## _cr15105 — EXECUTIVE SUMMARY

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---

### Context and program objectives
- SMP: a 15-month program approved in October 2014.
- Main objective: strengthen Zimbabwe’s external position as a prerequisite toward arrears clearance, resumption of debt servicing, and restoring access to external financing.
- Key policy priorities for 2015:
  - reducing the primary fiscal deficit to raise Zimbabwe’s capacity to repay;
  - restoring confidence in the financial system;
  - improving the business climate;
  - garnering support for an arrears clearance strategy.

### Recent developments and key statistics
- Growth and sectoral performance:
  - Real GDP growth slowed in 2014 despite strong performance in agriculture; mining and manufacturing contracted.
  - Mining suffered from supply constraints and adverse price developments, particularly for gold and platinum.
  - Manufacturing remained depressed due to inadequate infrastructure, rigid labor laws, lack of financing, and competition from cheaper imports amid a stronger dollar.
- Prices and external position:
  - Inflation remained low, reflecting the impact of the persistent depreciation of the South African rand.
  - International reserve coverage improved to about two weeks.
  - Large current account deficit remains and is mainly financed by short- and long-term loans to the private sector.
- 2014 fiscal outturns:
  - Adjusted primary fiscal deficit (cash basis) outturn: 0.7 percent of GDP, compared with 1 percent of GDP under the program.
  - Nontax revenues below program projections, mainly due to shortfall in mining revenue; the 15 percent special diamond dividend underperformed because of a drop in production and exports.
  - Domestic arrears clearance exceeded programmed levels.
  - Lower-than-projected employment costs and capital spending contributed to the fiscal outcome.
- Financial sector indicators and developments:
  - Deposit growth picked up in 2014, supported by tobacco-related inflows.
  - Private-sector credit increased slightly but remained constrained.
  - Deposit composition (as of December 2014): Long-Term (>30 days) 19%, Savings 13%, Demand Deposits (< 30 days) 49%, Short-Term 19%.
  - Private sector credit composition (as of December 2014): Distribution & Transport 16%, Agriculture 18%, Manufacturing 25%, Construction 1%, Trade & Services 2%, Individuals 22%, Energy & Minerals 5%, Other 11%.
  - Nine out of 20 operating financial institutions face tight liquidity; distribution of liquidity ratios (number of banks, as of December 2014): <30%: 9 banks; 30>40%: 4 banks; 40>50%: 3 banks; >50%: 4 banks.
  - Afreximbank-supported interbank liquidity facility of $200 million became operational in March 2015.
  - RBZ introduced bond coins in December 2014; coins fully backed by a dedicated $50 million facility managed by the RBZ.

### Program performance and structural reforms (first review)
- Quantitative targets and structural benchmarks for the first review were met:
  - Adjusted floor on the primary budget balance of the central government met by a significant margin.
  - Expenditure on priority social spending and domestic arrears clearance was well above targeted levels.
  - Floor on the stock of international reserves was met.
  - Floor on payments to the PRGT was met.
  - Newly contracted nonconcessional external debt stayed within the ceiling.
- Structural benchmarks met:
  - Cabinet approved the Public Debt Management Bill.
  - Board of ZAMCO approved its mandate, strategy, and objectives.
- Other reforms:
  - ZAMCO operationalized and tasked to acquire and resolve NPLs on commercial terms.
  - Amendments to the indigenization and empowerment law progressed; January 2015 amendment assigns new roles to line ministries.
  - Progress in modernizing mining legislation; amended Mines and Minerals Act expected to be submitted to the Attorney General by end-March and to Parliament in the third quarter of 2015.
  - Commitment to continue publishing audited financial statements of the Zimbabwe Mining Development Corporation.

