payments arrears would increase. Given current policy of allocating significant budgetary resources to wages and no scope for a significant revenue-to-GDP ratio increase, essential infrastructure projects would remain underfinanced.
- Baseline scenario projections and implications
  - Baseline assumes a more pessimistic outlook than the previous DSA (IMF Country Report No.09/139) reflecting weakening of macroeconomic policy discipline and structural reform momentum.
  - Annual real GDP growth is projected to average 1.5 percent for 2010–15 and about 3.0 percent during 2016–30.
  - The non-interest external current account deficit is projected to fall from 16 percent of GDP in 2010 to 6 percent in 2015, mainly due to drying up of private capital inflows and import compression.
  - External financing gaps would remain over the long term and are assumed to be financed by continued buildup of external payments arrears.
  - In the baseline, at end-2009, PPG external debt indicators exceed LIC thresholds for poor performers and are projected to continue to exceed those thresholds by a large margin, declining only gradually.
  - Thresholds for PV of PPG external debt used for this LIC DSA (weak policy performer) are: 200 percent of revenue; 100 percent of exports; and 30 percent of GDP.
- Sensitivity analysis
  - Historical sensitivity analysis indicates external debt indicators could increase rapidly (rather than decline) in the medium to long term relative to the baseline.
- Public debt dynamics
  - Baseline assumes limited progress in fiscal policy implementation; budget revenue projected to remain at around 26 percent of GDP over the medium to long term.
  - Wage bill projected to continue to claim a large share of total revenue, leaving virtually no room for growth-enhancing capital expenditures.
  - Initial public domestic debt level is low but expected to increase: RBZ’s foreign currency-denominated domestic debt is estimated at $419 million (10 percent of GDP) and government domestic payments arrears at $48 million (1.2 percent of GDP) at end-December 2009.
  - Projected continued accumulation of government domestic payments arrears in the medium term drives increase in stock of domestic public debt.
  - Zimbabwe’s overall public debt is unsustainable: public debt estimated to gradually decline from 157 percent of GDP in 2009 to about 119 percent of GDP in 2020.
  - Present value of the debt-to-revenue ratio is projected to remain at about 400 to 500 percent through 2020.
  - Debt service-to-revenue ratio is projected to decline to about 30 percent by 2020.

*International Monetary Fund — Zimbabwe: Appendix II and related statistical and DSA material (As of April, 2010; Debt Sustainability Analysis approved April 29, 2010).*

### Conclusion

### _cr10186 - Conclusion

### Key assessment and outlook
- "Zimbabwe is in debt distress, which is compounded by unresolved economic policy challenges."
- Achieving debt sustainability requires "a significant strengthening of economic policies and an improvement of relations with the international community whose support is essential for securing debt relief."
- The outlook for 2010 is described as "highly uncertain" given: large budgetary wage increases; a potential slowdown in private capital inflows; strong credit growth; rising external and banking system vulnerabilities.
- Real GDP growth and inflation:
  - Real GDP is estimated to have grown by about 4 percent in 2009, following a contraction of about 14 percent in 2008.
  - The officially reported 12-month consumer price index (CPI) in U.S. dollar terms declined by about 8 percent in December 2009.

### Major macrofinancial indicators and vulnerabilities (selected figures)
- External position and financing:
  - Donors provided significant off-budget financing for social services and humanitarian assistance: about US$540 million, or 12 percent of GDP, in 2009.
  - Current account deficit estimated to have widened to 30 percent of GDP in 2009, from 24 percent in 2008.
  - External debt estimated at US$7.1 billion (162 percent of GDP) by end-2009.
  - Total external arrears: 2009 value in table shows 4,575 (US$ millions) and percent of GDP 104.0 for 2009 (Table: Selected Economic Indicators).
- Fiscal and public finance:
  - Budget revenue and grants increased from less than 4 percent of GDP during hyperinflation in 2008 to an estimated 22 percent of GDP (US$975 million) in 2009, mainly on account of indirect taxes.
  - Budgetary cash expenditures in 2009: 21 percent of GDP (US$920 million).
  - Capital expenditures accounted for 1 percent of GDP in 2009.
  - Quasi-fiscal activity by RBZ in 2009 amounted to 0.5 percent of GDP.
- Banking and monetary sector:
  - Deposits with banks tripled between end-March and end-December 2009; banks’ loan portfolios grew six-fold (from a very low base).
  - Gross official reserves (end-of-period): 2009 reported as 12 (US$ millions) in Selected Economic Indicators table.
- Other selected numbers from the assessment tables (baseline projections and indicators):
  - Total external debt (US$ millions; end-of-period): 2008 = 5,794; 2009 = 7,145; 2010 projection = 7,662.
  - Total external debt (percent of GDP): 2008 = 147.5; 2009 = 162.5; 2010 projection = 149.0.
  - Current account balance (excluding official transfers) in US$ millions: 2009 = -1,323; 2010 projection = -1,183 (percent of GDP: -30.1 in 2009; -23.0 in 2010).
  - Real GDP growth (annual percent change) in Selected Economic Indicators: 2008 = -14.5; 2009 = 4.0; 2010 projection = 2.2.
  - Nominal GDP (US$ millions): 2008 = 3,929; 2009 = 4,397; 2010 projection = 5,144.
  - Broad money (M3): 2008 = 314; 2009 = 1,276; 2010 projection = 1,511 (US$ millions).
  - Debt service-to-exports and other debt sustainability metrics are presented in the staff tables and charts, showing elevated PV of debt-to-exports and PV of PPG external debt in percent of exports and revenues across the projection period (2010-2030).

