## _cr12279 ## Source details **Canonical URL:** [_cr12279](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12279.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12279.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12279.pdf.json) --- ### Background and recent developments - Economic stabilization and recovery began in 2009 after prolonged crisis, aided by: adoption of the multicurrency system (U.S. dollar, South African rand, Botswana pula, the euro, and the British pound are legal tender), cash budgeting, and discontinuation of quasi-fiscal activities by the Reserve Bank of Zimbabwe (RBZ). - Real GDP growth averaged 9½ percent 2010–11. - 2011/12 agricultural output declined by 3½ percent due to drought in parts of the country. - Growth in 2012 is projected at 5 percent. - CPI inflation: 4.9 percent (y/y) in December 2011; 4 percent in June 2012. - Maize imports: projected to increase to 0.9 percent of GDP in 2012 (from 0.6 percent in 2011) and 1.1 percent of GDP in 2013. ### External sector and reserves - Current account and trade: - Current account deficit widened to 36 percent of GDP in 2011. - Exports continued to grow at 9 percent in January–April 2012; trade deficit shrank by $260 million (2½ percent of annual GDP) in January–April 2012 relative to 2011. - Financing and errors: - Errors and omissions remained high at 10 percent of GDP in 2011. - Current account financing relied on debt-based inflows and arrears, and a draw-down of SDR holdings. - Reserves: - Usable international reserves very low at 0.3 months of imports at end-2011. - International reserves cover only 10 days of imports (analysis); staff scenario with active policies projects reserve coverage rising to 1½ months of imports by 2017. ### Public finances and fiscal pressures - 2012 budget targeted fiscal balance on a cash basis with total revenue and cash expenditure set at US$4 billion. - 2012 budget represented roughly a 25 percent increase in real terms over 2011. - Diamond revenue expectations and shortfalls: - Expected to quadruple to US $600 million (some 5½ percent of GDP) but projected to reach US$240 million (2¼ percent of GDP) in 2012. - Projected fiscal outturns for 2012: - Employment costs projected to exceed originally budgeted levels by US$260 million (2½ percent of GDP). - Projected tax revenue shortfall of ½ percent of GDP. - Government estimate of an emerging fiscal gap for the fiscal year: 6¼ percent of GDP. - Stock of domestic arrears: $179 million ([1¾] percent of GDP) at end-June 2012; revised budget makes provision for clearance of $51.4 million. - Mid-year fiscal policy review (presented July 18, 2012): - Hiring freeze; suspension of diamond-revenue-financed projects; increases in fuel excises; plans to insert ZIMRA in diamond value chain; exploring options for grants and credit lines. - Box 1 proposed measures aimed to address diamond revenue shortfall (~3¼ percent of GDP), tax revenue shortfall (~½ percent of GDP), and employment cost overrun (2½ percent of GDP): - Revenue measures expected to raise ¼ percent of GDP and additional non-tax revenue ¼ percent of GDP. - Expenditure rationalization targets: recurrent expenditure by 2¾ percent of GDP and capital expenditure by 3 percent of GDP. - Staff projections and financing: - Staff projects a remaining budget gap of 1 percent of GDP and a cash deficit of 1½ percent of GDP in 2012, including clearance of domestic arrears equivalent to ½ percent of GDP. - Financing to include external loans and drawdown of Zimbabwe’s SDR holdings by SDR 71.3 million ($110 million). - Staff recommendations to contain 2012 expenditure: - Contain cash deficit to under 1½ percent of GDP (active policies scenario). - Refrain from further wage increases in remainder of 2012. - Bring forward some nontax revenue and dispose of assets to close about half of the remaining budget gap. - Convert civil servants’ allowances into taxable salaries from October (yield about ½ percent of GDP). - Seek donor funding for census, constitutional referendum, and elections. - Ensure core budget can be financed without diamond revenue and without further drawdown of SDR holdings until diamond sector transparency improves. ### Banking sector and financial stability - Liquidity and capitalization: - Rapid credit growth raised loan-to-deposit ratios; banking system liquidity ratio stood at 26 percent at end-2011. - 15 banks were below the 25 percent prudential liquid ratio as of end-2011. - RBZ raised the prudential liquidity ratio from 25 percent to 30 percent by end-June 2012. - Distressed banks and failures: - In the last year three small banks experienced severe distress: one under curatorship, two surrendered licenses. - Specific recent failures/events: Renaissance Merchant Bank (curatorship June 2011; curatorship lifted March 2012 after NSAA acquisition), Interfin Bank Limited (recuperative curatorship June 11, 2012), Genesis Investment Bank (voluntarily surrendered license June 2012), Royal Bank Zimbabwe Limited (surrendered licence July 27, 2012). - Deposit and credit structure (Dec-2011): - Deposits predominantly short-term: 57 percent demand deposits (<30 days), 33 percent savings & short term, only 10 percent long-term (>30 days). - Private sector credit biased toward consumption (individuals, distribution sectors). - Policy responses and options: - Government issued bonds in March 2012 to financial institutions in exchange for US$83 million frozen statutory reserves; first coupons paid in July. - Government provided RBZ US$7 million to start a liquidity facility, committed to raise to US$30 million; options to enlarge with private resources. - Staff supports a narrowly targeted liquidity facility with appropriate collateral and tight governance; cautions mixed public-private capital. - Fast-track amendments to Banking Act, strengthen Troubled and Insolvent Bank Resolution Framework, incorporate prompt corrective actions, and improve corporate governance. - RBZ action on capital: - Undercapitalized banks required to comply with minimum capital requirements by end-March 2012 and/or merge; number below/just above minimum declined from twelve at end-December 2011 to eight at end-June 2012. - July 2012 announced steep capital requirement increases, phased over two years (new minimums and phasing schedule provided below). ### Key banking capitalization table (New capital requirements and phasing) - New Capital Requirements (US$ Million) and compliance phasing: - Commercial Banks: Current Minimum Capital 12.5; New Minimum Capital 100 - Merchant Banks: Current Minimum Capital 10; New Minimum Capital 80 - Building Societies: Current Minimum Capital 10; New Minimum Capital 60 - Finance Houses: Current Minimum Capital 7.5; New Minimum Capital 60 - Discount Houses: Current Minimum Capital 7.5; New Minimum Capital 60 - Microfinance Banks: Current Minimum Capital 1.5; New Minimum Capital 5 - Compliance with New Capital Requirements: 25 percent Dec-12; 50 percent Jun-13; 75 percent Dec-13; 100 percent Jun-14 ### Financial sector vulnerabilities and systemic issues - Financial sector assets: 52 percent of annual GDP at end-June 2012 (up from 36 percent of GDP in 2009). - Banking sector concentration: 5 largest commercial banks account for 63 percent of commercial bank deposits, and 54 percent of total banking sector deposits. - RBZ estimates about $2 billion (18 percent of GDP) circulating outside formal banking sector. - Average solvency ratio (regulatory capital to risk-weighted assets) declined to 12.9 percent at end-March 2012 (minimum requirement 10 percent), with large variations across banks. - NPLs increased from 6 percent on average at end-December 2011 to 10 percent at end-June 2012; misreporting concerns suggest NPLs may be underestimated. - Recommendation: orderly consolidation of the banking system; intensified supervision; identification of quality collateral to activate liquidity facilities; gradual issuance of treasury bills to support interbank market with monitoring to avoid fiscal pressure. ### Outlook and risks - Growth projections: - Baseline: Growth projected to decelerate gradually to some 4 percent by 2017. - Staff active policies scenario: higher growth (see scenario section). - Key downside risks: - Resurgence of political instability ahead of elections expected in 2013 (Likelihood: Medium to High; Impact: Medium). - Deeper global downturn, notably in Europe and China (Likelihood: Medium; Impact: Low to Medium). - Quantified: A 10 percent fall in metals and diamond prices would worsen the 2013 current account deficit by about 2½ percent of GDP; a 10 percent fall in minerals and diamond production would increase current account deficit by another 2 percent of GDP and reduce growth by 1½ percentage points. - Destabilizing effects of indigenization policy on investment and banking liquidity (Likelihood: Medium; Impact: Medium). - Fiscal slippages and financial sector instability (Likelihood: Medium; Impact: Medium to High). - Buffers and vulnerabilities: Low external reserves and lack of lender-of-last-resort; debt overhang remains an impediment to fiscal and external sustainability. ### Scenarios: Unchanged Policies vs. Active Policies - Unchanged Policies Scenario (Figure 6 summary): - Commodity prices remain high except for platinum. - Fiscal revenue growth stagnates; expenditure heavily tilted towards employment costs. - Cash balances fail to provide appropriate buffers; external debt remains unsustainable. - Active Policies Scenario (Figure 7 summary / Table 7 highlights): - Corrective measures imply faster growth driven by higher FDI and improved business environment. - Fiscal revenues strengthen; expenditure composition becomes more balanced. - Positive cash balances provide greater reserve buffers; smaller external debt stock. - Active policies generate higher real GDP (index, 2011=100), higher FDI, improved current account balances (percent of GDP), greater usable international reserves (million US$ and months of imports), and lower external debt (percent of GDP) over 2012–2017 relative to unchanged policies. - Active Policies Scenario key projections (selected): - Real GDP growth: 2013–2017: 7.0; 7.0; 7.0; 7.0; 7.0 (annual percent change). - Nominal GDP (US$ millions) 2013: 12,399; 2014: 13,928; 2015: 15,755; 2016: 17,843; 2017: 20,206. - Usable international reserves (US$ millions): 2013: 270; 2014: 470; 2015: 744; 2016: 1,069; 2017: 1,443. - Total external debt (percent of GDP) under active policies: 2017: 98.2 (declining from 124.0 in 2009 to 98.2 in 2017 under active policies). ### Debt, arrears, and sustainability - Staff estimates total external debt at $10.7 billion at end-2011 (113½ percent of GDP); 67 percent of GDP are arrears. - Zimbabwe’s arrears to the PRGT: SDR 84.3 million ($127 million) at end-July 2012. - Recent nonconcessional external borrowing contracted: - Loan from China for Victoria Falls Airport renovation: 1.7 percent of GDP. - Facility from South Africa for parastatal development banks: 0.3 percent of GDP. - Staff cautions: - Refrain from further nonconcessional borrowing. - Avoid issuing debt backed by collateralized mineral revenues. - Avoid selective debt servicing. - Further depletion of SDR holdings to fund expenditure would worsen external vulnerability. - Debt outlook: - Under baseline, total external debt (percent of GDP) projected to be 116.0 in 2012, 119.6 in 2013, rising to 128.7 in 2017 and 142.4 in 2022. - Under alternative active scenario, external debt (percent of GDP) declines faster: e.g., 2017: 99.5; 2022: 87.5; 2032: 58.6 (selected series). - Conclusion: Zimbabwe is unlikely to restore debt sustainability without a comprehensive arrears clearance and debt relief strategy. ### Macroeconomic projections — Selected economic indicators (2009–17, baseline) - Real GDP growth (annual percent change): 2009: 6.3; 2010: 9.6; 2011: 9.4; 2012: 5.0; 2013: 6.0; 2014: 5.0; 2015: 4.5; 2016: 4.0; 2017: 4.0 - Nominal GDP (US$ millions): 2009: 6,133; 2010: 7,433; 2011: 9,458; 2012: 10,796; 2013: 12,293; 2014: 13,564; 2015: 14,997; 2016: 16,523; 2017: 18,210 - Consumer price inflation (annual average): 2009: 6.5; 2010: 3.0; 2011: 3.5; 2012: 5.0; 2013: 5.7; 2014: 4.3; 2015: 4.4; 2016: 4.5; 2017: 4.6 - Central government (percent of GDP): Revenue and grants 2012: 32.6; Expenditure and net lending 2012: 36.4; Employment costs 2012: 23.5 - Cash balance (percent of GDP): 2012: -1.5; 2013: -2.1; 2014: -0.8; 2015: -0.1; 2016: 0.2; 2017: 0.2 ### Monetary and external aggregates (selected levels) - Broad money (M3, US$ millions): 2012: 4,208; 2013: 5,164; 2014: 6,095; 2017: 8,838 - Gross international reserves (US$ millions): 2012: 477; 2013: 598; 2017: 1,027 - Usable international reserves (US$ millions): 2012: 130; 2013: 130; 2017: 129 - Months of imports of goods and services (usable reserves): 2012: 0.2; 2013: 0.2; 2017: 0.1 - Total external debt (US$ millions): 2012: 12,540; 2013: 14,680; 2017: 23,135 - Total external debt (percent of GDP): 2012: 116.2; 2013: 119.4; 2017: 127.1 - Total external arrears (US$ millions): 2012: 6,798; 2017: 9,379 - Total external arrears (percent of GDP): 2012: 63.0; 2017: 51.5 ### Structural priorities and policy recommendations (summary) - Strengthen public financial management (PFM) and improve control over payroll. - Raise productivity of government expenditure; rebalance expenditure mix away from employment costs to public investment and service delivery. - Reduce financial sector vulnerabilities: enforce capital and liquidity requirements, accelerate RBZ restructuring, strengthen supervision, and design a narrowly targeted liquidity facility with quality collateral and transparent governance. - Address infrastructure bottlenecks, notably energy, water, roads, railways, and ICT. - Increase competitiveness: reduce cost of doing business, limit wage increases, protect property rights in implementation of indigenization policy. - Improve diamond sector transparency: fast-track the Diamond Act, strengthen ZIMRA monitoring at mining sites, utilize anti-money laundering framework, consider joining EITI or domestic transparency initiative. - Refrain from nonconcessional borrowing; develop a comprehensive arrears clearance framework to restore external sustainability. - Seek donor funding and support to reduce fiscal slippage risk (census, referendum, elections). ### Statistical and institutional notes - Data limitations: weaknesses in national accounts, price statistics, government finance statistics, and external sector data; ongoing debt reconciliation by Debt Management Office (ZADMO) with UNCTAD assistance. - Technical assistance: ongoing IMF TA in PFM, tax administration, AML/CFT, macroeconomic statistics, and banking supervision; World Bank and IMF collaboration on reform priorities and division of labor. *International Monetary Fund. Selected extracts from the 2012 Article IV report for Zimbabwe (content unit _cr12279).