### Reengagement with creditors and recent financing
- Authorities stepped up reengagement with creditors:
  - Increased payments to the World Bank and the African Development Bank.
  - Began making pari passu payments to the AfDB in March 2015 and token payments to the EIB.
  - Continued monthly payments of $150,000 to the PRGT and committed to increase repayments as capacity improves.
- Recent loan and guarantee transactions (Dec 2014–Feb 2015):
  - Concessional $3 million loan for micro-, small- and medium-sized enterprises.
  - $50 million non-concessional loan for essential equipment to fight wildlife poaching and support the tourism sector.
  - Authorities guaranteed two commercial facilities: $100 million (Dec 2014) and $13 million (Feb 2015) for purchases of mining equipment.
- Multilateral and donor support:
  - AfDB approved a $103 million grant for infrastructure development and institutional strengthening.
  - World Bank and development partners established the Zimbabwe Reconstruction Fund expected to raise $100 million.
  - European Union lifted its 12 year suspension of direct financial aid and provided five-year support starting in 2015.

### Macroeconomic outlook and balance of risks
- 2015 outlook highlights:
  - Growth expected to weaken further in 2015; late and erratic rains could affect agriculture.
  - Subdued recovery in mining and manufacturing projected, supported by improved mining techniques and efforts to increase value added and by improved water and power supply following government investment.
  - Inflation projected to remain in negative territory in 2015.
  - External position expected to continue improving due to further fiscal tightening and lower oil prices; international reserves projected to increase.
  - Country will remain in debt distress until a comprehensive arrears clearance strategy is in place.
- Key risks:
  - Further declines in global commodity prices for gold, platinum, and diamonds.
  - Fiscal challenges and possible difficulties in policy implementation.
  - Lower oil prices could dampen fiscal revenue but could benefit the external position and domestic demand.
- Balance of scenarios:
  - Favorable scenario: continued program implementation, successful reengagement with creditors, debt rescheduling, resumption of official financing flows → growth prospects would rise dramatically.
  - Downside scenario: policy slippages preventing reengagement → economic issues remain unattended and prospects unchanged.

### Fiscal policy, revenue measures, and PFM reforms
- Fiscal consolidation objective: bring the central government primary account close to balance in 2015 while protecting priority social spending and gradually reducing domestic arrears.
- Employment cost controls:
  - Near-term measures include a hiring freeze, freezing promotions, and eliminating redundancies.
  - No plans to raise wages and salaries in 2015.
  - MoFED and Ministry of Labour and Social Welfare mandated to explore medium-term public sector reform options; strategy paper to be submitted to cabinet by the second review.
- Revenue mobilization:
  - Excise duties raised on fuel, beer, and cigarettes; levy on tobacco growers increased.
  - Strengthening revenue administration with Fund TA and stepped-up collection of outstanding tax arrears.
  - Expected revenue gains from additional measures amount to about 1 percent of GDP, with most gains materializing in the second half of the year.
  - If revenue measures underperform, shortfalls will be offset by cuts in lower-priority current and capital spending.
- Public financial management:
  - PFM reform strategy under Fund TA aims to improve budget preparation and execution, and strengthen expenditure control.
  - Amendments to the Public Finance Management Act being drafted; World Bank assisting procurement framework amendments.
  - Identified 10 parastatals for restructuring; external audits underway to inform restructuring exercises.

### Financial sector reforms and recommendations
- Recapitalization and debt assumption:
  - MoFED provided the RBZ with $100 million (0.7 percent of GDP) in securities for recapitalization.
  - At end-December 2014, some $311 million (2.3 percent of GDP) in government securities was issued for takeover of RBZ noncore debt.
  - MoFED has started to assume RBZ noncore debt related to previous quasi-fiscal activities following the central government’s decision.
- Bank resolution and NPLs:
  - RBZ placed three troubled banks into liquidation; decline in NPLs from 20.4 percent at end-September 2014 to 15.4 percent at end-December 2014.
  - RBZ continued close monitoring of the remaining two troubled banks and planned to rid the system of all distressed banks by end-June 2015.
  - ZAMCO operational and tasked to acquire and resolve NPLs; to be provided with long-term government securities and to explore private investor funding.
- Supervision and legal reform:
  - Amendments to the Banking Act to be submitted to Parliament by mid-2015 (structural benchmark).
  - Establishment of a credit registry unit in the RBZ and collaboration with the World Bank to set up credit reference bureaus.
- AML/CFT:
  - FATF removed Zimbabwe from the list of countries subject to FATF monitoring in February 2015.
- Staff recommendations:
  - Maintain decisive actions against troubled banks; ensure ZAMCO operates according to best practices.
  - Continue RBZ recapitalization and strengthen supervision to sustain confidence and credit extension.

