## _cr14202 - EXECUTIVE SUMMARY

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### Outlook
- The economic rebound experienced since 2009 has ended, with economic growth decelerating in 2013.
- The external position is vulnerable, with a wide current account deficit, an overvalued exchange rate, and low international reserves.
- Baseline scenario: sluggish growth in 2014 and over the medium term, with risks clearly to the downside in the near term.
- Key near-term risks: lower than programmed tax collections, policy slippages, financial sector stress, and global commodity prices.
- Zimbabwe faces these risks with very thin buffers.

### Performance under the staff-monitored program (SMP) and program timing
- The SMP provided a useful anchor for Zimbabwe in an election year.
- Progress complicated by a long electoral process and a protracted post-election transition, as well as an adverse external environment.
- A number of quantitative targets and structural benchmarks were not met.
  - Of six quantitative targets for the first review (end-June 2013), three met and three missed.
  - For end-December 2013 test date, three of six revised quantitative targets met; misses included the primary fiscal balance (cash basis) missed by about 1.6 percent of GDP and stock of domestic arrears overshot ceiling.
  - Structural benchmarks: three of five for the first review met; one of five for the second review met.
- Discussions on the first and second reviews are at an advanced stage.
- Mission timing: discussions in Harare from March 12 to 26, 2014; staff team comprised Mr. Cuevas (head), Ms. Morgan, Mr. Slavov (all AFR), Mr. Cipollone (SPR), and Ms. Mendez (FIN). Document dated May 29, 2014.

### Growth, prices, and sectoral developments
- GDP growth averaged 10.5 percent during 2009-2012.
- Real GDP growth estimated to have decelerated to 3.3 percent (from 10.6 percent in 2012).
- Inflation: decelerated to -0.3 percent year-on-year in April 2014; staff projection 0.2 percent in 2014, picking up to 1.2 percent in 2015.
- Sectoral drivers:
  - Adverse weather, weak demand for key exports, and election-year uncertainty impacted 2013 activity.
  - Agriculture affected by erratic rainfalls; manufacturing faced liquidity shortages and a weaker South African rand that undercut competitiveness.
  - Mining buoyant but affected by easing global commodity prices and domestic infrastructure challenges.
- Sectoral 2014 prospects: agricultural and mining exports projected to accelerate in 2014 (strong tobacco season; increased output of gold and platinum), offsetting continued shrinking of the industrial sector.

### Fiscal performance, composition, and near-term priorities
- 2013 fiscal outcomes:
  - Government accommodated large election-related spending of 1.4 percent of GDP (mostly unbudgeted) and employment cost overruns of 0.8 percent of GDP.
  - Overall budget outcome: fiscal year 2013 ended with an overall budget deficit (cash basis) of 2.2 percent of GDP.
  - Total revenue & on-budget grants (2013 actual) = 3,860 (US$ millions); Total expenditure & net lending (2013 actual) = 3,935 (US$ millions).
  - Total revenue & on-budget grants (2013 actual) = 28.8 (percent of GDP); Total expenditure & net lending (2013 actual) = 30.3 (percent of GDP).
  - Overall balance (commitment basis) 2013 actual = -2.5 (percent of GDP); Overall balance (cash basis) 2013 actual = -2.2 (percent of GDP).
  - Diamond dividends collected: US$18 million in 2013 versus a budget estimate of US$70 million.
  - Government net issuance of domestic debt securities: equivalent to about 1 percent of GDP in 2013.
  - Drawdown of government deposits in the banking sector: fell by US$157 million (1.2 percent of GDP) in 2013.
- 2014 fiscal pressures and wage bill:
  - Q1 2014 preliminary revenues 8 percent below budget projections.
  - Civil service wage increases agreed January 2014 estimated to result in a 14 percent increase in the overall wage bill in 2014 (assuming broadly unchanged numbers of civil servants), exceeding both budget projections and inflation.
  - Share of government expenditures: excluding grant-aided institutions and pensions, civil service wage bill projected to claim 53 percent of government expenditures in 2014.
  - Employment costs (incl. grants & transfers), US$ millions: 2011 = 1,544; 2012 = 2,134; 2013 = 2,260; 2014 (budget) = 2,340; 2015 (prog.) = 2,344.
  - Employment costs (percent of GDP): 2011 = 14.1; 2012 = 17.1; 2013 = 17.4; 2014 (f) = 18.0; 2015 (f) = 18.1.
- Staff near-term guidance:
  - Be ready to take additional actions should revenue fall short of revised projections, while protecting priority infrastructure and social spending.
  - Prevent accumulation of future domestic arrears: strengthen expenditure controls; implement measures to curb consumption; ensure adequate budgetary provisions for domestic service providers.
  - Begin addressing employment-costs issue as soon as possible and maintain focus over the medium term.
- Diamond sector revenue measures:
  - 2014 Finance Act (signed April 2014) introduced withholding of a special dividend equal to 15 percent of the gross proceeds from diamond sales (the withholding has been suspended until further consultations).
  - Diamond dividends (US$ millions): 2011 = 15; 2012 = 144; 2013 (budget) = 0; 2013 (outturn) = 17; 2014 (budget) = 189.
  - Joint task force constituted (MoFED, MoMMD, Zimbabwe Revenue Authority) to forecast and monitor diamond-related revenue flows.

### Banking sector liquidity, soundness, and interventions
- Liquidity and interventions:
  - Liquidity tightened in 2013 with crunches in June–August and again in November–December; year-end bonus withdrawals amplified late-year crunch in a few troubled banks.
  - Afreximbank launched a US$100 million interbank facility (AFTRADES) in March 2014 to help address liquidity challenges among solvent banks.
  - Government contingent exposure if Afreximbank facility fully used: US$20 million over two years.
- Asset quality and capital:
  - NPLs: 13.8 percent at end-2012 → 15.9 percent at end-2013 → 16.6 percent in March 2014.
  - Capital adequacy averaged 12.4 percent in March 2014, just over the 12 percent minimum requirement.
  - At end–December 2013, 14 out of 21 operating financial institutions were compliant with the minimum capital requirements prescribed in December 2012.
  - Troubled banks on RBZ’s watch list jointly account for 15 percent of total banking sector assets and 10 percent of deposits at end-2013.
- Regulatory actions and recapitalization:
  - Reaffirmed minimum capital requirement (US$25 million) in January 2014; deadline for meeting the US$100 million minimum extended from June 2014 to December 2020.
  - By end-June 2014 all banks required to submit recapitalization plans with interim milestones.
  - January 2014: banks instructed to end new insider lending; boards required to ensure adequate provisioning and submit regular reports.
- Staff priority recommendations:
  - Enhance financial sector stability and restore confidence; monitor weak banks vigilantly; proactively avoid disorderly resolution of insolvent, non-systemic banks.
  - Advance restructuring of the financially distressed RBZ to mitigate vulnerabilities and bolster medium-term viability of the multicurrency system.
  - Give priority to financial stability when designing and implementing indigenization policy for the financial sector.

### Exchange rate regime and monetary context
- Authorities reiterated commitment to the multicurrency system, dominated by the US dollar in practice, and added four new currencies as legal tender (Australian dollar, Chinese yuan, Indian rupee and Japanese yen added January 2014).
- The regime expected to remain in place over the medium term (until at least 2018).
- Authorities agreed that full restoration of fiscal, financial, and external sustainability is a pre-requisite before substantive changes to the exchange rate regime are considered.
- Dollarization eliminates the nominal exchange rate as a macro adjustment tool; exchange rate misalignment must be addressed through relative price changes and productivity gains.

### External position, reserves, arrears, and re-engagement
- Current account and reserves:
  - Current account balance (excluding official transfers, US$ millions): 2011 = -3,269; 2012 = -3,048; 2013 = -3,613.
  - Current account (percent of GDP): 2011 = -29.8; 2012 = -24.4; 2013 = -27.8.
  - Usable international reserves (end-of-period, US$ millions): 2011 = 366; 2012 = 398; 2013 = 284.
  - Usable international reserves cover less than two weeks of imports at end-December 2013; standard minimum reserve coverage = 3 months of imports.
- Debt stocks and arrears:
  - Total external debt (US$ millions, e.o.p.): 2011 = 8,207; 2012 = 9,031; 2013 = 10,632.
  - External arrears (US$ millions, e.o.p., part of debt stocks): 2011 = 5,076; 2012 = 5,286; 2013 = 5,420.
  - Zimbabwe remains in debt distress.
- Arrears clearance framework and re-engagement:
  - Addressing debt will require a comprehensive arrears clearance framework underpinned by strong macro policies; process likely protracted.
  - Authorities adopted ZAADDS (Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy) described as a “hybrid debt resolution strategy.”
  - Staff urges coordinated discussions with the World Bank Group and other IFIs; respect preferred creditor status of IFIs; avoid selective debt service; minimize new non-concessional external debt.