* ### 1. Selected Economic Indicators, 2009–17 _______________________________________________________ 29 ### 1. Selected Economic Indicators, 2009–17 ### Background and recent developments - Economic stabilization and recovery began in 2009 following prolonged economic and political crisis; recovery aided by policy reforms post-hyperinflation, formation of a coalition government in February 2009, sizeable off-budget grants, and a favorable external environment. - Key policy actions that helped restore stability: - Adoption of the multicurrency system (U.S. dollar, South African rand, Botswana pula, the euro, and the British pound are legal tender). - Cash budgeting. - Discontinuation of quasi-fiscal activities by the Reserve Bank of Zimbabwe (RBZ). - Real GDP growth averaged 9½ percent 2010–11. - Agriculture shock and inflation: - 2011/12 agricultural output declined by 3½ percent due to drought in parts of the country. - Growth in 2012 is projected at 5 percent reflecting adverse events in agriculture. - CPI inflation rose to 4.9 percent (year-on-year) in December 2011 and declined to 4 percent in June 2012. - Maize import projections: - Maize imports are expected to increase to 0.9 percent of GDP in 2012 (from 0.6 percent in 2011) and 1.1 percent of GDP in 2013. ### External sector and reserves - Current account and trade: - The current account deficit widened in 2011, reaching a deficit of 36 percent of GDP in 2011. - Higher exports (notably platinum, gold and tobacco) were more than offset by higher imports (fuel, machinery and transport equipment). - Exports continued to grow at 9 percent in January–April 2012; the trade deficit shrank by $260 million (2½ percent of annual GDP) in January–April 2012 relative to 2011. - Errors and omissions and financing: - Errors and omissions remained high at 10 percent of GDP in 2011. - Current account financing relied on debt-based inflows and arrears, and a draw-down of SDR holdings. - Usable international reserves: - Usable international reserves remained very low at 0.3 months of imports at end-2011. ### Public finances and fiscal pressures - Fiscal outturns and pressures: - The budget had a cash deficit of 0.6 percent of GDP in 2011 despite better-than-expected revenue performance. - Domestic arrears accumulation of about 1 percent of GDP in 2011. - Fiscal stress drivers included an unanticipated salary increase in July 2011, increased employee allowances and unbudgeted recruitment in early-2012 (some 7,800 officers were hired in January–June 2012), and underperforming diamond revenues in the first half of 2012. - Cash management: - Cash budgeting has strained under a heavy wage bill; the government responded in a mid-year fiscal policy review. ### Banking sector and financial stability - Liquidity and credit: - Rapid credit growth earlier caused loan-to-deposit ratios to rise steeply; banking system liquidity ratio stood at 26 percent at end-2011. - 15 banks were below the 25 percent prudential liquid ratio as of end-2011. - Large government transactions triggered a liquidity crunch between December 2011 and February 2012, prompting temporary limits on cash withdrawals. - Policy responses and outcomes: - Liquidity improved after receipt of resources from sale of SDRs and partial repatriation of banks’ offshore balances directed by the RBZ. - The RBZ raised the prudential liquidity ratio in two steps from 25 percent to 30 percent by end-June 2012. - In March 2012 the government issued bonds to financial institutions in exchange for US$83 million of statutory reserves frozen at the RBZ; the first coupons on the bonds were paid in July. - Bank distress: - In the last year three small banks experienced severe distress: one came under curatorship and two gave up their licenses. - Deposit structure and credit composition (as of December 2011): - Deposits remained predominantly short-term; only 10 percent long-term (>30 days) and 33 percent savings & short term, 57 percent demand deposits (<30 days). - Private sector credit distribution highlighted consumption bias (individuals, distribution sectors). ### Outlook and risks - Growth projections: - Growth projected to moderate over the medium term; medium-term growth projected to decelerate gradually to some 4 percent by 2017. - Constraints include energy supply, weak competitiveness, poor business climate, indigenization policy uncertainties, political instability, and difficulties accessing long-term credit for domestic investors. - Key downside risks: - Possible resurgence of political instability ahead of elections expected in 2013. - Deeper global downturn (sharper recession in Europe, slowdown in China) affecting commodity prices and activity in South Africa. - Policy risks include destabilizing effects of the indigenization policy on the banking system and its chilling effect on investment. - Fiscal slippages and financial sector instability. - Buffers and vulnerabilities: - Low external reserves and lack of a lender-of-last-resort mean Zimbabwe faces risks with minimal buffers. - Debt overhang: - Zimbabwe’s debt overhang remains an impediment to medium-term fiscal and external sustainability and will need to be addressed via a comprehensive arrears clearance framework underpinned by strong policies. ### Scenario analysis: Unchanged Policies vs. Active Policies - Unchanged Policies Scenario (Figure 6 summary): - Commodity prices remain high except for platinum. - Economic rebound is projected to moderate. - Fiscal revenue growth will stagnate; expenditure will be heavily tilted towards employment costs. - Cash balances will fail to provide appropriate buffers against external shocks. - Despite stabilization of the current account, external debt will remain unsustainable. - Active Policies Scenario (Figure 7 summary): - If corrective measures are implemented (given the same commodity price trajectories), the economy is projected to grow faster, driven by higher FDIs and a better business environment. - Fiscal revenues will strengthen and expenditure composition will become more balanced. - Positive cash balances will provide greater reserve buffers against external shocks and the economy will have a smaller debt stock. - Comparative outcomes (Figure 8 highlights): - Active policies generate higher real GDP (index, 2011=100) relative to no policy change. - Active policies are associated with higher FDI, improved current account balances (percent of GDP), greater usable international reserves (million US$ and months of imports), and lower external debt (percent of GDP) over 2012–2017 relative to unchanged policies. ### Policy recommendations and structural priorities - To unlock higher growth potential and achieve sustained improvements, the report identifies a set of priorities for a vigorous program of reforms: - Strengthen public financial management. - Improve control over the payroll. - Raise the productivity of government expenditure. - Reduce financial sector vulnerabilities. - Address infrastructure bottlenecks (notably energy). - Increase competitiveness. - Improve the business climate. - Implementation of these corrective measures is reflected in the macroeconomic framework for the “active policies scenario.” *International Monetary Fund. Selected extracts from the 2012 Article IV report for Zimbabwe, including overview, outlook, scenarios, and policy priorities.* ### 14. The government experienced ### _cr12279 - 14. The government experienced ### Fiscal performance and shortfall in 2012 - 2012 budget targeted fiscal balance on a cash basis with total revenue and cash expenditure set at US$4 billion. - The 2012 budget represented roughly a 25 percent increase in real terms over 2011. - Diamond revenues were expected to quadruple to US $600 million (some 5½ percent of GDP). - Projected outturns for 2012: - Diamond revenues projected to reach US$240 million (2¼ percent of GDP) for the year. - Employment costs projected to exceed originally budgeted levels by US$260 million (2½ percent of GDP). - Projected tax revenue shortfall of ½ percent of GDP. - Government estimate of an emerging fiscal gap for the fiscal year: 6¼ percent of GDP. - The stock of domestic arrears stood at $179 million ([1¾] percent of GDP) at end-June 2012; the revised budget makes provision for clearance of $51.4 million. ### Mid-year fiscal policy review measures (MYFPR) and Box 1 summary - Government measures announced in MYFPR (presented to parliament on July 18, 2012): - Hiring freeze and suspension of various diamond-revenue-financed projects. - Increases in fuel excises and other expenditure-rationalizing and revenue-enhancing measures. - Plans to insert the revenue authority in the diamond value chain. - Exploring options for grants and credit lines from neighboring countries. - Box 1: Proposed fiscal measures in the MYFPR (aimed to address a diamond revenue shortfall of about 3¼ percent of GDP, tax revenue shortfall of about ½ percent of GDP, and employment cost overrun of 2½ percent of GDP): - Revenue measures: - Increased excise duties on petrol and diesel, and custom duty on wheat flour expected to raise ¼ percent of GDP. - Finalize drafting of the income tax act, enhance ZIMRA systems, strengthen ZIMRA’s role in monitoring the mineral resources process, and review revenue retention policy (estimated to raise non-tax revenue by ¼ percent of GDP). - Expenditure measures: - Rationalize recurrent and capital expenditure by 2¾ and 3 percent of GDP, respectively. - Announce an employment freeze and no additional salary increase for the remainder of 2012. - Actions to tackle the serious domestic arrears situation. - Characterization: The proposed measures are described as second best, but necessary; to avoid recurrence and achieve medium-term fiscal sustainability the government will need to increase transparency in the diamond sector and step up reforms in human resource management and PFM. ### Budget outcomes, staff projections, and financing - Staff projects: - Lower tax and diamond revenue than authorities, implying a remaining budget gap of 1 percent of GDP. - A cash deficit of 1½ percent of GDP in 2012, including clearance of domestic arrears equivalent to ½ percent of GDP. - Financing of the cash deficit to include external loans and a drawdown of Zimbabwe’s SDR holdings by SDR 71.3 million ($110 million). - Risks highlighted: - If tax revenue undershoots projections, diamond dividends do not pick up in the last quarter, or new spending pressures arise, additional measures will be needed. - These risks could jeopardize planned clearance of domestic arrears and lead to further arrears accumulation. - Outlook into 2013: - Budget expected to remain under pressure as the electoral cycle gains intensity and wage pressures increase. - Without improvements in transparency, diamond revenues can at best be expected to remain around 2 percent of GDP in 2013. ### Expenditure mix, sustainability concerns, and recommended fiscal policies - Finding: The expenditure mix is becoming unsustainable—employment costs claim a disproportionate majority of government resources, crowding out public investment and service delivery. - Staff recommendations to contain 2012 budget expenditure within available resources: - Seek to contain the cash deficit to under 1½ percent of GDP in staff’s active policies scenario. - Refrain from further wage increases in the remainder of 2012. - Bring forward some nontax revenue and dispose of some assets to close about half of the remaining budget gap. - Consider converting civil servants’ allowances into part of their (taxable) salaries starting from October, yielding additional revenue of about ½ percent of GDP. - Seek donor funding for the census, the constitutional referendum, and general elections to reduce fiscal slippage risk. - Ensure the core budget can be financed without diamond revenue and without further drawdown of SDR holdings until transparency and regulatory frameworks in the diamond sector are strengthened. ### Diamond sector transparency - Recommendation: Fast-track drafting and submission of the Diamond Act. - Strengthen ZIMRA’s capacity to monitor and assess production and trade of diamonds. - Utilize the anti-money laundering framework to increase transparency and consider joining the EITI. - Authorities noted varied urgency across government elements; authorities concurred with staff on advantages of shielding a core budget from diamond revenue uncertainty and argued that remaining international sanctions were detrimental to diamond revenues. ### Public financial management (PFM) and human resource management - Recommendations: - Reinforce expenditure control and strengthen human resources and payroll management to contain the wage bill. - Improve financial monitoring and oversight, strengthen governance of public enterprises, and develop a medium-term expenditure framework. - Identify most effective and well-targeted social programs and interventions; use inflation as an upper limit on wage increases to free fiscal space for service delivery and investment (sanitation, potable water, agricultural inputs, social protection). ### Authorities’ views on fiscal reforms - Authorities agreed on the need to contain fiscal spending, close the financing gap, and stick to cash budgeting. - Indicated intention to review civil servants’ salaries on an annual basis only and to improve PFM to avoid further arrears accumulation and strengthen oversight and governance of public enterprises. - Welcomed IMF and World Bank TA in PFM and related areas. - Acknowledged slow progress in finalizing the new diamond act and highlighted revenue potential of the mining sector; views on urgency varied across government. ### Financial sector vulnerabilities and RBZ actions - RBZ actions and outcomes: - Undercapitalized banks required to comply with minimum capital requirements by end-March 2012 and/or merge; number of banks below or just above minimum capital requirement declined from twelve at end-December 2011 to eight at end-June 2012. - In July 2012, RBZ announced steep capital requirement increases, to be phased over two years. - Ongoing vulnerabilities: - Several banks remain inadequately capitalized; some weak banks meet current minimums following capital injections but credit risks remain high, particularly for smaller banks with low capital buffers. - Asset quality deterioration due to unsound lending practices and poor risk management. - Systemic liquidity issues: liquidity relatively low and unequally distributed; shortage of adequate collateral. - Government securities issued to clear frozen statutory deposits at the RBZ have uneven distribution and 2–3 year tenors, limiting usefulness as collateral in repo operations. - Absence of quality collateral may impede re-emergence of a formal interbank market. - Policy advice and options: - Any issuance of treasury bills to re-establish the interbank market should be gradual, limited, and closely monitored to ensure they support interbank liquidity without creating additional fiscal pressures. - Government provided the RBZ US$7 million to start a liquidity facility, committed to raise this to US$30 million; options include enlarging the facility with private resources. - Staff supports creation of a narrowly targeted liquidity facility but cautions about mixed public-private capital and stresses appropriate collateral and tight, transparent governance as pre-conditions. - Identify quality assets on banks’ balance sheets as a priority to activate existing funds and target solvent entities requiring temporary liquidity. - Fast-track amendments to the Banking Act to improve oversight and surveillance, strengthen the Troubled and Insolvent Bank Resolution Framework, incorporate prompt corrective actions, and improve corporate governance. - Continue restructuring the RBZ: proposed modifications to the RBZ debt relief bill focus on transferring liabilities from RBZ’s balance sheet to a fund managed by the finance ministry; proceed with disposal of noncore assets and consider applying proceeds to funding the systemic liquidity facility; ensure transparent reporting including publication of external audits. - Risks from indigenization policy: - Fast-tracking forced indigenization of the banking sector could be destabilizing. - Inconsistent government messages on indigenization are undermining confidence. - Forced reductions in foreign investors’ equity could deteriorate management in stronger banks and hamper recapitalization. - Authorities’ views (RBZ): - RBZ considered the banking sector largely safe but concerned over uneven liquidity distribution; viewed weaker banks as relatively few and non-systemic. - RBZ committed to implementing risk-based supervision through Basel II; all banks expected to be Basel II compliant by 2013. - RBZ favors an empowerment model for indigenization focused on indigenous suppliers of goods and services to banks rather than forced equity changes; stressed that further forced indigenization may exacerbate liquidity problems. ### External imbalances and competitiveness - Current account and exchange rate considerations: - Current account deficit projected at 20½ percent of GDP for 2012, mostly financed by debt and arrears. - Staff’s estimated current account “norm” on the order of a 13 percent deficit suggests the real exchange rate would have to depreciate by 15-20 percent to ensure long-term external sustainability. - A reinforced focus on raising competitiveness is needed; within the multicurrency regime this requires reducing the cost of doing business and limiting wage increases. - Business environment constraints: - Zimbabwe ranked 171 out of 183 in the Doing Business survey 2012. - Key constraints include property and land rights issues, weak governance, high corruption perception, high country risk and credit costs, political and policy uncertainty (notably indigenization policy), and infrastructure bottlenecks in power, water, roads, railways, and information and communication networks. *Source: _cr12279 - 14. The government experienced (IMF staff and Ministry of Finance material as presented in the provided content).