## _cr11135 - 1. Selected Economic Indicators, 2008–16 ## Source details **Canonical URL:** [_cr11135 - 1. Selected Economic Indicators, 2008–16](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11135.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11135.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11135.pdf.json) --- ### A nascent recovery (2009–10) - Overview - Political turmoil and economic mismanagement caused large output losses and culminated in hyperinflation and a humanitarian crisis in 2008. - The unity government formed in February 2009 adopted a multicurrency regime that restored price stability and forced stronger fiscal discipline. - Price and exchange liberalization increased efficiency, boosted output, and encouraged renewed capital inflows. - Growth and composition - Real GDP growth accelerated from 6 percent in 2009 to 9 percent in 2010. - Growth concentrated on primary commodity sectors in mining and agriculture; manufacturing and utilities remained weighed down by structural impediments. - Fiscal developments - Off-budget donor grants amounted to 8.6 percent of GDP in 2010 and supported the recovery and food security. - After a small cash fiscal surplus in 2009, the central government had a cash deficit in 2010. - Expenditure arrears amounted to $75 million at end-2010. - Improvements in tax policy and administration generated large increases in fiscal revenues, but oversized employment costs and financing of weakly supervised state-owned enterprises undermined expenditure quality. - External and debt position - Current account deficit was 23 percent of GDP in 2010. - Usable reserves were 0.4 months of imports at end-2010. - External debt stock was 118 percent of GDP at end-2010, with the bulk in arrears (80 percent of GDP at end-2010). - Financial sector - The banking system surpassed prehyperinflation size but remained highly vulnerable with weakening capitalization, rising nonperforming loans, tightening liquidity, and declining liquid foreign assets. ### Outlook and risks (Unchanged policies scenario and medium term) - Near-term projections under unchanged policies - Growth projected to decelerate to 5.5 percent in 2011. - Twelve-month inflation forecast to increase to about 7 percent by December 2011. - Current account deficit projected at about 14 percent of GDP in 2011. - Foreign direct investment and portfolio investment projected to decline in 2011. - Government intends to run a fiscal deficit of 4 percent of GDP, financed by nonconcessional external borrowing. - Medium-term baseline (unchanged policies) - Real GDP growth rates gradually decline to about 3 percent over the medium term. - Balance of risks (unchanged policies) - Upside: higher commodity prices and increased diamond exports could underpin higher growth and faster reduction of the current account deficit. - Downside: political disturbances, export price declines, higher food and fuel prices, unfavorable weather, reversals of capital inflows, and banking system instability. ### Recommended policies scenario (assumed measures and projected outcomes) - Policy measures assumed - Eliminate expenditure overruns in 2011 while leaving more fiscal space for critical infrastructure and social spending. - Start rebuilding fiscal buffers in the medium term. - Forcefully address financial sector vulnerabilities. - Strengthen the business climate to attract capital inflows. - Projected outcomes - 2011 growth could reach 7.2 percent. - Over the medium term, growth performance could potentially be boosted by about 3 percentage points relative to the unchanged policies scenario. - International reserves could increase to almost 1 month of imports by 2016. - Higher fiscal revenues, a smaller share of employment costs in expenditures, higher capital spending, a positive cash balance, and a smaller external debt stock. ### Authorities’ views (summary) - Authorities confident growth could be maintained at about 9 percent in 2011 but agreed growth would decline in the medium term under unchanged policies. - Lack of access to concessional official financing cited as a major constraint on medium-term growth potential. - Some officials noted restrictive measures imposed on some Zimbabwean officials and their companies by several countries hindered the recovery and constituted the major obstacle to medium-term growth. ### Policy theme #1 — Create fiscal space and rebuild reserves - Revenue, financing, and expenditure pressures - Revenues projected to remain broadly unchanged at 29 percent of GDP in 2011 compared with 2010 under the unchanged policies scenario, implying a revenue shortfall of 1.6 percent of GDP compared to the 2011 budget. - Over the medium term, revenues expected to stabilize at about 28 percent of GDP. - Donors expected to contribute about $770 million (8.6 percent of GDP in 2011) in off-budget assistance. - Under the recommended policies scenario, nominal revenues would be significantly higher mainly owing to stronger growth in 2011. - Financing and gaps - Contracted nonconcessional borrowing will lead to fiscal deficits in 2011 and 2012, with access to foreign financing uncertain beyond 2012. - 2011 budget limits domestically financed cash expenditure to 31 percent of GDP; external borrowing financed expenditure would amount to 4 percent of GDP. - In absence of corrective measures, domestically-financed expenditure commitments would be higher than budgeted by about 2.7 percent of GDP. - Taking into account the revenue shortfall (1.6 percent of GDP) under unchanged policies, a financing gap of 4.4 percent of GDP likely will emerge. - A significant part of the gap likely will be closed by further accumulation of expenditure arrears and cuts in capital expenditure. - Employment costs and PFM weaknesses - In 2011, employment costs projected to increase by 45 percent to $1.54 billion (17.3 percent of GDP), well above the budgeted $1.4 billion. - Employment costs will account for 59 percent of revenue. - Public payroll audit identified 38,000 staff positions with significant irregularities, including possibly 14,000 ghost workers. - On-budget nonwage expenditure on social programs remains very low. - Zimbabwe, Fiscal Outlook for 2011 (US$ millions, unless otherwise indicated) - Budget 2011: - Net revenues 2,743 - Domestic expenditures and net lending 2,746 - Postbudget expenditure pressures: - Wage over run 155 - External loan commitment fee 4 - Domestic arrears clearance 75 - Total 243 - Recommended scenario: - Revenue shortfall -47 - Expenditure overrun 243 - Total gap 290 - Percent of GDP 3.2 - Baseline scenario: - Revenue shortfall -145 - Expenditure overrun 243 - Total gap 389 - Percent of GDP 4.4 - Staff recommendations (fiscal stance and reforms) - Rebuild fiscal buffers while commodity prices are high. - For 2011, first best advice is a balanced cash budget with no nonconcessional borrowing; given contracted loan, limit fiscal deficit to already contracted foreign borrowing and close likely financing gap of 4.4 percent of GDP ($390 million). - Measures to close the gap may include: - Reducing the wage bill closer to the initially budgeted amount (elimination of ghost workers, strict controls on hiring). - Mobilizing off-budget donor grants for some capital projects. - Curtailing low-priority current and capital expenditures. - Prepare a contingency plan for revenue underperformance or upside revenue saving. - Medium-term fiscal reforms: - Reduce employment costs to about 40 percent of revenues by 2016. - Reinforce expenditure controls and activate human resource module of expenditure control system. - Strengthen oversight of SOEs. - Enhance budget planning within a medium-term expenditure framework. - Continue tax system reform; encourage public debate on draft Zimbabwe Income Tax Act, including mining. ### Policy theme #2 — Contain financial sector vulnerabilities under the multicurrency regime - Background: currency regime and RBZ - Official policy: the multicurrency system will be maintained until at least 2012. - RBZ completed staff downsizing with severance and back wages of about $59 million (0.7 percent of GDP), of which $15 million has already been paid using fiscal transfers. - RBZ remains in financial distress with $1.2 billion of negative equity; financial restructuring at an early stage. - Use of fiscal transfers earmarked for operating expenses to pay severance packages results in further accumulation of RBZ expenditure arrears. - Banking system vulnerabilities - Large exposures to the financially distressed RBZ: $174 million or 40 percent of banks’ equity capital at end-2010. - Rising liquidity risk: 8 banks had liquidity ratios below 20 percent as of end-February 2011. - Increase in number of smaller banks (to seven) failing to comply with minimum capital requirements. - Rising credit risk and nonperforming loans, particularly in smaller banks. - Staff recommendations (financial sector) - Announce an extension of the lifespan of the multicurrency system by mid-2011. - RBZ balance sheet restructuring: - Transfer noncore assets and liabilities to a special purpose vehicle (SPV). - Refund statutory reserves to commercial banks ($83 million) as a priority. - Clarify status of frozen foreign currency accounts of resident nonbanks lodged by banks at the RBZ ($91 million). - Define status of remaining claims of downsized staff ($44 million, 0.5 percent of GDP) and ensure fiscal transfers to RBZ planned under the 2011 budget are used for operating expenses. - RBZ should publish its audited financial statements for 2008 and accelerate completion of the 2009 audit. - Banking supervision and prudential measures: - Intervene swiftly to resolve banks that fail to restore compliance with minimum capital requirements. - Require banks exposed to the RBZ to raise capital, if needed, after RBZ restructuring. - Raise the prudential liquidity ratio to 25 percent (from 20 percent) and exclude illiquid claims on the RBZ from liquid assets definition. - Require risky banks to hold additional liquidity buffers. - Improve stress testing and ensure sound loan underwriting standards. - Authorities’ views (financial) - Authorities intend to announce an extension of the multicurrency system by end-2011. - Government to submit SPV legislation to parliament in coming months; requested further Fund TA in RBZ balance-sheet restructuring. - RBZ officials emphasized need for lender-of-last-resort facility but acknowledged no fiscal space for such a facility. ### Financial soundness indicators (selected) - Capital adequacy - Regulatory capital to risk-weighted assets: Avg.2000-07 21.4; 2008 43.5; Mar-09 32.4; Jun-09 31.3; Sep-09 25.7; Dec-09 21.6; Mar-10 19.0; Jun-10 17.0; Sep-10 14.3; Dec-10 15.3. - Capital to assets: Avg.2000-07 11.2; 2008 41.7; Mar-09 24.1; Jun-09 18.1; Sep-09 16.5; Dec-09 12.0; Mar-10 11.4; Jun-10 10.2; Sep-10 9.1; Dec-10 9.4. - Asset quality - Past-due loans to gross loans 2/: Avg.2000-07 5.9; 2008 59.5; Mar-09 16.1; Jun-09 23.5; Sep-09 19.2; Dec-09 19.9; Mar-10 16.9; Jun-10 16.9; Sep-10 18.1; Dec-10 16.1. - Nonperforming loans 3/: Avg.2000-07 11.5; 2008 6.5; Mar-09 3.5; Jun-09 2.4; Sep-09 1.8; Dec-09 1.8; Mar-10 1.7; Jun-10 1.9; Sep-10 2.3; Dec-10 3.1. - Liquidity and exposures - Loans to deposits: Avg.2000-07 61.0; 2008 73.1; Mar-09 27.8; Jun-09 37.7; Sep-09 48.8; Dec-09 48.1; Mar-10 57.7; Jun-10 60.7; Sep-10 51.6; Dec-10 79.1. - Eight banks had liquidity ratios below 20 percent as of end-February 2011. - Minimum capital requirements: US$10 million for merchant banks and building societies, and US$12.5 million for commercial banks. ### Risk Assessment Matrix (main threats and impacts) - Threat 1: Banks unable to recover frozen claims on RBZ; frozen claims amount to $174 million (about 40 percent of banks’ equity capital at end-2010). Likelihood: Medium; Impact: High. - Threat 2: Failure of smaller distressed banks or banks with weak liquidity. Likelihood: Medium; Impact: High. - Threat 3: Balance of payments pressure forcing contraction in banks’ liquid foreign assets under the multicurrency system. Likelihood: High; Impact: High. - Threat 4: A sharp economic slowdown increasing NPLs and causing contagion. Likelihood: Medium; Impact: Medium. ### Policy theme #3 — Constraints on medium-term growth and competitiveness; structural recommendations - Key constraints - Rapidly rising labor costs, structural impediments, governance impediments. - Indigenization legislation requires 51 percent equity for indigenous Zimbabweans in firms with assets exceeding $500,000; in mining, 51 percent requirement should be met by September 25, 2011. - Staff recommendations (sectoral and structural) - Align empowerment objectives with facilitating domestic and foreign investment and respect for property rights. - Implement a land audit as a first step toward resolving land rights and security of land tenure. - Improve governance of public enterprises active in the diamond sector. - Strengthen regulatory framework in the utilities sector. - Strengthen AML/CFT framework in the diamond and precious metals sector. - Increase flexibility of labor legislation to improve competitiveness. ### Policy theme #4 — Move toward external sustainability and debt - Background and current status - Zimbabwe is in debt distress with the bulk of external debt in arrears. - At end-2010, all but two external debt indicators exceeded thresholds for low-income countries with weak policy frameworks. - Borrowing and guaranteeing of nonconcessional loans by government has intensified debt distress. - Mineral wealth and financing outlook (Figure 10 findings) - NPV of mineral wealth is less than Zimbabwe's external debt. - Projected inflows from mining are not large enough to cover yearly external financing needs. - Definitions: Yearly external financing need = Financing gap (BOP deficit excluding diamonds, gold, and platinum) plus change in arrears; Net mining flows = net value of diamonds, gold, and platinum production available for exports. - Staff recommendations on external sustainability and debt - Significant strengthening of policies and debt relief essential for external sustainability. - Debt relief would require a comprehensive arrears clearance framework supported by donors. - Authorities need to reconcile debt data with creditors. - Adhere to a regular schedule of payments to the PRGT and increase payments as capacity improves. - Refrain from incurring or guaranteeing new nonconcessional loans. ### Preconditions and markers for a Staff-Monitored Program (SMP) - Before an SMP stocktaking exercise: - Meet SMP marker on eliminating ghost workers. - Make progress on measures to eliminate projected fiscal financing gap for 2011. - Strengthen liquidity requirements for banks. - Continue timely data reporting. - Authorities’ actions - Government approved Zimbabwe Accelerated Arrears Clearance, Debt and Development strategy. - A newly established debt office initiated debt reconciliation