### Debt Sustainability Analysis (DSA) — key baseline projections and vulnerabilities
- Baseline macro assumptions:
  - Baseline assumes average annual real GDP growth about 4 percent for projection period 2014–33, with 3 percent in 2014-15.
  - Inflation expected 2.5 percent over the medium term, with 0.2 percent in 2014.
  - Exports projected to grow at 7 percent over the medium term (nominal).
  - Import growth projected to average 4 percent annually for 2014–19, then 5.5 percent until 2033.
  - Non-interest current account deficit expected above 25 percent of GDP in 2014, decline to 15 percent in 2019, and average 13 percent thereafter.
  - Tax revenues projected broadly stable at around 27-28 percent of GDP.
  - External grants assumed around 0.5 percent of GDP per annum.
  - New non-concessional borrowing assumed average 1 percent of GDP annually during 2013-2016 and 2 percent from 2017 onwards, with a grant element about 27 percent.
- External debt projections:
  - PPG external debt expected to grow from 82 percent of GDP in 2013 to 122 percent in 2023, then decline to 108 percent in 2033.
  - PV of the PPG external debt-to-exports ratio: 171 percent in 2013 → 119 percent in 2023 → 98 percent in 2033.
  - PV of external debt-to-revenue ratio: almost 176 percent in 2013 → about 138 percent in 2023 → 114 in 2033.
  - Overall debt service-to-exports ratio will remain close to 5 percent throughout projection period; PPG debt service-to-exports about 2 percent until 2018, increasing to 3 percent in 2033.
- Public sector debt projections:
  - PPG debt-to-GDP projected to decline from 62 percent in 2013 to 51 percent in 2023, and to 41 percent in 2033.
  - PV of PPG debt-to-revenue ratio declines from 206 percent in 2013 to 123 percent in 2033.
  - Debt service-to-revenue ratio around 3 percent until 2023, then increasing to 5 percent by end of projection period.
- Domestic public debt:
  - Total domestic public debt (US$ millions): 2011 = 887; 2012 = 1,110; 2013 = 1,117.
  - Domestic public debt (percent of GDP): 2011 = 8.1; 2012 = 8.9; 2013 = 8.6.
  - Short-term domestic public debt (percent of total): 2011 = 100.0; 2012 = 83.9; 2013 = 78.1.
- Sensitivity and shock results (selected):
  - Under lower GDP growth bound test, PV of PPG external debt-to-GDP ratio reaches 69 percent in 2015.
  - Under combined shock, ratio reaches 88 percent in 2015 before declining to 44 percent in 2033.
  - Under lower exports scenario, PV of PPG external debt-to-exports reaches almost 400 percent in 2015, then declines to just below 190 percent in 2033.
- Conclusion: Zimbabwe remains in debt distress under baseline of no debt relief; debt indicators vulnerable to shocks, particularly exports and GDP growth.

### Deflation risks (Box 1)
- Inflation decelerated from 2.9 percent at end-2012 to -0.3 percent in April 2014.
- Deflationary pressures stronger in traded sectors; pass-through from depreciating rand important.
- Benefits identified:
  - Temporarily falling prices benefit consumers with job security; may boost aggregate demand and erode negative output gap; could help correct real exchange rate overvaluation if non-traded prices fall faster.
  - Falling prices boost real money supply and could alleviate liquidity shortages to some extent.
- Costs and risks:
  - Persistent deflation may increase real burden of existing debt.
  - Deflation hurts producers and may reduce productive capacity via downsizing given downward wage rigidity.
  - Risks of sustained deflation noted in the Risk Assessment Matrix.
- Policy guidance:
  - Near-term (absence of monetary tools): resist restricting imports; avoid further public sector wage increases.
  - Medium-term: implement structural reforms to improve business environment, productivity, and investment to offset deflationary impulse in a fully dollarized economy.

### Risk Assessment Matrix — selected risks and policy responses
- Fiscal underperformance (short term)
  - Relative Likelihood: High
  - Impact if Realized: High
  - Policy advice: Implement measures to mobilize diamond dividends and increase diamond revenue transparency; refrain from further wage increases in 2014; maintain hiring freeze except in critical areas; be prepared to take necessary actions should revenue fall short while protecting priority spending.
- Destabilizing effects from indigenization and empowerment policy (short to medium term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium
  - Policy advice: Clarify policy; enhance predictability and transparency; prioritize financial sector stability; ensure consistency with financial sector laws and prudential regulations.
- Risks to financial stability from incomplete regulatory reforms (medium term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium to High
  - Policy advice: Proactive approach to avoid disorderly resolution of troubled banks; consider closing insolvent, non-systemic banks; advance restructuring of RBZ.
- Adverse weather conditions (short term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium
  - Policy advice: Implement development agenda to build/rehabilitate irrigation, increase affordable energy for irrigation, and create self-sufficient agriculture.
- Protracted slow growth in advanced and emerging economies
  - Relative Likelihood: High
  - Impact if Realized: Medium to High
  - Policy advice: Progress fiscal consolidation; create enabling business environment; normalize relations with creditors; diversify the economy.

### Data, statistics, and technical assistance priorities
- Data adequacy: shortcomings exist but data broadly adequate for surveillance.
- Identified gaps: weak data sources, insufficient coverage, capacity constraints particularly for NA and price statistics.
- Progress and TA:
  - ZIMSTAT revised NA data using PICES (June 2011–May 2012), resulting in upward revision of GDP for 2009–12 (published September 2013).
  - CPI compiled monthly; PPI quarterly.
  - STA TA missions assisted MFS, ESS, GFS; migration from BPM4 to BPM6 recommended.
  - RBZ resumed monthly reporting of monetary and financial statistics to STA since May 2014.
- IIP not compilable due to lack of reliable private sector external position data; authorities committed to prepare preliminary IIP after first foreign private capital stocks and flows survey.

### Policy priorities and recommendations (summarized)
- Near term:
  - Fully implement the adjustment program; be ready to take additional fiscal actions if revenues underperform while protecting priority infrastructure and social spending.
  - Strengthen expenditure controls and prevent accumulation of new domestic arrears.
  - Mobilize diamond-related revenues and enhance transparency in the diamond sector; modernize mining legislation.
  - Prioritize financial stability: monitor weak banks, proactively resolve insolvent non-systemic banks, recapitalize and restructure RBZ.
- Medium term:
  - Implement vigorous structural reforms to expand productive capacity, diversify the economy, and improve the business environment to attract FDI and access affordable financing.
  - Rebalance expenditure mix to reduce employment costs and free resources for capital and social spending.
  - Rebuild international reserves at an ambitious pace to provide buffers in a dollarized context.
  - Seek grants and highly concessional financing for critical development projects; limit non-concessional borrowing to cases where concessional finance unavailable and projects have high economic returns.
  - Improve governance, judicial independence, property rights protection, and reduce perceptions of corruption to support competitiveness and investment.

*International Monetary Fund. EXECUTIVE SUMMARY (May 29, 2014).*

### EXECUTIVE SUMMARY

### _cr14202 - EXECUTIVE SUMMARY

### Outlook
- The economic rebound experienced since 2009 has ended, with economic growth decelerating in 2013.
- The external position is vulnerable, with a wide current account deficit, an overvalued exchange rate, and low international reserves.
- The baseline scenario is marked by sluggish growth in 2014 and over the medium term, with risks clearly to the downside in the near term.
- Key near-term risks: lower than programmed tax collections, policy slippages, financial sector stress, and global commodity prices.
- Zimbabwe faces these risks with very thin buffers.

### Performance under the staff-monitored program (SMP)
- The SMP provided a useful anchor for Zimbabwe in an election year.
- Progress in implementing the program was complicated by a long electoral process and a protracted post-election transition, as well as an adverse external environment.
- A number of quantitative targets and structural benchmarks were not met.
- Discussions on the first and second reviews are at an advanced stage.

### Macroeconomic policies in the near term
- The economic environment remains difficult, posing significant risks to the budget and to financial stability.
- Policy efforts should continue to aim to:
  - restore fiscal and external sustainability, and
  - reduce financial vulnerabilities.

### Medium-term challenges and reform priorities
- Zimbabwe faces serious medium-term challenges; a vigorous reform program is needed to put the country on a sustainable, inclusive growth path.
- Priority fiscal strategy:
  - rebalance the expenditure mix,
  - prevent the accumulation of domestic arrears.
- Significant financing is needed to address:
  - the infrastructure deficit, and
  - widespread poverty,
  - as targeted under the government’s development plans (ZIM ASSET referenced).
- To attract FDI and access affordable financing, the authorities need to improve the business environment.

### Resolving external payment arrears
- Zimbabwe’s debt situation remains a serious impediment to external sustainability and economic development.
- Addressing the issue will require a comprehensive arrears clearance framework underpinned by strong macro policies, in what will likely be a protracted process.

### Background and recent developments
- Political context:
  - In January 2013 the main political parties reached agreement on a new constitution, leading to a constitutional referendum in March and national elections in July.
  - The elections gave President Mugabe a new term and ZANU-PF a super-majority in Parliament.
  - A major reshuffle of key policy-makers occurred; a new cabinet was announced only in September 2013.
  - The new government has expressed commitment to the SMP and unveiled the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM ASSET).
- Growth and structure:
  - GDP growth averaged 10.5 percent during 2009-2012.
  - Real GDP growth is estimated to have decelerated to 3.3 percent (from 10.6 percent in 2012).
  - The post-hyperinflation economy is structurally different from the pre-crisis economy.
- Poverty and labor markets:
  - At 72 percent in 2011, the poverty rate remains high.
  - The Gini coefficient was 0.42 in 2011.
  - Formal employment has been shrinking, with an increasing fraction of the labor force in the informal economy.
  - Little progress has been made toward the Millennium Development Goals, particularly in improving gender equality.
- Sectoral and external developments:
  - Adverse weather, weak demand for key exports, and election-year uncertainty impacted 2013 activity.
  - Erratic rainfalls affected agriculture; manufacturing faced liquidity shortages and a weaker South African rand that undercut competitiveness.
  - Mining remained buoyant but was affected by easing global commodity prices and domestic infrastructure challenges.
  - The current account deficit deteriorated in 2013; deterioration reflects lower mining exports as gold prices and diamond production declined.
  - Manufacturing exports continued to shrink, reflecting declining competitiveness.
  - The current account deficit was mostly financed by private capital inflows; errors and omissions remain large but on a declining path, reflecting under-recorded exports, remittances, and FDI inflows.
  - Usable reserves remained below two weeks of imports at end-December (Table 1 referenced).
- Prices and inflation:
  - Inflation dipped into negative territory: -0.3 percent year-on-year in April 2014.
  - Weak domestic demand and appreciation of the US dollar against the South African rand contributed to easing of the price level during 2013.
- Fiscal outcomes in 2013:
  - The government accommodated large election-related spending of 1.4 percent of GDP (mostly unbudgeted) and employment cost overruns of 0.8 percent of GDP.
  - The political process was funded by one-off revenue measures, cuts in other spending, and accumulation of new arrears to service providers.
  - The government granted only one salary increase during the year, but promotion drift in the civil service and overspending on certain allowances resulted in employment costs exceeding budget levels.
  - There was higher-than-budgeted clearance of pre-2013 domestic arrears (Text Table 1 referenced).
- Program and mission timing:
  - Discussions took place in Harare from March 12 to 26, 2014.
  - Staff team comprised Mr. Cuevas (head), Ms. Morgan, Mr. Slavov (all AFR), Mr. Cipollone (SPR), and Ms. Mendez (FIN).
  - Document dated May 29, 2014.