### Debt strategy, borrowing policy, and project financing
- Borrowing policy:
  - Authorities reiterated commitment to contract or guarantee loans on concessional terms and only opt for nonconcessional loans in absence of grants or concessional loans.
  - Nonconcessional loans to be contracted or guaranteed for critical growth-enhancing projects that can enhance capacity to repay.
  - For large projects (above $100 million), authorities commit to consult reputable and independent institutions such as the WB or AfDB prior to signing.
- Notable projects under consideration:
  - Feasibility studies for construction and rehabilitation of schools amounting to $18 million.
  - Considering guarantees for: (a) $98 million for fibre optic expansion; and (b) $939 million for expansion of power generation in Hwange.
- Institutional debt management:
  - Public Debt Management Bill approved by Cabinet; will establish a debt management office within MoFED and outline legal and institutional framework for debt management operations.
- Payments to IFIs:
  - Continued monthly payments of $150,000 to the PRGT and stepped-up payments to the WB and AfDB as part of a roadmap toward Paris Club rescheduling.

### Program monitoring, governance, and data/reporting
- SMP monitoring through quantitative targets and structural benchmarks; modified quarterly quantitative targets for 2015 to reflect weaker growth and timing of revenue measures.
- Review schedule: semi-annual; end-June 2015 and end-December 2015 test dates for quantitative targets.
- Technical Memorandum of Understanding specifies technical definitions and reporting requirements.
- Programme governance:
  - Political-level monitoring coordinated by the Office of the President and Cabinet via monthly meetings.
  - Technical monitoring committee: MoFED, RBZ, Zimbabwe National Statistics Agency, Zimbabwe Revenue Authority; meets regularly.
- Data reporting requirements (selected):
  - NIR, NFA, monetary control programme — RBZ, Weekly, 1 week.
  - Broad money survey — RBZ, Monthly, 2 months.
  - RTGS transactions — RBZ, Monthly, 1 month.
  - Central government operations — MoFED, Monthly, 1 month.
  - Detailed data on protected social spending — MoFED, Quarterly, 1 month.

### Selected headline macro-fiscal indicators (2011–15 from Table 1 highlights)
- Population (millions): 13.1 (2013)
- Per capita GDP: US$ 1028 (2013)
- Real GDP growth (annual percentage change, 2011–2015 series as presented): 11.9; 10.6; 4.5; 3.1; 3.2; 2.8 (Program / Est. / Proj. columns as presented)
- Nominal GDP (US$ millions, 2011–2015): 10,956; 12,472; 13,490; 14,012; 13,673; 13,973
- Consumer price inflation (annual average): 3.5; 3.7; 1.6; 0.0; -0.2; -1.0
- Central government: Revenue and grants (percent of GDP): 26.7; 28.0; 27.7; 28.0; 27.6; 27.9
- Employment costs (percent of GDP): 16.7; 20.1; 20.5; 22.9; 22.2; 23.4
- Primary balance (cash basis, percent of GDP): -0.2; -0.4; -1.9; -1.0; -0.7; -0.1
- Gross international reserves (US$ millions): 366; 398; 284; 304; 303; 337
- Months of imports (of goods and services): 0.5; 0.6; 0.4; 0.5; 0.5; 0.6
- Public and publicly guaranteed external debt (US$ millions, e.o.p.): 6,268; 6,709; 7,013; 7,249; 7,181; 7,607
- Of which: Arrears (US$ millions): 5,101; 5,313; 5,607; 5,761; 5,760; 5,903

*Source: IMF staff report content (as provided in the supplied document).*

### EXECUTIVE SUMMARY

### _cr15105 - EXECUTIVE SUMMARY

### Context and Program Objectives
- The authorities implemented a macroeconomic stabilization and structural reform program under a staff-monitored program (SMP).
- The SMP is a 15-month program approved in October 2014.
- Main objective: strengthen Zimbabwe’s external position as a prerequisite toward arrears clearance, resumption of debt servicing, and restoring access to external financing.
- Key policy priorities for 2015: (a) reducing the primary fiscal deficit to raise Zimbabwe’s capacity to repay; (b) restoring confidence in the financial system; (c) improving the business climate; and (d) garnering support for an arrears clearance strategy.