* ### 37. Wage developments reinforce ### _cr12279 - 37. Wage developments reinforce ### Competitiveness and wage dynamics - The public sector wage bill is now among the highest in Sub-Saharan Africa. - Unit labor costs in most of the domestic private sector have increased considerably, illustrating that wages have outpaced productivity. - With inflation in the low single digits: - the real exchange rate appreciated moderately vis-à-vis the US dollar, - the real effective exchange rate depreciated. - Risk: continued appreciation of the U.S. dollar against trading partner currencies could worsen competitiveness concerns, underlining the need to address competitiveness preemptively. ### Reserves and external vulnerability - International reserves cover only 10 days of imports. - Analysis suggests that at least three months of imports in reserve coverage would be necessary for Zimbabwe (Appendix V). - There is currently no strategy to increase reserves over time; such a strategy would require sustained fiscal surpluses. ### Debt stock and arrears - Staff estimates total external debt at $10.7 billion at end-2011 (113½ percent of GDP). - Of that total external debt, 67 percent of GDP are arrears. - Zimbabwe’s arrears to the PRGT stood at SDR 84.3 million ($127 million) at end-July 2012. - Conclusion: Zimbabwe is unlikely to restore debt sustainability without a comprehensive arrears clearance and debt relief strategy; developing and implementing such a strategy will require great persistence and involve a large number of creditors. ### Recent borrowing and staff cautions - Recent nonconcessional external borrowing contracted: - Loan from China for renovation of Victoria Falls Airport: 1.7 percent of GDP. - Facility from South Africa for parastatal development banks to finance on-lending for agricultural and industrial equipment: 0.3 percent of GDP. - Staff recommendations and cautions: - Refrain from any nonconcessional borrowing going forward. - Cautioned against issuing debt backed by collateralized mineral revenues, which would add to budgetary rigidities. - Cautioned against selective debt servicing, as this may complicate arrears clearance and debt relief in future. - Further depletion of the SDR holdings to fund expenditure would worsen external vulnerability and debt situation, and could complicate eventual arrears clearance. ### Competitiveness policy scenario and reserves projection - Staff scenario: If policies such as those under the staff’s active policies scenario were implemented, the competitiveness gap could be largely closed by 2017. - In particular, the recommended move towards fiscal surpluses would allow reserve coverage to rise to 1½ months of imports. ### Authorities’ views and actions - Moving towards a debt-resolution strategy is one of the authorities’ overarching objectives; adoption of the ZAADDS by the government in full is an encouraging step. - Progress made: - Operationalizing the debt management office. - With assistance of UNCTAD and MEFMI, reconciling and validating debt data with creditors. - Competitiveness measures announced in the mid-year budget review include: - Rehabilitation and expansion of power stations. - Rehabilitation and construction of road networks. - Upgrades to water and sewer infrastructure. - Views on indigenization: mixed—some officials question adverse effects, others concede uncertainty and inconsistency in implementation could be hurting investment. - On nonconcessional borrowing, authorities emphasized balancing development needs with debt sustainability and monitoring all borrowing; new debt contracted is earmarked for Victoria Falls Airport rehabilitation and on-lending by parastatals for equipment. ### Staff-monitored program (SMP) stocktaking - Markers for initiating a stocktaking on the feasibility of an SMP have been met. - The outstanding marker concerned actions to address the “ghost worker” problem: - Public Service Commission (PSC) report indicated some 6,000 irregularly employed youth officers have been removed from the payroll. - PSC report affirmed that the bulk of red flags raised in the Payroll and Skills Audit have been explained or addressed. - The removal of ghost workers represents savings of about 0.2 percent of GDP on an annual basis. - Authorities’ interest in an SMP remains high; they consider an SMP would support macroeconomic stabilization and arrears clearance strategy by boosting credibility and catalyzing donor support. - Payments to the PRGT: - So far in 2012, two payments totaling SDR 3.3 million ($5 million) have been made. - Staff strongly encourages Zimbabwe to make regular and timely payments to the Fund, and increase them as payments’ capacity improves. - Preconditions for an SMP: improving macroeconomic policy management, regular payments to the PRGT, progress towards a consistent policy package, and assurances on capacity and commitment to implement an upper credit tranche facility quality program. - If cooperation continues to improve, staff would request lifting of TA restrictions on staff monitoring to make negotiation of an SMP possible and continue gradual lifting of TA restrictions in targeted areas. ### Staff appraisal and policy recommendations - Positive developments since hyperinflation: - Adoption of the multicurrency system, cash budgeting, and discontinuation of quasi-fiscal activities by the RBZ helped restore some macroeconomic stability. - Risks and requirements: - Rising near term risks include drought, risky external environment, and pressures from the electoral cycle. - Sustaining growth requires commitment to reform: strengthen macroeconomic and financial policies, create an enabling environment for private sector development and capital investment, and normalize relations with creditors. - Indigenization and empowerment policies should be implemented according to transparent rules and with respect to property rights. - Fiscal management: - Firm implementation of measures in the mid-year budget review is essential and should lay the basis for a stronger 2013 budget. - Increase transparency (including fast-tracking of the diamond act and using the anti-money laundering framework). - Address imbalanced expenditure mix and correct deficiencies in employment practices and payroll management to release fiscal space for social spending and public investment. - Financial sector: - Vulnerabilities persist; authorities should strengthen financial regulatory framework and address systemic liquidity. - Recent bank failures highlight need for strong, proactive banking supervision. - The capital requirement increase will alter banking system structure and demands close RBZ monitoring. - Advancing RBZ restructuring is necessary for financial sector stability; systemic liquidity facility work should prioritize identification of usable collateral. - Debt stance: - Zimbabwe remains in debt distress; authorities should refrain from nonconcessional borrowing which may complicate future debt resolution. - Engagement with Fund: - Staff is open to working toward an SMP; strong implementation of mid-year budget measures would demonstrate policy cooperation. - Staff welcomes authorities’ renewed commitment to make regular payments to the PRGT. - Improved cooperation would allow staff to propose to the Board lifting of TA restrictions against an SMP. - Technical assistance: - Authorities continue to make good use of Fund TA in public financial management, tax administration, anti-money laundering, macroeconomic statistics, and banking supervision. *Source: ZIMBABWE 2012 ARTICLE IV REPORT (content unit _cr12279 - 37).* ### 58. Staff recommends that the next ### _cr12279 - 58. Staff recommends that the next ### Recommendation - Staff recommends that the next Article IV consultation be held on the regular 12-month cycle. ### Macroeconomic outlook — Selected economic indicators (2009–17) - Real GDP growth (annual percent change, constant 2009 prices): 2009: 6.3; 2010: 9.6; 2011: 9.4; 2012: 5.0; 2013: 6.0; 2014: 5.0; 2015: 4.5; 2016: 4.0; 2017: 4.0 - Nominal GDP (US$ millions): 2009: 6,133; 2010: 7,433; 2011: 9,458; 2012: 10,796; 2013: 12,293; 2014: 13,564; 2015: 14,997; 2016: 16,523; 2017: 18,210 - GDP deflator (annual percent change): 2009: 23.3; 2010: 10.6; 2011: 16.3; 2012: 8.7; 2013: 7.4; 2014: 5.1; 2015: 5.9; 2016: 6.0; 2017: 6.0 - Consumer price inflation (annual average): 2009: 6.5; 2010: 3.0; 2011: 3.5; 2012: 5.0; 2013: 5.7; 2014: 4.3; 2015: 4.4; 2016: 4.5; 2017: 4.6 - Consumer price inflation (end-of-period): 2009: -7.7; 2010: 3.2; 2011: 4.9; 2012: 6.5; 2013: 4.3; 2014: 4.3; 2015: 4.5; 2016: 4.6; 2017: 4.6 ### Fiscal sector — Central government (percent of GDP, measured in US$) - Revenue and grants: 2009: 15.9; 2010: 29.6; 2011: 30.9; 2012: 32.6; 2013: 32.0; 2014: 32.0; 2015: 31.9; 2016: 31.7; 2017: 31.5 - Expenditure and net lending: 2009: 18.7; 2010: 31.9; 2011: 34.1; 2012: 36.4; 2013: 35.8; 2014: 34.5; 2015: 33.6; 2016: 33.0; 2017: 32.8 - Of which: cash expenditure and net lending: 2009: 15.0; 2010: 30.0; 2011: 31.4; 2012: 35.2; 2013: 34.1; 2014: 32.8; 2015: 32.0; 2016: 31.5; 2017: 31.3 - Of which: employment costs: 2009: 8.4; 2010: 14.3; 2011: 19.2; 2012: 23.5; 2013: 22.6; 2014: 22.5; 2015: 22.4; 2016: 22.3; 2017: 22.3 - Quasi-fiscal activity by RBZ: 2009: 0.4; 2010: 0.2; 2011–2017: 0.0 - Overall balance (including quasi-fiscal activity): 2009: -3.2; 2010: -2.5; 2011: -3.2; 2012: -3.8; 2013: -3.8; 2014: -2.5; 2015: -1.7; 2016: -1.3; 2017: -1.3 - Primary balance (including quasi-fiscal activity): 2009: 0.1; 2010: -0.1; 2011: -1.1; 2012: -1.8; 2013: -2.0; 2014: -0.7; 2015: 0.1; 2016: 0.4; 2017: 0.4 - Cash balance: 2009: 1.7; 2010: -0.4; 2011: -0.6; 2012: -1.5; 2013: -2.1; 2014: -0.8; 2015: -0.1; 2016: 0.2; 2017: 0.2 ### Monetary sector and credit aggregates (US$ millions) - Broad money (M3): 2009: 1,381; 2010: 2,329; 2011: 3,100; 2012: 4,208; 2013: 5,164; 2014: 6,095; 2015: 6,942; 2016: 7,829; 2017: 8,838 - Net foreign assets (monetary survey): 2009: -295; 2010: -151; 2011: -290; 2012: -257; 2013: -772; 2014: 210; 2015: 425; 2016: 1,380 - Net domestic assets: 2009: 1,677; 2010: 2,480; 2011: 3,391; 2012: 4,465; 2013: 5,241; 2014: 6,073; 2015: 6,838; 2016: 7,579; 2017: 8,458 - Domestic credit (net): 2009: 649; 2010: 1,696; 2011: 2,754; 2012: 3,709; 2013: 4,463; 2014: 5,219; 2015: 5,910; 2016: 6,624; 2017: 7,451 - Of which: credit to the private sector: 2009: 684; 2010: 1,665; 2011: 2,711; 2012: 3,591; 2013: 4,369; 2014: 5,150; 2015: 5,875; 2016: 6,589; 2017: 7,414 - Reserve money: 2009: 125; 2010: 256; 2011: 186; 2012: 347; 2013: 468; 2014: 553; 2015: 630; 2016: 710; 2017: 802 - Velocity (M3): 2009: 4.4; 2010: 3.2; 2011: 3.1; 2012: 2.6; 2013: 2.4; 2014: 2.2; 2015: 2.2; 2016: 2.1; 2017: 2.1 ### External sector — Balance of payments (2009–17, US$ millions) - Merchandise exports: 2009: 1,613; 2010: 3,317; 2011: 4,496; 2012: 5,195; 2013: 5,762; 2014: 6,240; 2015: 6,767; 2016: 7,224; 2017: 7,683 - Merchandise imports: 2009: -3,213; 2010: -5,162; 2011: -7,562; 2012: -7,223; 2013: -7,950; 2014: -8,446; 2015: -8,987; 2016: -9,519; 2017: -10,074 - Current account balance (excluding official transfers, US$ millions): 2009: -1,359; 2010: -2,141; 2011: -3,427; 2012: -2,199; 2013: -2,464; 2014: -2,625; 2015: -2,831; 2016: -3,080; 2017: -3,352 - Current account (percent of GDP): 2009: -22.2; 2010: -28.8; 2011: -36.2; 2012: -20.4; 2013: -20.0; 2014: -19.4; 2015: -18.9; 2016: -18.6; 2017: -18.4 - Overall balance (US$ millions): 2009: -239; 2010: -677; 2011: -751; 2012: -569; 2013: -696; 2014: -781; 2015: -841; 2016: -1,014; 2017: -998 ### Official reserves and external debt - Gross international reserves (US$ millions): 2009: 437; 2010: 453; 2011: 366; 2012: 477; 2013: 598; 2014: 683; 2015: 759; 2016: 840; 2017: 1,027 - Usable international reserves (US$ millions): 2009: 312; 2010: 197; 2011: 182; 2012: 130; 2013: 130; 2014: 130; 2015: 130; 2016: 129; 2017: 129 - Months of imports of goods and services (usable reserves): 2009: 1.0; 2010: 0.4; 2011: 0.3; 2012: 0.2; 2013: 0.2; 2014: 0.2; 2015: 0.2; 2016: 0.1; 2017: 0.1 - Total external debt (US$ millions): 2009: 7,602; 2010: 9,018; 2011: 10,726; 2012: 12,540; 2013: 14,680; 2014: 16,810; 2015: 18,874; 2016: 20,953; 2017: 23,135 - Total external debt (percent of GDP): 2009: 124.0; 2010: 121.3; 2011: 113.4; 2012: 116.2; 2013: 119.4; 2014: 123.9; 2015: 125.8; 2016: 126.8; 2017: 127.1 - Total external arrears (US$ millions): 2009: 5,284; 2010: 5,868; 2011: 6,344; 2012: 6,798; 2013: 7,301; 2014: 7,821; 2015: 8,318; 2016: 8,838; 2017: 9,379 - Total external arrears (percent of GDP): 2009: 86.2; 2010: 78.9; 2011: 67.1; 2012: 63.0; 2013: 59.4; 2014: 57.7; 2015: 55.5; 2016: 53.5; 2017: 51.5 ### Balance of payments detail highlights (2009–17) - Trade balance (US$ millions): 2009: -1,600; 2010: -1,844; 2011: -3,066; 2012: -2,028; 2013: -2,189; 2014: -2,206; 2015: -2,220; 2016: -2,295; 2017: -2,391 - Investment income, net (US$ millions): 2009: -419; 2010: -421; 2011: -519; 2012: -604; 2013: -714; 2014: -863; 2015: -1,017; 2016: -1,175; 2017: -1,341 - Private transfers (including transfers to NGOs, US$ millions): 2009: 926; 2010: 573; 2011: 803; 2012: 996; 2013: 1,055; 2014: 1,090; 2015: 1,106; 2016: 1,127; 2017: 1,158 - Capital account (including official transfers, US$ millions): 2009: 1,223; 2010: 605; 2011: 1,717; 2012: 1,629; 2013: 1,768; 2014: 1,844; 2015: 1,991; 2016: 2,066; 2017: 2,354 - Change in arrears (US$ millions): series shows large positive entries reflecting accumulation/clearance patterns (2009: 1,031; 2010: 584; 2011: 476; 2012: 454; 2013: 503; 2014: 521; 2015: 497; 2016: 519; 2017: 541) ### Central government operations (2009–17, US$ millions) - Total revenue & grants: 2009: 975; 2010: 2,199; 2011: 2,921; 2012: 4,000; 2013: 3,519; 2014: 3,933; 2015: 4,341; 2016: 4,777; 2017: 5,239; 2018: 5,741 (table horizon) - Tax revenue: 2009: 883; 2010: 2,074; 2011: 2,660; 2012: 3,253; 2013: 3,183; 2014: 3,533; 2015: 3,910; 2016: 4,312; 2017: 4,729; 2018: 5,184 - Total expenditure & net lending: 2009: 1,145; 2010: 2,372; 2011: 3,223; 2012: 4,000; 2013: 3,926; 2014: 4,403; 2015: 4,680; 2016: 5,036; 2017: 5,459; 2018: 5,979 - Employment costs (US$ millions): 2009: 517; 2010: 1,064; 2011: 1,817; 2012: 2,281; 2013: 2,541; 2014: 2,773; 2015: 3,050; 2016: 3,355; 2017: 3,691; 2018: 4,060 - Interest payments (US$ millions): 2009: 198; 2010: 176; 2011: 198; 2012: 182; 2013: 122; 2014: 272; 2015: 492; 2016: 712; 2017: 923; 2018: 1,023 - Overall balance (US$ millions): 2009: -170; 2010: -173; 2011: -302; 2012: 0; 2013: -407; 2014: -470; 2015: -339; 2016: -259; 2017: -220; 2018: -238 - Cash balance (US$ millions): 2009: 106; 2010: -28; 2011: -530; 2012: 0; 2013: -166; 2014: -261; 2015: -114; 2016: -164; 2017: 0; 2018: 40 ### Central government operations (percent of GDP highlights) - Total revenue & grants (percent of GDP): 2009: 15.9; 2010: 29.6; 2011: 30.9; 2012: 33.7; 2013: 32.6; 2014: 32.6; 2015: 33.3; 2016: 33.6; 2017: 33.8; 2018: 33.8 - Total expenditure & net lending (percent of GDP): 2009: 18.7; 2010: 31.9; 2011: 34.1; 2012: 37.1; 2013: 36.4; 2014: 35.8; 2015: 34.5; 2016: 33.6; 2017: 33.1; 2018: 33.1 - Overall balance (percent of GDP): 2009: -2.8; 2010: -2.3; 2011: -3.2; 2012: 0.0; 2013: -3.8; 2014: -3.8; 2015: -2.5; 2016: -1.7; 2017: -1.3; 2018: -1.3 - Primary balance (percent of GDP): 2009: 0.5; 2010: 0.0; 2011: -1.1; 2012: 0.2; 2013: -1.8; 2014: -2.0; 2015: -0.7; 2016: 0.1; 2017: 0.4; 2018: 0.4 ### Integrated balance sheet and monetary authorities (selected) - Monetary authorities net foreign assets (Dec.): 2009: -845; 2010: -680; 2011: -734; 2012: -608; 2013: -485; 2014: -401; 2015: -324; 2016: -243; 2017: -151 - Usable international reserves (Dec., US$ millions): 2009: 312; 2010: 197; 2011: 182; 2012: 130; 2013: 130; 2014: 130; 2015: 130; 2016: 129; 2017: 129 - Deposit money banks: net domestic assets (Dec., US$ millions): 2009: 832; 2010: 1,799; 2011: 2,657; 2012: 3,857; 2013: 4,756; 2014: 5,672; 2015: 6,514; 2016: 7,336; 2017: 8,308 - Broad money liabilities (M3, Dec., US$ millions): 2009: 1,381; 2010: 2,329; 2011: 3,100; 2012: 4,208; 2013: 5,164; 2014: 6,095; 2015: 6,942; 2016: 7,829; 2017: 8,838 - Loan-to-deposit ratio (percent, memorandum): 2009: 50; 2010: 71; 2011: 87; 2012: 85; 2013: 84; 2014: 85; 2015: 84; 2016: 84; 2017: 84 - Money multiplier (M3/monetary base, memorandum): 2009: 1.19; 2010: 1.71; 2011: 2.11; 2012–2017: values reported at or near 1.1 ### Active Policies Scenario (alternative projections, Table 7 highlights) - Real GDP growth (annual percent change, active policies scenario): 2009: 6.3; 2010: 9.6; 2011: 9.4; 2012: 5.0; 2013: 7.0; 2014: 7.0; 2015: 7.0; 2016: 7.0; 2017: 7.0 - Nominal GDP (US$ millions, active policies scenario): 2009: 6,133; 2010: 7,433; 2011: 9,458; 2012: 10,796; 2013: 12,399; 2014: 13,928; 2015: 15,755; 2016: 17,843; 2017: 20,206 - Current account balance (excluding official transfers, US$ millions, active policies scenario): 2009: -1,359; 2010: -2,141; 2011: -3,427; 2012: -2,199; 2013: -2,273; 2014: -2,251; 2015: -2,340; 2016: -2,560; 2017: -2,805 - Current account (percent of GDP, active policies scenario): 2009: -22.2; 2010: -28.8; 2011: -36.2; 2012: -20.4; 2013: -18.3; 2014: -16.2; 2015: -14.9; 2016: -14.3; 2017: -13.9 - Gross international reserves (US$ millions, active policies scenario): 2009: 437; 2010: 453; 2011: 366; 2012: 477; 2013: 700; 2014: 987; 2015: 1,350; 2016: 1,773; 2017: 2,096 - Usable international reserves (US$ millions, active policies scenario): 2009: 312; 2010: 197; 2011: 182; 2012: 130; 2013: 270; 2014: 470; 2015: 744; 2016: 1,069; 2017: 1,443 - Total external debt (US$ millions, active policies scenario): 2009: 7,602; 2010: 9,018; 2011: 10,726; 2012: 12,545; 2013: 14,305; 2014: 15,712; 2015: 17,048; 2016: 18,396; 2017: 19,843 - Total external debt (percent of GDP, active policies scenario): 2009: 124.0; 2010: 121.3; 2011: 113.4; 2012: 116.2; 2013: 115.4; 2014: 112.8; 2015: 108.2; 2016: 103.1; 2017: 98.2 - Total external arrears (US$ millions, active policies scenario): 2009: 5,284; 2010: 5,868; 2011: 6,344; 2012: 6,798; 2013: 7,300; 2014: 7,817; 2015: 8,307; 2016: 8,815; 2017: 9,341 - Total external arrears (percent of GDP, active policies scenario): 2009: 86.2; 2010: 78.9; 2011: 67.1; 2012: 63.0; 2013: 58.9; 2014: 56.1; 2015: 52.7; 2016: 49.4; 2017: 46.2 ### Risk assessment pointer - Table 8 referenced: "Zimbabwe: Risk Assessment Matrix" (source indicates presence of a risk matrix; content not provided beyond header and column labels "Source of Risks Relative Likelihood Impact if Realized"). *Sources: Zimbabwean authorities; IMF staff estimates and projections.* ### 1. Resurgence in domestic ### 1. Resurgence in domestic ### Risk Assessment Matrix — Major Risks and Their Impacts - 1. Resurgence in domestic political instability ahead of the elections. - Likelihood: Medium to High - Context: Preparations for elections, now expected in 2013, and deteriorating relationship between coalition partners could complicate decision-making within government. - Impact assessment: Medium - Possible effects: Political instabilities and stalemates in government decision-making could result in policy setbacks, lower business confidence and possibly cause further contraction of economic activity. - 2. Strong intensification of the euro area crisis. - Likelihood: Medium - Context: Zimbabwe’s economy sustained by strong demand for key exports and heavily dependent on external credit flows (including short term) alongside accumulation of arrears to finance a large current account deficit. - Impact assessment: Low to Medium - Quantified scenario effects: - A 10 percent fall in metals and diamond prices would worsen the 2013 current account deficit by about 2½ percent of GDP. - If minerals and diamond production fell by 10 percent, the current account deficit would increase by another 2 percent of GDP and growth would fall by 1½ percentage points. - Additional risk: Such shocks could reduce debt inflows and, given low reserve levels, balance of payments difficulties could quickly ensue. - 3. Potential destabilizing effects of the indigenization and empowerment policy. - Likelihood: Medium - Context: Uncertainty and inconsistency around application of the policy has affected investment decisions, particularly for new investments, across the productive sector and for FDI. - Impact assessment: Medium - Possible effects: Continued uncertainties would limit foreign direct investment, including in mining. Indigenization in the banking sector could exacerbate liquidity and credit risks and reduce potential sources of external credit flows. - 4. Fiscal slippages. - Likelihood: Medium - Context: Risk that diamond revenues could fall short of the revised projection; pressures from trade unions to increase civil servants’ wages; potential drawdown on already low deposits and further accumulation of domestic arrears if wage demands materialize, especially pre-election. - Impact assessment: Medium - Quantified scenario effects: - If nominal wages were increased by 20 percent for civil servants in 2013, employment costs would increase by about 2 percent of GDP. - This, combined with further shortfall in diamond revenue, could undermine service delivery and critical social and capital spending, cause a draw down in government deposits, a liquidity crunch, and new accumulation of domestic arrears. - 5. Financial sector instabilities, including liquidity constraints. - Likelihood: Medium - Context: Several banks remain weakly capitalized with imprudently low liquidity buffers, particularly small banks. Asset quality has deteriorated due to unsound lending practices and poor risk management; several banks are overstretched. - Impact assessment: Medium to High - Possible effects: In the absence of a LOLR facility, deterioration in bank capitalization would lead to further loss of confidence, aggravation of tight liquidity conditions, and possible bank runs. *The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of the staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. The RAM reflects staff's views on the source of risks and overall level of concerns as of the time of discussions with the authorities.* ### Appendix I — Forecasting CPI Inflation in Zimbabwe - Empirical relationships: - The CPI inflation rate in Zimbabwe is highly associated with both CPI and PPI inflation rates in South Africa with a lag, largely due to the high share of imports from South Africa. - Correlation coefficients: - Correlation between CPI inflation in Zimbabwe and CPI inflation in South Africa: 0.51. - Correlation between CPI inflation in Zimbabwe and one-month lagged PPI inflation in South Africa: 0.51. - Regression findings: - Five-month lag relationships best explain Zimbabwe CPI fluctuations: - A 1-percentage point increase in the South African CPI inflation rate this month leads to a 0.6-percentage point increase in Zimbabwe’s CPI inflation rate 5 months later. - A 1-percentage point increase in South Africa’s PPI inflation rate this month leads to a 0.5-percentage point increase in Zimbabwe’s CPI inflation rate five months later. - A 1-percentage point increase in the rand/US dollar exchange rate reduces Zimbabwe’s CPI inflation rate five months later marginally (-0.02 percentage point). - RMSE and model selection: Fluctuations of Zimbabwe CPI are best explained by five-month lags of South African CPI/PPI and the rand/US$ exchange rate (RMSE and Adjusted Uncentered R squared statistics reported in the original regressions). - Forecasts: - Forecast using South African CPI indicates the rising trend in Zimbabwe CPI will continue until November 2012. - Forecast using South African PPI indicates a weaker trend. - Note: Forecasts do not capture Zimbabwe-specific inflationary factors such as increases in electricity tariffs and fuel excises. - Selected historical and forecasted CPI levels and y/y percent changes (excerpted from Table 3; forecasts are five-month ahead based on data observed five months earlier): - Jan-11: Level 96.3, y/y % chg 3.5; Five-month ahead (PPI) Level 95.9, y/y % chg 3.1; Five-month ahead (CPI) Level 95.9, y/y % chg 3.1 - Feb-11: Level 96.8, y/y % chg 3.1; Five-month ahead (PPI) Level 96.6, y/y % chg 2.9; Five-month ahead (CPI) Level 96.9, y/y % chg 3.1 - ... - Nov-12 (forecast horizon): Five-month ahead (CPI) y/y % chg 4.3; Five-month ahead (PPI) y/y % chg 2.2 - (Notes: For full month-by-month series see the original Table 3. "Forcasts are based on the data observed five months ago from the projected month.") ### Appendix II — Mineral Resources and Mining Sector - Mining sector contribution: - Mining sector accounted for 12 percent of GDP in 2011. - Mineral exports share of total export value in 2011: Mineral Exports 45%, Non-Mineral Exports 55%. - Within mining exports: Platinum Group Metals 19%, Gold 13%, Diamond 9%, Other 4%. - Production and potential: - Zimbabwe has been the world’s third largest platinum producer since 2009. - Gold production has been recovering from the hyperinflation plunge; 2010 production was one third of peak levels in 1999. - Marange diamond fields potential estimates: 25 to 36 million carats per year, with total gross revenue of US$ 1–2 billion, sustainable for 14 years (production started in 2006). - Chimanimani trial mining started in 2010. - Ownership and revenue implications: - Government holds large shares in several diamond mining companies through the Zimbabwe Mining Development Corporation. - International experience: treasuries receive 15 to 30 percent of total revenue on average; Zimbabwe could receive more given high public sector stakes. - Policy recommendations and governance: - Need to strengthen regulatory framework, especially to address smuggling of precious metals. - Recommended actions: - Fast-track the new diamond act. - Advance the Zimbabwe Mining Revenue Transparency Initiative (home grown version of EITI standards). - Introduce onsite monitoring by the revenue authority at mining locations (planned from September 2012 onward). - Table of shares of diamond mining companies (public share): - Anjin Investments (Private) Ltd., Marange, Alluvial, 50 - Marange Resources, Marange, Alluvial, 100 - Mbada Diamonds, Marange, Alluvial, 50 - Diamond Mining Corporation (DMC), Marange, Alluvial, 50 - Sino-Zimbabwe Ltd., Marange, Alluvial, 100 - DTZ-OZGE, Chimanimani, Alluvial, 0 - Rio Tinto, Murowa, Kimberlite, 0 - Rani Investment LLC., River Ranch, Kimberlite, 0 ### Appendix III — Indigenisation and Economic Empowerment Act (IEE Act) - Key objectives of the IEE Act (Chapter 14:33) of 2008: - To endeavor to secure that at least 51 percent of the shares of every public company and any other business shall be owned by indigenous Zimbabweans. - To establish the National Indigenisation and Economic Empowerment Board and Fund to advise on IEE policies and administer the Fund; objective is to provide financial assistance for share acquisitions, start-ups, rehabilitation, and expansion. - A transfer of $3 million to the Fund in 2012 is envisaged in the revised budget in the mid-year fiscal policy review. - Implementation timeline and sectoral treatments: - Implementation began March 2010 through specific regulations; initial rule required businesses with net asset value in excess of $500,000 to transfer 51 percent of assets within five years; later implementation rules differ by sector. - Sector-specific minimum net asset value and timeframes (selected): - Mining: Minimum Net Asset Value $1, Timeframe: No later than December 24, 2011 - Manufacturing: Minimum Net Asset Value $100,000, Timeframe: Yr. 1 - 26%, Yr. 2 - 36%, Yr. 3 - 46%, Yr. 4 -51%; beginning October 28, 2011 - Finance: As per minimum capital prescribed by the RBZ, Timeframe: One year from July 2012 - Other: Minimum Net Asset Value $1 - $10,000,000, Timeframe: One year from July 2012 - Note: "Other" sectors include education and sports; arts, entertainment and culture; engineering and construction; energy; services; telecommunications; and transport and motor industry. Minimum net asset value varies across sub-sectors. - Economic effects: - Uncertainty and inconsistent application have affected investment decisions, particularly new investments and FDI. - Risks noted earlier: limited FDI flows, potential exacerbation of liquidity and credit risks in banking sector. ### Appendix IV — Financial Sector Risk and Vulnerabilities - Financial sector size and structure: - Financial sector assets accounted for 52 percent of annual GDP at end-June 2012, up from 36 percent of GDP in 2009. - Banking sector concentration: the 5 largest commercial banks account for 63 percent of commercial bank deposits, and 54 percent of total banking sector deposits. - Rapid credit growth funded by unstable short-term deposits. - Inclusion and informal circulation: - RBZ estimates some $2 billion (18 percent of GDP) to be circulating outside the formal banking sector. - Based on 2011 FinScope survey: of the 65 percent of the population living in rural areas, 51 percent are excluded from the banking system. - Vulnerabilities and recent failures: - Several banks, particularly small ones, are weakly capitalized with low liquidity buffers; asset quality deterioration reflects unsound lending and poor risk management; several banks are overstretched. - Recent bank failures cited: Renaissance Merchant Bank, Interfin Bank Limited, Genesis Investment Bank, and Royal Bank Zimbabwe Limited. - Recommendation: Zimbabwe’s financial system would benefit from an orderly process of consolidation. - Solvency and regulatory actions: - Average solvency ratio (regulatory capital to risk-weighted assets) declined to 12.9 percent at end-March 2012, slightly above the 10 percent minimum requirement, with large variations across banks. - January 2012 directive: undercapitalized banks required to comply with minimum capital requirements by end-March 2012 and/or merge with stronger banks. - June 2012 interventions: intervention of Interfin and deregistration of Genesis. - At end-June, one bank had still not met minimum requirements; several banks remain barely above the minimum. - Weak banks accounted for about 7 percent of total banking system assets, but recent failures erode confidence, particularly in smaller banks. - Financial system structure (June 2012 snapshot): - Total Banking sector: Total Assets 265,581 $ million, Share 100.0, % of GDP 51.7, Total Deposits 3,422 $ million, Share 100.0 - Commercial Banks: Total Assets 194,730 $ million, Share 84.8, % of GDP 43.8, Total Deposits 2,931 $ million, Share 85.7 - Domestic banks: Total Assets 112,328 $ million, Share 41.7, % of GDP 21.6, Total Deposits 1,369 $ million, Share 40.0 - Foreign-owned banks: Total Assets 82,402 $ million, Share 43.0, % of GDP 22.3, Total Deposits 1,562 $ million, Share 45.6 - Large commercial banks: Total Assets 52,837 $ million, Share 50.8, % of GDP 26.3, Total Deposits 1,851 $ million, Share 54.1 - Merchant banks: Total Assets 218 $ million, Share 3.2, % of GDP 1.7, Total Deposits 92 $ million, Share 2.7 - Building societies: Total Assets 4,597 $ million, Share 10.7, % of GDP 5.5, Total Deposits 341 $ million, Share 10.0 - Post Office Bank: Total Assets 173 $ million, Share 1.3, % of GDP 0.7, Total Deposits 58 $ million, Share 1.7 - Note: At end-July 2012, there were 25 banks, after Royal Bank surrendered its licence on July 27th. GDP