*International Monetary Fund. EXECUTIVE SUMMARY (May 29, 2014).*

### 2013. Despite some measures taken to cover the costs of the political process, revenue came in

### _cr14202 - 2013. Despite some measures taken to cover the costs of the political process, revenue came in

### Fiscal performance in 2013
- Revenues came in lower than budgeted, with an exceptionally low Q4 performance.
- Drivers of weak revenue: general weakness in the economy and a liquidity crunch in December that probably hurt tax compliance.
- Tax categories performing poorly: corporate income tax, VAT, and customs. Better performance: personal income tax and excises (the latter boosted by increases to fuel excises implemented in March 2013).
- Non-tax revenues: boosted by telecom license fees mobilized to finance the referendum and elections.
- Diamond dividends collected: US$18 million in 2013 versus a budget estimate of US$70 million.
- Overall budget outcome: fiscal year 2013 ended with an overall budget deficit (on a cash basis) of 2.2 percent of GDP.
- Government net issuance of domestic debt securities: equivalent to about 1 percent of GDP in 2013.
- Drawdown of government deposits in the banking sector to close financing gap: fell by US$157 million (1.2 percent of GDP) in 2013.

### 2014 budget pressures and wage bill
- Early 2014 revenue performance: preliminary fiscal outturn for Q1 of 2014 showed total revenues 8 percent below budget projections.
- Civil service wage increases: agreement in January 2014 estimated to result in a 14 percent increase in the overall wage bill in 2014 (assuming broadly unchanged numbers of civil servants), exceeding both budget projections and inflation.
- Share of government expenditures: excluding grant-aided institutions and pensions, the civil service wage bill is projected to claim 53 percent of government expenditures in 2014, placing Zimbabwe at the top in Sub-Saharan Africa.

### Banking sector liquidity and recent interventions
- Liquidity tightened in 2013 with crunches in June–August and again in November–December; year-end bonus withdrawals contributed to the late-year crunch, most pronounced in a few troubled banks.
- Deposits started to return slowly in early 2014, but liquidity conditions remained tight.
- Afreximbank launched a US$100 million interbank facility (AFTRADES) in March 2014 to help address liquidity challenges among solvent banks.
- Government contingent exposure if the Afreximbank facility were fully used: US$20 million over two years.

### Financial sector soundness and indicators
- Asset quality deterioration: average non-performing loans (NPLs) rose from 13.8 percent at end-2012 to 15.9 percent at end-2013 and to 16.6 percent in March 2014.
- Capital adequacy: averaged 12.4 percent in March 2014, just over the 12 percent minimum requirement.
- Compliance with minimum capital requirements: at end–December 2013, only 14 out of 21 operating financial institutions were compliant with the minimum capital requirements prescribed in December 2012.
- Troubled banks: several on the Reserve Bank of Zimbabwe’s watch list jointly accounting for 15 percent of total banking sector assets and 10 percent of deposits at end-2013.
- Authorities’ capital requirement actions: reaffirmed current minimum capital requirement (US$25 million) in January 2014 and extended the deadline for meeting the US$100 million minimum from June 2014 to December 2020. By end-June 2014 all banks required to submit recapitalization plans with interim milestones.

### Exchange rate and monetary regime
- Authorities reiterated commitment to the multicurrency system, dominated by the US dollar in practice, and added four new currencies as legal tender.
- The regime expected to remain in place over the medium term (until at least 2018).
- Authorities agreed that full restoration of fiscal, financial, and external sustainability is a pre-requisite before substantive changes to the exchange rate regime are considered.

### Performance under the SMP and structural reforms
- SMP period originally scheduled to expire end-2013, extended by Fund Management through end-June 2014.
- Of six quantitative targets for the first review (end-June 2013), three met and three missed. Misses included:
  - Floor on the primary fiscal balance missed by 1.3 percent of GDP.
  - Continuous zero ceiling on new domestic arrears missed (authorities prioritized clearance of old verified arrears).
  - Floor on usable international reserves missed by a small margin.
- For end-December 2013 test date, authorities met three of six revised quantitative targets: floors on stock of usable international reserves and on PRGT payments, and continuous ceiling on stock of new non-concessional external debt.
  - Misses included the primary fiscal balance on a cash basis missed by about 1.6 percent of GDP, floor on protected social spending missed by about 0.3 percent of GDP, and stock of domestic arrears overshot ceiling by a similar margin.
- Structural benchmark implementation:
  - Met: Income Tax Bill submitted May 2013 and passed June 2013.
  - Met: framework for contingency planning and systemic risk management submitted to RBZ Board and approved October 2013.
  - Met: time-bound action plan by the Public Service Commission on HR management and payroll systems submitted mid-December 2013.
  - Met: RBZ Debt Assumption Bill approved by Cabinet in November 2013 and submitted to Parliament in April 2014.
  - Overall: three of five structural benchmarks for the first review were met; one of five for the second review was met.

### Diamond sector transparency and revenue measures
- Report on verified pre-2013 domestic arrears finalized mid-December 2013; total stock of domestic arrears and strategy to clear it made public in the 2014 National Budget Statement.
- Statutory instrument establishing formula for diamond dividends not issued due to lack of enabling legislation; broadly equivalent measures introduced in 2014:
  - 2014 Finance Act (signed April 2014) introduced withholding of a special dividend equal to 15 percent of the gross proceeds from diamond sales (the withholding has been suspended until further consultations with mining companies are completed).
  - Joint task force constituted (MoFED, MoMMD, Zimbabwe Revenue Authority) to forecast and monitor diamond-related revenue flows.
  - 2012 audited financial accounts of the Zimbabwe Mining Development Corporation (ZMDC) submitted to Parliament and published online in May 2014.
  - Minerals Marketing Corporation of Zimbabwe conducted diamond auctions in Antwerp (December 2013 and February 2014) and in Dubai (March 2014); authorities intend all diamonds to be sold through auctions at international trading centers.
  - Authorities intend to streamline the number of companies in the diamond sector and undertake a reassessment of the fiscal regime for mining, including diamond mining.

### Outlook and risks
- Growth: projected to be sluggish over the short to medium term.
- Policy requirement: a comprehensive and determined reform program needed to foster investment (especially foreign) and boost productivity beyond the baseline.
- 2014 prospects: hard to see a vigorous recovery given weak momentum coming out of 2013.
- Sectoral projections: agricultural and mining exports projected to accelerate in 2014 (strong tobacco season; increased output of gold and platinum), offsetting continued shrinking of the industrial sector under pressure from competing imports from South Africa.
- Current account: expected to improve over the medium term as export capacity increases, but the current account deficit is expected to remain high, averaging around 15 percent of GDP in the medium term.
- Fiscal and reserve outlook: fiscal consolidation should permit a modest re-building of international reserves.
- Inflation projections: 0.2 percent in 2014, picking up to 1.2 percent in 2015.

*Source: IMF staff report (Zimbabwe).*

### Box 1. Zimbabwe: Deflation Risks

### Box 1. Zimbabwe: Deflation Risks

### Deflation developments and drivers
- Zimbabwe’s 12-month inflation rate decelerated from 2.9 percent at end-2012 to -0.3 percent in April 2014.
- Deflationary pressures have been stronger in traded sectors (Box Figure 1), indicating that pass-through from a depreciating rand also plays an important role.
- The deceleration is partly driven by weak aggregate demand.

### Benefits identified
- Temporarily falling prices benefit consumers with job security.
- Falling prices may boost aggregate demand and contribute to eroding the country’s negative output gap.
- Deflation could help correct the existing overvaluation in the real exchange rate if prices of non-traded inputs (notably labor) and final goods fall faster than prices of traded goods (not yet observed).
- Falling prices boost the real money supply and could alleviate persistent liquidity shortages to some extent.

### Costs and risks
- Persistent deflation may increase the real burden of existing debt in a country already under financial stress.
- Zimbabwe’s financial underdevelopment (low stocks of loans and deposits, with short maturities) may mitigate the increased real-debt-burden effect.
- Deflation hurts producers and might reduce productive capacity if it leads to widespread company downsizing and closures, given downward wage rigidity.
- There are risks of sustained deflation in Zimbabwe (noted in the Risk Assessment Matrix).

### Near-term policy guidance (absence of monetary policy tools)
- Avoid exacerbating distortions and imbalances:
  - Resist the impulse to restrict imports.
  - Avoid further public sector wage increases, which put pressure on salary negotiations elsewhere in the economy.

### Medium-term policy guidance
- Structural reforms that improve the business environment and stimulate domestic and foreign investment could offset the deflationary impulse.
- Reforms should target the business environment, productivity, and investment to support relative price adjustments or productivity growth in a fully dollarized economy.

*Source: Box 1. Zimbabwe: Deflation Risks.*

### 2014. The authorities must implement their adjustment program fully, and be ready to take

### _cr14202 - 2014. The authorities must implement their adjustment program fully, and be ready to take

### Fiscal performance and near-term priorities
- 2013: Good progress was made in reducing the stock of domestic arrears; 2014 is likely to bring new domestic arrears.
- Authorities need to be ready to take additional actions should revenue fall short of revised projections, while protecting priority infrastructure and social spending.
- To prevent accumulation of future domestic arrears:
  - Further strengthen expenditure controls.
  - Implement measures to curb consumption.
  - Ensure adequate budgetary provisions for domestic service providers.
- From Table 3 (Central government, US$ millions): Total revenue & on-budget grants (2013 actual) = 3,860; Total expenditure & net lending (2013 actual) = 3,935.
- From Table 3 (Percent of GDP): Total revenue & on-budget grants (2013 actual) = 28.8; Total expenditure & net lending (2013 actual) = 30.3.
- Overall balance (commitment basis): 2013 actual = -2.5 (percent of GDP); Overall balance (cash basis): 2013 actual = -2.2 (percent of GDP).