### Recent Developments
- Real GDP growth slowed in 2014 despite strong performance in agriculture; mining and manufacturing contracted.
- Mining suffered from supply constraints and adverse price developments, particularly for gold and platinum.
- Manufacturing remained depressed due to inadequate infrastructure, rigid labor laws, lack of financing, and competition from cheaper imports amid a stronger dollar.
- Inflation remained low, reflecting the impact of the persistent depreciation of the South African rand.
- External position: improved in 2014 but remains precarious.
  - International reserve coverage improved to about two weeks.
  - Large current account deficit remains and is mainly financed by short- and long-term loans to the private sector.
- Fiscal outturns for 2014:
  - Adjusted primary fiscal deficit (cash basis) outturn: 0.7 percent of GDP, compared with 1 percent of GDP under the program.
  - Nontax revenues below program projections, mainly due to shortfall in mining revenue; the 15 percent special diamond dividend underperformed because of a drop in production and exports.
  - Domestic arrears clearance exceeded programmed levels.
  - Lower-than-projected employment costs and capital spending contributed to the fiscal outcome.
- Financial sector developments:
  - Deposit growth picked up in 2014, supported by tobacco-related inflows.
  - Private-sector credit increased slightly but remained constrained.
  - Financial sector highly segmented; limited exposure between large strong banks and smaller weak ones.
  - An Afreximbank-supported interbank liquidity facility ($200 million) became operational in March 2015 to help unlock liquidity.
  - RBZ introduced bond coins in December 2014 to address absence of small denomination dollar coins; the coins are fully backed by a dedicated $50 million facility managed by the RBZ.

### Program Performance and Structural Reforms
- All quantitative targets and structural benchmarks for the first review under the SMP were met.
  - Adjusted floor on the primary budget balance of the central government met by a significant margin.
  - Expenditure on priority social spending and domestic arrears clearance was well above targeted levels.
  - Floor on the stock of international reserves was met.
  - Floor on payments to the PRGT was met.
  - Newly contracted nonconcessional external debt stayed within the ceiling.
- Structural benchmarks met:
  - Cabinet approved the Public Debt Management Bill.
  - Board of the Zimbabwe Asset Management Corporation (Pvt.) Limited (ZAMCO) approved its mandate, strategy, and objectives.
- Other meaningful reforms:
  - ZAMCO operationalized.
  - Amendments to the indigenization and empowerment law progressed.
  - Progress in modernizing mining legislation; amended Mines and Minerals Act (including fiscal regime) expected to be submitted to the Attorney General by end-March and to Parliament in the third quarter of 2015.
  - Commitment to continue publishing audited financial statements of the Zimbabwe Mining Development Corporation.

### Reengagement with Creditors
- Authorities stepped up reengagement with creditors:
  - Increased payments to the World Bank (WB) and the African Development Bank (AfDB).
  - These payments are part of a roadmap toward seeking rescheduling of bilateral official debt under the Paris Club umbrella.
- Authorities plan to intensify efforts to build consensus among creditors and development partners on addressing external arrears.

### Macroeconomic Outlook and Risks
- Outlook for 2015:
  - Growth expected to weaken further in 2015; late and erratic rains could affect agriculture.
  - Subdued recovery in mining and manufacturing projected, supported by improved mining techniques and efforts to increase value added and by improved water and power supply following government investment.
  - Inflation projected to remain in negative territory in 2015.
  - Ongoing financial sector reforms expected to spur deposit and credit growth.
  - External position expected to continue improving due to further fiscal tightening and lower oil prices; international reserves projected to increase.
  - Country will remain in debt distress until a comprehensive arrears clearance strategy is in place.
- Key risks:
  - Further declines in global commodity prices for main mineral exports—gold, platinum, and diamonds—would negatively impact fiscal and external accounts.
  - Fiscal challenges and possible difficulties in policy implementation.
  - Lower oil prices could dampen fiscal revenue but could benefit the external position and domestic demand.