estimate for 2012 used in % of GDP calculations. *2012 ARTICLE IV REPORT ZIMBABWE — INTERNATIONAL MONETARY FUND* ### 4. Against the background of weak ### 4. Against the background of weak ### Banking-sector capitalization and regulatory changes - On August 1, 2012, the RBZ announced steep increases in the minimum capital requirements for banking institutions, to be phased over a two-year period. - The five largest banks should be able to manage the new requirements; the majority of domestic banks, which tend to be small, will face a significant challenge and some merging activity would appear necessary. - At end-March 2012, the average capitalization of the largest banks was $52 million, compared with an average of some $17 million for the remaining 21 banking institutions. - New Capital Requirements (US$ Million) by category and compliance phasing (as presented): - Commercial Banks: Current Minimum Capital 12.5; New Minimum Capital 100 - Merchant Banks: Current Minimum Capital 10; New Minimum Capital 80 - Building Societies: Current Minimum Capital 10; New Minimum Capital 60 - Finance Houses: Current Minimum Capital 7.5; New Minimum Capital 60 - Discount Houses: Current Minimum Capital 7.5; New Minimum Capital 60 - Microfinance Banks: Current Minimum Capital 1.5; New Minimum Capital 5 - Compliance with New Capital Requirements: 25 percent Dec-12; 50 percent Jun-13; 75 percent Dec-13; 100 percent Jun-14 - Source indicated: Reserve Bank of Zimbabwe. ### Asset quality, bank failures, and governance concerns - Asset quality deteriorated over the last 1½ years, exacerbating credit risks. - Loan origination from weak banks remains high, funded by unstable short-term deposits. - Non-performing loans (NPLs) increased from 6 percent on average at end-December 2011 to 10 percent at end-June 2012. - NPLs could rise further with the ongoing deceleration in economic activity. - RBZ uncovered misrepresentation in some banks’ reporting, raising concerns that NPLs may be underestimated. - Box 1: Recent Bank Failures (selected events and findings) - Renaissance Merchant Bank: Placed under 6-month curatorship in June 2011 after audit revealed inappropriate shareholding structure, chronic undercapitalization and liquidity challenges, high level of nonperforming insider and related party exposures, persistent losses, and corporate governance and internal control deficiencies; curatorship lifted March 2012 after cash injection by the National Social Security Authority, which acquired 84 percent share and installed new management. - Interfin Bank Limited: Placed under recuperative curatorship on June 11, 2012, after RBZ audit found inadequate capitalization; concentrated shareholding; abuse of corporate structures; high level of non-performing insider and related party loan exposures; chronic liquidity and income-generating challenges; weak governance and management oversight; and violation of banking laws and regulations. - Genesis Investment Bank: Voluntarily surrendered its banking license to the RBZ in June 2012 after failing to realize adequate financing from partners; RBZ commenced modalities on liquidating the bank. - Royal Bank Zimbabwe Limited: Surrendered its banking license on July 27, 2012; onsite inspection determined critical undercapitalization, chronic liquidity challenges and liabilities to the RTGS system, high non-performing insider loans, and misrepresentation of information to the RBZ. ### Liquidity risks, lender-of-last-resort absence, and interbank market issues - The absence of a lender-of-last-resort (LOLR) facility, in the context of a multicurrency system, increases liquidity risks and hence financial sector vulnerabilities. - Situation compounded by unequal distribution of liquidity in the system and acute shortage of assets that could serve as collateral for lending. - Authorities plan to establish a liquidity facility and need to consider steps to restore an official interbank market, including developing a collateral policy efficient in Zimbabwe’s business environment. ### Financial sector monitoring, supervision, and reform priorities - Continuing vigilance and more proactive supervision will be critical. Key recommendations include: - Intensified monitoring of banks with low liquidity buffers and high and increasing risk exposures. - Enforcement of minimum capital adequacy and liquidity requirements. - Close monitoring of provisioning practices. - Enhancement of risk management frameworks. - Fast-tracking the restructuring of the RBZ. ### Financial soundness indicators and selected statistics (Dec-2009 to Mar-2012 series highlights) - Regulatory capital to risk-weighted assets: series examples include 21.6 (Dec-09), 19.0 (Mar-10), 13.4 (Dec-11), 12.9 (Mar-12). - Capital to assets: series examples include 12.0 (Dec-09), 11.4 (Mar-10), 8.3 (Dec-11), 8.4 (Mar-12). - Past-due loans to gross loans: 19.9 (Dec-09), 16.9 (Mar-10), 21.1 (Dec-11), 26.2 (Mar-12). - Nonperforming loans series (percent): 1.8 (Dec-09), 1.7 (Mar-10), 9.2 (Mar-12). - Provisions as percent of past-due loans: 10.8 (Dec-09), 7.1 (Mar-10), 13.4 (Mar-12). - Liquidity indicators: - Loans/deposits: examples include 48.1 (Dec-09) and 85.2 (Mar-12). - Excess Reserves to Broad Money: examples include 0.03 (Dec-09) and 47.0 (Mar-12) — as reported in the table. - Interest rate and deposit/lending rate examples: - Commercial banks fixed deposits (12 months): 10.3 (Dec-09), 8.6 (Mar-12). - Commercial banks lending rate (weighted average): 11.0 (Dec-09), 18.0 (Mar-12). - Saving deposit rate: 1.0 (Dec-09), 2.6 (Mar-12). ### Reserve adequacy assessment and recommended reserve range - Zimbabwe’s usable reserves were USD 182 million, 0.3 months of imports at end of 2011. - Usable reserves are well below levels observed in officially dollarized economies and benchmarks for sub-Saharan fragile states with fixed exchange rate regimes. - Dabla-Norris et al. (2011) methodology applied to assess reserve adequacy for low-income/dollarized context. - Shocks and assumptions used (historical or latest data since 2009; CPIA rating of 1.8): - Government balance, % of GDP: -2.8 - External demand growth, %: -1.8 - Terms of trade growth, percent: -1.6 - Change in FDI to GDP: -0.3 - Change in aid to GDP: -0.5 - Limitations of methodology noted: - Does not consider rapid domestic bank run (internal withdrawal of dollars); optimal reserves could be underestimated. - Cost of holding reserves in Zimbabwe could exceed 6 percent assumed upper bound; optimal reserves could be overestimated if alternative uses (pay arrears, infrastructure) produce higher returns. - Recommended reserve holdings according to this methodology could range between 3.6 and 10 months of imports. - Current reserve holdings are much lower than the lower limit of the recommended range; authorities should aim to generate fiscal surpluses to increase reserves. *Source: IMF staff summary of Chapter 4 and related sections in the Zimbabwe 2012 Article IV Report (Reserve Bank of Zimbabwe data as presented).* ### 4. In recognition of the need to ### _cr12279 - 4. In recognition of the need to ### I. FUND RELATIONS — Financial and Nonfinancial Relations - 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 93.12 34.21 - Note: Excluding SDRs allocated and placed in escrow account under the Fourth Amendment of the IMF’s Articles of agreement (SDR 66,402,156). Such holdings will be available to Zimbabwe upon the settlement of all overdue obligations to the Fund. - Outstanding Purchases and Loans (SDR Million; %Quota) - ECF arrangements 67.86 19.20 - Latest financial arrangements (Type; Arrangement Date; Expiration Date; 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 (Formerly PRGF); 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) - Overdue: Principal 67.86 - Charges/interest 16.41; forthcoming: 0.12 0.23 0.23 0.23 0.23 - Total 84.27; forthcoming: 0.12 0.23 0.23 0.23 0.23 - 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. - Arrears, remedial measures, and Fund decisions - Zimbabwe has been in continuous arrears to the Fund since February 2001. - Key Board actions and dates: - September 24, 2001: declared Zimbabwe ineligible to use the general resources of the Fund and removed it from the list of PRGT-eligible countries. - June 13, 2002: declaration of non-cooperation and suspension of all technical assistance. - June 6, 2003: suspension of Zimbabwe’s voting and related rights. - February 15, 2006: Zimbabwe fully settled its arrears to the General Resources Account; Managing Director withdrew complaint for compulsory withdrawal; Board did not restore voting and related rights nor terminate ineligibility to use general resources. - May 4, 2009: Executive Board lifted suspension of technical assistance in specified areas (tax policy and administration; payments system; lender-of-last-resort and banking supervision; central banking governance and accounting) (EBS/09/55). - February 19, 2010: Executive Board restored Zimbabwe’s voting rights and its eligibility for general resources. - May 17, 2010: Executive Board added macroeconomic statistics to targeted areas for technical assistance. - January 2011 review (EBS/11/4, 1/7/2011): Board continued technical assistance in targeted areas and added public financial management and AML/CFT to targeted areas; other measures addressing PRGT arrears remained in place. - April 2012 review of overdue financial obligations (EBS/12/56): Executive Board maintained the decisions. - Zimbabwe’s arrears to the PRGT Trust remain, amounting to SDR 84.3 million (US$ 127 million) as of July 31, 2012. - Exchange arrangement and Article IV - Exchange system significantly liberalized and exchange rates unified. - One remaining exchange restriction subject to IMF jurisdiction arising from unsettled balances under an inoperative bilateral payments agreement with Malaysia. - Since 2009, a multi-currency regime has been adopted, including the U.S. dollar, the South African rand, the British pound, the euro and the Botswana pula, with the U.S. dollar as principal currency. - The use of the Zimbabwe dollar as domestic currency was discontinued. - De facto exchange regime classified as exchange arrangement with no separate legal tender. - Zimbabwe is on the standard 12-month consultation cycle. The Executive Board discussed the staff report for the 2011 consultation on June 1, 2011. ### Technical Assistance (selection by year and mission focus) - 2009 - MCM mission on payments systems, lender-of-last resort operations and banking supervision, and central banking governance and accounting - FAD mission on tax policy - FAD mission on revenue administration - FAD follow-up mission on tax policy - 2010 - MCM mission on accounting - FAD mission on general tax policy and mining taxation - STA mission on compilation of national accounts - MCM mission on central bank balance sheet restructuring and reporting - STA mission on compilation of monetary statistics for the central bank - FAD follow-up mission on general tax policy and mining taxation - LEG mission on fiscal law - 2011 - MCM mission on banking supervision - MCM mission on Review of Stress Testing Framework and Action for its Enhancement - MCM mission on Central Bank Accounting - MCM mission on Central Banking Restructuring - MCM mission on Systemic Liquidity, Stress Testing, and Bank Distress Resolution - FAD mission on Development of PFM regulations - FAD mission on Strengthening PFM and Statistics - FAD mission on Status Review of Revenue Administration Reforms and Updating the Reform Agenda - 2012 - LEG mission on AML/CFT Diagnostic: Precious Metals and Stones - MCM mission on Central Bank Debt Relief and Liquidity Support to the Banking system - FAD mission on PFM and Government Finance Statistics --- ### II. WORLD BANK—IMF COLLABORATION — Agreed Reform Priorities and Division of Labor - Joint assessment (Fund team led by Mr. A. Cuevas; World Bank team led by Mr. N. Lenneiye) - Zimbabwe requires a vigorous program of reforms focused on: - strengthening public financial management (PFM); - improving control over the payroll; - raising the productivity of government expenditure; - reducing financial sector vulnerabilities; - tackling infrastructure bottlenecks; - improving the business environment. - Division of labor (selected items) - PFM reform - Fund TA: (i) forecasting and budgeting within a medium-term expenditure framework; (ii) strengthening budget preparation, including more rigorous costing of services; (iii) improving fiscal oversight at general government and public sector levels, including SOEs; (iv) revising the legal and regulatory framework. - Bank: implement Country Integrated Fiduciary Assessment and Country Procurement Assessment Report; (i) expand (phase II) TA to strengthen the computerized PFM system and expand functionality; (ii) support strengthening legal framework for PFM to increase compliance; (iii) provide TA in human resource management and payroll systems supported by electronic document and records management system, following completion of payroll and skills audit; (iv) provide TA to strengthen and decentralize public procurement. - Wage bill management - Bank support on a medium-term framework for compensation and employment. - Public investment program - Bank providing analytical and capacity-building support for implementation of the capital budget, including PPP capacity building and elaboration of medium-term investment frameworks in water, energy, agriculture, transport and ICT. - Tax reform - Fund to continue TA in tax policy and tax administration reform, including that related to the income tax act. - Diamond sector reform - Fund to develop detailed recommendations to increase transparency and revenue collection in the precious minerals sector following June 2012 diagnostic TA on AML/CFT standards. - Bank providing technical support through a domesticated EITI-initiative – Zimbabwe Mining Revenue Transparency Initiative; initiated survey of existing mineral projects to improve mineral revenue forecasting; jointly with Fund to build on October 2011 joint workshop and provide technical advice on mining sector tax policy and revenue management. - Delivery of basic services and social safety nets - Bank TA to support 2013 budget preparation, scaling up key programs for basic services and social safety nets (within ZAREP); implementing results-based financing program for maternal and child health and public works rapid social response program; analytical support for safety nets tracking survey, health financing issues note, and design of social transfer framework. - Fund to provide policy advice and TA support to the budget preparation. - Business environment reform - Bank completed a business enterprise survey and trade facilitation assessment; undertaking analysis on growth, trade diagnostic and competitiveness strategy. - Financial sector reform - Fund to continue TA in banking supervision to enhance compliance with Basle core principles and stress testing for liquidity and credit risks. - Bank finalized FINSCOPE survey to assess access to finance. - Central bank reform - Following Parliamentary approval of RBZ debt relief bill and advances towards establishing a lender-of-last-resort facility, Fund will offer additional TA in governance and central bank accounting and financial controls. - Statistical system reform - Bank assisted ZIMSTAT in developing a System Wide Approach to statistics to implement the National Statistics Development Strategy. - Fund will 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 2012 Article IV Consultation; Bank carried out a reconciliation and Debt Management Reform mission. - Poverty analysis and poverty reduction strategy - Bank providing technical guidance to analyze the 2011 household survey data, and the August 2012 census and produce updated poverty analysis; Bank will deliver TA to support preparation of a poverty reduction strategy. - Information sharing agreements - Fund requests to be kept informed of progress in macro-critical structural reform areas, timing of Bank missions, and to share outputs when