### Medium-term fiscal challenge: unsustainable expenditure mix and employment costs
- Key medium-term challenge: Addressing the unsustainable expenditure mix, with implications beyond public finances.
- Large employment costs are crowding out social and investment spending, and competing for resources with ZIM ASSET.
- High salary increases in the public sector influence wage negotiations elsewhere, exacerbating imbalances in the real exchange rate.
- Employment costs (incl. grants & transfers), US$ millions: 2011 = 1,544; 2012 = 2,134; 2013 = 2,260; 2014 (budget) = 2,340; 2015 (prog.) = 2,344.
- Employment costs (percent of GDP): 2011 = 14.1; 2012 = 17.1; 2013 = 17.4; 2014 (f) = 18.0; 2015 (f) = 18.1.
- Staff recommendation: Begin addressing the employment-costs issue as soon as possible and maintain focus over the medium term.

### Diamond sector transparency and revenue mobilization
- Increasing transparency in the diamond sector remains critical for improving fiscal management and good governance.
- Recent measures to increase diamond sector transparency are steps in the right direction.
- Authorities should:
  - Follow through on commitments to modernize mining legislation.
  - Implement the withholding of interim diamond dividends.
- From Table 3 (Non-tax revenue and diamond dividends, US$ millions): Diamond dividends (2011–2014 actuals and budgets shown) — 2011 = 15; 2012 = 144; 2013 (budget) = 0; 2013 (outturn) = 17; 2014 (budget) = 189.

### Financial sector stability and banking system
- Enhancing financial sector stability and restoring confidence in the banking system must remain a priority.
- Staff urges continued vigilance in monitoring weak banks and a proactive approach to avoid the disorderly resolution of insolvent, non-systemic banks.
- Advance the restructuring of the financially distressed RBZ to mitigate financial sector vulnerabilities and bolster medium-term viability of the multicurrency system.
- Staff strongly urges the authorities to give priority to financial stability in designing and implementing the indigenization policy for the financial sector.
- Banking system indicators (text summary and figures):
  - Banking system capital has begun to recover but remains low; solvency remains an issue in a number of small banks.
  - Asset quality has deteriorated, with high and rising levels of NPLs; this, together with the economic slowdown, has impacted bank profitability.
- From Figure 8 notes: The minimum capital ratio was increased from 10 percent to 12 percent in August 2012.
- From Table 8 (selected FSI highlights, commercial banks, percent): Regulatory capital to risk-weighted assets series includes values such as 12.0 (Dec-09), 11.9 (Mar-10), 10.5 (Dec-12), 12.3 (Dec-13), 12.4 (Mar-14) (series shown across periods).

### External sector, debt, and reserves
- While Zimbabwe remains in debt distress:
  - Staff welcomes authorities’ commitment to continue making regular payments to the PRGT, to rebuild external buffers, and to refrain from drawing down their remaining SDR holdings.
  - Strong macroeconomic policies and a comprehensive arrears clearance framework, supported by development partners, are essential to addressing Zimbabwe’s debt problems.
  - Staff urges coordinated discussions with the World Bank Group and other IFIs on future payments, to increase the size of payments as capacity to repay improves, and to respect the preferred creditor status of the IFIs.
  - Selective debt service to bilateral creditors should be avoided.
  - Continue to minimize new non-concessional external debt and seek external financing on the most favorable terms possible for critical development projects with high economic returns.
- External position and vulnerabilities (Table 1 and Figure summaries):
  - Current account balance (excluding official transfers, US$ millions): 2011 = -3,269; 2012 = -3,048; 2013 = -3,613.
  - Current account (percent of GDP): 2011 = -29.8; 2012 = -24.4; 2013 = -27.8.
  - Usable international reserves (end-of-period, US$ millions): 2011 = 366; 2012 = 398; 2013 = 284.
  - Total external debt (US$ millions, e.o.p.): 2011 = 8,207; 2012 = 9,031; 2013 = 10,632.
  - External arrears (US$ millions, e.o.p., part of debt stocks): 2011 = 5,076; 2012 = 5,286; 2013 = 5,420.
- Program scenario outlook:
  - Export prices expected to stabilize; growth in 2014 projected to be weak, led by services, mining, and a recovery in agriculture.
  - Fiscal revenues projected to stabilize around 30 percent of GDP; employment costs need containment to make space for high-priority capital and social spending.
  - Large current account deficit will persist and external debt will remain unsustainable.

### Risk Assessment Matrix — key risks, likelihood, impact, and policy responses
- Fiscal underperformance (short term)
  - Relative Likelihood: High
  - Impact if Realized: High
  - Implication: Further weakening of revenue, postponement of special diamond dividend, or further increases in civil servants’ pay in 2014 could increase fiscal stress, crowd out social spending and capital investment, and cause unplanned accumulation of new domestic arrears.
  - Policy advice: Implement announced measures to mobilize diamond dividends and increase diamond revenue transparency; refrain from further wage increases in 2014 and maintain the hiring freeze except in critical areas; be prepared to take necessary actions should revenue fall short of revised projections, while protecting priority infrastructure and social spending.
- Destabilizing effects from indigenization and empowerment policy (short to medium term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium
  - Policy advice: Clarify the indigenization and empowerment policy; enhance predictability and transparency; give priority to financial sector stability; ensure application is consistent with existing financial sector laws and prudential regulations.
- Risks to financial stability from incomplete regulatory reforms (medium term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium to High
  - Policy advice: Take a proactive approach to avoid disorderly resolution of troubled banks; consider closing insolvent, non-systemic banks; advance restructuring of the RBZ and other financial sector reforms.
- Adverse weather conditions (short term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium
  - Policy advice: Implement development agenda plans to build/rehabilitate irrigation schemes, increase availability of affordable energy for irrigation, and create a self-sufficient agricultural sector.
- Protracted slow growth in advanced and emerging economies
  - Relative Likelihood: High
  - Impact if Realized: Medium to High
  - Policy advice: Progress fiscal consolidation to build buffers; create enabling business environment and normalize relations with creditors; diversify the economy by boosting agriculture, manufacturing, and services.

### Program timing and consultations
- Staff recommends that the next Article IV consultation be held on the regular 12-month cycle.

*IMF staff report content as provided in the supplied document.*

### 1. Floor on primary budget balance of the central government

### 1. Floor on primary budget balance of the central government

### Quantitative targets and outcomes
- 1. Floor on primary budget balance of the central government
  - 3,4,5,6,7
  - -261880-47-262
  - Adjusted floor169-3Not met170-25-53Not met

- 2. Continuous ceiling on new domestic payment arrears
  - 8
  - n.a.0n.a.Not met0n.a.

- 3. Floor on protected social spending
  - 185158Met9398144100Not met

- 4. Floor on stock of usable international reserves
  - 143149143Not met169143143143Met

- 5. Floor on payments to the PRGT
  - 0.450.901.05Met1.351.501.801.80Met

- 6. Continuous ceiling on the stock of new non-concessional external
  - 033029Met
  - 9
  - 33029350348Met
  - debt contracted or guaranteed by the general government with
    original maturity of one year or more

- 7. Ceiling on total stock of arrears to domestic service providers,17175117158Not met
  - agricultural input suppliers, and on capital certificates

### Memorandum Items (In millions of U.S. dollars, unless otherwise indicated)
- Broad Money (stock)
  - 3,6464,0433,6894,2263,7573,8283,888
- Reserve Money (stock)
  - 227232337243276283272
- Disbursements on medical equipment and supplies loan
  - 0903090307272
- Unbudgeted costs related to the referendum and elections
  - 1814847148153153153
- Unbudgeted revenues from telecom licence fees
  - 0504050859185
- Sept.
- Dec.
- 2
- 2013
- 1
- June
- 2
- 1
- Value of cumulative flows for the calendar year, unless otherwise indicated.
- 2
- Program performance will be monitored based on the quantitative targets for June and December 2013.

### Adjustments, footnotes, and ex post notes (verbatim)
- 3
  - To be adjusted downwards in any quarter and subsequent quarters by the full amount of any new borrowing disbursed and utilised by central government 
    for priority infrastructure projects.
- 4
  - To be adjusted downwards in any quarter and subsequent quarters by the full amount of any domestic debt issuance by central government ring-fenced for 
    clearance of domestic payment arrears.
- 5
  - To be adjusted upwards (downwards) in Q2 and Q3 of 2013 by the full amount of any shortfall (excess) in unbudgeted costs related to the constitutional 
    referendum and national elections and incurred by central government, relative to programme assumptions.
- 7
  - To be adjusted downwards in Q1 of 2013 by the value of the medical equipment and supplies project loan if the loan were disbursed in that quarter. To be 
    adjusted upwards in Q2 and Q3 of 2013 by the shortfall in the cumulative disbursement on the loan effected through these quarters, relative to programme 
    assumptions. To be adjusted downwards (upwards) in Q4 of 2013 by the full amount of any excess (shortfall) in the cumulative disbursement on the loan for 
    the calendar year, relative to programme assumptions.
- 9
  - A US$ 319 million non-concessional loan was signed with the Export-Import Bank of China in November, thus breaching the continuous US$ 330 million 
- 8
  - For the second SMP review, the continuous ceiling on new domestic payment arrears is replaced with a ceiling on the total stock of arrears to domestic 
    service providers, agricultural input suppliers, and on capital certificates.
- 6
  - To be adjusted downwards (upwards) in any quarter and subsequent quarters in 2013 by the full amount of any shortfall (excess) in unbudgeted revenues 
    from telecom licence fees received by central government, relative to programme assumptions.