process expected to be completed later in 2011. - Authorities agreed to make timely quarterly payments to the PRGT and increase them over time. ### Staff appraisal: macroeconomic assessment and priorities - Recovery supported by stronger policies, favorable external environment, and sizeable off-budget donor grants during 2009–10. - Growth concentrated in mining and agriculture; recovery remains fragile. - Urgent priorities and recommended actions: - Strengthen fiscal position and improve expenditure quality: - Immediate return to cash budgeting. - Prevent further increases of the deficit beyond nonconcessional borrowing already undertaken. - Implement expenditure measures to eliminate financing gap from wage overruns and domestic arrears. - Generate small fiscal surpluses to raise international reserves to two months of expenditures over medium term. - Gradually reduce wage bill relative to revenues and tighten SOE budget constraints. - Contain financial sector vulnerabilities: - Restructure RBZ and strengthen prudential regulations and enforcement. - Step up structural reforms: - Align indigenization with property rights, make labor legislation more flexible, improve governance in diamond sector. - Avoid exacerbating debt distress: - Refrain from nonconcessional borrowing and seek better terms for recently contracted debt; secure debt relief within a comprehensive arrears clearance framework. - Staff welcomes authorities’ commitment to make regular quarterly payments to the PRGT and increase payments over time. ### Macroeconomic projections (selected tables and key figures, Unchanged Policies Scenario) - Real GDP growth (annual percent change, 2008–2016): -17.7, 6.0, 9.0, 5.5, 3.5, 3.5, 3.5, 3.3, 3.2 - Nominal GDP (US$ millions, 2008–2016): 4,416; 5,836; 7,474; 8,916; 9,359; 9,871; 10,290; 10,830; 11,515 - Consumer price inflation (annual average, 2008–2016): 5.56E+10, 6.5, 3.0, 4.8, 5.8, 5.7, 5.2, 5.0, 5.0 - Current account balance (percent of GDP, 2008–2016): -23.2; -24.4; -23.2; -13.5; -12.2; -8.7; -8.9; -8.6; -8.4 - Usable international reserves (months of imports, 2008–2016): 0.0; 1.0; 0.4; 0.3; 0.4; 0.4; 0.4; 0.3; 0.3 - Total external debt (percent of GDP, 2008–2016): 143.9; 130.1; 118.0; 107.9; 111.4; 111.5; 113.1; 113.6; 113.1 - Total external arrears (percent of GDP, 2008–2016): 96.2; 90.6; 79.6; 72.4; 74.2; 75.6; 77.7; 79.5; 80.5 ### Recommended Policies Scenario — key differences (selected) - Real GDP growth (annual percent change, 2008–2016): -17.7, 6.0, 9.0, 7.2, 6.2, 6.0, 6.0, 6.5, 6.5 - Central government revenue and grants (percent of GDP, 2008–2016): 3.0; 16.7; 29.4; 29.8; 29.9; 29.8; 29.9; 29.8; 29.7 - Cash balance (percent of GDP, 2008–2016): 0.3; 1.0; -0.4; -3.9; -1.9; 0.7; 0.7; 0.7; 0.7 - Current account as percent of GDP under Recommended Policies (2008–2016): -23.2; -24.4; -23.2; -17.1; -15.9; -12.7; -12.0; -11.4; -10.8 - Months of imports of goods and services (Recommended Policies, 2008–2016): 0.0; 1.0; 0.4; 0.3; 0.6; 0.7; 0.8; 0.8; 0.9 - Total external debt (percent of GDP) under Recommended Policies (2008–2016): 143.9; 130.1; 118.0; 108.1; 110.6; 109.7; 110.6; 109.4; 107.0 - Total external arrears (US$ millions) remain: 4,248; 5,289; 5,950; 6,452; 6,948; 7,459; 7,990; 8,613; 9,267 ### Appendix I — Reserve adequacy (summary) - At end-2010, reserve coverage was about half month of imports and about one month of government expenditures. - Optimal reserve levels for sub-Saharan fragile states with fixed exchange rate regimes range from about six to nine months of import coverage; Zimbabwe was not included in panel estimates due to lack of reliable data. - Country-specific recommendation: - Increase international reserves to at least two months of government expenditures (one month of imports) to ensure continuity of government operations under moderate shocks. - Banking-sector recommendation: - Banks should be required to build liquidity buffers equivalent to 25 percent of their short-term liabilities. ### Appendix III — Net external wealth and mineral wealth NPV (selected numeric results) - Under a 17 percent discount rate: - NPV of mining wealth under the recommended policies scenario: US$6.8 billion (90.5 percent of GDP). - Under optimistic assumptions, Zimbabwe’s NFA position still negative at -12.9 percent of GDP. - Under the unchanged policies scenario NPV of mining wealth is US$5.3 billion (71.5 percent of GDP) with a 17 percent discount rate, and total NFA between -47 and -32 percent of GDP. - Production assumptions by 2016 (unchanged policies): gold 9.7 metric tons; platinum 13.6 metric tons; diamonds 7.6 million carats. - Production assumptions by 2016 (recommended policies): gold 23.9 metric tons; platinum 21.1 metric tons; diamonds 7.6 million carats. - World prices assumed at end-2010 nominal levels: gold US$1,318 per troy ounce; platinum US$1,679 per troy ounce; diamonds 2010 average US$53 per carat, assumed to reach US$90 per carat by 2016. - Extraction costs: US$650 per troy ounce for gold and platinum; US$10 per carat for diamonds. ### Debt sustainability and DSA conclusions (selected) - Core conclusion: Zimbabwe is in debt distress; public and publicly-guaranteed external debt is unsustainable under the baseline scenario. - At end-2010, total external debt estimated at $8.8 billion or 118 percent of GDP; total PPG external debt estimated at $7.1 billion or 95 percent of GDP, with 77 percent of GDP in arrears. - Overdue financial obligations to IFIs include: - World Bank: $807 million - African Development Bank: $510 million - EIB: $239 million - IMF: $134 million - Baseline projections: - Annual real GDP growth projected to average about 4.7 percent for 2010–15 and about 3 percent for 2016–30. - External current account deficit, net of interest, projected to improve from 18 percent of GDP in 2010 to about 3 percent in 2015. - Financing gap of about 4.4 percent of GDP projected in 2011 to be covered mostly by accumulation of expenditure arrears and cuts in capital expenditure. - Policy implication: Debt sustainability requires policy strengthening and debt relief contingent on normalization of relations with the international community. *Source: IMF staff estimates and text from the Zimbabwe 2011 Article IV Report (corrected 5/27/11).* ### 1. Selected Economic Indicators, 2008–16 ____________________________________________ 27 ### _cr11135 - 1. Selected Economic Indicators, 2008–16 ____________________________________________ 27 ### A nascent recovery (2009–10) - Overview - Political turmoil and economic mismanagement caused large output losses and culminated in hyperinflation and a humanitarian crisis in 2008. - The unity government formed in February 2009 adopted a multicurrency regime that restored price stability and forced stronger fiscal discipline. - Price and exchange liberalization increased efficiency, boosted output, and encouraged renewed capital inflows. - Growth and composition - Real GDP growth accelerated from 6 percent in 2009 to 9 percent in 2010. - Growth concentrated on primary commodity sectors in mining and agriculture; manufacturing and utilities remained weighed down by structural impediments. - Fiscal developments - Off-budget donor grants amounted to 8.6 percent of GDP in 2010 and supported the recovery and food security. - After a small cash fiscal surplus in 2009, the central government had a cash deficit in 2010. - Expenditure arrears amounted to $75 million at end-2010. - Improvements in tax policy and administration generated large increases in fiscal revenues, but oversized employment costs and financing of weakly supervised state-owned enterprises undermined expenditure quality. - External and debt position - Current account deficit was 23 percent of GDP in 2010. - Usable reserves were 0.4 months of imports at end-2010. - External debt stock was 118 percent of GDP at end-2010, with the bulk in arrears (80 percent of GDP at end-2010). - Financial sector - The banking system surpassed prehyperinflation size but remained highly vulnerable with weakening capitalization, rising nonperforming loans, tightening liquidity, and declining liquid foreign assets. ### Outlook and risks - Near-term projections under unchanged policies - Growth is projected to decelerate to 5.5 percent in 2011 due to projected budget overruns, inefficient expenditure composition, rising financial sector vulnerabilities, and announced fast-track indigenization of the mining sector. - Twelve-month inflation is forecast to increase to about 7 percent by December 2011 because of higher food and fuel prices and wage-driven increases in nontradable prices. - The current account deficit is projected at about 14 percent of GDP in 2011, to be financed in part by short-term capital flows and nonconcessional government borrowing. - Foreign direct investment and portfolio investment are projected to decline in 2011. - The government intends to run a fiscal deficit of 4 percent of GDP, financed by nonconcessional external borrowing. - Medium-term baseline (unchanged policies scenario) - Real GDP growth rates gradually decline to about 3 percent over the medium term due to subdued investment and structural impediments, including indigenization acceleration and ownership uncertainties. - Balance of risks (unchanged policies) - Upside: even higher commodity prices and increased diamond exports could underpin higher growth, revenues, and faster reduction of the current account deficit. - Downside: political disturbances, export price declines, higher-than-anticipated import food and fuel prices, unfavorable weather, reversals of capital inflows, and banking system instability. ### Recommended policies scenario (policy measures and projected outcomes) - Policy measures assumed - Eliminate expenditure overruns in 2011 while leaving more fiscal space for critical infrastructure and social spending. - Start rebuilding fiscal buffers in the medium term. - Forcefully address financial sector vulnerabilities. - Strengthen the business climate to attract capital inflows. - Projected near-term and medium-term outcomes - 2011 growth could reach 7.2 percent, mainly because mining and mining-related activities would benefit from higher capital inflows and higher public investment in critical infrastructure. - Over the medium term, growth performance could potentially be boosted by about 3 percentage points relative to the unchanged policies scenario. - International reserves could increase to almost 1 month of imports by 2016. - The economy would record higher fiscal revenues, a smaller share of employment costs in expenditures, higher capital spending, a positive cash balance providing greater reserve buffers, and a smaller external debt stock. *ZIMBABWE 2011 ARTICLE IV REPORT INTERNATIONAL MONETARY FUND* ### 9. The authorities were confident that ### 9. The authorities were confident that ### Overview - Authorities were confident that growth could be maintained at about 9 percent in 2011 but agreed that growth would decline in the medium term under unchanged policies. - Officials expect staff recommendations to be implemented in a timely manner, supporting strong growth in 2011 alongside favorable external conditions. - Authorities indicated lack of access to concessional official financing is a major constraint on medium-term growth potential. - Some officials noted that restrictive measures imposed on some Zimbabwean officials and their companies by several countries hindered the recovery and constituted the major obstacle to medium-term growth. ### POLICY THEME #1—CREATE FISCAL SPACE FOR ADDRESSING PRESSING SOCIAL AND INFRASTRUCTURE NEEDS AND REBUILDING INTERNATIONAL RESERVES Background: Revenues, financing, and expenditure pressures - Revenues projected to remain broadly unchanged at 29 percent of GDP in 2011 compared with 2010 under the unchanged policies scenario, implying a revenue shortfall of 1.6 percent of GDP compared to the 2011 budget. - Over the medium term, revenues expected to stabilize at about 28 percent of GDP as Zimbabwe simplifies its tariff structure in line with regional trade agreements. - Donors expected to contribute about $770 million (8.6 percent of GDP in 2011) in off-budget assistance, including food aid, medicine, and expenditure from the Multi-Donor Trust Fund. - Under the recommended policies scenario, nominal revenues would be significantly higher mainly owing to stronger growth in 2011, supplemented with additional revenue measures over the medium term. Financing and gaps - Contracted nonconcessional borrowing will lead to fiscal deficits in 2011 and 2012, with access to foreign financing uncertain beyond 2012. - 2011 budget limits domestically financed cash expenditure to 31 percent of GDP, and external borrowing financed expenditure would amount to 4 percent of GDP. - In the absence of corrective measures, domestically-financed expenditure commitments would be higher than budgeted by about 2.7 percent of GDP. - Taking into account the revenue shortfall (1.6 percent of GDP) under unchanged policies, a financing gap of 4.4 percent of GDP likely will emerge. - A significant part of the gap likely will be closed by further accumulation of expenditure arrears and cuts in capital expenditure, with negative feedback on growth. - Risk of further accumulation of expenditure arrears in the medium term remains high. Employment costs and PFM weaknesses - In 2011, employment costs, including wages, benefits, and pensions, are projected to increase by 45 percent to $1.54 billion (17.3 percent of GDP), well above the budgeted $1.4 billion. - Employment costs will account for 59 percent of revenue, crowding out other essential expenditures and leaving no room for increasing international reserves. - A public payroll audit identified 38,000 staff positions with significant irregularities, including possibly 14,000 ghost workers. - On-budget nonwage expenditure on social programs remains very low; public investment program contains some projects with little immediate impact on social sectors, poverty reduction, and growth. - Despite computerization upgrades and efforts to improve budget formulation, PFM systems contain a number of weaknesses. Zimbabwe, Fiscal Outlook for 2011 (US$ millions, unless otherwise indicated) - Budget 2011: - Net revenues 2,743 - Domestic expenditures and net lending 2,746 - Postbudget expenditure pressures: - Wage over run 155 - External loan commitment fee 4 - Upfront loan payment 1/9 (Medical equipment and supplies loan is assumed to be on-budget.) - Domestic arrears clearance 75 - Total 243 - Recommended scenario: - Revenue shortfall -47 - Expenditure overrun 243 - Total gap 290 - Percent of GDP 3.2 - Baseline scenario: - Revenue shortfall -145 - Expenditure overrun 243 - Total gap 389 - Percent of GDP 4.4 Staff Recommendations (fiscal stance and reforms) - Rebuild fiscal buffers while commodity prices are high to reduce macroeconomic volatility and build usable international reserves