requested by the Fund team. - Bank requests to be kept informed of progress in areas where the Fund takes the lead and to share outputs when requested by the Bank team. - Planned activities (June 2012–June 2013) — summary of Bank and Fund work programs and provisional timing - Bank work program highlights include: Strengthening PFM and Procurement Systems; TA for Human Resource Management and payroll Systems; TA on wage bill and employment issues; Results-based financing program in health; Support to 2013 Budget Preparation; Technical support for improving mineral revenue transparency; Growth recovery notes; Trade and Competitiveness; Poverty Analysis and Poverty Strategy. Provisional timing spans Q3 2012 – Q3 2013 with specific mission months listed (May, Sept 2012; July, Sept 2012; Q3-Q4 2012; September-October 2012; Aug. 2012; Q4 2013; October 2012; November 2012; Q1 2013; November 2012; Q1 2013; Q3-2012; Q2 2013; Q1 2013). - Fund work program highlights include: Article IV Consultations; MCM TA mission on Central Bank Debt Relief and liquidity support to the Banking system; MCM TA mission on Lender of Last Resort; FAD/ATS TA mission on PFM and Government Finance Statistics; Support to 2013 Budget Preparation; possible LEG TA on AML/CFT (subject to external financing); MCM TA mission on Banking Supervision, governance, and central bank accounting and financial controls; FAD/ATS mission on strengthening the natural resource tax regime; STA/ATS TA on national accounts; FAD/ATS follow-up mission in PFM. Provisional timing includes Q2 2012; Q2-Q3 2012; Q4 2012; June 2013; June 2012; June/July 2012; October/November 2012; November 2012; June 2013. --- ### III. STATISTICAL ISSUES — Data Adequacy and Specific Statistical Problems (as of July 2012) - Overall assessment - General: Data provision has shortcomings but the data is broadly adequate for surveillance. - Despite improvements in timeliness and coverage, shortcomings stem from weak data sources, insufficient coverage and capacity constraints. - May 17, 2010: Executive Board approved a list of targeted TA, including macrostatistics. - April 2012: ZIMSTAT resumed publishing the “Quarterly Digest of Statistics” – a booklet that shows most economic/social data. - A census was carried out in [August] 2012. - Labor market statistics, including unemployment rate, are expected to be available in 2013. - National accounts - Most recent official publication includes developments in 2010 based on surveys of industrial production, a quarterly employment survey and a survey of non-profit institutions. - Production of national accounts is constrained by insufficient input data, low survey response rates, and resource capacity. - Benchmark data for industrial production improved with the 2010 update. - Last income, consumption, and expenditure survey of reasonable quality was made in 2001 (2007/08 survey distorted due to hyperinflation). - Despite revision of the base year to 2009 for GDP, value added for most sectors including agriculture is still based on 1990 weights for individual commodities because of difficulty in constructing weights based on relative prices in 2009. - Analysis of the 2011 household survey is underway. - Price statistics - March 2009: ZIMSTAT published a new CPI based on prices in U.S. dollars, with December 2008 as the base. - The index uses 2001 weights for the consumer basket. - When aggregating CPI from individual prices and sub-group CPIs, ZIMSTAT’s calculation omits items/regions for which information on prices is not available. This results in time-varying weights significantly different from the original 2001 weights. - Concerns that CPI does not adequately reflect price changes faced by households. - A review of the weights, coverage, and outlet and product selections is expected to be completed by end-2012. - Government finance statistics (GFS) - Ministry of Finance (MoF) does not yet compile government finance statistics in line with the Government Finance Statistics Manual (GFSM) 2001, but is in the process of moving to GFSM 2001, with IMF TA. - Budget data are compiled only for the budgetary central government. - Reporting of government finance statistics for the central government has improved significantly over the past three years. - MoF publishes data on revenue and expenditure on its website on a monthly basis, along with budget statements. - There is limited data on government financing. - MoF is in the final stages of reconciling and validating its external debt data with creditors. - Monetary statistics - RBZ produces monthly monetary and financial statistics which are published on their website. - RBZ has not published an annual report or audited financial statement since [text ends in source]. *Prepared By The African Department (In collaboration with other departments); CONTENTS September 7, 2012 — ZIMBABWE: STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX* ### 2008. They are far advanced with the audit of the 2010 financial statements that carry a qualified audit ### _cr12279 - 2008. They are far advanced with the audit of the 2010 financial statements that carry a qualified audit ### Central bank audit, accounting, and reporting - The 2010 financial statements carry a qualified audit opinion and present a negative equity position of US$ 1,235.9 million. - The basis of the qualification relates to disputed liabilities totaling US $20.5 million that will require resolution prior to any transfer of liabilities from the RBZ. - MCM and STA technical assistance and the Article IV missions have made recommendations on central bank accounting and reporting. - Timeliness and coverage of data continue to improve. ### External sector statistics: data issues and limitations - Structural break in trade data in 2010: - Source prior to 2010: Exchange Control Department of the RBZ. - Source from 2010 onwards: customs data. - In 2010 and 2011, very large, unidentified financing flows in the BOP are financing imports but cannot be explained. - Labor income and workers’ remittances do not include estimates of cash and in-kind transfers from Zimbabweans working abroad. - Interest payments: - Not yet reconciled with creditors’ records. - Do not contain accrued interest on overdue financial obligations. - Data on outstanding debt stocks and principal payments are inconsistent with data received directly from Paris Club and major multilateral creditors; finalization of the authorities’ debt reconciliation exercise is expected to remedy this. - Current and capital transfers to nongovernmental organizations and to the government are not fully reconciled with donors’ data. - Financial account is incomplete: does not record substantial transactions in assets reported by central banks that are members of the Bank for International Settlements. - RBZ’s initial submission of flows and stocks of gross international reserves and its net foreign assets position often require substantial adjustments. - Exceptional financing does not fully capture the flow of overdue financial obligations. - External sector data are reported to staff irregularly with significant delays. ### Data standards, reporting, and dissemination - Participant in the General Data Dissemination System since November 1, 2002. - No data ROSC is available. - Zimbabwe does not report balance of payments statistics or the international investment position to STA for redissemination in the International Financial Statistics or the Balance of Payments Statistics Yearbook. - No monetary or fiscal data are currently reported to STA for publication in the International Financial Statistics, and annual fiscal data are also 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: selected reporting dates and frequencies (as reported) - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 6/12; Date received 7/12; Frequency of data W; Frequency of reporting W; Frequency of publication NA. - Reserve/base money: 6/12; 7/12; W; W; NA. - Broad money: 6/12; 7/12; M; M; NA. - Central bank balance sheet: 5/12; 7/12; W; M; NA. - Consolidated balance sheet of the banking system: 9/11; 1/12; Q; Q; NA. - Interest rates: 3/12; 6/12; Q; I; NA. - Consumer price index: 01/11; 02/11; M; M; M. - Central government revenue, expenditure, balance and composition of financing: 06/12; 07/12; M; M; NA. - Stocks of central government and central government-guaranteed debt: 2011; 05/12; M; I; NA. - External current account balance: 2011; 02/12; A; I; NA. - External capital and financial account: Q1 2012; 06/12; Q; I; NA. - Exports and imports of goods: 04/12; 06/12; M; 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. ### Debt stock and arrears: key figures (end-2011 and comparisons) - Total external debt (end-2011): 10,726 (in millions of USD) or 113.4 (in percent of GDP). - Total external debt (end-2010): 9,018 (in millions of USD) or 121.3 (in percent of GDP). - MLT Debt (2011): 8,207 (in millions of USD) or 86.8 (in percent of GDP); (2010) 6,927 or 93.2. - Bilateral Creditors (2011): 3,311 (in millions of USD) or 35.0 (in percent of GDP); (2010) 3,107 or 41.8. - Paris Club (2011): 2,758 or 29.2; (2010) 2,680 or 36.1. - Non-Paris Club (2011): 535 or 5.8; (2010) 427 or 5.7. - Multilateral institutions (2011): 2,828 or 29.9; (2010) 2,687 or 36.1. - IMF: 138 or 1.5 (2011); 133 or 1.8 (2010). - AfDB: 645 or 6.8 (2011); 582 or 7.8 (2010). - WB: 1,336 or 14.1 (2011); 1,279 or 17.2 (2010). - EIB: 305 or 3.2 (2011); 305 or 4.1 (2010). - Others: 404 or 4.3 (2011); 388 or 5.2 (2010). - Private Creditors (2011): 2,068 or 21.9; (2010) 1,133 or 15.2. - Suppliers credits (2011): 273 or 2.9; (2010) 313 or 4.2. - Short-Term Debt (2011): 1,921 or 20.3; (2010) 1,673 or 22.5. - Unidentified financing gap (public sector) (2011): 325 or 3.4; (2010) 105 or 1.4. - Total public and publicly-guaranteed (PPG) external debt at end-2011: estimated at 84 percent of GDP, of which 65 percent of GDP were in arrears. - Overdue financial obligations to IFIs (end-2011): - World Bank: $911 million. - African Development Bank: $587 million. - EIB: $244 million. - IMF: $138 million. - Total debt table (selected row totals, in million US dollars): Total 10,727; Remaining Principal Due 4,383; Total Arrears 6,344; Principal Arrears 3,671. - Domestic government debt (end-2011): $507 million. - RBZ-related domestic debt: $342 million. - Other expenditure arrears: $160 million. ### Background progress and debt data reconciliation - Debt Management Office (ZADMO) is expecting to conclude by September its debt stock taking exercise by completing reconciliation with individual creditors, with assistance of UNCTAD. - Given delays, preliminary data for end-2011 debt stocks are expected to become available upon completion of the stock taking exercise. - The DSA is still based on mostly estimated figures; a comprehensive data base is expected to be completed by end 2012. ### Macroeconomic and financing assumptions: Baseline scenario (selected projections and assumptions) - Growth: - Annual real GDP growth projected to average 4.7 percent for the period 2012–17 and 3 percent for 2018–32. - Box 1: Real GDP is projected to grow by about 4.7 percent in the medium term and 3 percent in the long term. - Inflation: - Inflation would remain contained at an average of about 4½ percent in the medium to long term. - External current account: - Projected to halve from 36¼ percent of GDP in 2011 to about 18½ percent in 2017. - Fiscal cash balances and financing: - Central government projected to run cash deficits through 2015. - Fiscal cash deficits projected at 1½, 2 and ¾ percent of GDP in 2012, 2013 and 2014, respectively. - Thereafter, small cash surpluses of ¼ to ½ percent of GDP are assumed and no further external loans would be contracted under the baseline. - Central government revenues projected to rise to around 33¼ percent in 2012. - Central government cash expenditures projected to peak at around 36½ percent of GDP in 2012, before leveling off at around 32 percent in the medium term. - Current expenditures expected to gradually level off to 30 percent of GDP after 30½ percent of GDP in 2012. - Employment costs expected at 22½ percent of GDP over the medium term. - Non-concessional borrowing: - Central government deficits expected to be financed by non-concessional loans from Chinese creditors contracted in 2011 and 2012. - Total non-concessional loans contracted with Chinese creditors amounted to $817 million to finance specified projects. - Newly contracted nonconcessional external borrowing included a loan from China for renovation of Victoria Falls Airport ($161 million) and a facility from South Africa ($31 million). - Donor support assumption: confined to humanitarian assistance; no debt relief expected under baseline. - FDI: expected to remain limited. - Imports: import growth would gradually decline in line with slower economic growth. ### Results of baseline debt sustainability analysis (DSA) and risks - Zimbabwe is in debt distress based on the external LIC DSA. - Under the baseline scenario, at end-2011, all PPG external debt indicators exceed thresholds for LICs with low CPIA scores. - Debt dynamics: - Total external debt increased by $1.7 billion compared to end-2010, but the debt-to-GDP ratio declined by 8 percentage points due to higher GDP growth. - Continued PPG external debt accumulation of about 4 percent of GDP in the medium term is projected as most debt service payments continue to build up into arrears. - Sensitivity analysis: - If key variables returned to recent historical averages even temporarily, external debt indicators could deteriorate rapidly. - The combination shock could increase present value of debt-to-GDP by more than 70 percentage points by 2015. - Public debt: - Debt-to-GDP ratio projected to decline from 89.2 percent of GDP in 2011 to 74.5 percent of GDP in 2017, but remain elevated and above indicative benchmarks. - Debt service, including arrears, would continue to rise and remain unaffordable due to the large size of arrears. - Most extreme stress test: present value of the public debt-to-GDP ratio could more than double over the next ten years if Zimbabwe suffers another large growth shock in the near future. ### Policy implications and reform priorities (in-text conclusions) - Continued reforms to underpin high growth are essential for debt sustainability. - A comprehensive arrears clearance framework is required to restore sustainability. - Debt reconciliation and completion of the comprehensive debt database (expected by end 2012) are critical to firm up DSA results and policy responses. *International Monetary Fund — ZIMBABWE 2012 ARTICLE IV REPORT—INFORMATIONAL ANNEX and STAFF REPORT FOR THE 2012 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS (excerpts).