### Status of Structural Benchmarks for 1st and 2nd SMP Reviews (selected entries, verbatim)
- Table 10. Zimbabwe: Status of Structural Benchmarks for 1st and 2nd SMP Reviews
  - Benchmarks Macroeconomic Rationale Review Status
  - Tax Policy
    - 1. Submit to Parliament the new Income Tax Bill.Enhance tax administration. 1st Met.
    - 2. Issue a Statutory Instrument establishing a clear formula for the calculation and remittance of dividends from entities in which the Government holds shares. Increase transparency and accountability. 1st Not met.
    - 3. Submit to Cabinet amendments to the Precious Stones Trade Act to incorporate the principles of the Diamond Policy. Increase transparency and accountability. 2nd Not met.
    - 4. Submit to Parliament amendments to the Precious Stones Trade Act. Increase transparency and accountability. 2nd Not met.
    - 5. Submit to Parliament a new Mines and Minerals Act.Increase transparency and accountability. 2nd Not met.
  - Public Financial Management
    - 6. PSC to submit to MoFED a time-bound action plan on measures to modernize the human resources and payroll systems. Enhance public expenditure and financial management. 1st Met.
    - 7. Publish a report on the stock of verified arrears and a strategy to clear validated arrears by December 2013 on MoFED’s website. Enhance public expenditure and financial management. 1st Not met.
  - Financial Sector
    - 8. Submit to the RBZ Board a framework for contingency planning and systemic crisis management. Reduce financial sector vulnerabilities. 1st Met.
    - 9. Submit amendments to the Banking Act to Parliament aimed at strengthening the Troubled Bank Resolution Framework. Strengthen legal and regulatory framework and reduce systemic liquidity risks. 2nd Not met.
    - 10. Submit the RBZ Debt Relief Bill to Parliament to complete the restructuring of the RBZ balance sheet. Reduce financial sector vulnerabilities. 2nd Met

*ZIMBABWE — INTERNATIONAL MONETARY FUND*

### Appendix I. Zimbabwe: Assessment of External Stability and

### Appendix I. Zimbabwe: Assessment of External Stability and Competitiveness

### Assessment overview and projections
- Dollarization eliminates the nominal exchange rate as a macro adjustment tool; exchange rate misalignment must be addressed through relative price changes and productivity gains.
- In recent years the current account deficit has been very large, but it is projected to moderate in the medium term as mining production accelerates.
- Long-term external borrowing is likely to remain the key source of financing for the current account.
- A more sustainable external position requires strong and timely structural reforms to expand productive capacity and diversify the economy.

### Competitiveness and structural bottlenecks
Findings:
- Boosting competitiveness requires substantial efforts to improve the business environment to catalyze domestic and foreign investment.
- Improving basic infrastructure and removing legal and regulatory obstacles are essential to creating favorable investment conditions and boosting external competitiveness.
- Limited progress has been made: Zimbabwe’s rank in qualitative competitiveness indicators has remained near the bottom of the list; only marginal gains have been made in The World Bank’s Ease of Doing Business rankings.
- In the World Economic Forum’s Global Competitiveness Index, Zimbabwe’s ranking deteriorated in 2013-14.
- Governance indicators show limited progress in critical areas, including the judiciary, property rights, and government effectiveness; perceptions of corruption remain high and there has been some deterioration in voice and accountability.

Policy implications:
- Prioritize reforms that remove structural bottlenecks: infrastructure, legal/regulatory frameworks, and business environment.
- Implement measures to improve government effectiveness, rule of law, and reduce perceptions of corruption to attract investment.

### Exchange rate assessment and external position
Findings:
- Standard methodologies indicate the real effective exchange rate is overvalued.
- Macro-balance approach: degree of overvaluation between 21-23 percent.
- External sustainability approach: degree of overvaluation 23 percent.
- These imbalances are expected to decline in the medium-term due to accelerating exports and slower import growth as domestic production expands.
- Results should be interpreted with caution given data limitations.

Quantified results:
- Macro-balance approach: 21-23 percent (overvaluation)
- External sustainability approach: 23 percent (overvaluation)

### Reserve adequacy and external buffers
Findings:
- Zimbabwe’s usable reserves are well below standard thresholds: less than one month of import cover.
- Standard minimum reserve coverage: 3 months of imports.
- Low-Income Country (LIC) metric for Zimbabwe indicates reserves should cover 6 to 16 months of imports, assuming an opportunity cost to holding reserves in the range of 2-6 percent.
- Currently, remaining SDR holdings are the main component of usable international reserves.
- A more ambitious pace of reserve accumulation is urgently needed to rebuild external buffers.

Illustrative reserve coverage data (from staff estimates / figures):
- Reserve holdings (baseline): 16.2, 13.0, 10.4, 8.2, 6.3 (displayed in Figure 7)
- Cost of holding reserves scenarios shown: 2 percent, 3 percent, 4 percent, 5 percent, 6 percent (reserve coverage in 2014 baseline plotted against these costs)

Analytical caveats:
- The LIC metric may underestimate Zimbabwe’s need for external buffers because in a dollarized economy reserves are also important for ensuring a stable financial system.
- The opportunity cost to holding reserves in Zimbabwe could be higher than 6 percent given large infrastructure needs.

### Policy recommendations (priorities)
- Implement strong, timely structural reforms to expand productive capacity and diversify the economy to restore external sustainability.
- Strengthen the business environment to catalyze domestic and foreign investment: remove legal and regulatory obstacles; improve infrastructure.
- Rebuild international reserves at an ambitious pace to meet at least standard minimums and to provide buffers for external shocks and financial stability in a dollarized context.
- Improve governance, judicial independence, property rights protection, and reduce corruption perceptions to support competitiveness and investment.
- Use long-term external financing prudently as the key source of current account financing while pursuing reforms that reduce reliance on external borrowing.

*Source: Appendix I. Zimbabwe: Assessment of External Stability and Competitiveness (IMF staff report content).*

### 4.      The teams agreed to the following sharing of information:

### 4.      The teams agreed to the following sharing of information:

### Information-sharing agreements
- The Fund team requests:
  - To be kept informed about the timing of Bank missions.
  - To be kept informed about progress in the macrocritical structural reform areas cited.
  - The Bank team to share outputs, as requested.
- The Bank team requests:
  - To be kept informed of progress in the areas where the Fund takes the lead.
  - The Fund team to share outputs, as requested.
- The appendix lists the teams’ work programs over the period June 2014–June 2015.
- The Bank team noted that a Zimbabwe Interim Strategy Note was issued April 2013.
- The Bank’s engagement in 2014/15 will strongly be influenced by programs under the new programmatic trust fund; the program listed represents the teams’ best judgment at this stage.

### Joint Bank-Fund Work Program (June 2014–June 2015) — Bank work program (next 12 months)
- PFM reform — Provisional timing of missions: Apr.-Sept. 2014 — Expected delivery dates: Q1-Q2 of FY15
- Private Sector Development Program — Provisional timing of missions: May-July 2014 — Expected delivery dates: Q1-Q2 of FY15
- TA on Mineral Sector Development — Provisional timing of missions: September 2014 — Expected delivery dates: June 2015
- Doing Business Reform Memorandum — Provisional timing of missions: December 2014 — Expected delivery dates: June 2015

### Joint Bank-Fund Work Program (June 2014–June 2015) — IMF work program (next 12 months)
- Macroeconomic policy analysis and policy advice:
  - Support the formulation and implementation of a comprehensive adjustment and reform program — Ongoing
  - [Third review of the SMP] — Late 2014
  - [Discussion of a successor SMP] — Late 2014
- Technical Assistance:
  - Medium-term macro-fiscal and budget frameworks — Q3-Q4:2014, Q1:2015
  - Customs and tax administrations — Q3:2014, Q2:2015
  - Comprehensive, timely, and accurate accounting and financial reporting — Q3:2014, Q1:2015
  - Tax compliance and risk management — Q4:2014
  - Strengthening data compilation and dissemination — Q4:2014, Q2:2015

### Requests for work program inputs
- Fund requests to Bank (ongoing):
  - Updates on policy reform work: increasing diamond sector transparency, strengthening human resource and payroll management, PFM reform, improving the business climate, I-PRSP.
  - Macro framework — Ongoing.
  - Timing and scope of Bank’s missions — Ongoing.
- Bank requests to Fund (ongoing):
  - Updates on the SMP — Ongoing.
  - Updates on policy reform work: PFM, tax and financial sector reforms — Ongoing.
  - Timing and scope of missions — Ongoing.

### Agreements on joint products and missions (next 12 months)
- Debt sustainability analysis — Q4:2014
- Updates on the SMP — Ongoing

### Statistical issues (As of May 29, 2014) — Assessment of data adequacy for surveillance
- General: Data provision has shortcomings but data are broadly adequate for surveillance.
- Identified shortcomings: weak data sources, insufficient coverage, capacity constraints.
- Authorities adopted a National Strategy for the Development of Statistics (NSDS) for 2011–15.
- STA multisector statistics mission (April-May 2013) objectives included assessing ESS, MFS, NA, price statistics; identifying priorities for 2–3 years; developing TA/training strategy; examining cross-sector consistency; updating GDDS metadata.
- Progress: Good progress on MFS, ESS, and GFS recommendations; capacity constraints have limited implementation for NA and price statistics.

### National accounts
- ZIMSTAT revised NA data based on the Poverty Income Consumption and Expenditure Survey (PICES) conducted June 2011–May 2012, resulting in an upward revision of GDP data for 2009–12 (published September 2013).
- NA compilation system and statistical infrastructure are being upgraded (e.g., 2008 SNA).
- Scope is being expanded to include quarterly national accounts; staff resources remain inadequate.

### Price statistics
- ZIMSTAT compiles and disseminates:
  - Monthly consumer price index (CPI) — weights based on 2011/12 Household Budget Survey (HBS) with a December 2012 base; new CPI compiled since January 2013.
  - Quarterly producer price index (PPI) — based on December 2009 with December 2008 weights.
- STA TA mission (2013) recommendations included: updating CPI basket; increasing frequency of data collection for perishable items from monthly to weekly; expanding PPI coverage to include exports.

### Government finance statistics (GFS)
- Reporting of central government GFS improved significantly since 2009.
- MoFED publishes monthly revenue and expenditure data and annual budget statements on its website.
- MoFED is moving to GFSM 2001 with IMF TA; budget data compiled only for the budgetary central government.
- Data on government financing are limited.