over the medium term. - For 2011, first best advice is a balanced cash budget with no nonconcessional borrowing. Given the contracted loan, limit the fiscal deficit to already contracted foreign borrowing and close the likely financing gap of 4.4 percent of GDP ($390 million). - Measures to close the gap may include: - Reducing the wage bill closer to the initially budgeted amount (e.g., elimination of ghost workers, strict controls on hiring, initiation of due process for irregular civil servants). - Mobilizing off-budget donor grants for some capital projects. - Curtailing low-priority current and capital expenditures. - Prepare a contingency plan owing to significant uncertainties regarding revenue performance in 2011: - If upside risks materialize, save revenues above budget expectations as part of international reserves. - If revenue collection underperforms, activate a plan specifying areas of expenditure cuts to facilitate orderly expenditure reductions. - Fiscal reforms to pursue over the medium term: - Reduce employment costs to about 40 percent of revenues by 2016 to increase fiscal space for priority expenditures and reserve accumulation. - Reinforce expenditure controls and activate the human resource module of the expenditure control system. - Strengthen oversight of state-owned enterprises (SOEs). - Enhance budget planning within a medium-term expenditure framework. - Continue tax system reform in line with previous IMF technical assistance; encourage public debate on key features of the draft Zimbabwe Income Tax Act, including mining. Authorities’ Views (fiscal) - Most officials agreed the country would benefit from countercyclical fiscal policy and that fiscal and reserve buffers need to be built while commodity prices are high. - Government will initiate an internal debate on a reserve accumulation strategy and the role for fiscal policy in the context of full dollarization. - Authorities felt their revenue target for 2011 is within reach provided the political situation does not deteriorate; they indicated risks to revenue are broadly balanced in 2011, with an upside risk to diamond revenues offsetting downside risk from weaker growth. - Authorities agreed expenditure measures would be required in 2011 to offset wage bill overruns and accumulated expenditure arrears; they indicated part of the wage bill overrun relative to the budget ($120 million) would be addressed by implementing corrective measures. - Authorities would seek to continue reviewing civil service wages on an annual rather than semiannual basis, despite pressure for a wage increase in June 2011. - Burden of adjustment for the remaining financing gap for 2011 most likely will fall on capital expenditure; off-budget donor grants for capital projects (about $60 million) through the Multi-Donor Trust Fund managed by the African Development Bank would cover some capital expenditure projects. - Authorities agreed continued accumulation of domestic expenditure arrears remains a concern and indicated they would allocate sufficient resources and improve PFM systems to reduce these arrears. - Authorities intend to advance fiscal reforms with IMF and World Bank TA, plan to complete work on a new Income Tax Act in 2011, and initiate medium-term reforms to improve tax administration, strengthen PFM systems and oversight of SOEs, and significantly reduce employment costs relative to revenues. ### POLICY THEME #2—CONTAIN FINANCIAL SECTOR VULNERABILITIES UNDER THE MULTICURRENCY REGIME Background: currency regime and RBZ - Official policy is that the multicurrency system will be maintained until at least 2012. The government stated the Zimbabwe dollar would not be reintroduced until there is clear evidence of a strong economic recovery, policy consistency, a sustainable external position, and a strong financial sector. - RBZ reforms proceeding, but significant challenges remain: - Governing board appointment in May 2010 strengthened reporting and accounting. - RBZ completed staff downsizing involving a severance package and back wages of about $59 million (0.7 percent of GDP), of which $15 million has already been paid using fiscal transfers. - RBZ remains in financial distress with $1.2 billion of negative equity; financial restructuring at an early stage. - Use of fiscal transfers earmarked for operating expenses to pay severance packages results in further accumulation of RBZ expenditure arrears. - RBZ’s data reporting to the Fund has improved significantly. Banking system vulnerabilities - Vulnerabilities stem from: - Large exposures to the financially distressed RBZ: $174 million or 40 percent of banks’ equity capital at end-2010. - Rising liquidity risk partly attributable to weak prudential requirements, possible balance of payments pressures, and lack of lender-of-last-resort facility: 8 banks, including one large bank, had liquidity ratios below 20 percent as of end-February 2011. - Increase in the number of smaller banks (to seven) failing to comply with minimum capital requirements and delays in resolving some smaller banks in distress. - Rising credit risk and nonperforming loans, in particular in smaller banks. Staff Recommendations (financial sector) - Announce an extension of the lifespan of the multicurrency system (perhaps by another three years) by mid-2011 to remove uncertainties regarding the future currency regime. - RBZ balance sheet restructuring: - Transfer noncore assets and liabilities to a special purpose vehicle (SPV). - Give priority to transparent disposal of noncore assets and refund of statutory reserves to commercial banks ($83 million). - Clarify status of frozen foreign currency accounts of resident nonbanks lodged by banks at the RBZ ($91 million). - Ensure treatment of liabilities to nonresidents is consistent with the overall external debt strategy. - Define the status of remaining claims of downsized staff ($44 million, 0.5 percent of GDP) and ensure fiscal transfers to the RBZ planned under the 2011 budget are used for operating expenses as intended. - RBZ should publish its audited financial statements for 2008 and accelerate completion of the 2009 audit. - Banking supervision and prudential measures: - Intervene swiftly to resolve banks that fail to restore compliance with minimum capital requirements. - Require banks exposed to the RBZ to raise capital, if needed, after RBZ restructuring. - Raise the prudential liquidity ratio to 25 percent (from 20 percent) and exclude illiquid claims on the RBZ from the definition of banks’ liquid assets, while ensuring noncompliant banks have credible transition schedules to rebuild liquidity. - Require that risky banks hold additional liquidity buffers. - Improve stress testing of banks (with additional IMF TA). - Ensure sound loan underwriting standards and practices. - Tightening and stricter enforcement of prudential requirements would contribute to a reduction in credit growth to a more sustainable pace. Authorities’ Views (financial) - Authorities agreed conditions for re-introduction of the Zimbabwe dollar have not been met and intend to announce an extension of the multicurrency system by end-2011; they plan an internal debate on long-term currency options beyond the next three years. - Authorities attach highest importance to building internal consensus on speedy resolution of financial distress at the RBZ and broadly agreed with staff recommendations regarding creation of the SPV for disposal of noncore assets and resolution of nonperforming liabilities. - Ministry of Finance concurred that claims of banks should be given priority for financial stability, while underscoring the importance of validating RBZ’s external liabilities before incorporating them into the sovereign external debt resolution framework. - RBZ saw merit in giving priority to claims of downsized staff and called for using part of Zimbabwe’s SDR allocation for this purpose. - Authorities expect to conclude internal debate soon and submit SPV legislation to parliament in the coming months; they requested further Fund TA in RBZ balance-sheet restructuring and reporting. - Authorities acknowledged rising risks in the banking sector and intend to remain vigilant in monitoring vulnerable institutions; Ministry of Finance will work closely with RBZ on tightening liquidity requirements, enforcing minimum capital requirements, and strengthening monitoring of credit risk. - RBZ officials expressed reluctance to implement some staff advice, stressing balance between financial stability and need to support credit growth and provide banking services to underfinanced groups; RBZ emphasized need for a sufficiently large lender-of-last-resort facility rather than prudential measures, but policymakers agree there is no fiscal space for such a facility. - Authorities conveyed appreciation for continued IMF TA on stress testing and expressed interest in further Fund TA. *Source: IMF staff estimates and text from the Zimbabwe 2011 Article IV Report (corrected 5/27/11).* ### 30. Medium-term growth potential and ### _cr11135 - 30. Medium-term growth potential and ### Constraints on medium-term growth and competitiveness - Rapidly rising labor costs, structural impediments, and governance impediments constrain medium-term growth potential and competitiveness. - Recent wage increases in the public sector, including SOEs, have: - Had a demonstrative impact on private sector wages. - Exerted pressure on utility prices. - Contributed to a high cost of doing business. - Indigenization uncertainties: - Indigenization legislation requires that 51 percent of equity of companies with assets exceeding $500,000 belong to indigenous Zimbabweans. - Authorities planned to set sector-specific thresholds on minimum local ownership by end-2010; announcement delayed except for mining. - In mining, a 51 percent requirement should be met by September 25, 2011 for all firms regardless of their value. - Governance and sector-specific issues: - Government preparing a diamond act to clarify the institutional framework for diamond mining. - Many private businesses indicate current labor market legislation could be made more flexible to facilitate employment creation. - Launch of a land audit has been delayed. ### Staff recommendations (sectoral and structural) - Align the objective of empowerment with the need to facilitate domestic and foreign investment and respect for property rights. - Implement a land audit as a first step toward resolving issues of land rights and the security of land tenure. - Improve governance of public enterprises active in the diamond sector—with IMF and World Bank TA. - Strengthen the regulatory framework in the utilities sector. - Strengthen the anti-money-laundering and combating of terrorism framework in the diamond and precious metals sector. - Increase the flexibility of labor legislation to improve competitiveness and facilitate adjustment in the labor market. ### Authorities’ views on indigenization, governance, and land/labor reform - Broad agreement on the importance of empowerment of indigenous Zimbabweans through indigenization, but significant differences on pace and modalities. - Some officials favor rapid achievement of indigenization targets to reassure foreign investors. - Other officials and staff express concern that rapid, nontransparent indigenization could undermine exports, investment, and capital inflows. - Officials expressed confidence that flexibility in implementation of indigenization in mining could be introduced within the year, with other sectors to benefit. - Governance and transparency: - Authorities prioritize improving governance of public enterprises and establishing transparency in diamond revenue management. - Requested IMF TA on governance of public sector enterprises and on anti-money-laundering and combating the financing of terrorism in the diamond and precious metals sector. - Expressed interest in participating in the Extractive Industry Transparency Initiative. - Land and labor: - Authorities concur that land reform and more flexible labor legislation are important for sustainable growth. - Efforts to start a land audit are hampered by lack of funds and equipment; authorities are seeking assistance from cooperating partners. - Addressing labor market rigidities requires further consensus building within government. ### Policy Theme #4 — Move toward achieving external sustainability: Background - Zimbabwe is in debt distress with the bulk of external debt in arrears. - At end-2010, all but two external debt indicators exceeded thresholds for low-income countries with weak policy frameworks. - Recent borrowing and guaranteeing of nonconcessional loans by government has intensified debt distress. - Zimbabwe is not likely to reach debt sustainability even taking into account increased receipts from mineral resources and assuming significant strengthening of policies in line with staff recommendations. - Authorities expressed interest in a staff-monitored program (SMP). - Markers agreed for initiating a stocktaking exercise: (i) timely data reporting for at least three months, in particular by the RBZ, and (ii) concrete steps toward eliminating ghost workers. - The data reporting marker has been met, but not the marker on eliminating ghost workers. - Recent policy setbacks have raised concerns about the sustainability of reform and stabilization efforts. ### Mineral wealth and financing outlook (Figure 10 findings) - The net present value (NPV) of mineral wealth is less than Zimbabwe's external debt. - Projected inflows from mining are not large enough to cover yearly external financing needs. - Note definitions used in Figure 10: - Yearly external financing need = Financing gap (balance of payments deficit excluding diamonds, gold, and platinum) plus change in arrears. - Net mining flows = net value of diamonds, gold, and platinum production available for exports. ### Staff recommendations on external sustainability and debt - A significant strengthening of policies and debt relief are essential for achieving external sustainability. - Debt relief would require a comprehensive arrears clearance framework supported by donors. - Authorities need to make further progress in reconciling their debt data with individual creditors. - Adhering to a regular schedule of payments to the Poverty Reduction and Growth Trust (PRGT) and increasing payments as the country’s payment capacity increases will have a strong positive signaling effect. - Government should seek to renegotiate terms of contracted loans to increase concessionality and refrain from incurring or guaranteeing new nonconcessional loans to prevent further exacerbation of debt distress and complications in normalizing relations with external creditors. ### Preconditions and markers for moving toward an SMP - Before an SMP stocktaking exercise can begin, authorities must: - Meet the SMP marker on eliminating ghost workers. - Make progress on key policy