* ### 9. An alternative active scenario ### 9. An alternative active scenario ### Overview - Assumes that the government would implement strong policy measures to address existing impediments to sustainable growth. - Under this scenario, the country’s external debt ratios would decline much faster than under the baseline scenario and all indicators would be within prudent thresholds by 2023. - If the government strengthens fiscal discipline, improves the quality of expenditures, ensures that the implementation of the indigenization legislation takes into account investors’ concerns, presses ahead with key structural reforms, and takes forceful steps to address financial sector vulnerabilities, the country could potentially boost growth performance by about 2–3 percentage points relative to the baseline scenario over the medium term. - Alongside the achievement of cash surpluses over the medium term, this would allow debt indicators to decline substantially faster (Tables 5–8 and Figures 3 and 4). - 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. ### Key Macroeconomic Assumptions: Alternative Scenario - Real GDP is projected to grow at an average of 7 percent over the medium term driven by mainly by increased investment in mining and strong growth in construction, electricity and manufacturing as the business environment improves. - Inflation would remain contained at an average of about 4½ percent in the medium to long term. - The external account is expected to benefit from increased capital inflows as the business climate improves. - The current account deficit would decrease to around 14 percent of GDP by 2017, largely financed by foreign direct investment. - No debt relief is assumed under the alternative scenario. - The fiscal path is projected to generate cash surpluses averaging 1½ percent over the medium term, mainly reflecting higher diamond revenue as transparency in the sector improves, a declining wage bill (as a percent of GDP) reflecting payroll control measures and containment of wage increases at or below inflation. - This would enable a more sustainable fiscal path allowing for the rebuilding of fiscal buffers and the international reserves, while improving service provision. - Enforcement of prudential requirements and fast-tracking of the restructuring of the central bank to enhance financial sector stability. ### Projected Outcomes and Timing - External debt ratios decline much faster than under the baseline scenario and reach prudent thresholds by 2023. - Growth performance could be higher by about 2–3 percentage points relative to the baseline over the medium term. - Cash surpluses over the medium term support faster declines in debt indicators. ### Policy Measures / Recommendations - Strengthen fiscal discipline. - Improve the quality of expenditures. - Ensure that implementation of the indigenization legislation takes into account investors’ concerns. - Press ahead with key structural reforms. - Take forceful steps to address financial sector vulnerabilities, including enforcement of prudential requirements and restructuring of the central bank. - Implement payroll control measures and contain wage increases at or below inflation to reduce the wage bill (as a percent of GDP). - Improve transparency in the diamond sector to raise revenue. ### Implications for Investment and Public Spending - Improved business climate expected to elicit a positive private investment response in mining and industry. - Reduced wage costs would free resources for higher public spending on infrastructure. - Increased capital inflows expected to help finance the narrowing current account deficit, with foreign direct investment as a key source. *2012 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS ZIMBABWE* ### 10. Zimbabwe is likely to remain in debt ### 10. Zimbabwe is likely to remain in debt ### Debt outlook and implications - "Zimbabwe is likely to remain in debt distress for the foreseeable future." - "The country’s debt overhang remains a serious impediment to macroeconomic stability and sustainable growth and development." - Required actions: "It will need to be addressed in the context of a comprehensive arrears clearance framework and will also require a further considerable strengthening of economic policies, as described in the staff report." ### External debt sustainability — Baseline scenario (selected indicators and projections) - External debt (nominal): - 2009: 124.0 - 2010: 121.3 - 2011: 113.4 - 2012: 116.0 - 2013: 119.6 - 2014: 124.4 - 2015: 126.8 - 2016: 128.2 - 2017: 128.7 - 2022: 142.4 - 2032: 131.1 - o/w public and publicly guaranteed (PPG) external debt: - 2009: 108.7 - 2010: 97.9 - 2011: 83.9 - 2012: 79.5 - 2013: 78.4 - 2014: 78.1 - 2015: 76.6 - 2016: 74.6 - 2017: 72.4 - 2022: 70.6 - 2032: 57.2 - Change in external debt: - 2009: -10.0 - 2010: -2.7 - 2011: -7.9 - 2012: 2.6 - 2013: 3.6 - 2014: 4.8 - 2015: 2.4 - 2016: 1.4 - 2017: 0.5 - 2022: 1.1 - 2032: -2.1 - Identified net debt-creating flows: - 2009: -11.3 - 2010: 5.5 - 2011: 6.3 - 2012: 13.8 - 2013: 11.4 - 2014: 11.3 - 2015: 11.1 - 2016: 11.2 - 2017: 10.8 - 2022: 6.5 - 2032: 1.6 - Non-interest current account deficit: - 2009: 16.3 - 2010: 23.9 - 2011: 31.4 - 2012: 10.9 - 2013: 10.2 - 2014: 15.3 - 2015: 14.8 - 2016: 13.8 - 2017: 13.1 - 2022: 12.7 - 2032: 12.4 - Exports and imports (indices shown in table): - Exports (2012–2017 trend values shown): 51.1 (2012), 49.7 (2013), 48.8 (2014), 47.7 (2015), 46.3 (2016), 44.6 (2017), with 2022: 44.5 and 2032: 44.2. - Imports (2012–2017 trend values shown): 75.1 (2012), 72.5 (2013), 69.8 (2014), 67.2 (2015), 64.6 (2016), 62.0 (2017), with 2022: 51.0 and 2032: 38.0. - Net FDI (negative = inflow): - 2009: -1.7 - 2010: -1.6 - 2011: -3.9 - 2012: -1.2 - 2013: 1.1 - 2014: -1.6 - 2015: -2.5 - 2016: -2.6 - 2017: -2.7 - 2022: -2.9 - 2032: -3.0 - Endogenous debt dynamics (contributions): - Contribution from nominal interest rate (selected): 2012: 5.1; 2013: 5.3; 2014: 5.6; 2015: 5.8; 2016: 5.9; 2017: 6.0; 2022: 7.0; 2032: 7.0. - Contribution from real GDP growth (selected): 2012: -5.0; 2013: -6.1; 2014: -5.4; 2015: -5.0; 2016: -4.6; 2017: -4.6; 2022: -4.0; 2032: -3.7. - PV of external debt (selected rows show PV of external debt and PV of PPG external debt trends): - PV of PPG external debt (percent of exports, percent of government revenues, and levels shown in table): - PV of PPG external debt (percent of exports) examples: 2012: 249.6; 2013: 247.3; 2014: 256.6; 2017: 295.9; 2022: 319.9; 2032: 295.2. - PV of PPG external debt (in billions US$) (select series in table show rising values through the projection horizon; see table for detailed sequence). - Debt service and financing needs: - Debt service-to-exports ratio (in percent), sample values: 2012: 19.9; 2013: 22.3; 2014: 26.4; 2015: 30.1; 2016: 33.9; 2017: 37.5; 2022: 50.1; 2032: 47.0. - PPG debt service-to-exports ratio (in percent), sample values: 2012: 15.1; 2013: 17.1; 2014: 21.0; 2015: 24.0; 2016: 27.5; 2017: 30.5; 2022: 41.0; 2032: 37.4. - Total gross financing need (Billions of U.S. dollars): - 2009: 2.0 - 2010: 3.0 - 2011: 4.7 - 2012: 4.3 - 2013: 5.2 - 2014: 6.2 - 2015: 7.3 - 2016: 8.5 - 2017: 9.7 - 2022: 15.3 - 2032: 27.0 - Key macroeconomic assumptions (baseline): - Real GDP growth (in percent): 2009: 6.3; 2010: 9.6; 2011: 9.4; 2012: -3.8; 2013: 9.9; 2014: 5.0; 2015: 6.0; 2016: 5.0; 2017: 4.5; 2018-32 average: 3.0 (split across projection columns: 2018-32 average: 3.0). - GDP deflator in US dollar terms (change in percent): 2009: 23.3; 2010: 10.6; 2011: 16.3; 2012: 7.7; 2013: 7.6; 2014: 8.7; 2015: 7.4; 2016: 5.1; 2017: 5.9; 2022: 6.0; 2032: 6.0. - Effective interest rate (percent) 5/: 2009: 5.7; 2010: 4.8; 2011: 5.1; 2012: 4.7; 2013: 1.0; 2014: 5.1; 2015: 5.2; 2016: 5.1; 2017: 5.1; 2022: 5.1; 2032: 5.2. - Growth of exports of G&S (US dollar terms, in percent): 2009: -1.8; 2010: 97.2; 2011: 34.7; 2012: 10.7; 2013: 33.3; 2014: 15.5; 2015: 10.9; 2016: 8.3; 2017: 8.1; 2022: 6.7; 2032: 6.4. - Growth of imports of G&S (US dollar terms, in percent): 2009: 21.8; 2010: 59.3; 2011: 45.4; 2012: 15.9; 2013: 21.5; 2014: -4.5; 2015: 10.0; 2016: 6.2; 2017: 6.4; 2022: 5.9; 2032: 5.8. - Grants and aid flows: - Aid flows (in Billions of US dollars) rows show 0.0 across 2009–2032 in the baseline tables. - Grant element of new public sector borrowing (in percent) shows negative values in many projection years due to higher interest rate assumptions; notes explain negative grant-equivalent financing stems from zero grants and negative grant elements of new borrowing because of higher interest rates (about 7 percent) than the assumed discount rate (4 percent). ### Public sector debt sustainability — Baseline scenario (selected indicators) - Public sector debt (percent of GDP): - 2009: 117.5 - 2010: 104.1 - 2011: 89.2 - 2012: 83.8 - 2013: 82.0 - 2014: 81.2 - 2015: 79.2 - 2016: 76.9 - 2017: 74.5 - 2022: 72.2 - 2032: 58.0 - Change in public sector debt: - 2009: -17.4 - 2010: -13.4 - 2011: -14.9 - 2012: -5.3 - 2013: -1.9 - 2014: -0.8 - 2015: -2.0 - 2016: -2.3 - 2017: -2.4 - 2022: -1.0 - 2032: -1.7 - Identified debt-creating flows (public sector): - 2009: -27.1 - 2010: -16.4 - 2011: -17.7 - 2012: -6.5 - 2013: -4.9 - 2014: -3.6 - 2015: -4.3 - 2016: -4.2 - 2017: -4.0 - 2022: -1.3 - 2032: -0.3 - Primary deficit (percent of GDP) and fiscal assumptions: - Primary deficit sequence shows small positive and negative values in projections; revenue and grants (percent of GDP) example: 2012: 33.2; 2013: 32.0; 2014: 32.0; 2015: 31.9; 2016: 31.7; 2017: 31.5; 2022: 30.5; 2032: 28.5. - Automatic debt dynamics: - Automatic debt dynamics (contribution from interest rate/growth differential) 2012: -7.6; 2013: -6.8; 2014: -4.2; 2015: -4.3; 2016: -3.8; 2017: -3.6; 2022: -0.9; 2032: 0.0. - PV of public sector debt (selected): - PV of public sector debt (percent of GDP examples): 2012: 101.7; 2013: 94.2; 2014: 90.0; 2015: 87.8; 2016: 84.5; 2017: 81.2; 2022: 77.9; 2032: 72.0; longer-horizon 2032 in baseline table shows 57.3 in one series and 56.5 in external breakdown. - Gross financing need (percent of GDP or level provided in table): - Gross financing need examples: 2012: 16.5; 2013: 18.9; 2014: 20.6; 2015: 22.3; 2016: 24.1; 2017: 25.8; 2022: 33.9; 2032: 30.7. - Debt service-to-revenue and grants ratio (in percent): - 2012: 23.2; 2013: 26.6; 2014: 32.0; 2015: 36.0; 2016: 40.1; 2017: 43.3; 2022: 59.7; 2032: 58.0. ### Sensitivity analysis and stress tests (public and PPG external debt) - Multiple sensitivity tables (Tables 3–4a, 7–8a) present scenario outcomes for PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio, and debt service-to-revenue ratio under: - Baseline - Alternative scenarios (e.g., "Real GDP growth and primary balance at historical averages"; "Primary balance unchanged from 2012"; "Permanently lower GDP growth") - Bound tests (e.g., "Real GDP growth at historical average minus one standard deviation"; "One-time 30 percent real depreciation in 2013"; "10 percent of GDP increase in other debt-creating flows") - Illustrative baseline and stress results (selected values from tables and figures): - PV of Debt-to-GDP Ratio (baseline sample values): 2012: 90; 2013: 86; 2014: 85; 2015: 82; 2016: 79; 2017: 76; 2022: 70; 2032: 56 (see Table 4). - PV of debt-to-exports ratio (baseline sample values): 2012: 176; 2013: 174; 2014: 174; 2015: 172; 2016: 170; 2017: 170; 2022: 158; 2032: 128 (see Table 4). - PV of debt-to-revenue ratio (baseline sample values): 2012: 270; 2013: 270; 2014: 265; 2015: 257; 2016: 249; 2017: 240; 2022: 231; 2032: 198 (see Table 4). - Debt service-to-exports and debt service-to-revenue ratios exhibit sharp increases under some stress tests, with some scenarios producing the most extreme ratios in 2022 (figures note which shocks are most extreme for each indicator). - Memorandum and notes: - The "Grant element assumed on residual financing (i.e., financing required above baseline)" used in stress tables: -14 (applies to stress scenarios except A2). - Footnotes clarify methodology: PV of private sector debt assumed equivalent to face value; endogenous debt dynamics formula; grant-equivalent financing definitions; negative grant-equivalent financing results from higher interest rates (about 7 percent) than discount rate (4 percent). ### Alternative scenario (selected contrasts with baseline) - Table 5 (External debt, alternative scenario) and Table 6 (Public sector debt, alternative scenario) present a less adverse path for debt metrics under stronger assumptions (e.g., higher real GDP growth assumptions in 2015–2017 and beyond). - External debt (nominal) under alternative scenario (selected values): - 2012: 116.0 - 2013: 115.6 - 2014: 113.3 - 2015: 109.1 - 2016: 104.3 - 2017: 99.5 - 2022: 87.5 - 2032: 58.6 - PV of PPG external debt under alternative scenario (percent of exports and revenues trend lower over time compared with baseline): - PV of PPG external debt (percent of exports) example: 2012: 191.1; 2013: 176.1; 2014: 163.8; 2017: 103.0; 2022: 64.0; 2032: 32.1. - PV of PPG external debt (in percent of GDP + remittances) example: 2012: 91.8; 2013: 85.7; 2014: 78.9; 2017: 50.1; 2022: 31.6; 2032: 16.3. - Public sector debt under alternative scenario (selected): - Public sector debt (percent of GDP): 2012: 83.9; 2013: 77.4; 2014: 70.6; 2015: 63.5; 2016: 56.6; 2017: 50.5; 2022: 33.6; 2032: 17.4. - Change in public sector debt under alternative scenario shows larger declines (e.g., 2012: -5.3; 2013: -6.5; 2014: -6.8; 2015: -7.1; 2016: -6.9; 2017: -6.2). - Under the alternative scenario, many debt ratios decline more markedly over 2012–2032 compared with the baseline, and some debt-service indicators turn negative in projections where projected exports and revenues outpace debt service needs (see tables for detailed sequences). ### Key economic context and assumptions from PIN and report excerpts - PIN summary (September 25, 2012): - IMF Executive Board concluded the 2012 Article IV consultation with Zimbabwe on September 21, 2012. - Post-2009 recovery drivers: end of hyperinflation, coalition government, favorable external environment, adoption of the multicurrency system and cash budgeting, discontinuation of quasi-fiscal activities by the Reserve Bank of Zimbabwe (RBZ). - Recent growth: "real GDP growth averaging some 9½ percent during 2010–11." - 2012 projection: "Real GDP growth in 2012 is projected to slow to 5 percent, reflecting the impact of adverse weather conditions on agriculture, erratic electricity supply, and tight liquidity conditions." - "Mining production is expected to benefit from the lifting of restrictions on diamond exports from the Marange fields as a result of certification by the Kimberley process." - "Inflation slowed to 4 percent in June 2012..." ### Policy implications and required actions (as stated) - Addressing the debt overhang requires: - A comprehensive arrears clearance framework. - "A further considerable strengthening of economic policies" as described in the staff report. *Sources: Country authorities; and staff estimates and projections (2012 Article IV Report — Debt Sustainability Analysis).