### Monetary statistics (MFS)
- MFS are timely but based on 1984 IMF guidelines.
- 2013 STA TA mission assisted RBZ to start compiling data using standardized reporting forms (SRFs) consistent with current international standards.
- Recommendations: improve classification and valuation of financial instruments; expand coverage beyond commercial banks to include other financial corporations (merchant banks, building societies, People’s Own Savings Bank).
- Follow-up mission in March/April 2014.
- In May 2014, RBZ published annual reports and audited financial statements for 2009-2012. Prior publication was 2008.
- The audited 2010 financial statement carried a qualified audit opinion and presented a negative equity position of [US$1,235.9] million. The basis of the qualification relates to disputed liabilities totaling US$20.5 million, which have been reduced to US$8 million at end-December 2013.
- MCM and STA TA and Article IV missions have made recommendations on central bank accounting and reporting.

### External sector statistics
- Balance of payments and external debt statistics have data issues:
  - Structural break in trade data in 2010 (pre-2010 source: Exchange Control Department of RBZ; 2010 onward source: customs data).
  - 2010–2011: very large unidentified credits in the BOP financing imports, probably due to under-recorded export receipts and FDI.
  - Labor income and workers’ remittances omit cash and in-kind transfers from Zimbabweans abroad.
  - Interest payments are not reconciled with creditors’ records and do not contain accrued interest on overdue obligations.
- 2013 STA TA mission identified gaps in international trade in services, direct and portfolio investment income, transactions of direct investment assets/liabilities, trade credit and advances, currency and deposit assets/liabilities of banks, and other sector deposit assets.
- RBZ followed BPM4 methodology; mission provided training in BPM6 and mapping tables from BPM4 to BPM6.
- Recommendations: migrate from BPM4 to BPM6; expand export coverage to include estimates for unrecorded mineral exports, informal artisanal exports and other items carried by pedestrians and small cars; improve coverage of service exports and imports; separate capital account from financial account transactions.
- Authorities finalized first debt reconciliation exercise; joint Fund/Bank mission visited Harare in May/June for loan-by-loan assessment.
- Current and capital transfers to NGOs 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 stocks and flows of gross international reserves and its NFA position often require adjustments.
- Exceptional financing does not fully capture the flow of overdue financial obligations.

### International Investment Position (IIP)
- Compilation of the IIP is not possible due to lack of reliable information on private sector stocks of foreign assets and liabilities and lack of appropriate categorization of available stock data by instrument.
- Authorities committed to preparing a preliminary IIP once results of the first foreign private capital stocks and flows survey are available.

### Data standards and reporting
- Participant in the General Data Dissemination System since November 1, 2002.
- No data ROSC is available.
- Zimbabwe does not report NA, price, BOP, GFS or its IIP to STA for dissemination in the International Financial Statistics, the BOP Statistics Yearbook, or the GFS Yearbook.
- NA data have not been reported since 2005 and no data are being reported for the new CPI.
- Since May 2014, RBZ resumed monthly reporting of monetary and financial statistics to STA.

### Common Indicators Required for Surveillance (selected entries; dates preserved exactly as in source)
- International reserve assets and reserve liabilities of the monetary authorities — Date of latest observation: Mar. 2014 — Date received: Apr. 2014 — Frequency of data: W — Frequency of reporting: W — Frequency of publication: M
- Reserve/base money — Mar. 2014 — Apr. 2014 — W — W — M
- Broad money — Mar. 2014 — Apr. 2014 — M — M — M
- Central bank balance sheet — Mar. 2014 — Apr. 2014 — W — M — M
- Consolidated balance sheet of the banking system — Dec. 2013 — Mar. 2014 — Q — Q — NA
- Interest rates — Mar. 2014 — Apr. 2014 — M — M — M
- Consumer price index — Mar. 2014 — Apr. 2014 — M — M — M
- Revenue, expenditure, balance and composition of financing — Central government — Mar. 2014 — Apr. 2014 — M — M — M
- Stocks of central government and central government-guaranteed debt — 2012 — Nov. 2013 — M — I — I
- External current account balance — 2013 — Mar. 2014 — A — I — I
- External capital and financial account — 2013 — Mar. 2014 — Q — I — I
- Exports and imports of goods — Dec. 2013 — Mar. 2014 — M — I — I
- GDP/GNP — 2012 — Sept. 2013 — A — A — A
- Gross external debt — 2013 — Mar. 2014 — A — I — I
- International investment position — NA — NA — NA — NA — NA

### Debt Sustainability Analysis — Key background points and figures
- The DSA was prepared jointly by Bank and Fund staffs in accordance with the standardized Debt Sustainability Framework (DSF) methodology for Low-Income Countries (LICs).
- Zimbabwe remains in debt distress.
- Following the debt reconciliation exercise for end-2011 and end-2012, Zimbabwe’s total external debt has been estimated at about 70 percent of GDP.
- Public and Publicly Guaranteed (PPG) external debt is broadly divided between bilateral creditors (60 percent) and multilateral creditors (40 percent).
- External private sector debt represents roughly 18 percent of total external debt.
- Compared to the 2012 DSA, there is a sharp downward revision of the total external debt stock ($2.5 billion), mainly driven by short-term private debt and supplier credits.
- The revision to short-term private debt reflects a change in assumptions: the BoP financing gap is no longer assumed to be covered with new short-term debt financing at the end of each year.
- The change follows STA technical assistance recommending that unidentified financing or year-end financing gaps be consolidated in the errors and omissions line.
- Errors and omissions are driven by large under-recorded exports (mainly minerals), remittances through non-banking channels, and certain FDI-related imports (mining companies recapitalized in kind by parents sending equipment without reporting related financing).
- Debt management capacity has improved; the Debt Management Office (DMO) at MoFED is fully staffed and developed an external debt database.
- However, decisions on new external borrowing continue to be taken with limited involvement of technical staff, posing risks to medium-term sustainability.

### Specific debt tables and figures (as presented)
- Text Table 1 / Text Table 2 (aggregated presentation in source):
  - Total external debt stock (2011): 823 (in millions of USD) — 275.1 (in percent of GDP)
  - Total external debt stock (2012): 903 (in millions of USD) — 172.4 (in percent of GDP)
  - Public and Publicly Guaranteed Debt (2011): 626 (in millions of USD) — 857.2 (percent of GDP)
  - Public and Publicly Guaranteed Debt (2012): 660 (in millions of USD) — 352.9 (percent of GDP)
  - Bilateral Creditors (2011): 322 (in millions of USD) — 529.4 (percent of GDP)
  - Bilateral Creditors (2012): 347 (in millions of USD) — 627.9 (percent of GDP)
  - Paris Club (2011): 281 (in millions of USD) — 125.7 (percent of GDP)
  - Paris Club (2012): 288 (in millions of USD) — 123.1 (percent of GDP)
  - Multilateral institutions (2011): 244 (in millions of USD) — 822.3 (percent of GDP)
  - Multilateral institutions (2012): 252 (in millions of USD) — 520.2 (percent of GDP)
  - IMF (2011): 13 (in millions of USD) — 51.2 (percent of GDP)
  - IMF (2012): 12 (in millions of USD) — 71.0 (percent of GDP)
  - AfDB (2011): 63 (in millions of USD) — 35.8 (percent of GDP)
  - AfDB (2012): 60 (in millions of USD) — 53.3 (percent of GDP)
  - WB (2011): 129 (in millions of USD) — 711.8 (percent of GDP)
  - WB (2012): 134 (in millions of USD) — 810.8 (percent of GDP)
  - Short-term debt RBZ (2011): 59 (in millions of USD) — 55.4 (percent of GDP)
  - Short-term debt RBZ (2012): 60 (in millions of USD) — 34.8 (percent of GDP)
  - Private Sector (2011): 196 (in millions of USD) — 417.9 (percent of GDP)
  - Private Sector (2012): 242 (in millions of USD) — 819.5 (percent of GDP)
  - (Sources listed in the source: WB, AfDB, Zimbabwean authorities, and staff estimates.)
- Servicing status (aggregated figures presented in source tables):
  - Total Remaining Principal Due: 379 (in millions of USD)
  - Total Arrears Principal Arrears Total Debt: 2524031919031 (formatted as in source)
  - Public and Publicly Guaranteed Debt Remaining Principal Due: 1364524031916603 (formatted as in source)
  - Bilateral Creditors Remaining Principal Due: 838263814323476 (formatted as in source)
  - Paris Club Remaining Principal Due: 367251313482881 (formatted as in source)
  - Multilateral institutions Remaining Principal Due: 525199911572525 (formatted as in source)
  - IMF Remaining Principal Due: 0127100127 (formatted as in source)
  - Short-term debt RBZ Remaining Principal Due: 0603603603 (formatted as in source)
  - Private Creditors Remaining Principal Due: 2428002428 (formatted as in source)

### Box 1 — Key Baseline Macroeconomic Assumptions
- The baseline scenario assumes average annual real GDP growth of about 4 percent for the projection period (2014–33), with somewhat lower growth at the beginning of the projection period (3 percent in 2014-15).
- In the medium term, uncertainty around the potential of diamond resources, constrained public finances, and the severe bottlenecks facing Zimbabwe would result in lower growth than in the recent past.
- Mining investment projects (especially in gold and platinum) should contribute to a change in the composition of growth and make up for sluggish growth in agriculture and manufacturing.
- The baseline assumes macroeconomic stabilization, but does not assume normalized access to finance or scaled-up public or private investment.
- Inflation is expected to be 2.5 percent over the medium term, accelerating from

*Prepared by staffs of the International Monetary Fund and the International Development Association — May 29, 2014.*

### 0.2 percent in 2014.

### _cr14202 - 0.2 percent in 2014.

### Assumptions
- Real/nominal projections:
  - Exports are projected to grow at 7 percent over the medium term, in nominal terms.
  - Import growth is projected to average 4 percent annually for the period 2014–19, and then increase to 5.5 percent until 2033.
- Current account and revenues:
  - The non-interest current account deficit is expected to remain above 25 percent of GDP in 2014, decline to 15 percent in 2019, and stabilize to an average of 13 percent throughout the remaining projection period.
  - Tax revenues are projected to remain broadly stable at around 27-28 percent of GDP. Gradual decline in customs revenues is expected to be offset by increases in other revenue sources.
  - External grants are assumed to remain confined to humanitarian assistance, estimated in the range of 0.5 percent of GDP per annum.
- Borrowing and arrears:
  - Under the baseline scenario, policies are unchanged and there is no debt relief.
  - New non-concessional borrowing is assumed to average 1 percent of GDP annually during 2013-2016 and 2 percent of GDP from 2017 onwards, with a grant element of about 27 percent.
  - The assumption is that Zimbabwe will continue to receive limited financing from non-traditional creditors in exchange for regular payments to them.
  - While outstanding external arrears continue to be rolled over, the DSA assumes no accumulation of new external arrears.
- Context and methodological notes:
  - The macroeconomic framework reflects developments and structural reforms under the 2013-2014 Staff-Monitored Program (SMP).
  - The baseline assumes no debt relief given limited progress with main traditional creditors; new external borrowing expected to remain limited to non-traditional creditors, mainly Brazil, China, and India.
  - Zimbabwe’s CPIA rating improved from 1.7 to 2.1 since the 2012 DSA.
  - Significant revisions to total external debt based on debt reconciliation: at end-2011 PPG external debt amounted to US$ 5.7 billion and private external debt US$ 1.7 billion; total debt declined from 113 to 74 percent of GDP compared to the 2012 DSA, due to methodological changes and revision to the nominal GDP series.