### Fiscal Policy and Structural Measures
- Fiscal consolidation remains critical to rebuild reserves and restore repayment capacity.
- Authorities committed to bringing the primary fiscal deficit (cash basis) close to balance in 2015 while protecting priority social spending and gradually reducing domestic arrears.
- Employment cost measures:
  - Steps to keep employment costs below budgeted amounts for 2015 after significant wage-bill savings in 2014.
  - Near-term measures include a hiring freeze, freezing promotions, and eliminating redundancies.
  - No plans to raise wages and salaries in 2015.
  - Ministry of Finance and Economic Development (MoFED) and Ministry of Labour and Social Welfare mandated to explore medium-term public sector reform options; a strategy paper is to be submitted to cabinet by the second review (structural benchmark).
- Revenue mobilization:
  - Excise duties raised on fuel, beer, and cigarettes; levy on tobacco growers increased.
  - Strengthening revenue administration with Fund TA and stepped-up collection of outstanding tax arrears.
  - Expected revenue gains from additional measures amount to about 1 percent of GDP, with most gains materializing in the second half of the year.
  - If revenue measures underperform, shortfalls will be offset by cuts in lower-priority current and capital spending.

*April 17, 2015 — Executive Summary of IMF staff report on Zimbabwe*

### 14.      Further strengthening of the public financial management system (PFM) would

### _cr15105 - 14.      Further strengthening of the public financial management system (PFM) would

### Further strengthening of PFM
- PFM reform strategy under Fund TA aims to improve budget preparation and execution, and strengthen expenditure control (¶7, LOI).
- Amendments to the Public Finance Management Act (PFMA) are being drafted to improve the public procurement framework, with World Bank assistance (¶8, LOI).
- Authorities have embarked on restructuring 10 parastatals to help alleviate fiscal costs; external audits of the parastatals have started and will inform restructuring exercises (¶9, LOI).

### Restoring confidence and financial stability
- Recapitalization of the RBZ is well underway:
  - The MoFED provided the RBZ with $100 million (0.7 percent of GDP) in securities for its recapitalization (footnote 8).
  - At end-December 2014, some $311 million (2.3 percent of GDP) in government securities was issued for the takeover of RBZ noncore debt (footnote 8).
- The MoFED has started to assume RBZ noncore debt related to previous quasi-fiscal activities following the central government’s decision to assume these debts (¶15).
- Actions taken have reduced risks to the financial system:
  - RBZ placed three troubled banks into liquidation, producing a marked decline in nonperforming loans (NPLs).
  - RBZ continued close monitoring of the remaining two troubled banks and planned to rid the system of all distressed banks by end-June 2015 (¶15).
- AML/CFT improvements resulted in FATF removing Zimbabwe from the list of countries subject to FATF monitoring in February 2015 (¶15, LOI).
- ZAMCO operationalization measures:
  - RBZ has taken measures, with Fund TA, to make ZAMCO operational in line with international best practices (¶16, LOI).
  - ZAMCO is tasked to acquire and resolve NPLs from banks on commercial terms to free the banking system from high NPL burdens (¶16).
  - Complementary measures: establishment of a credit registry unit in the RBZ and collaboration with the World Bank to set up credit reference bureaus (¶13, LOI).
- Legislative reforms:
  - Authorities plan to submit amendments to the Banking Act to parliament by mid-2015 (structural benchmark for the second review, ¶14, LOI).