* ### 4.9 percent in December 2011, reflecting in part some moderation in imported goods inflation. ### _cr12279 - 4.9 percent in December 2011, reflecting in part some moderation in imported goods inflation. ### External position and reserves - Current account deficit widened to 36 percent of GDP in 2011 (from 29 percent of GDP in 2010), due in part to a spike in imports associated with some one-off factors. - Deficit financed by debt-related flows, arrears, and a drawdown of SDR holdings; uncertainties regarding policy implementation affected foreign investment flows. - Usable international reserves remained very low at 0.3 months of imports at end-2011. - Current account deficit projected to narrow to 20½ percent of GDP in 2012 as the 2011 import spike is reversed and exports continue to expand. - Zimbabwe remains in debt distress with total external debt estimated at $10.7 billion (113½ percent of GDP) at end-2011, of which 67 percent of GDP are in arrears. - The large debt overhang is described as a serious impediment to medium-term fiscal and external sustainability. ### Public finances and fiscal measures - Central government operations recorded a cash deficit of 0.6 percent of GDP in 2011 and domestic arrears accumulation of about 1 percent of GDP. - Two salary increases raised employment costs by 22 percent, crowding out social and capital investment; compounded in early-2012 by an increase in employee allowances and unbudgeted recruitment. - Fiscal pressures exacerbated by significant underperformance by diamond revenues during the first half of 2012. - In July the government announced expenditure and revenue measures and a reassessment of diamond revenue flows, including: - a hiring freeze, - suspension of a number of diamond-revenue-financed projects, - increases in excises on fuel, - enhanced monitoring of the mineral resources. ### Financial sector and banking supervision - Banking system recovering from a recent liquidity crunch after rapid credit growth funded by unstable short-term deposits; liquidity remains relatively low and unequally distributed across banks. - RBZ raised the prudential liquidity ratio from 25 percent to 30 percent by end-June 2012. - Some banks, particularly small ones, show weak capitalization, insufficient liquidity, and low asset quality due to unsound lending practices and poor risk management. - Mid-2012 developments: RBZ placed one troubled bank in recuperative curatorship and two banks surrendered their licenses. - August 2012: RBZ announced steep increases in the minimum capital requirements to be phased over a two-year period. - Directors called for more proactive banking supervision and enforcement of prudential regulations, focusing on banks with low liquidity buffers and high risk exposures. - Directors urged authorities to fast-track the restructuring of the financially distressed Reserve Bank of Zimbabwe and to increase the level of reserves over time. ### Medium-term outlook and reforms - Under an unchanged policy scenario, growth is projected to moderate to average some 4 percent; constraints on energy supply and weak competitiveness may challenge achieving these rates. - Foreign investment likely hampered by poor business climate, uncertainties over implementation of the indigenization policy, and political instability; domestic investors may face difficulties accessing long-term credit. - A vigorous program of structural reform and strengthened macroeconomic management would allow the country to sustain higher rates of growth. - Directors stressed full commitment to policies focusing on strengthening fiscal management, reducing financial sector vulnerabilities, and improving the business climate. - Directors emphasized enhancing transparency in the diamond sector, including timely finalization and implementation of the Diamond Act, as key to strengthening revenues and reducing fiscal pressures. - Directors urged refraining from further nonconcessional borrowing and avoiding selective debt servicing; they cautioned against further use of SDR holdings to finance expenditures. ### Policy cooperation, IMF engagement, and SMP prospects - Directors welcomed Zimbabwe’s continued improvement in cooperating with the Fund on policies and payments to the PRGT; this would allow lifting of relevant technical assistance restrictions and advance toward negotiation of a staff-monitored program (SMP). - Most Directors indicated readiness to support lifting restrictions; Directors commended the authorities on meeting the outstanding marker on steps towards removing irregularly hired workers from the payroll, enabling a stock taking on the feasibility of the SMP. - Directors noted that credible government commitment to comprehensive reforms will be necessary before embarking on an SMP. ### Executive Board assessment — key messages - Directors welcomed economic recovery and stabilization but noted risks from adverse weather, uncertain political situation ahead of elections, and a difficult global environment. - Urged full implementation of mid-year fiscal policy review measures and additional measures if necessary to address slippages and close the financing gap. - Stressed need to rebalance expenditure mix by containing growth of the wage bill to create fiscal space for increased social spending and public investment. - Welcomed actions to strengthen financial regulatory framework; called for proactive supervision and enforcement and fast-tracking RBZ restructuring. - Agreed that addressing the large debt overhang and achieving external sustainability will require strong macroeconomic policies and a comprehensive arrears clearance framework supported by donors. - Underscored importance of improving the business climate and ensuring indigenization and empowerment policies are implemented with transparent rules preserving property rights. ### Selected Economic Indicators (actual, estimate, projection snapshots) - Real GDP growth (annual percent change) 2009: 6.3; 2010: 9.6; 2011: 9.4; 2012: 5.0 - Nominal GDP (US$ millions) 2009: 6,133; 2010: 7,433; 2011: 9,458; 2012: 10,796 - GDP deflator (annual percent change) 2009: 23.3; 2010: 10.6; 2011: 16.3; 2012: 8.7 - Consumer price inflation (annual average) 2009: 6.5; 2010: 3.0; 2011: 3.5; 2012: 5.0 - Consumer price inflation (end-of-period) 2009: -7.7; 2010: 3.2; 2011: 4.9; 2012: 6.5 - Central government (percent of GDP, measured in US$): Revenue and grants 2009: 15.9; 2010: 29.6; 2011: 30.9; 2012: 32.6 - Central government: Expenditure and net lending 2009: 18.7; 2010: 31.9; 2011: 34.1; 2012: 36.4 - Of which: cash expenditure and net lending 2009: 15.0; 2010: 30.0; 2011: 31.4; 2012: 35.2 - Of which: employment costs 2009: 8.4; 2010: 14.3; 2011: 19.2; 2012: 23.5 - Overall balance (including quasi-fiscal activity) 2009: -3.2; 2010: -2.5; 2011: -3.2; 2012: -3.8 - Primary balance (including quasi-fiscal activity) 2009: 0.1; 2010: -0.1; 2011: -1.1; 2012: -1.8 - Cash balance 2009: 1.7; 2010: -0.4; 2011: -0.6; 2012: -1.5 - Broad money (M3) (US$ millions) 2009: 1,381; 2010: 2,329; 2011: 3,100; 2012: 4,208 - Net foreign assets (US$ millions) 2009: -295; 2010: -151; 2011: -290; 2012: -257 - Net domestic assets (US$ millions) 2009: 1,677; 2010: 2,480; 2011: 3,391; 2012: 4,465 - Domestic credit (US$ millions) 2009: 649; 2010: 1,696; 2011: 2,754; 2012: 3,709 - Of which: credit to the private sector 2009: 684; 2010: 1,665; 2011: 2,711; 2012: 3,591 - Reserve money 2009: (blank); 2010: 125; 2011: 256; 2012: 186; 2013: 347 (table shows reserve money entries with formatting across years) - Velocity (M3) 2009: 4.4; 2010: 3.2; 2011: 3.1; 2012: 2.6 - Merchandise exports (US$ millions; annual percent change) 2009: -2.8; 2010: 105.6; 2011: 35.5; 2012: 15.5 - Merchandise imports (US$ millions; annual percent change) 2009: 22.2; 2010: 60.7; 2011: 46.5; 2012: -4.5 - Merchandise exports (US$ millions) 2009: 1,613; 2010: 3,317; 2011: 4,496; 2012: 5,195 - Merchandise imports (US$ millions) 2009: -3,213; 2010: -5,162; 2011: -7,562; 2012: -7,223 - Current account balance (excluding official transfers) (US$ millions) 2009: -1,359; 2010: -2,141; 2011: -3,427; 2012: -2,199 - Current account balance (percent of GDP) 2009: -22.2; 2010: -28.8; 2011: -36.2; 2012: -20.4 - Overall balance (US$ millions) 2009: -239; 2010: -677; 2011: -751; 2012: -569 - Gross international reserves (US$ millions) 2009: 437; 2010: 453; 2011: 366; 2012: 477 - Usable international reserves (US$ millions) 2009: 312; 2010: 197; 2011: 182; 2012: 130 - Usable international reserves (months of imports of goods and services) 2009: 1.0; 2010: 0.4; 2011: 0.3; 2012: 0.2 - Total external debt (US$ millions) 2009: 7,602; 2010: 9,018; 2011: 10,726; 2012: 12,540 - Total external debt (percent of GDP) 2009: 124.0; 2010: 121.3; 2011: 113.4; 2012: 116.2 - Total external arrears (US$ millions) 2009: 5,284; 2010: 5,868; 2011: 6,344; 2012: 6,798 - Total external arrears (percent of GDP) 2009: 86.2; 2010: 78.9; 2011: 67.1; 2012: 63.0 ### Statement highlights from Mr. Majoro (Executive Board Meeting, September 21, 2012) - Authorities grateful for IMF support and requested the Board to lift all TA restrictions on Zimbabwe to facilitate further engagement. - Noted recovery since hyperinflation era with appreciable growth and macroeconomic stability between 2009 and 2011 driven by policy reforms, coalition government formation in February 2009, adoption of multicurrency system and cash budgeting, discontinuation of quasi-fiscal activities by RBZ, sizeable off-budget grants, and a favorable external environment. - Reported 2011 economy growth estimated at 9 percent and inflation closing at 4.9 percent in December 2011, reflecting in part some moderation in imported goods inflation. *IMF staff report and Executive Board documents as provided in the source content.* ### 4.9 percent (year-on-year) in December. The widening of current account deficit to 35½ ### _cr12279 - 4.9 percent (year-on-year) in December. The widening of current account deficit to 35½ ### Economic outlook and short-term projections - Growth rate in 2012 is expected to moderate to about 5 percent mainly due to: - negative impact on agricultural production of the drought in the south of the country - slowdown in investment arising from uncertainty surrounding the implementation of the indigenization policy and the political process - Inflation is expected to moderate further; the July figure standing at 3.9 percent - Current account deficit projections: - widened to 35½ percent of GDP in 2011 - useable international reserves of just 0.3 months of imports at year end (2011) - projected to narrow to 20 ½ percent on the back of moderating imports and improved export performance - Downside risks that could dampen growth: - possible resurgence of political instability ahead of the elections - global economic downturn - potentially destabilizing effects of indigenization policy on the banking system and investment - fiscal slippages and financial sector instability ### Public Finances - Fiscal constraints and pressures: - Zimbabwe lacks fiscal space - Revenue underperformance – mainly diamond revenue – has put public finances under severe pressure - Exacerbating factors: expenditure overruns, weak payroll and commitment controls, irregularities in employment practices, and losses by public enterprises due to inadequate oversight - Government fiscal responses: - scaled down the 2012 budget - steps to improve revenue collection and rationalize expenditure, often at the expense of growth-enhancing public sector investments - stricter expenditure control measures and ring-fencing of limited cash flows to finance some critical capital projects - Specific measures on diamond revenue transparency and tax policy: - amending legislation to provide for the physical presence of Zimbabwe Revenue Authority (ZIMRA) personnel at mining locations to monitor mining processes, auctioning, and processing of export customs documents - reviewing mining fees and charges, revenue retention policy, and all aspects of VAT processes - redrafting of the Income Tax legislation is a government priority with the Income Tax Bill already approved by the Cabinet Committee - Wage bill management: - maintain a general freeze on recruitment of staff into the public service - align any wage bill reviews to economic improvement - effectively implement recommendations of the public service audit and conclude work on it ### Financial Sector Policies - Recent improvements since multicurrency introduction in February 2009: - efforts to enhance the financial regulatory framework and recapitalize banks - both deposits and credit to the economy have increased albeit modestly - lending rates remain quite high - Banking sector soundness and exceptions: - banking sector is relatively sound and safe except for three banks: - Interfin (under curatorship) - Genesis (deregistered) - Royal Bank (closed for operating in an unsound manner) - the weak/troubled banks are few, small, and of low systemic importance, though failures have large public impact - Persisting vulnerabilities: - evidence of high credit risks, deteriorating asset quality, high non-performing loans, uneven distribution of deposits, liquidity crunch, and poor quality of corporate governance - delay in completion of the RBZ restructuring and RBZ’s limited capacity to perform lender of last resort (LOLR) functions - Authorities' actions and reforms: - phased recapitalization plan for all banking institutions through end-June 2014, with provision for merger and/or acquisition if recapitalization deadline is unmet - RBZ strengthening oversight and liquidity management, including upward review of minimum prudential liquidity requirement and capital adequacy/tier 1 ratio in line with Basel III requirements - directive for repatriation by banks of funds held in offshore accounts has helped improve liquidity - Government finalizing amendments to the Banking Act to improve RBZ oversight and strengthen the Troubled and Insolvent Bank Resolution Framework - Government issued bonds in March 2012 to reimburse commercial banks for the US$83 million statutory reserves blocked at the RBZ; these bonds are tradable with maturity period of 2-4 years - established a US$150 million “LOLR Fund” with expected private investor contribution of US$120 million and Ministry of Finance contribution of US$30 million (including $7 million already in the RBZ); fund intended to deal with emergency liquidity requirements of fundamentally solvent entities - ongoing restructuring of the RBZ, including removal of non-core assets and liabilities from the RBZ’s balance sheet - Remaining challenges: - identifying private investors for the LOLR Fund - establishing strong safeguards on accountability and governance of the Fund ### External sustainability and debt - External position characterization: - remains precarious with substantial balance of payments deficit, limited international reserves, and excruciating debt overhang - likely surge in food imports due to drought and debt service requirements amid dwindling foreign capital inflows would put severe pressure on external sustainability - Debt sustainability assessment: - Joint IMF/World Bank DSA shows Zimbabwe’s overall public debt is unsustainable given current fiscal policies and current size and evolution of the debt stock - Authorities' stance and initiatives: - deeply concerned about public debt to international financial institutions and contracting new non-concessional loans - ZAADDS (Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy) was put in place to accelerate arrears clearance and secure debt relief - convened a High Level Debt Forum hosted by the African Development Bank in Tunis on 23 March 2012, and a Forum with Development Partners on the side-lines of the April 2012 IMF/World Bank Spring meetings in Washington DC - outcomes encouraging as creditors and development partners have expressed willingness to assist Zimbabwe ### Structural Reforms - Authorities’ commitments: - committed to structural reforms, recognizing that consistent macroeconomic policies and a transparent legal and regulatory environment are prerequisites for sustained economic growth and development - Policy actions: - addressing uncertainties surrounding the implementation of the indigenization policy and the infrastructure deficit to improve the business environment - reviewing aspects of the Indigenization and Empowerment Regulations to harmonize and fine-tune gray areas, including those relating to the Banking sector - ring-fencing expenditure on critical infrastructure projects (power, water, roads, railways, and information and communication technology) under an emergency response package - implementation of sound macroeconomic policies under the Zimbabwe Accelerated Re-engagement Economic Programme (ZAREP): 2012-2015 viewed as supporting and sustaining inclusive economic growth ### Relations with the IMF - Progress toward normalization and program engagement: - both Fund staff and the authorities agreed that two markers for initiating discussions on a Staff Monitored Program (SMP) — adequate data reporting and removal of “ghost workers” — had been met - Public Service Commission (PSC) report indicates some 6,000 irregularly employed youth officers have been removed from the payroll and red flags raised in the Payroll and Skills audit have been either explained or addressed - authorities resumed regular payments to the PRGT; three payments totaling $7.5 million have been made in 2012 - commitment to persevere with efforts to address identified policy slippages - these developments opened the way for a joint staff/authorities stocktaking exercise on the road to a possible SMP during the 2012 Article IV Consultation mission to Harare - Request to the Executive Board: - authorities regard SMP as critical to economic restructuring and inclusive growth efforts - lifting of all restrictions on technical assistance (TA) to Zimbabwe imposed in June 2002 is viewed as a precondition to commencing SMP discussions; lifting TA restrictions depends on favorable staff assessment and Board conviction that Zimbabwe’s cooperation with the Fund has improved - authorities urge the Executive Board to consider lifting the TA restrictions to pave the way for commencement of discussions for a Staff Monitored Program *IMF staff/authorities report text (content unit: _cr12279).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12279.pdf_