### External Debt Sustainability
- Baseline debt path and ratios:
  - PPG external debt is expected to grow from 82 percent of GDP in 2013 to 122 percent in 2023, before declining to 108 percent in 2033.
  - The PV of the PPG external debt will remain well above the 30 percent of GDP threshold during the entire projection period.
  - The PV of the PPG external debt-to-exports ratio: 171 percent in 2013, decline to 119 percent in 2023, and to 98 percent by end of projection period.
  - The PV of the external debt-to-revenue ratio: almost 176 percent in 2013, about 138 percent in 2023, and 114 in 2033.
  - Debt accumulation driven by assumption of moderate non-concessional borrowing of 2 percent of GDP.
- Debt service indicators:
  - Overall debt service-to-exports ratio will remain close to 5 percent throughout the projection period.
  - PPG debt service-to-exports ratio will remain around 2 percent until 2018, then slowly increase to 3 percent in 2033.
- Sensitivity to shocks and alternative scenarios:
  - Under the related bound test (lower GDP growth), PV of PPG external debt-to-GDP ratio reaches 69 percent in 2015.
  - Under a combined shock, the ratio reaches 88 percent in 2015 before declining to 44 percent in 2033.
  - Under lower exports scenario, PV of PPG external debt-to-exports ratio reaches almost 400 percent in 2015, then declines to just below 190 percent in 2033.
  - Assuming lower FDI, the same ratio reaches 217 percent in 2015 and declines to around 102 percent by end of projection period.
  - Similar adverse results obtain under lower GDP growth and less favorable borrowing terms scenarios.

### Public Sector Debt Sustainability
- Baseline projections:
  - PPG debt-to-GDP ratio projected to decline from 62 percent in 2013 to 51 percent in 2023, and to 41 percent in 2033.
  - PV of the PPG debt-to-revenue ratio declines from 206 percent in 2013 to 123 percent in 2033.
  - Debt service-to-revenue ratio will remain around 3 percent until 2023 and then gradually increase to 5 percent by end of projection period.
- Alternative/low-growth scenario outcomes:
  - Under alternative scenario of lower GDP growth and primary balance at historical averages, PV of PPG debt-to-GDP ratio increases from 59 percent in 2013 to 106 percent in 2023, reaching 175 percent by end of projection period.
  - PV of the PPG debt-to-revenue ratio deteriorates from 206 percent in 2013 to above 500 percent by end of projection period.
  - Debt service-to-revenue ratio rises from 3 percent in 2013 to 32 percent in 2033, reflecting inclusion of historical average growth that includes steep contractions.

### Domestic Public Debt (Box 2)
- Levels and composition:
  - Overall domestic public debt is low and stable, at around 8-9 percent of GDP.
  - Diverging component paths: domestic debt of the Reserve Bank of Zimbabwe (RBZ) has been shrinking, while government securities have expanded post-hyperinflation.
  - Short-term domestic public debt fell from 100 percent of the total in 2011 to 78 percent in 2013, as the government placed securities with maturities of one year or more.
  - All domestic public debt is denominated in U.S. dollars.
- Actuals (Millions of U.S. Dollars):
  - Total domestic public debt: 2011 = 887; 2012 = 1,110; 2013 = 1,117.
  - Domestic debt of the RBZ: 2011 = 711; 2012 = 709; 2013 = 645.
  - Government securities: 2011 = 0; 2012 = 188; 2013 = 314.
  - Domestic payment arrears: 2011 = 176; 2012 = 213; 2013 = 158.
- Memorandum items:
  - Total domestic public debt (percent of GDP): 2011 = 8.1; 2012 = 8.9; 2013 = 8.6.
  - Short-term domestic public debt (percent of total): 2011 = 100.0; 2012 = 83.9; 2013 = 78.1.

### Alternative Scenarios and Shocks
- General findings:
  - Alternative and shock scenarios show similar gradually rising trends in debt indicators.
  - Under less favorable scenarios, debt indicators deteriorate substantially across PV debt-to-GDP, PV debt-to-revenue, and debt service ratios.
  - The scenarios illustrate high sensitivity of debt indicators to GDP growth, exports, FDI, and borrowing terms.

### Conclusions
- Zimbabwe remains in debt distress in the baseline scenario of no debt relief.
- Under the baseline, which includes new non-concessional borrowing of 2 percent of GDP a year on average from 2017 onwards, debt indicators remain above relevant indicative thresholds.
- Zimbabwe’s debt situation is vulnerable to shocks, particularly to exports and GDP growth, and sensitive to FDI flows and less favorable financial terms.

*International Monetary Fund — ZIMBABWE*

### 12.      The Zimbabwean authorities share the staff assessment and therefore remain committed to

### _cr14202 - 12.      The Zimbabwean authorities share the staff assessment and therefore remain committed to 

### Debt strategy and financing guidance
- Authorities remain committed to re-engaging with all creditors, multilateral and bilateral.
- Staff encourages authorities to:
  - Primarily seek grants and financing on terms as favorable as possible, ideally at highly concessional terms, to finance critical development projects with high economic returns.
  - Consider limited non-concessional borrowing only if grants and concessional resources are unavailable or insufficient to implement critical growth-enhancing projects.

### Public and external debt indicators (selected baseline projections and metrics)
- Figure and table highlights (2013-2033 projections):
  - Grant-equivalent financing (percent of GDP) and grant element of new borrowing (right scale) are tracked in Figure 1 (a).
  - PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio, debt service-to-exports ratio, and debt service-to-revenue ratio are shown under baseline, historical scenario, and most extreme shock scenarios (Figures 1 and 2).
- Table 1: External Debt Sustainability Framework, Baseline Scenario, 2010-2033 (selected lines; in percent unless otherwise indicated):
  - External debt (nominal): 71.8 74.9 72.4 72.4 82.7 82.7 95.0 106.8 115.4 120.8 121.2 122.1 108.7 (presented across years).
  - of which: public and publicly guaranteed (PPG): 60.6 57.0 53.6 53.6 53.6 53.6 52.8 52.4 50.6 50.0 48.9 44.9 37.8.
  - Change in external debt: -17.0 3.1 -2.5 10.3 12.3 11.8 8.6 5.4 0.4 -0.7 -1.3.
  - Identified net debt-creating flows: 4.8 16.6 12.5 23.5 22.3 19.7 15.9 11.8 8.3 6.3 5.2.
  - Non-interest current account deficit: 17.6 29.5 24.3 16.3 13.1 28.5 27.4 26.3 23.3 19.9 16.3 15.0 12.3 14.1.
  - PV of external debt: 69.8 80.1 92.7 104.5 113.2 118.2 118.1 118.7 118.7 104.8 (selected years presented).
  - PV of PPG external debt (percent of exports): 156.0 171.2 165.7 160.5 152.2 144.0 133.4 119.0 97.8.
  - PPG debt service-to-exports ratio (in percent): 0.9 0.7 0.4 2.3 2.3 2.2 2.2 2.2 2.2 2.4 3.8.
  - PPG debt service-to-revenue ratio (in percent): 1.4 1.2 0.5 2.4 2.3 2.4 2.3 2.4 2.5 2.8 4.5.
  - Total gross financing need (Billions of U.S. dollars): 2.3 3.7 3.6 4.7 5.1 5.6 6.2 6.8 7.1 10.7 19.6.
  - Grant element of new public sector borrowing (in percent): 28.9 28.9 21.9 22.9 27.8 27.9 26.4 27.3 26.1 26.8 (selected years).
  - Grant-equivalent financing (in percent of GDP): 0.4 0.3 0.2 0.2 0.6 0.6 0.6 0.6 0.6 (selected years).
- Table 3: Public Sector Debt Sustainability Framework, Baseline Scenario, 2010-2033 (selected lines; in percent of GDP unless otherwise indicated):
  - Public sector debt: 67.5 65.1 62.5 62.0 64.4 64.1 60.9 60.0 58.1 51.0 ... 41.1.
  - Change in public sector debt: -18.2 -2.5 -2.6 -0.4 2.4 -0.4 -3.1 -0.9 -1.9 -1.1 -0.6.
  - Identified debt-creating flows: -10.5 -6.9 -6.6 0.1 -0.2 -3.0 -4.7 -4.1 -5.1 -3.9 -3.3.
  - Primary deficit: 0.8 2.1 1.1 1.9 1.4 2.3 2.1 -0.9 -1.4 -1.0 -1.4 -0.1 -1.2 -1.2 -1.2.
  - Revenue and grants: 23.3 26.7 28.0 28.8 29.8 29.6 29.8 29.9 29.9 30.1 ... 30.1.
  - Automatic debt dynamics: -11.4 -9.0 -7.7 -2.2 -2.2 -2.0 -3.3 -3.1 -3.7 -2.7 -2.1.
  - PV of public sector debt: 59.9 59.4 62.2 61.8 58.7 57.4 55.0 47.7 37.2.
  - Gross financing need: 6.6 8.3 8.4 10.2 9.4 8.8 8.2 7.6 6.9 4.7 2.7.
  - PV of public sector debt-to-revenue and grants ratio (in percent): 213.6 206.0 208.8 208.8 197.3 191.8 184.1 158.5 123.8.
  - Primary deficit that stabilizes the debt-to-GDP ratio: 19.0 4.5 3.7 2.7 -0.3 -0.5 1.7 -0.1 0.5 -0.2 -0.6.