challenges, particularly by adopting measures to eliminate the projected fiscal financing gap for 2011. - Strengthen liquidity requirements for banks. - Continue timely data reporting. ### Authorities’ views on arrears clearance and nonconcessional borrowing - Government approved the Zimbabwe Accelerated Arrears Clearance, Debt and Development strategy to facilitate re-engagement with the international community on arrears clearance, new financing, and a comprehensive debt relief program. - The strategy involves a request for debt relief under the HIPC Initiative and use of fresh financing from international institutions and mineral wealth for sustainable development. - A newly established debt office has initiated a debt reconciliation process with individual creditors, expected to be completed later in 2011. - Authorities intend to build internal consensus for meeting the SMP marker on eliminating ghost workers and addressing policy setbacks. - Agreed to make timely quarterly payments to the PRGT and increase them over time as payment capacity improves. - On nonconcessional borrowing: - Government emphasized balancing debt sustainability considerations and re-engagement with creditors with delivery of crucial social services. - Indicated recently contracted and guaranteed nonconcessional debt obligations would be used to finance critical agricultural, water, and health projects, which would be closely monitored. ### Staff appraisal: macroeconomic assessment and priorities - Recovery supported by stronger policies, favorable external environment, and sizeable off-budget donor grants during 2009–10, with improvement in the humanitarian situation. - Growth concentrated in primary commodities (mining and agriculture) and started from a low base; sectors sensitive to exogenous shocks. - Budget heavily tilted toward the wage bill with insufficient resources for social programs and high-priority infrastructure; growth benefits did not fully reach many Zimbabweans outside the public sector. - Recovery remains fragile; significant policy improvement needed to solidify macroeconomic prospects. - Urgent priorities and recommended actions: - Strengthen the fiscal position and improve expenditure quality. - First-best policy: immediate return to cash budgeting. - Prevent further increases of the deficit beyond nonconcessional borrowing already undertaken. - Implement expenditure measures to eliminate the financing gap emerging mainly from wage bill overruns and domestic expenditure arrears. - Over the medium term, generate small fiscal surpluses to raise international reserves to two months of expenditures. - Gradually reduce the wage bill relative to revenues and tighten SOE budget constraints to free fiscal space for priority social programs and critical infrastructure. - Contain rising financial sector vulnerabilities by: - Restructuring the financially distressed RBZ. - Strengthening prudential regulations and their enforcement. - Reducing financial sector vulnerabilities alongside countercyclical fiscal policy to support the medium-term viability of the multicurrency system. - Step up structural reforms: - Align indigenization and empowerment objectives with respect for private property rights and the need to attract investment. - Make labor market legislation more flexible. - Improve governance, particularly in the diamond sector, to strengthen the business climate and boost growth. - Avoid exacerbating debt distress: - Refrain from nonconcessional borrowing and seek better terms for recently contracted debt. - Secure debt relief within a comprehensive arrears clearance framework supported by donors. - Staff welcomes authorities’ commitment to make regular quarterly payments to the PRGT and increase payments over time as payment capacity rises. *2011 ARTICLE IV REPORT ZIMBABWE, INTERNATIONAL MONETARY FUND.* ### 46. Staff recommends that the next Article ### 46. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. ### Macroeconomic outlook and projections (Unchanged Policies Scenario) - Real GDP growth (annual percent change): -17.7, 6.0, 9.0, 5.5, 3.5, 3.5, 3.5, 3.3, 3.2 (2008–2016) - Nominal GDP (US$ millions): 4,416; 5,836; 7,474; 8,916; 9,359; 9,871; 10,290; 10,830; 11,515 (2008–2016) - GDP deflator (annual percent change): 1.3, 24.7, 17.5, 13.1, 1.4, 1.9, 0.7, 1.9, 3.0 (2008–2016) - Consumer price inflation (annual average): 5.56E+10, 6.5, 3.0, 4.8, 5.8, 5.7, 5.2, 5.0, 5.0 (2008–2016) - Consumer price inflation (end-of-period): 4.89E+11, -7.7, 3.2, 7.1, 6.0, 5.5, 5.0, 5.0, 5.0 (2008–2016) ### Fiscal sector (Central government, percent of GDP, measured in US$) — Unchanged Policies Scenario - Revenue and grants: 3.0, 16.7, 29.4, 29.2, 28.7, 28.6, 28.5, 28.4, 28.3 (2008–2016) - Expenditure and net lending: 5.8, 19.6, 32.1, 35.7, 33.9, 31.0, 31.0, 31.0, 30.9 (2008–2016) - Cash expenditure and net lending: 2.7, 15.7, 29.8, 33.1, 31.4, 28.6, 28.5, 28.4, 28.3 (2008–2016) - Employment costs: 1.3, 8.9, 14.2, 17.3, 17.3, 17.3, 17.3, 17.3, 17.4 (2008–2016) - Overall balance (including quasi-fiscal activity): -28.5, -3.3, -2.9, -6.5, -5.2, -2.5, -2.6, -2.7, -2.6 (2008–2016) - Primary balance (including quasi-fiscal activity): -25.4, 0.1, -0.1, -4.1, -2.5, 0.3, 0.3, 0.4, 0.3 (2008–2016) - Cash balance: 0.3, 1.0, -0.4, -3.9, -2.8, 0.0, 0.0, 0.0, 0.0 (2008–2016) ### Money and credit (US$ millions) - Broad money (M3): 314; 1,322; 2,222; 2,667; ... (series then not fully tabulated) - Net foreign assets: -316; -295; -151; -182; ... - Net domestic assets: 630; 1,618; 2,374; 2,849; ... - Domestic credit: 140; 649; 1,577; 1,992; ... - Credit to the private sector: 140; 684; 1,665; 2,080; ... - Reserve money: 71; 252; 562; 625; 1; ... - Velocity (M3): 14.1; 4.4; 3.4; 3.4; 3.3; ... ### External sector and balance of payments (Unchanged Policies Scenario) - Merchandise exports (US$ millions): 1,662; 1,616; 3,382; 4,346; 4,500; 4,629; 4,769; 4,968; 5,124 (2008–2016) - Merchandise imports (US$ millions): -2,630; -3,213; -5,162; -5,882; -5,803; -5,632; -5,777; -5,920; -6,051 (2008–2016) - Current account balance (excluding official transfers): -1,026; -1,426; -1,735; -1,203; -1,146; -859; -913; -932; -966 (US$ millions for 2008–2016) - Current account balance (percent of GDP): -23.2; -24.4; -23.2; -13.5; -12.2; -8.7; -8.9; -8.6; -8.4 (2008–2016) - Overall balance: -1,114; 96; -649; -516; -506; -499; -520; -609; -640 (US$ millions, 2008–2016) ### Official reserves and liquidity - Gross international reserves (US$ millions, end-of-period): 6; 43; 74; 53; 44; 24; 31; 44; 54; 46; 74; 84 (table entries indicate series with small values and gaps; shown as 6437453442431443454467484 in table) - Usable international reserves (US$ millions): 6; 31; 21; 97; 19; 19; 19; 18; 189 (table entries appear as 6312197191190190190189189) - Months of imports of goods and services: 0.0; 1.0; 0.4; 0.3; 0.4; 0.4; 0.4; 0.3; 0.3 (2008–2016) ### External debt and arrears - Total external debt (US$ millions, end-of-period): 6,355; 7,595; 8,823; 9,624; 10,426; 11,010; 11,641; 12,305; 13,019 (2008–2016) - Total external debt (percent of GDP): 143.9; 130.1; 118.0; 107.9; 111.4; 111.5; 113.1; 113.6; 113.1 (2008–2016) - Total external arrears (US$ millions, end-of-period): 4,248; 5,289; 5,950; 6,452; 6,948; 7,459; 7,990; 8,613; 9,267 (2008–2016) - Total external arrears (percent of GDP): 96.2; 90.6; 79.6; 72.4; 74.2; 75.6; 77.7; 79.5; 80.5 (2008–2016) ### Balance of payments detail highlights (selected) - Trade balance (US$ millions): -967; -1,598; -1,779; -1,536; -1,303; -1,003; -1,007; -952; -927 (2008–2016) - Nonfactor services (net): -207; -266; -444; -418; -401; -376; -385; -412; -419 (2008–2016) - Investment income (net): -477; -442; -486; -680; -737; -778; -826; -882; -934 (2008–2016) - Private transfers (including transfers to NGOs): 625; 879; 974; 1,431; 1,295; 1,298; 1,304; 1,313; 1,313 (2008–2016) ### Central government operations (US$ millions and percent of GDP) — Unchanged Policies Scenario - Total revenue & grants (US$ millions): 133; 975; 2,199; 2,601; 2,684; 2,818; 2,930; 3,074; 3,259 (2008–2016) - Tax revenue (US$ millions): 128; 883; 2,074; 2,418; 2,503; 2,628; 2,731; 2,865; 3,036 (2008–2016) - Total expenditure & net lending (US$ millions): 257; 1,145; 2,402; 3,184; 3,169; 3,062; 3,193; 3,361; 3,563 (2008–2016) - Current expenditure (US$ millions): 240; 1,099; 1,809; 2,372; 2,451; 2,591; 2,715; 2,872; 3,049 (2008–2016) - Employment costs (US$ millions): 59; 517; 1,064; 1,542; 1,622; 1,710; 1,784; 1,879; 1,999 (2008–2016) - Interest payments (US$ millions): 13; 81; 98; 206; 221; 254; 275; 299; 329; 343 (various table placements) - Capital expenditure and net lending (US$ millions): 174; 659; 381; 171; 184; 7147?; 148?; 489?; 514? (table shows 174, 659, 381, 171, 184, 714, 147, 848, 9514 — retain original table formatting ambiguity) ### Integrated balance sheet and monetary survey (selected items) - Net financial worth (US$ millions): -6,327; -7,177; -7,646; -7,913; -8,448; -8,742; -9,060; -9,407; -9,777 (Dec. 2008–Dec. 2016) - Financial liabilities (US$ millions): 6,328; 7,704; 8,292; 9,058; 9,682; 10,071; 10,487; 10,937; 11,417 (Dec. 2008–Dec. 2016) - Monetary authorities: Net foreign assets: -577; -845; -680; -700; -701 (Dec. 2008–Dec. 2011) - Monetary base (Dec. 2008–Dec. 2011): 71; 252; 562; 625; 1251 - Broad money liabilities (M3) (Dec. 2008–Dec. 2011): 314; 1,322; 2,222; 2,171; 2,667 ### Recommended Policies Scenario — key differences and projected outcomes - Real GDP growth (annual percent change): -17.7, 6.0, 9.0, 7.2, 6.2, 6.0, 6.0, 6.5, 6.5 (2008–2016) — higher growth from 2011 onward relative to Unchanged Policies Scenario - Nominal GDP (US$ millions): 4,416; 5,836; 7,474; 9,060; 9,758; 10,548; 11,187; 12,077; 13,178 (2008–2016) - GDP deflator (annual percent change): 1.3, 24.7, 17.5, 13.1, 1.4, 2.0, 0.1, 1.4, 2.5 (2008–2016) - Central government revenue and grants (percent of GDP): 3.0; 16.7; 29.4; 29.8; 29.9; 29.8; 29.9; 29.8; 29.7 (2008–2016) - Expenditure and net lending (percent of GDP): 5.8; 19.6; 32.1; 34.8; 34.1; 31.5; 31.5; 31.5; 31.3 (2008–2016) - Cash balance (percent of GDP): 0.3; 1.0; -0.4; -3.9; -1.9; 0.7; 0.7; 0.7; 0.7 (2008–2016) - Overall balance (including quasi-fiscal activity, percent of GDP): -28.5; -3.3; -2.9; -5.1; -4.3; -1.6; -1.6; -1.7; -1.6 (2008–2016) - Primary balance (including quasi-fiscal activity, percent of GDP): -25.4; 0.1; -0.1; -2.6; -1.7; 1.0; 1.0; 1.0; 1.0 (2008–2016) - Money and credit: Broad money (M3) series similar early years; reserve money and private credit projections modestly higher under Recommended Policies - Merchandise exports (US$ millions) projected higher: 1,662; 1,616; 3,382; 4,564; 4,925; 5,274; 5,656; 6,167; 6,699 (2008–2016) - Merchandise imports (US$ millions) projected: -2,630; -3,213; -5,162; -6,468; -6,615; -6,709; -7,018; -7,452; -7,937 (2008–2016) - Current account balance (excluding official transfers, US$ millions): -1,026; -1,426; -1,735; -1,554; -1,551; -1,344; -1,344; -1,374; -1,429 (2008–2016) - Current account as percent of GDP under Recommended Policies: -23.2; -24.4; -23.2; -17.1; -15.9; -12.7; -12.0; -11.4; -10.8 (2008–2016) - Gross international reserves (US$ millions, end-of-period) under Recommended Policies: 6; 43; 74; 53; 44; 75; 60; 77; 81; 39; 42 (table entries indicate series with formatting like 6437453447515607707813942) - Usable international reserves (US$ millions) under Recommended Policies (end-of-period): 6; 31; 21; 97; 19; 134; 441; 349; 357; 266; 6 (table entries show 6312197191344413493572666) - Months of imports of goods and services (Recommended Policies): 0.0; 1.0; 0.4; 0.3; 0.6; 0.7; 0.8; 0.8; 0.9 (2008–2016) - Total external debt (US$ millions, end-of-period) under Recommended Policies: 6,355; 7,595; 8,823; 9,794; 10,791; 11,570; 12,376; 13,216; 14,104 (2008–2016) - Total external debt (percent of GDP) under Recommended Policies: 143.9; 130.1; 118.0; 108.1; 110.6; 109.7; 110.6; 109.4; 107.0 (2008–2016) - Total external arrears (US$ millions) remain: 4,248; 5,289; 5,950; 6,452; 6,948; 7,459; 7,990; 8,613; 9,267 (2008–2016) ### Policy implications and staff recommendation - Staff recommends that the next Article IV consultation be held on the standard 12-month cycle. - Under the Recommended Policies Scenario, higher growth, improved revenue ratios, and smaller overall deficits are projected relative to the Unchanged Policies Scenario, with modest improvements in usable reserves and months of imports. - Quasi-fiscal activity by the central bank remains a notable element of the fiscal stance (quasi-fiscal activity includes subsidies provided by the central bank to the public sector and producers/exporters). - External arrears and high external debt ratios persist across scenarios, reflecting continued financing and debt-service challenges. *Sources: Zimbabwean authorities; IMF staff estimates and projections. (Tables and projections are as presented in the 2011 Article IV Report excerpts supplied.)