### Executive Board assessment and recommendations
- Directors welcomed recent improvements in macroeconomic performance and humanitarian conditions but stressed the need for decisive policy measures to solidify gains and reduce vulnerabilities.
- Fiscal policy recommendations:
  - Create sufficient space for social and developmental expenditure.
  - Return to cash budgeting.
  - Reduce the wage bill and other low-priority expenditures.
  - Additional revenue measures are necessary.
  - Refrain from further use of nonconcessional SDR-related funds for budget financing; save SDR holdings as part of reserves.
- Financial sector and RBZ governance:
  - Address governance weaknesses at the Reserve Bank of Zimbabwe (RBZ); the appointment of an RBZ Board on May 3, 2010 is welcomed.
  - Step up prudential supervision to contain credit and liquidity risks.
  - Caution against moral suasion on banks to lend to specific sectors.
- Currency and structural reforms:
  - The multi-currency system is considered appropriate in the coming years.
  - The Zimbabwe dollar may be reintroduced as sole legal tender only after a track record of sound policies and a central bank governance framework focused on price stability is established.
  - Improve the business climate by enforcing property rights, maintaining rule of law, ensuring security of land tenure, and increasing labor market flexibility (especially regarding wage levels).
- Debt relief and Fund engagement:
  - Directors agreed that Zimbabwe is in debt distress.
  - Sound policies and good governance are critical to pave the way for eventual debt relief and access to donor financing.
  - Authorities encouraged to improve cooperation with the Fund on policies and payments.
  - Many Directors supported continuation of Fund technical assistance; some Directors viewed a Staff Monitored Program (SMP) as potentially helpful to establish a track record, subject to demonstrated progress in policies and data reporting.
- Data and statistics:
  - Directors noted significant deficiencies in the quality and timeliness of data reporting and underscored the need for rapid improvement with Fund technical assistance.

### Authorities’ intentions and measures (Statement by Mr. Majoro, May 17, 2010)
- Fiscal management and reforms:
  - Authorities committed to cash budgeting and have placed a cap on the current wage bill while considering additional revenue measures (including receipts from diamond exports and income tax reform).
  - Recruitment in non-critical vacant positions frozen; a civil service audit undertaken with report expected by end-May 2010 and to be availed to the public in July 2010.
  - Public Finance Management and Audit Acts passed to improve accountability and oversight.
  - A high level committee set up to formulate recommendations to reduce cost of living, rationalize utility tariffs, and improve public utilities management.
- Use of SDRs and arrears:
  - Authorities decided to use part of their SDR allocation to meet urgent humanitarian needs and focused spending to rehabilitate agriculture, essential infrastructure, and support ongoing projects; they argue this was the only viable financing source for immediate needs.
  - Regarding Fund arrears, authorities had a quarterly payment plan of US$100,000 towards PRGT arrears in 2009 and report paying slightly more, committing to continue quarterly payments and increase amounts as capacity improves.
- RBZ reform:
  - Progress reported on RBZ governance and accounting reforms; new Board established May 3, 2010 to refocus RBZ on core functions, right-size staff, and address quasi-fiscal operations.
  - Authorities indicate RBZ debt reconstruction legislation in preparation and continuing budgetary allocations to RBZ to restore viability.
- Debt management and engagement with donors:
  - Authorities recognize debt-overhang and are developing a debt relief and arrears clearance strategy; initial steps include engaging a debt consultant with support from African Development Bank; technical help from DfID and MEFMI in debt management and debt sustainability analysis.
  - A Debt Management office is being set up.
- Policy program and SMP:
  - Authorities devised a three year macroeconomic policy and budget framework for 2010-2012 (Short Term Emergency Recovery Program II).
  - Authorities view an SMP as an appropriate framework to advance reforms and as a critical step toward debt relief; they request Board support for an SMP and welcome continued Fund technical assistance to improve data reporting.

*Source: IMF staff report and Public Information Notice summarizing the 2010 Article IV consultation with Zimbabwe (May 17 and May 25, 2010).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10186.pdf_