### Sensitivity analyses and stress tests
- Table 2a and 2b provide sensitivity analyses for PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio, debt service-to-exports ratio, and debt service-to-revenue ratio for 2013-2033 under:
  - Alternative scenarios (A1: key variables at historical averages; A2: new public sector loans on less favorable terms).
  - Bound tests (B1: Real GDP growth shock; B2: Export value growth shock; B3: US dollar GDP deflator shock; B4: Net non-debt creating flows shock; B5: combination of B1-B4; B6: one-time 30 percent nominal depreciation in 2014).
- Table 2a selected results (PV of debt-to-GDP ratio projections in percent for key years):
  - Baseline: 51 50 50 48 47 46 41 34 (years 2013-2018 and projection points).
  - A2 (less favorable loan terms): 25 15 15 15 4 9 49 49 47 45 41.
- Table 2b selected results (debt service and revenue ratios, baseline and scenarios):
  - Baseline debt service-to-exports and debt service-to-revenue ratios shown as 22 22 22 24 (selected years) with alternative scenarios and bound tests generating higher or lower ratios depending on shocks.
- Table 4 shows sensitivity of PV of Debt-to-GDP ratio, PV of Debt-to-Revenue ratio, and Debt Service-to-Revenue ratio to macro-fiscal shocks and scenarios (2013-2033):
  - Baseline PV of Debt-to-GDP Ratio samples: 59 62 62 59 57 55 48 37.
  - A1 (real GDP growth and primary balance at historical averages) raises ratios: 59 65 69 72 77 78 106 175.
  - B4 (one-time 30 percent real depreciation in 2014) produces elevated ratios: 59 78 75 81 78 17 87 46 24 62 46.

### Macroeconomic outlook and near-term projections
- Medium-term baseline outlook:
  - Growth to average some 4 percent as large mining sector investments reach full capacity.
  - Current account deficit expected to improve but remain high, averaging 15 percent of GDP.
  - Planned fiscal consolidation should facilitate modest rebuilding of fiscal and external buffers, including international reserves.
- Table 1 key macro assumptions and projections:
  - Real GDP growth (in percent): 11.4 11.9 10.6 -1.2 11.1 3.3 3.1 3.2 3.9 4.3 4.4 3.7 4.0 4.0 4.0.
  - GDP deflator in US dollar terms (change in percent): 4.0 3.7 3.0 5.2 8.5 0.7 0.8 1.1 2.5 2.3 3.6 1.8 2.5 2.5 2.5.
  - Effective interest rate (percent): 0.4 0.5 0.2 0.1 0.2 0.2 -0.1 0.4 0.3 0.3 0.5 0.3 0.3 0.4 0.3.
  - Growth of exports of G&S (US dollar terms, percent): 92.6 35.2 -13.2 10.4 31.8 -5.6 6.7 6.8 8.5 10.6 13.0 6.7 6.6 6.6 6.7.
  - Growth of imports of G&S (US dollar terms, percent): -6.4 47.9 -8.7 17.3 35.7 4.1 2.9 3.7 3.2 3.4 5.4 3.8 4.9 4.5 5.6.
  - Government revenues (excluding grants, in percent of GDP): 23.3 26.7 28.0 28.8 29.8 29.6 29.8 29.9 29.9 30.1 29.6 30.0.
  - Nominal GDP (Billions of US dollars): 9.4 11.0 12.5 13.0 13.5 14.1 15.0 16.0 17.3 24.0 45.5 (selected years).

### Fiscal policy, revenues, and public finances
- 2013 fiscal and revenue performance:
  - Growth fell to an estimated 3.3 percent in 2013 from an average of 10 percent over 2009-2012.
  - Budget deficit reached 2.2 percent of GDP in 2013.
  - Election-related spending and the public sector wage bill drove expenditure overruns in 2013.
  - Government identified revenue and expenditure measures valued at some 4.6 percent of GDP in 2014; if fully implemented could reduce 2014 budget deficit to 0.6 percent of GDP.
- Selected fiscal ratios (Table titled "Selected Economic Indicators, 2011–14"):
  - Real GDP growth (annual percentage change): 11.9 10.6 3.3 3.1 (2011–2014).
  - Nominal GDP (US$ millions): 10,956 12,472 12,974 13,483.
  - Revenue and grants (percent of GDP): 26.7 28.0 28.8 29.8.
  - Expenditure and net lending (percent of GDP): 29.0 29.3 31.4 31.9.
  - Employment costs (incl. grants & transfers) (percent of GDP): 16.7 20.1 21.3 23.4.
  - Overall balance (commitment basis) (percent of GDP): -2.4 -1.3 -2.5 -2.2.
  - Overall balance (cash basis) (percent of GDP): -0.5 -0.6 -2.2 -0.6.
  - Primary balance (cash basis): -0.2 -0.4 -2.0 -0.3.

### Monetary policy and financial sector developments
- Monetary and financial sector context:
  - Multi-currency regime continues to constrain the use of monetary policy instruments; RBZ focuses on promoting a strong and stable financial system and preserving the multi-currency system.
  - Financial sector vulnerabilities persist: high levels of nonperforming loans (16.6 percent on average for banks in March 2014), low capitalization, low liquidity, and wide differentiation across banks.
  - Liquidity crunches occurred in 2013; deposits slowly returning but liquidity remains generally tight.
- Measures taken and planned:
  - January 2014: banks instructed to immediately end new insider lending; bank boards required to ensure adequate provisioning and submit regular reports.
  - Minimum capital requirement of $100 million deadline extended to December 2020.
  - Banks required to submit recapitalization plans by end-June 2014, with interim milestones toward compliance with $100 million by December 2020.
  - Recapitalization of RBZ to allow it to resume core functions; plans to transfer the treasury account from the Commercial Bank of Zimbabwe to RBZ.
  - Afreximbank launched a US$100 million interbank facility in March 2014 to address liquidity crunch, aimed at illiquid but solvent institutions.
  - RBZ added the Australian dollar, Chinese yuan, Indian rupee and Japanese yen to legal tender list in January 2014, alongside the US dollar, South African rand, Botswana pula and British pound.

### External sector, arrears, and re-engagement strategy
- External position:
  - Usable international reserves cover less than two weeks of imports; usable international reserves (end-of-period) were 366 398 284 464 (US$ millions for 2011–2014) and months of imports: 0.5 0.6 0.4 0.7.
  - Current account deficit: widened to 28.7 percent of GDP in 2013; current account balance (excluding official transfers) -29.8 -24.4 -27.8 -28.2 (percent of GDP for 2011–2014).
  - Total external debt (end-of-period, US$ millions): 8,207 9,031 10,632 12,700; percent of GDP: 74.9 72.4 81.9 94.2 (2011–2014).
  - PPG external debt (US$ millions, e.o.p.): 6,243 6,680 6,834 7,101; percent of GDP: 57.0 53.6 52.7 52.7.
  - Of PPG arrears: 5,076 5,286 5,420 5,575 (US$ millions); percent of GDP: 46.3 42.4 41.8 41.3.
- Arrears clearance and re-engagement:
  - Authorities adopted the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS) aimed at accelerating re-engagement with creditors and clearing outstanding arrears by mobilizing capital from internal resources.
  - ZAADDS described as a “hybrid debt resolution strategy” combining traditional debt resolution initiatives with leveraging natural resources for sustainable development.
  - Authorities view the SMP as a crucial element of ZAADDS and the Zimbabwe Accelerated Re-engagement Economic Program.

### Executive Board assessment, recommendations, and authorities' commitments
- Executive Directors concurred with staff appraisal: fragile economic situation with growth slowdown, large external deficit, and low international reserves; downside risks.
- Key Board recommendations and emphases:
  - Restore fiscal and external sustainability and reduce financial vulnerabilities.
  - Fully implement revised fiscal plan for 2014 and be ready to take additional actions if needed, while protecting priority infrastructure and social spending.
  - Mobilize revenue, including from the diamond sector; rebalance expenditure away from employment costs to free resources for development.
  - Strengthen public financial management to prevent accumulation of new arrears.
  - Improve debt management and seek mainly grants and highly concessional resources, limiting non-concessional financing to critical development projects with high economic returns.
  - Engage in coordinated discussions with the World Bank and other IFIs; respect preferred creditor status of IFIs, avoid selective debt service, and increase payments to the Fund’s Poverty Reduction and Growth Trust as capacity to repay improves.
  - Enhance financial sector stability: monitor weak banks vigilantly, proactively resolve insolvent non-systemic banks, restructure and recapitalize RBZ, and preserve the multicurrency system for the time being.
  - Address structural bottlenecks to boost competitiveness and promote a sustainable external position; improve business environment and basic infrastructure; reduce uncertainty regarding indigenization policy; boost transparency in the diamond sector and modernize mining legislation.
- Authorities’ stated commitments (from their statement and staff assessment):
  - Continue implementing policies and reforms under the staff-monitored program (SMP) and remain engaged with international financial institutions.
  - Strengthen quality of public expenditures, increase revenue, raise productivity, reduce financial sector vulnerabilities, and improve competitiveness and the business environment under ZIM ASSET (four strategic clusters: food security and nutrition; social services and poverty eradication; infrastructure and utilities; and value addition and beneficiation).
  - Constituted a joint task force to forecast and monitor diamond-related revenues; all diamonds to be sold through auctions at international trading venues.
  - Continue regular repayments to the PRGT and commit to gradually increase repayments as capacity to repay improves.
  - Postpone further steps in creating a sovereign wealth fund until the macroeconomic outlook becomes favorable.

*Source: IMF staff report and related tables and press release materials provided in the content unit.*

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