* ### Appendix I. Zimbabwe: Reserve Adequacy ### Appendix I. Zimbabwe: Reserve Adequacy ### Overview - At end-2010, reserve coverage in Zimbabwe was about half month of imports and about one month of government expenditures. - Absent stronger policies and debt relief, reaching optimal reserve levels for fragile states (six to nine months of import cover) or a traditional benchmark of three months of import coverage over the medium term is unrealistic. - The government should seek to increase reserves to at least two months of government expenditures (one month of imports) to ensure continuity of government operations under moderate shocks. ### Common measures of reserve adequacy - Traditional measures include reserves as a ratio of: - imports (usually 3 months) for countries where shocks arise mainly from the current account; - broad money to capture risks of capital flight; and - short-term debt (usually 100 percent) reflecting rollover risks for countries with access to capital markets. - Less traditional measures include: - Wijnholds and Kapteyn (2001) (100 percent of short-term debt plus a fraction of M2 of between 5 to 20 percent); - measures derived from optimality models, reserve demand regressions, and country-specific scenario analysis. ### IMF approach for low-income countries - A new approach to deriving optimal reserve holdings has been proposed by the IMF. - The crisis prevention and mitigation benefits of reserves in the event of adverse external shocks are empirically estimated using data on past severe shock episodes. - Calibrated optimal reserves are derived using estimated regression coefficients, reference values for the opportunity cost of holding reserves, and simplified assumptions about risk aversion. - For sub-Saharan African fragile states with fixed exchange rate regimes (Zimbabwe’s peer group), the optimal level of reserves ranges from about six to nine months of import coverage. - Zimbabwe was not included in panel estimates on account of lack of reliable data. ### Zimbabwe: country-specific considerations - Unique characteristics increasing the need for precautionary buffers: - Highly exposed to terms-of-trade shocks as a primary commodity producer and oil importer. - Relies on volatile short-term capital, aid flows, and remittances to finance a large current account deficit net of transfers. - In debt distress, with the bulk of its external debt stock in arrears, limiting access to new official foreign financing, including insurance instruments. - History of political and economic instability, weak institutions, absence of a lender of last resort, and a fragile banking system. - Relatively open capital account regime and complete dollarization; any significant drain on the balance of payments could lead to liquidity problems in the banking system and intensify shock impacts. - Specific quantified vulnerability: - A one standard deviation shock to prices of Zimbabwe’s three main export products (platinum, gold and tobacco) would result in a financing gap equivalent to more than three times the current reserve level. ### Current reserve assessment and specific recommendations - Zimbabwe’s current reserve level is 0.4 month of imports, well below peer countries, widely-accepted benchmarks, and optimal levels for sub-Saharan fragile states with fixed exchange rate regimes. - While working toward resolution of external payments arrears, Zimbabwe should increase international reserves at a realistic pace aimed at ensuring continuity of government operations. - Target reserve levels: - Equivalent to at least two months of government expenditure (one month of imports) to allow the government to continue to function and initiate an orderly adjustment in the event of a moderate shock. - Banking-sector related recommendation: - Given lack of adequate reserves or access to other safety nets, banks should be required to build sufficient liquidity buffers equivalent to 25 percent of their short-term liabilities. This is also relevant from a microprudential perspective (Appendix II). ### Fiscal implications and policy tradeoffs - Because Zimbabwe has a fully dollarized economy, increasing reserve coverage requires fiscal discipline. - Fiscal surpluses would have to be generated to accumulate reserves abroad. - Authorities must carefully consider tradeoffs between accumulating savings abroad and spending on critical infrastructure and social sector needs crucial to long-term growth. - Opportunity: - High commodity prices projected in the Spring World Economic Outlook for the medium term present an opportunity to generate small surpluses to reach the recommended reserve coverage of two months of budget expenditures. *Source: Appendix I. Zimbabwe: Reserve Adequacy.* ### 11. The RBZ needs to enforce minimum ### _cr11135 - 11. The RBZ needs to enforce minimum ### Enforcement of capital and credit-risk management - The RBZ’s small lending facility of US$7 million cannot play the role of a lender-of-last-resort facility, because it would be inadequate in case of the failure of a large bank or a systemic banking crisis. - For undercapitalized banks, banking supervision should: - intervene swiftly to resolve banks that fail to restore compliance with minimum capital requirements, - not extend deadlines for noncompliant banks, - restrict the payment of dividends. - Banking supervision should continue to improve stress testing of all banks and ensure sound loan underwriting standards and practices to prevent wider problems in the banking sector. - The supervisor should have the discretion to use the tools best suited to the circumstances of the banks. ### Financial soundness indicators (selected figures and trends) - Capital adequacy - Regulatory capital to risk-weighted assets: Avg.2000-07 21.4; 2008 43.5; Mar-09 32.4; Jun-09 31.3; Sep-09 25.7; Dec-09 21.6; Mar-10 19.0; Jun-10 17.0; Sep-10 14.3; Dec-10 15.3. - Capital to assets: Avg.2000-07 11.2; 2008 41.7; Mar-09 24.1; Jun-09 18.1; Sep-09 16.5; Dec-09 12.0; Mar-10 11.4; Jun-10 10.2; Sep-10 9.1; Dec-10 9.4. - Asset quality - Past-due loans to gross loans 2/: Avg.2000-07 5.9; 2008 59.5; Mar-09 16.1; Jun-09 23.5; Sep-09 19.2; Dec-09 19.9; Mar-10 16.9; Jun-10 16.9; Sep-10 18.1; Dec-10 16.1. - Nonperforming loans 3/: Avg.2000-07 11.5; 2008 6.5; Mar-09 3.5; Jun-09 2.4; Sep-09 1.8; Dec-09 1.8; Mar-10 1.7; Jun-10 1.9; Sep-10 2.3; Dec-10 3.1. - Watch-listed loans 4/: Avg.2000-07 14.4; 2008 53.0; Mar-09 12.6; Jun-09 21.1; Sep-09 17.4; Dec-09 18.0; Mar-10 15.2; Jun-10 15.1; Sep-10 15.8; Dec-10 13.0. - Provisions as percent of past-due loans: Avg.2000-07 25.6; 2008 4.4; Mar-09 9.2; Jun-09 6.3; Sep-09 8.0; Dec-09 10.8; Mar-10 7.1; Jun-10 11.9; Sep-10 10.0; Dec-10 10.8. - Earnings and profitability - Net profit (before tax and extraordinary items) to net income: Avg.2000-07 154.1; 2008 154.3; Mar-09 88.0; Jun-09 260.8; Sep-09 379.7; Dec-09 188.1; Mar-10 139.5; Jun-10 127.7; Sep-10 173.3; Dec-10 166.0. - Return on assets: Avg.2000-07 8.5; 2008 3.5; Mar-09 -1.1; Jun-09 0.7; Sep-09 0.5; Dec-09 0.5; Mar-10 0.5; Jun-10 0.8; Sep-10 1.0; Dec-10 1.9. - Return on equity: Avg.2000-07 66.4; 2008 55.4; Mar-09 -5.3; Jun-09 1.5; Sep-09 0.4; Dec-09 1.9; Mar-10 3.0; Jun-10 5.5; Sep-10 5.4; Dec-10 11.0. - Expenses to income: Avg.2000-07 73.7; 2008 9.2; Mar-09 179.3; Jun-09 86.6; Sep-09 94.2; Dec-09 95.5; Mar-10 84.6; Jun-10 88.3; Sep-10 89.4; Dec-10 84.1. - Liquidity - Loans to deposits: Avg.2000-07 61.0; 2008 73.1; Mar-09 27.8; Jun-09 37.7; Sep-09 48.8; Dec-09 48.1; Mar-10 57.7; Jun-10 60.7; Sep-10 51.6; Dec-10 79.1. - Excess reserves to broad money: Avg.2000-07 2.1; 2008 0.2; Mar-09 0.0; Jun-09 0.0; Sep-09 0.0; Dec-09 0.0; Mar-10 0.0; Jun-10 5.3; Sep-10 7.1; Dec-10 5.7; (Dec-10?) 7.4. - Sensitivity to market risk - Net foreign exchange assets (liabilities) to shareholders' funds: Avg.2000-07 -6.1; 2008 10.6; Mar-09 49.0; Jun-09 14.7; Sep-09 -23.5; Dec-09 5.2; Mar-10 5.2; Jun-10 6.5; Sep-10 6.1; Dec-10 8.0. - Interest rates (selected) - Lending rate minus demand deposit rate: 255.6; 46; 97; 5.0; 31.5; 2.0; 2.6; 3.0; 2.9; 2.8; 3.3; 3.1 (as listed). - Commercial banks fixed deposits (12 months): 125.1; 320.0; 10.0; 6.3; 4.2; 10.3; 9.9; 9.4; 9.1; 9.0. - Commercial banks lending rate (weighted average): 259.9; 25; 250.0; 37.5; 7.5; 7.5; 7.7; 11.0; 7.2; 7.2; 7.1; 7.5. - Savings deposit rate: 33.3; 100.0; 1.0; 1.0; 1.0; 1.7; 1.0; 1.1; 1.3; 1.3; 1.4. - Notes from figures - The system appears to be compliant with RBZ capital adequacy requirements, although solvency is an issue for several smaller banks. - Bank asset quality is deteriorating with a rapid increase in NPLs during 2010. - Liquidity ratios are declining and creating binding constraints for some banks, particularly eight banks with liquidity ratios below 20 percent. - Minimum capital requirements are US$10 million for merchant banks and building societies, and US$12.5 million for commercial banks. ### Risk Assessment Matrix — Main threats, likelihood, and expected impacts - Threat 1: Banks are unable to recover their frozen claims on the RBZ, including statutory reserves. In addition, the RBZ may not be able to return banks’ RTGS funds. - Likelihood of severe realization (in the next 1-3 years): Medium (text) / High (impact summary). - Key facts: - The RBZ remains in financial distress, with slow progress in financial restructuring; it channels fiscal transfers to cover severance packages rather than operating expenses. - Frozen claims, including statutory reserves, amount to $174 million or about 40 percent of banks’ equity capital at end-2010. - The RTGS account operating at the RBZ was backed by international reserves as of end February 2011, but backing could fall short of 100 percent if RBZ’s situation worsens. - Expected impact if realized (High): - Banks forced to write down claims, leading to significant losses and undercapitalization, particularly among systemically important banks. - Loss of confidence in the banking system, possible bank runs, contagion, and spreading liquidity problems. - Loss of RTGS funds could undermine payments system confidence and banks’ capital positions. - Threat 2: Failure of smaller distressed banks or banks with weak liquidity to meet withdrawal demands could lead to loss of confidence and contagion. - Likelihood: Medium (text) / High (impact summary). - Key facts: - A number of small banks are undercapitalized; some are heavily insolvent. - Several banks, including some systemically important ones, have liquidity buffers below 20 percent of short-term liabilities. - As of February 2011, interbank claims were $185.2 million, approximately 1/5 of prudential liquid assets, excluding illiquid claims on the RBZ. - Stress test results indicate liquidity risk remains high. - Expected impact if realized (High): - Contagion to other banks, bank runs, large losses for otherwise solvent banks, rapid erosion of capital at weakly capitalized banks. - Systemic failure possible because the banking system has no safety-net. - Threat 3: Balance of payments pressure (e.g., sharp reversal of capital flows or negative terms-of-trade shock) forces a contraction in banks’ liquid foreign assets under the multicurrency system, leading to liquidity difficulties. - Likelihood: High. - Key facts: - Current account deficits are projected at double digits over the medium term, largely financed by volatile capital flows. - Under the multicurrency system, balance of payments pressure leads to outflow of nostro accounts and cash in vaults from banks. - The banking system is unlikely to be able to borrow abroad to resolve these liquidity issues. - Expected impact if realized (High): - Systemic liquidity shortage may lead to bank runs and general loss of confidence in the banking system. - Sharp curtailment of credit, with strong negative impact on economic activity. - Threat 4: A sharp economic slowdown. - Likelihood: Medium. - Key facts: - Growth largely driven by mining and agriculture, both vulnerable to shocks; mining activity depends on investment climate affected by indigenization requirements. - There is a sharp rise in nonperforming loans despite recent favorable economic conditions. - The average NPL ratio remains low but may reflect immaturity of loan portfolio, inexperience in assessing loan quality, and potential hidden evergreening of mostly short-term loans; some banks have NPL ratios well above the system average. - Expected impact if realized (Medium): - High credit concentration risk; default of large debtors could drive many banks to undercapitalization. - Increase in NPLs would lower interest income and require provisioning, hurting profitability. - Weakly capitalized banks would struggle to withstand loan losses; failure of one or more banks could cause general loss of confidence and worsen the macroeconomic situation. ### Appendix III — Estimating Zimbabwe’s Net External Wealth (summary of approach and key numeric results) - Overall conclusion: Zimbabwe’s net foreign asset (NFA) position is negative even when taking into account the economy’s net present value of mineral wealth. - Methodology: - Backward-looking NFA estimates based on: - Updated External Wealth database (Lane and Milesi-Ferretti, 1970–2009). - Public debt data complemented with estimates of private net assets and Joint BIS-IMF-OECD-World Bank external debt statistics. - Two backward-looking estimates indicate Zimbabwe is a net debtor: estimates range between 103 and 118 percent of GDP in 2010. - Forward-looking component: net present value (NPV) of mineral wealth (gold, platinum, diamonds). - Assumptions for mineral wealth NPV: - Discounting flows for the next 20 years (at least 95 percent of the NPV is attained within the first 20 years). - Production assumptions by 2016 under scenarios: - Unchanged policies scenario: gold 9.7 metric tons; platinum 13.6 metric tons; diamonds 7.6 million carats by 2016, then constant. - Recommended policies scenario: gold 23.9 metric tons by 2016; platinum 21.1 metric tons by 2016; diamonds 7.6 million carats by 2016. - Discount factors used: 15 percent, 17 percent, and 20 percent. - World prices assumed at end-2010 nominal levels: gold US$1,318 per troy ounce; platinum US$1,679 per troy ounce; diamonds: 2010 average US$53 per carat, assumed to reach US$90 per carat by 2016. - Extraction costs: US$650 per troy ounce for gold and platinum; US$10 per carat for diamonds (estimates from Zimbabwe Chamber of Mines). - Key numeric results (selected) - Under a 17 percent discount rate: - NPV of mining wealth under the recommended policies scenario: US$6.8 billion (90.5 percent of GDP). - Under fairly optimistic assumptions about price levels and extraction costs, Zimbabwe’s NFA position is still negative at -12.9 percent of GDP. - Under the unchanged policies scenario the NPV of mining wealth is US$5.3 billion (71.5 percent of GDP) with a 17 percent discount rate, and total NFA is between -47 and -32 percent of GDP. - The economy would need to adjust its nonmineral primary current account deficit by about 38 percent of GDP in 2011 to maintain this level of NFA, let alone reduce it. - Government net debt position in 2010: - A little less than 70 percent of GDP under the unchanged policies scenario. - 63 percent of GDP under the recommended policies scenario. - Table 1 (Net foreign assets, 2010) (selected entries shown as in source): - Net present value of mining wealth (billions of U.S. dollars): discount rate 15% 6.1; 17% 5.3; 20% 4.5 (in one column); alternate columns: 15% 7.7; 17% 6.8; 20% 5.7. - Net present value of gold (billions): 1.6; 1.4; 1.2; 2.1; 1.9; 1.6. - Net present value of platinum (billions): 1.7; 1.5; 1.3; 2.8; 2.5; 2.1. - Net present value of diamonds (billions): 2.8; 2.4; 2.0; 2.8; 2.4; 2.0. - Net foreign assets based on External wealth (percent of GDP): -22.1; -31.9; -42.7; 0.0; -12.9; -27.2 (columns correspond to scenarios/discount rates as in source). - Net foreign assets based on Public and private debt (percent of GDP): -36.8; -46.6; -57.4; -14.7; -27.6; -41.9. - Government wealth (billions of U.S. dollars) (as presented): - Unchanged policy scenario (2010): -7.7; -8.8; -103.4; -118.0 (layout as in source). - Recommended scenario (2010): -4.8; 2.4; 7.1; 5.7; 95.2; 76.7 (layout as in source). - Policy implication: - The government can only claim part of mineral wealth (through taxes and royalties) while most liabilities are owed by the public sector; estimates suggest debt relief should be part of any debt resolution strategy for Zimbabwe. *Source: IMF staff estimates and projections, Zimbabwe 2011 Article IV Report (extracts).* ### References: ### _cr11135 - References: ### References - Philip R. Lane and Gian Maria Milesi-Ferretti (2007), “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004,” Journal of International Economics 73, November, 223-250. - Kramarenko, Vitaliy, and others, 2010, “Zimbabwe: Challenges and Policy Options after Hyperinflation” African Departmental Paper No. 10/3, Chapter 3 (Washington: International Monetary Fund). http://www.imf.org/external/pubs/ft/dp/2010/afr1003.pdf ### Appendix IV. Zimbabwe: Tax Reform Measures - Income tax law - Finalize the draft of the new Zimbabwe income tax law (ZITA) in line with IMF technical assistance advice. - VAT - Strengthening options: - Eliminating the temporary VAT and customs duties exemptions on the 36 basic commodities. - Abolishing defunct customs and VAT rebates. - Requiring all government purchases to pay customs duties and VAT at customs. - Trade reform - Current tariff structure: more than 17 bands; excessively complex. - Medium-term actions: - Adopt a time-bound action plan to simply tariff bands with a view to eventual harmonization with COMESA external tariffs. - Establish higher domestic excises on: i) beer and soft drinks, ii) tobacco products, and iii) motor vehicles while reducing the current tariff rates to 40 percent. In principle, these measures should be revenue neutral. - Financial sector - Repeal transaction taxes on banking and securities transactions. - Subject fee-based financial transactions to VAT. - Replace the current formula for taxing long-term insurance with a revised current year transactions formula. - Taxation of mining - Consider applying the current first-tier additional profits tax (APT) – for special mining leases – to all mining leases and special grants, with a transitional deduction for existing projects at the written-down book value of assets. - Revise capital allowances for tangible assets to conform to generally applicable rules. - Revise thin capitalization rules restricting the deductibility of interest. - Define direct or indirect sales of immoveable property by nonresidents as chargeable to capital gains tax. - Mining companies or projects should pay normal customs and excise duties and VAT. - Tax administration - Complete the reorganization of the Zimbabwe Revenue Authority (ZIMRA) in line with previous IMF technical assistance recommendations. - Strengthen the operation of the recently created large tax payers unit. - Introduce a post-clearance audit infrastructure within Customs. ### Fund Relations (as of March 31, 2011) - Membership Status - Joined: September 29, 1980; Article VIII - 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 - SDR Department: SDR Million %Allocation - Net cumulative allocation 272.18 100.00 - Holdings 164.82 60.55 - Outstanding Purchases and Loans: SDR Million %Quota - ECF arrangements 71.14 20.13 - Latest Financial Arrangements (Date of Expiration; Amount Approved (SDR Million); Amount Drawn (SDR Million)) - Stand-by Aug 02, 1999 Oct 01, 2000 141.36 24.74 - Stand-by Jun 01, 1998 Jun 30, 1999 130.65 39.20 - ECF Sep 11, 1992 Sep 10, 1995 200.60 151.90 - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal Mar 31, 2011: 71.14 - Charges/interest Mar 31, 2011: 16.01 - Charges/interest 2011–2015 (each year): 0.70 0.84 0.84 0.84 0.84 - Total Mar 31, 2011: 87.15; Total 2011–2015 (each year): 0.70 0.84 0.84 0.84 0.84 - 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. - Zimbabwe’s arrears to the PRGT Trust: SDR 87.15 million (US$138 million) as of March 31, 2011. - Exchange Arrangement - Since 2009, adopted a multi-currency regime with the U.S. dollar as principal currency; use of the Zimbabwe dollar as domestic currency was discontinued over the period 2010–12. - De facto exchange regime classified as exchange arrangement with no separate legal tender. - One remaining exchange restriction arises from unsettled balances under an inoperative bilateral payments agreement with Malaysia. - Article IV Consultations - Zimbabwe is on the standard 12-month consultation cycle. - Executive Board discussed the staff report for the 2010 consultation on May 17, 2010. - Technical Assistance missions (selected, by year and focus) - 2009 MCM mission on payments systems, lender-of-last resort operations and banking supervision, and central banking governance and accounting - 2009 FAD mission on tax policy - 2009 FAD mission on revenue administration - 2009 FAD follow-up mission on tax policy - 2010 MCM mission on accounting - 2010 FAD mission on general tax policy and mining taxation - 2010 STA mission on compilation of national accounts - 2010 MCM mission on central bank balance sheet restructuring and reporting - 2010 STA mission on compilation of monetary statistics for the central bank - 2010 FAD follow-up mission on general tax policy and mining taxation - 2010 LEG mission on fiscal law - 2011 MCM mission on banking supervision ### World Bank—IMF Collaboration (May 3, 2011) - Shared assessment of Zimbabwe’s main economic challenges: - Sustain momentum of economic recovery. - Distribute recovery benefits more equitably. - Reduce significant external and financial vulnerabilities. - Priority policy areas identified to meet challenges: - Strengthen management of public finances: strengthen financial monitoring and control; improve allocation and use of public resources; improve efficiency and transparency in revenue collection. - Advance policies to support economic growth: improve business environment and labor market flexibility. - Reduce systemic risks in the banking system. - Restructure and downsize the RBZ. - Implement a strategy to resolve external payment arrears. - Macrocritical structural reform areas (identified by the teams): - Public financial management (PFM) reform: comprehensive revival of PFM systems, human resource management and procurement systems. - Public investment program: develop and implement a well-prioritized public investment program to rehabilitate infrastructure. - Service delivery and social safety nets: scale-up expenditure on education and health and consolidate social safety net interventions. - Tax reform: adopt a comprehensive new income tax act to simplify and modernize direct taxation. - Diamond sector reform: address governance and revenue collection risks, ensure transparency. - Business environment reform: address infrastructure bottlenecks, labor market rigidities, regulatory burden, and indigenization-related ownership clarity. - Financial sector reform: under full dollarization, strengthen banking supervision, adapt stress-testing framework, and move to a multi-factor stress testing methodology. - Central bank reform: major balance sheet restructuring of RBZ; give banks’ claims on the RBZ preference over all other claims in the resolution process. - Reform of the statistical system: rebuild ZIMSTAT capacity and acquire new equipment. - Debt and arrears strategy: implement Zimbabwe Accelerated Arrears Clearance, Debt, and Development Strategy; establish Debt Management Office. - Division of labor between World Bank and Fund: - PFM reform: Bank to complete TA for computerized PFM and lead a benchmarking assessment; Fund to offer TA in forecasting, budgeting, and fiscal oversight. - Public investment program: Bank providing analytical support and financing for water and sanitation rehabilitation. - Social delivery and safety nets: Bank to implement results-based financing and public works programs; provide analytical support. - Tax reform: Fund to offer TA in tax policy and drafting ZITA; Bank to support mineral revenue transparency and, jointly with Fund, provide TA on mining sector tax policy and revenue management. - Diamond sector reform: Fund to offer TA on AML/CFT standards in diamond and precious metal sectors, subject to external funding. - Business environment reform: Bank to undertake business enterprise survey and draft growth and competitiveness strategy. - Financial sector reform: Bank to undertake FINSCOPE survey; Fund to provide TA in banking supervision, Basle core principles, and stress testing. - Central bank reform: Fund to offer TA in governance and central bank accounting and financial controls following Parliamentary approval of a special purpose vehicle (SPV). - Statistical system reform: Bank to provide technical guidance to household survey and assist ZIMSTAT; Fund to offer TA in national accounts, monetary statistics, and government finance statistics. - Debt and arrears strategy: Bank and Fund staff produced a joint DSA in the context of the 2011 Article IV Consultation. - Information sharing commitments: - Fund to be kept informed of progress in macro-critical structural reform areas (timing: in the context of WB missions). - Bank to be kept informed of progress in areas where the Fund takes the lead and the Fund to share outputs when requested by the Bank team. *Italic: _cr11135 - References:_* ### 6. The appendix lists the teams’ separate ### _cr11135 - 6. The appendix lists the teams’ separate ### Bank and Fund Planned Activities in Macro-critical Structural Reform Areas, January–December 2011 - Bank Work Program (Products and Provisional Timing of Missions / Expected Delivery Date) - TA to strengthen the computerized PFM system — January 2011 - PFM benchmarking (CIFA) — January, May 2011 - TA for Human Resource Systems, wage bill and employment issues — May 2011 - Results-based financing program in health — March, June 2011 - Public works rapid social response program — June 2011 - Technical support for improving mineral revenue transparency — February, May 2011 - Inventory of mineral wealth to improve mineral revenue forecasting — February, May 2011 - Enterprise survey to benchmark business environment, SME survey — March, May 2011 - Growth recovery report — February, July 2011 - Support to debt data reconciliation — June 2011; March 2011; June 2011; September 2011; June 2011; July 2011; May 2011; September 2011; August 2011; September 2011 - Fund Work Program (Products and Provisional Timing of Missions / Expected Delivery Date) - MCM TA in stress testing — January 2011 - Article IV Consultations — March 2011 - MCM TA in balance sheet bifurcation and debt relief — March 2011 - LEG follow up TA on the Income Tax Act — Q2 2011 - FAD TA in tax administration reform — Q2 2011 - FAD diagnostic mission in PFM — Q2 2011 - STA mission in government finance statistics — Q2 2011 - MCM TA in liquidity risk stress testing and supervisory framework — Q2 2011 - MCM TA on credit risk stress testing and bank resolution framework — Q2 2011 - STA TA in national accounts — Q3 2011 - LEG TA in AML/CFT — Q2-Q4 2011 - FAD follow-up mission in PFM — Q3-Q4 2011 - Possible TA: - STA TA in monetary statistics — February 2011 - MCM TA in central bank accounting and financial controls — May 2011 - Joint Work Program - Debt Sustainability Analysis — March 2011 - Bank-Fund (FAD) TA in mining taxation — May 2011 ### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of April 2011) Findings on data quality and coverage: - General - "Data have serious shortcomings that significantly hamper surveillance." - ZIMSTAT needs to rebuild capacity and acquire new equipment. - All Fund technical assistance was suspended on June 13, 2002; suspension lifted in targeted areas on May 17, 2010. - ZIMSTAT conducted surveys in 2010 to benchmark national accounts for 2009 and planned a new labor force survey and an income, consumption and expenditure survey in 2011. - National Accounts - Most recent official national accounts publication includes developments in 2009 in U.S. dollars based on surveys conducted in 2010. - ZIMSTAT published preliminary estimates of GDP in U.S. dollars using 2009 as the base year for constant prices. - National accounts in Zimbabwe dollars exist before 2008 with 1990 as the base year. - Production constrained by insufficient input data, low survey response rates, and limited processing capacity. - Last income, consumption, and expenditure survey of any reasonable quality was in 2001; 2007/08 survey distorted due to hyperinflation. - Despite base year revision to 2009, value added for some sectors like agriculture still based on 1990 weights for individual commodities. - Price Statistics - New CPI published March 24, 2009: prices in U.S. dollars, base December 2008, uses 1990 weights. - Concerns CPI may not adequately reflect households’ price changes. - Review of weights, coverage, outlet and product selection planned after 2010 income, consumption and expenditure survey (to be completed in 2011). - Government Finance Statistics - Ministry of Finance (MoF) does not compile GFS in line with the Government Finance Statistics Manual 2001. - MoF compiles budget data for the budgetary central government; reporting has improved significantly over past two years. - MoF publishes revenue and expenditure data bi-annually along with budget statements. - Limited data on government financing. - MoF reconciling external debt data, particularly interest payments on principal and arrears, with external creditors. - Monetary Statistics - RBZ produces monthly monetary and financial statistics. - Data quality deteriorated up to 2009 due to hyperinflation, transition to U.S. dollar accounting, weak accounting practices, and quasi-fiscal activities. - Auditors provided an adverse opinion on the 2008 RBZ financial statement citing hyperinflationary environment and failures in financial reporting systems. - MCM and STA TA in 2009 and 2010 and Article IV missions in 2009 and 2010 made recommendations on central bank accounting and reporting. - Timeliness and coverage improved in 2010 partly due to TA. - RBZ has not published comprehensive monetary statistics since April 2008. - External Sector Statistics - Balance of payments and external debt statistics have multiple issues. - Structural break in trade data in 2010: source shifted from Exchange Control Department to customs data. - 2010 shows very large, unidentified financing flows in the BOP financing imports that cannot be explained. - Labor income and workers’ remittances exclude cash and in-kind transfers from Zimbabweans abroad. - Interest payments not reconciled with creditors’ records; do not contain accrued interest on overdue obligations. - Outstanding debt stocks and principal payments inconsistent with Paris Club and major multilateral creditors’ data. - Current and capital transfers to NGOs and government not fully reconciled with donors’ data. - Financial account incomplete; does not record substantial transactions in assets reported by BIS-member central banks. - RBZ’s initial submissions of reserves and net foreign assets often require substantial adjustments. - Exceptional financing does not fully capture overdue financial obligations. - External sector data reported irregularly with significant delays to staff. ### Data Standards, Reporting, and Timeliness - Participant in the General Data Dissemination System since November 1, 2002. - No data ROSC available. - Reporting to STA - Zimbabwe does not report balance of payments statistics to STA for redissemination in the International Financial Statistics or the Balance of Payments Statistics Yearbook. - No monetary or fiscal data currently reported to STA for publication in the 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. - Table of Common Indicators Required for Surveillance (selected exact entries preserved) - International reserve assets and reserve liabilities of the monetary authorities — Date of latest observation: 25/3/11; Date received: 4/4/11; Frequency of data: W; Frequency of reporting: W; Frequency of publication: NA - Reserve/base money — 25/3/11; 4/4/11; W; W; NA - Broad money — 28/2/11; 11/4/11; M; M; NA - Central bank balance sheet — 25/3/11; 4/4/11; W; W; NA - Consolidated balance sheet of the banking system — 28/2/11; 11/4/11; M; M; NA - Interest rates — 31/12/10; 16/3/11; Q; I; NA - Consumer price index — 01/11; 02/11; M; M; M - Revenue, expenditure, balance and composition of financing — General government — 02/11; 02/11; NA; NA; NA - Revenue, expenditure, balance and composition of financing — Central government — 02/11; 02/11; M; M; NA - Stocks of central government and central government-guaranteed debt — 2010; 02/11; M; I; NA - External current account balance — 2010; 02/11; A, Q; I; NA - Exports and imports of goods and services — 2010; 02/11; A, Q; I; NA - GDP/GNP — 2009; 02/11; A; I; NA - Gross external debt — 2010; 02/11; A; I; NA - International investment position — NA; NA; NA; NA; NA (Notes in table preserved: frequency codes; "The Zimbabwe dollar is no longer traded against foreign currencies on the exchange market." and other footnotes describing data composition and definitions.) ### Joint IMF/World Bank Debt Sustainability Analysis — Key Findings and Background - Classification and overall conclusion - "Based on the external LIC DSA, Zimbabwe is in debt distress." - "The public DSA suggests that Zimbabwe’s overall public debt is unsustainable in light of the fiscal policy implementation and the current size and evolution of the debt stock." - Authorities broadly agreed with these conclusions. - Under a country-specific alternative upside scenario, debt burden indicators would decline faster but external debt ratios would still remain above indicative thresholds. - Approval and preparation - Approved By: Mark Plant and Dominique Desruelle (IMF); Marcelo Giugale and Jeffery Lewis (IDA) - Prepared by: The International Monetary Fund; The International Development Association - Date: May 5, 2011 - Background (selected exact figures and findings) - "Zimbabwe is in debt distress, with arrears to most of its creditors continuing to build up." - At end-2010, total external debt is estimated at $8.8 billion or 118 percent of GDP. - Total public and publicly-guaranteed (PPG) external debt is estimated at $7.1 billion or 95 percent of GDP, with 77 percent of GDP in arrears. - Most PPG external debt is medium- to long-term and owed to official creditors. - Overdue financial obligations to IFIs include: - World Bank: $807 million - African Development Bank: $510 million - EIB: $239 million - IMF: $134 million - Table excerpt (Zimbabwe: 2010 External Debt Stock (in million US dollars) 1/): - Total Remaining Principal Due: 2,873; Total Arrears: 5,950; Principal Arrears: 3,605; Total Debt: 8,823 - MLT Debt: 1,880; 4,891; 2,708; 6,770 - Bilateral Creditors: 747; 2,296; 1,307; 3,043 - Paris Club: 532; 2,117; 1,183; 2,649 - Non-Paris Club: 215; 179; 124; 394 - Multilateral institutions: 637; 2,015; 1,265; 2,652 - IMF: 0; 134; 0; 134 - AfDB: 725; 102; 278; 582 - WB: 438; 807; 499; 1,246 - EIB: 672; 39; 145; 306 - Others: 593; 252; 33; 384 - Private Creditors: 496; 580; 135; 1,076 - Short-Term Debt: 993; 678; 611; 1,671 - Suppliers credits: 0; 313; 286; 313 - Sources: WB, AfDB, Zimbabwean authorities, and staff estimates. - Note: For multilateral institutions, short-term debt, and suppliers credits, estimates reflect compound factor; late interest is included under interest arrears. - Domestic public debt - Domestic debt incurred by RBZ estimated at about $690 million at end-February 2011. - This figure is only an estimate and could be larger if new liabilities of the central bank and its subsidiaries are identified. - Unidentified domestic contingent liabilities within the parastatal sector are another potential downside risk. - Data limitations for the DSA - DSA suffers from significant data shortcomings; authorities are reconciling debt stock and debt service data with creditors with significant differences remaining. - DSA largely based on non-reconciled official debt numbers, creditor-provided data, and staff estimates of accrued interest and penalties on arrears. - Results should be treated with caution. ### Macroeconomic and Financing Assumptions (Baseline Scenario) - Baseline summary - Assumes a more positive macroeconomic outlook largely due to a more favorable external environment compared with the previous DSA, but weakening policy stance increases downside risks. - Higher export commodity prices and resumption of official diamond trade improve outlook for real GDP and export growth. - Weaker fiscal discipline, fast-track mining indigenization, and uncertainties on ownership requirements may undermine investor confidence and discourage private capital inflows. - Government contracting of non-concessional loans would worsen debt outlook and complicate normalization with donors. - Growth and external balance projections (exact figures) - Annual real GDP growth projected to average about 4.7 percent for the period 2010–15 and about 3 percent for 2016–30. - External current account deficit, net of interest, projected to improve from 18 percent of GDP in 2010 to about 3 percent in 2015. - Fiscal assumptions and financing - Central government assumed to run deficits in 2011 and 2012 financed by recently contracted non-concessional loans, but maintain a balanced cash budget in medium and long terms. - Central government revenues projected broadly stable at around 28 percent of GDP over the long term. - Customs revenues anticipated to decline as Zimbabwe simplifies its tariff structure. - Baseline projects only a very marginal increase in fiscal space for nonwage expenditures and continued large financial support for parastatals. - Employment costs to GDP ratio projected to decline slightly but remain a high ratio of total revenues, constraining nonwage current expenditure and public investment. - Financing gap of about 4.4 percent of GDP projected in 2011 due to likely revenue shortfall and higher-than-budgeted expenditure, to be covered mostly by further accumulation of expenditure arrears and cuts in capital expenditure. - Specific policy and event notes preserved verbatim - Footnote on Indigenization legislation: "in the mining sector, a sector-specific ownership threshold of 51 percent should be met by September 25, 2011 for all firms regardless of their value." - On March 21, 2011, government contracted nonconcessional loans from the China Exim Bank amounting to US$566 million for agricultural equipment, medical equipment and supplies, and rehabilitation of water and sewage treatment plants. Terms of these loans are: i) interest rate of 6 months LIBOR plus 3 percent; ii) down payment of 10 percent; iii) management fee of 0.375 percent; and iv) commitment fee of 0.375 percent. ### Box 1 — Key Macroeconomic Assumptions: Baseline Scenario (exact text preserved) - Real GDP is projected to grow by about 4.7 percent in the medium term and 3 percent in the long term. Growth is projected to decelerate mainly due to a sharp slowdown in mining, which would be caused by the recently announced fast-track indigenization. Slow progress in addressing structural bottlenecks, including relatively high public wage costs, poorly maintained infrastructure, and a poor business climate, is expected to pose constraints to higher growth in other sectors. Inflation would remain contained at an average of about 5 percent in the medium to long term. - Donor support is assumed to be confined to humanitarian assistance. It is also assumed that the end-2010 arrears will remain unresolved and new projected debt service payments on PPG external debt will fall into arrears over the entire projection period.1/ No debt relief is expected under the baseline scenario. - 1/ The DSA is conducted on an accrual basis. - FDI, portfolio investment, and private sector borrowing will remain limited in the medium and long term. - Import growth would gradually decline over the long term constrained by a slackening in export growth and limited private capital inflows and lack of access to non-humanitarian assistance. - On the fiscal sector, a financing gap of about 4.4 percent of GDP is projected in 2011 due to a likely revenue shortfall and higher-than-budgeted expenditure, to be covered mostly by further accumulation of expenditure arrears and cuts in capital expenditure. ### Results of the Baseline Debt Sustainability Analysis — Public and Publicly-Guaranteed External Debt - Core conclusion: Public and publicly-guaranteed external debt is unsustainable under the baseline scenario given the fiscal policy implementation and current debt stock evolution. - Under the baseline (unchanged policies) scenario, no debt relief is expected and new projected debt service payments on PPG external debt will fall into arrears over the entire projection period. - Upside (country-specific alternative) scenario would lower debt burden indicators faster, but external debt ratios would still remain above indicative thresholds. *International Monetary Fund; The International Development Association — May 5, 2011* ### 6. Under the baseline scenario, at end- ### 6. Under the baseline scenario, at end- ### Baseline scenario: external debt indicators - At end-2010, all PPG external debt indicators exceed thresholds for LICs that have low Country Policy and Institutional Assessment (CPIA) scores, except the two debt service ratios. - Most ratios are projected to continue to exceed their respective thresholds by a wide margin in the medium term, and decline only gradually over the long term. - Footnote detail: Zimbabwe is considered as a country with weak institutions for the purpose of this LIC DSA with a CPIA of 2.0. The policy-based thresholds for the present value (PV) of PPG external debt are as follows: 200 percent of revenue; 100 percent of exports; and 30 percent of GDP. For debt service indicators, the ratios are 15 percent of exports and 25 percent of revenue. ### Sensitivity analysis and stress tests - The sensitivity analysis illustrates that Zimbabwe’s unsustainable debt situation could worsen further. - Historical analysis shows that all external debt indicators could deteriorate rapidly in the medium to long term compared to the baseline scenario reflecting the country’s poor macroeconomic performance in the past decade and the volatility of commodity prices. - Results of the most extreme stress test show that the present value of debt-to-GDP could more than double by 2012. - Footnote detail: The most extreme stress test is a combination shock which assumes that real GDP and export growth, the GDP deflator and net non-debt creating flows would be at their historical averages less ½ standard deviation. ### Public debt sustainability - While Zimbabwe's overall public debt indicators are expected to improve over the long term, they will remain elevated. - The schedule of debt service payments will remain high. - The authorities are unlikely to generate sizable primary surpluses, which would be necessary to achieve public debt sustainability. - Debt-to-GDP projections: - 2010: 104 percent of GDP - 2015: about 96 percent of GDP - Present value of public debt projections: - 2010: 119 percent of GDP - 2015: about 104 percent of GDP - Despite declines, these ratios would remain elevated, well above sustainable levels. - Debt service, including arrears, would remain unaffordable due to the large size of arrears. - Results of the most extreme stress test show that the present value of the public debt-to-GDP ratio more than doubles by 2030. - Footnote detail: The most extreme stress test assumes that real GDP growth is at historical average minus one standard deviation in 2011-12. ### Alternative (recommended policies) scenario - The alternative scenario assumes that the government would implement strong policy measures to address existing impediments to sustainable growth. - Under this scenario, debt burden indicators would decline faster than under the baseline scenario, but the country’s external debt ratios would still remain above the indicative thresholds. - Policy measures assumed: - Strengthen fiscal discipline - Improve the quality of expenditures - Ensure that the implementation of the indigenization legislation takes into account investors’ concerns - Press ahead with key structural reforms - Take forceful steps to address financial sector vulnerabilities - Projected impact: - The country could potentially boost growth performance by about 3 percentage points relative to the baseline scenario over the medium term. - Higher growth would be supported by a positive response of private investment in mining and industry to a better business climate. - A lower wage bill would help contain wage costs and leave more resources for higher public spending on infrastructure. - Footnote detail: The alternative scenario is referred to as the recommended policies scenario in the 2011 Article IV report. *ZIMBABWE 2011 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS INTERNATIONAL MONETARY FUND* ### 10. Zimbabwe is likely to remain in debt ### _cr11135 - 10. Zimbabwe is likely to remain in debt ### Main conclusion - Zimbabwe is likely to remain in debt distress for the foreseeable future. - Achieving debt sustainability will require a further considerable strengthening of economic policies and debt relief, which would necessitate normalization of relations with the international community. - The realization of contingent liabilities, including related to the RBZ restructuring, financial sector vulnerabilities, and SOEs, could make the debt situation even worse. ### Baseline debt dynamics and key indicators (selected) - External debt (nominal) (selected entries): 102.8; 143.9; 130.1; 118.0; 107.9; 111.4; 111.5; 113.1; 113.6; 102.7; 80.6. - o/w public and publicly guaranteed (PPG) external debt (selected entries): 95.7; 133.0; 114.1; 95.2; 86.8; 89.4; 88.7; 89.1; 88.8; 78.2; 61.5. - Change in external debt (selected): 10.1; 41.2; -13.8; -12.1; -10.1; 3.5; 0.1; 1.6; 0.5; -2.6; -1.9. - Identified net debt-creating flows (selected): 8.8; 43.3; -11.7; 13.0; 8.1; 8.9; 5.4; 5.6; 5.7; 4.5; 2.6. - Endogenous debt dynamics (selected): 7.1; 29.4; -28.2; -3.4; 0.6; 2.8; 2.8; 3.0; 3.4; 3.8; 3.3. - Contribution from nominal interest rate (selected): 4.5; 9.0; 6.9; 5.8; 6.0; 6.4; 6.5; 6.7; 7.0; 6.7; 5.6. - Contribution from real GDP growth (selected): 3.5; 21.8; -6.5; -9.2; -5.4; -3.6; -3.7; -3.8; -3.6; -2.9; -2.3. - PV of external debt (selected): 149.0; 133.5; 120.1; 122.4; 121.5; 122.2; 121.9; 107.6; 80.9. - PV of PPG external debt (selected): 132.9; 110.6; 99.0; 100.4; 98.6; 98.2; 97.1; 83.1; 61.8. - Ratios (selected): - PV of external debt in percent of exports (selected): 483.6; 276.5; 232.3; 240.0; 244.2; 248.6; 251.4; 289.2; 362.0. - PV of PPG external debt in percent of exports (selected): 431.5; 229.2; 191.4; 196.8; 198.2; 199.7; 200.3; 223.4; 276.5. - PV of PPG external debt in percent of government revenues (selected): 830.9; 376.1; 339.7; 350.5; 345.8; 345.4; 342.3; 294.0; 218.6. - Debt service-to-exports ratio (in percent) (selected): 24.0; 37.0; 33.1; 16.2; 16.6; 14.9; 14.6; 14.4; 15.9; 15.7; 20.1. - PPG debt service-to-exports ratio (in percent) (selected): 23.4; 34.7; 26.6; 14.6; 13.0; 11.3; 11.5; 11.7; 13.1; 12.9; 16.7. - PPG debt service-to-revenue ratio (in percent) (selected): 231.6; 477.6; 51.3; 24.0; 23.0; 20.2; 20.1; 20.2; 22.5; 17.0; 13.2. - Total gross financing need (Billions of U.S. dollars) (selected): 0.8; 1.7; 2.2; 2.6; 2.6; 2.7; 2.6; 2.8; 3.1; 4.0; 6.5. ### Macroeconomic and fiscal assumptions used in projections (selected) - Real GDP growth (selected historic and projections): -3.7; -17.7; 6.0; -5.5; 7.7; 9.0; 5.5; 3.5; 3.5; 3.5; 3.3; 4.7; 3.0; 3.0; 3.0. - GDP deflator in US dollar terms (change in percent) (selected): 0.9; 1.3; 24.7; 6.2; 12.4; 17.5; 13.1; 1.4; 1.9; 0.7; 1.9; 6.1; 5.0; 5.0; 4.9. - Effective interest rate (percent) (selected): 4.7; 7.3; 6.3; 4.7; 1.3; 5.7; 6.1; 6.2; 6.1; 6.3; 6.5; 6.1; 6.9; 7.3; 6.9. - Growth of exports of G&S (US dollar terms, in percent) (selected): 2.2; -8.4; -1.8; -3.3; 6.5; 100.6; 27.8; 3.5; 2.9; 3.0; 3.7; 23.6; 2.1; 3.3; 2.6. - Growth of imports of G&S (US dollar terms, in percent) (selected): -3.8; 22.4; 21.8; 5.2; 10.2; 59.2; 12.6; -1.3; -2.9; 2.6; 2.5; 12.1; 1.1; 2.2; 1.6. - Government revenues (excluding grants, in percent of GDP) (selected): 3.8; 3.0; 16.0; 29.4; 29.1; 28.6; 28.5; 28.4; 28.4; 28.3; 28.3; 28.3. - Memorandum items (selected): - Nominal GDP (Billions of US dollars) (selected): 5.3; 4.4; 5.8; 7.5; 8.9; 9.4; 9.9; 10.3; 10.8; 15.8; 34.5. - PV of PPG external debt (in Billions of US dollars) (selected): 7.8; 8.3; 8.8; 9.4; 9.7; 10.1; 10.5; 13.1; 21.3. ### Public sector debt (selected) - Public sector debt (selected): 95.7; 142.9; 123.4; 103.8; 95.4; 97.6; 96.5; 96.6; 95.9; 82.6; 63.5. - Change in public sector debt (selected): 8.0; 47.3; -19.5; -19.5; -8.4; 2.2; -1.1; 0.1; -0.7; -2.6; -1.5. - Identified debt-creating flows (selected): 6.5; 26.8; -29.6; -22.5; -8.6; 2.4; -0.9; 0.4; -0.4; -2.0; -1.2. - Automatic debt dynamics (selected): 6.8; 27.1; -29.1; -22.5; -12.7; -0.1; -0.6; 0.7; 0.0; -2.0; -1.2. - PV of public sector debt (selected): 142.2; 119.3; 107.6; 108.6; 106.4; 105.7; 104.2; 87.5; 63.8. - Gross financing need (selected): 10.8; 18.5; 13.3; 7.0; 10.8; 8.3; 5.4; 5.4; 6.0; 4.8; 3.7. - PV of public sector debt-to-revenue and grants ratio (in percent) (selected): 328.7; 851.3; 405.3; 369.0; 378.8; 372.8; 371.3; 367.0; 309.3; 225.5. - Debt service-to-revenue and grants ratio (in percent) (selected): 232.9; 478.4; 49.5; 24.0; 23.0; 20.2; 20.0; 20.2; 22.4; 17.0; 13.2. ### Alternative scenario summary (selected) - Under the Alternative Scenario, external debt (nominal) (selected): 102.8; 143.9; 130.1; 118.0; 108.1; 110.6; 109.7; 110.6; 109.4; 92.4; 62.2. - o/w PPG external debt (selected): 95.7; 133.0; 114.1; 95.2; 85.4; 85.7; 83.0; 82.0; 79.7; 63.3; 41.1. - PV of external debt (selected): 149.0; 133.5; 120.0; 120.5; 117.7; 117.7; 115.6; 95.6; 62.1. - PV of PPG external debt (selected): 132.9; 110.6; 97.4; 95.6; 91.0; 89.0; 85.8; 66.5; 41.0. - Key macro assumptions in Alternative Scenario (selected): - Real GDP growth (selected): -3.7; -17.7; 6.0; -5.5; 7.7; 9.0; 7.2; 6.2; 6.0; 6.0; 6.5; 6.8; 5.0; 5.0; 5.1. - Nominal GDP (Billions of US dollars) (selected): 5.3; 4.4; 5.8; 7.5; 9.1; 9.8; 10.5; 11.2; 12.1; 19.5; 51.7. - Total gross financing need (Billions of U.S. dollars) (selected): 0.8; 1.7; 2.2; 2.6; 2.9; 3.1; 3.2; 3.5; 3.9; 5.6; 10.4. ### Sensitivity analysis and stress tests (selected outcomes) - PV of Debt-to-GDP Ratio (baseline and stress ranges, selected): - Baseline trajectory examples: 119; 108; 109; 106; 106; 104; 88; 64. - Alternative scenarios and bound tests produce higher values under some shocks (e.g., historical and most extreme shock scenarios shown in tables and figures). - PV of Debt-to-Revenue Ratio (baseline and stress ranges, selected): - Baseline examples: 405; 369; 379; 373; 371; 367; 309; 226. - Stress scenarios show large increases (see tables for scenario-specific values). - Debt Service-to-Revenue Ratio (baseline and stress ranges, selected): - Baseline examples: 242; 320; 202; 202; 22; 17; 13. - Stress tests (B1–B6) show the ratio can rise substantially under adverse shocks. ### Risks, contingent liabilities, and exceptional financing - Principal risk drivers identified: - Contingent liabilities related to RBZ restructuring. - Financial sector vulnerabilities. - State-owned enterprises (SOEs). - Exceptional financing consists primarily of the accumulation of arrears; residuals reflect portfolio and equity investment, capital transfers, and errors and omissions. - From 2010 onwards, residuals include contributions to price and exchange rate changes. ### Policy implications highlighted in the analysis - Debt sustainability requires: - Further considerable strengthening of economic policies. - Debt relief, conditional on normalization of relations with the international community. - Without policy strengthening and debt relief, debt indicators (PV of debt-to-exports, PV of PPG external debt-to-revenue, debt service ratios) remain at levels consistent with debt distress. *Source: Zimbabwe 2011 Article IV Report — Debt Sustainability Analysis (IMF).* ### 2010. Historically high commodity prices, the resumption in official diamond trade, a ### _cr11135 - 2010. Historically high commodity prices, the resumption in official diamond trade, a ### Major macroeconomic developments (2010) - Historically high commodity prices, the resumption in official diamond trade, a significant appreciation of the rand, and capital inflows eased somewhat balance of payments pressures in 2010. - The current account deficit was 23 percent of GDP in 2010 and was financed in part by short-term capital flows. - Usable international reserves amounted to 0.4 months of imports at end-2010. - Zimbabwe is in debt distress with a large and unsustainable external debt stock of 118 percent of GDP at end-2010, the bulk of which is in arrears (80 percent of GDP at end-2010). ### Fiscal developments and policy challenges - After a small cash fiscal surplus in 2009, the central government had a cash deficit of about 0.4 percent of GDP in 2010. - Revenue increases driven by improvements in tax policy and administration: revenues rose from 3 percent of GDP in 2008 to 29 percent in 2010. - Large employment costs and other structural fiscal weaknesses: - Employment costs: 14.2 percent of GDP or 48 percent of revenues in 2010. - Continued financing of weakly supervised state-owned enterprises and public financial management challenges undermined expenditure quality and competitiveness. - Executive Directors’ fiscal guidance: - Short term: return to cash budgeting and implement strong expenditure measures, including elimination of ghost workers, to close the likely financing gap. - Medium term: generate fiscal surpluses to help raise international reserves and resilience to shocks. - Priorities: reduce the wage bill relative to revenues, tighten budget constraints on state-owned enterprises, and implement public finance management reforms. ### Financial sector status and vulnerabilities - The multicurrency system jumpstarted intermediation; banking system size surpassed prehyperinflation levels. - RBZ governance and restructuring: - RBZ governing board appointed May 2010; RBZ strengthened reporting and accounting and completed staff downsizing. - RBZ has not published audited financial statements since 2008; financial restructuring is at an early stage; status of nonperforming liabilities and severance packages remains unclear. - Rising vulnerabilities in the banking system, in part because of weak enforcement of prudential regulations. - Executive Directors’ financial-sector recommendations: - Restructure the financially distressed RBZ to which banks are exposed. - Strengthen prudential regulations and enforcement to contain liquidity, solvency, and credit risks. - Caution against using the SDR allocation for addressing claims of downsized RBZ staff. - Authorities’ stance: financial restructuring of the RBZ has commenced; committed to addressing vulnerabilities and balancing financial stability with credit growth resumption. ### Growth outlook and risks - Under unchanged policies, growth likely to decelerate in 2011 to 5.5 percent. - Factors weighing on recovery: inefficient composition of expenditure, rising financial-system vulnerabilities, and announcement of fast-track indigenization of the mining sector. - Key downside risks: possible political instability and a fall in commodity prices. - Authorities’ view: with timely implementation of staff recommendations and continued favorable external conditions, 2010 growth momentum might be sustained in 2011; lack of clear electoral plans could seriously hamper growth. ### Structural reforms and governance - Structural framework anchored in Three Year Macro-Economic Policy and Budget Framework 2010–2012 (STERP II). - Policy priorities highlighted: - Align indigenization and empowerment objectives with respect for property rights. - Improve rule of law, security of land tenure, governance (particularly in the diamond sector), and labor-market flexibility to attract private investment. - Increase transparency in management of diamond revenues and improve governance of public enterprises. - Requests by authorities for Fund technical assistance: - TA on revenue and tax reforms (requested June 2011). - TA on public financial management. - TA on anti-money laundering to review the draft Diamond Revenue Bill, perform diagnostic study of legal instruments on precious metals, and examine SME framework in the mining sector. - Land audit commencement hampered by lack of funds and equipment; assistance of cooperating partners being sought. - Labor market reforms require consensus building within government. ### External debt, arrears, and arrears-clearance strategy - As at end-2010: - Total external debt outstanding: US$8.8 billion (118 Percent of GDP). - External arrears: US$5.95 billion or 67.4 percent of total external debt. - Obligations to IFIs: US$1.69 billion (19 percent of total external debt). - Outstanding debt to the Fund: US$134 million, all in arrears. - Payments to the Fund in 2010: about US$4.05 million with commitment to scale up payments over time. - Staff assessment: public debt sustainability analysis suggests overall debt is unsustainable given fiscal implementation and current debt stock trajectory. - Government action: approved the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy aimed at facilitating re-engagement with creditors, arrears clearance, new financing, and comprehensive debt relief including debt reconciliation and validation. - Executive Directors’ guidance: refrain from further nonconcessional borrowing and seek better terms for recently contracted debt; achieve external sustainability via stronger policies and debt relief within a comprehensive arrears clearance framework. - Authorities’ commitment: regular quarterly payments to the PRGT and increasing payments over time as payment capacity increases. ### Staff Monitored Program (SMP) and data/reform conditionality - Directors agreed an SMP would help establish a track record of sound policies. - Authorities have met one of two staff markers for SMP (timely data reporting) and are committed to meeting the second (eliminating ghost workers). - Important preconditions for SMP progress: clear progress on closing the fiscal financing gap for 2011, addressing banking-system liquidity issues, and demonstrating capacity and commitment to implement an SMP. - Authorities view SMP as critical to economic restructuring and medium-term growth; request favorable Board consideration. ### Key selected economic indicators (2009–11) - Real GDP growth (annual percent change): 2009 = 6.0; 2010 = 9.0; 2011 = 5.5 - Nominal GDP (US$ millions): 2009 = 5,836; 2010 = 7,474; 2011 = 8,916 - GDP deflator (annual percent change): 2009 = 24.7; 2010 = 17.5; 2011 = 13.1 - Consumer price inflation (annual average): 2009 = 6.5; 2010 = 3.0; 2011 = 4.8 - Consumer price inflation (end-of-period): 2009 = -7.7; 2010 = 3.2; 2011 = 7.1 - Central government (percent of GDP, measured in US$): - Revenue and grants: 2009 = 16.7; 2010 = 29.4; 2011 = 29.2 - Expenditure and net lending: 2009 = 19.6; 2010 = 32.1; 2011 = 35.7 - Of which: cash expenditure and net lending: 2009 = 15.7; 2010 = 29.8; 2011 = 33.1 - Of which: employment costs: 2009 = 8.9; 2010 = 14.2; 2011 = 17.3 - Overall balance (including quasi-fiscal activity): 2009 = -3.3; 2010 = -2.9; 2011 = -6.5 - Primary balance (including quasi-fiscal activity): 2009 = 0.1; 2010 = -0.1; 2011 = -4.1 - Cash balance: 2009 = 1.0; 2010 = -0.4; 2011 = -3.9 - Money and credit (US$ millions): - Broad money (M3): 2009 = 1,322; 2010 = 2,222; 2011 = 2,667 - Net foreign assets: 2009 = -295; 2010 = -151; 2011 = -182 - Net domestic assets: 2009 = 1,618; 2010 = 2,374; 2011 = 2,849 - Domestic credit: 2009 = 649; 2010 = 1,577; 2011 = 1,992 - Of which: credit to the private sector: 2009 = 684; 2010 = 1,665; 2011 = 2,080 - Reserve money: 2009 = 125; 2010 = 256; 2011 = 251 - Velocity (M3): 2009 = 4.4; 2010 = 3.4; 2011 = 3.3 - External trade (US$ millions; annual percent change): - Merchandise exports (percent change): 2009 = -2.8; 2010 = 109.4; 2011 = 28.5 - Merchandise imports (percent change): 2009 = 22.2; 2010 = 60.6; 2011 = 14.0 - Merchandise exports (US$ millions): 2009 = 1,616; 2010 = 3,382; 2011 = 4,346 - Merchandise imports (US$ millions): 2009 = -3,213; 2010 = -5,162; 2011 = -5,882 - Balance of payments (US$ millions): - Current account balance (excluding official transfers): 2009 = -1,426; 2010 = -1,735; 2011 = -1,203 - Current account (percent of GDP): 2009 = -24.4; 2010 = -23.2; 2011 = -13.5 - Overall balance: 2009 = 96; 2010 = -649; 2011 = -516 - Official reserves (end-of-period): - Gross international reserves (US$ millions): 2009 = 437; 2010 = 453; 2011 = 442 - Usable international reserves (US$ millions): 2009 = 312; 2010 = 197; 2011 = 191 - Usable international reserves (months of imports of goods and services): 2009 = 1.0; 2010 = 0.4; 2011 = 0.3 - Debt (end-of-period): - Total external debt (US$ millions): 2009 = 7,595; 2010 = 8,823; 2011 = 9,624 - Total external debt (percent of GDP): 2009 = 130.1; 2010 = 118.0; 2011 = 107.9 - Total external arrears (US$ millions): 2009 = 5,289; 2010 = 5,950; 2011 = 6,452 - Total external arrears (percent of GDP): 2009 = 90.6; 2010 = 79.6; 2011 = 72.4 *IMF staff report and Executive Board assessment as reflected in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11135.pdf_