### Resolving external payments arrears
- Large external debt burden and outstanding arrears restrict access to financing and constrain growth (¶18).
- New loans contracted in December 2014:
  - A concessional $3 million loan for micro-, small- and medium-sized enterprises.
  - A $50 million non-concessional loan for essential equipment to fight wildlife poaching and support the tourism sector (¶18, LOI).
- Authorities guaranteed two commercial facilities:
  - $100 million in December 2014.
  - $13 million in February 2015; both for purchases of mining equipment (¶18, LOI).
- Policy on borrowing:
  - Authorities reiterated commitment to contract or guarantee loans on concessional terms and only opt for nonconcessional loans in absence of grants or concessional loans (¶19, LOI).
  - Nonconcessional loans will be contracted or guaranteed for critical growth-enhancing projects that can enhance capacity to repay (¶19, LOI).
  - For large projects, authorities commit to consult reputable and independent institutions, such as the WB or AfDB before signing loan agreements (¶19, LOI).
  - Authorities exploring financing options for construction and rehabilitation of schools, and considering guarantees for expansion of fiber optics networks and power generation; plan to request feasibility assessments from AfDB (¶19, LOI).
- Reengagement and support:
  - Authorities proposed a roadmap for debt resolution with multilateral institutions and the Paris Club and are exploring options for arrear clearance with IFIs (¶20, LOI).
  - AfDB approved a $103 million grant for infrastructure development and institutional strengthening (¶20, LOI).
  - The World Bank and development partners established the Zimbabwe Reconstruction Fund expected to raise $100 million to support ZIM ASSET implementation (¶20, LOI; footnote description).
  - The European Union lifted its 12 year suspension of direct financial aid and provided a five-year support toward health, agriculture and governance initiatives starting in 2015; private sector access to lines of credit from the European Investment Bank also facilitated (¶20, LOI).
- Payments and engagement with IFIs:
  - Authorities met the Bank’s pari passu requirement and plan to engage the Bank on options for arrear clearance (¶21, LOI).
  - Began making pari passu payments to the AfDB in March 2015 and token payments to the EIB (¶21, LOI).
  - Continue monthly payments of $150,000 to the PRGT and committed to increase repayments to IFIs as capacity to pay improves, consistent with their roadmap (¶21, LOI).

### Unlocking potential for sustained growth
- Zimbabwe is performing below growth potential; timely and full implementation of ZIM ASSET could accelerate growth substantially (¶22).
- Key constraints: macroeconomic vulnerabilities, infrastructure gap, poor business climate, property rights and longstanding land-related issues (¶22).
- Business climate reforms and investor confidence:
  - January 2015 amendment to the Indigenisation and Economic Empowerment (IEE) Act assigns new roles to line ministries to approve indigenization plans, issue compliance certificates, and monitor implementation; line ministries required to define and publish parameters for their respective sectors (¶23, LOI).
  - Authorities plan to publish a simplified summary of the law on the Zimbabwe Investment Authority’s website (structural benchmark for the third review) (¶23, LOI).
  - Review of the 1985 Labour Relations Act to promote labor market flexibility and enhance productivity; cabinet approved principles for amending the Act and amendments to be submitted to cabinet for approval by end-December (structural benchmark for the third review) (¶24, LOI).
  - An inter-ministerial committee was established to identify, recommend, implement and monitor reforms to improve the business climate (¶24, LOI).

### Program design and monitoring
- SMP monitoring will continue using quantitative targets and structural benchmarks (Tables 1 and 3, LOI) (¶24).
- Authorities proposed modifications to quarterly quantitative targets:
  - Proposed floor on the primary balance accommodates lower revenue and expenditure projections consistent with weaker 2015 growth outlook.
  - Targets for the floor on the primary balance for end-June and the indicative target for end-September were lowered to account for expected timing of additional revenue measures.
  - Floor on the stock of reserves adjusted to account for weaker-than-programmed fiscal performance and larger current account deficit.
- Structural benchmarks remain focused on fiscal transparency and accountability, enhancing PFM, restoring financial system confidence, and improving business climate (¶24, LOI).

### Staff appraisal — Achievements
- Initiation of reforms that could raise growth prospects through financial sector confidence restoration and business climate improvements (¶25).
- Reversal in adverse external trends: lower accumulation of external arrears, slightly higher external reserve coverage, and lower external current account deficit (¶25).
- Fiscal discipline maintained with initial steps toward rebalancing spending away from a too high wage bill (¶25).
- EU decision not to renew economic sanctions and to resume program support noted as a positive signal from development partners (¶25).

### Staff appraisal — Challenges
- Growth slowdown amid rising competitive pressures, insufficient external inflows, and declining mineral export prices (¶26).
- Country remains in debt distress; need to improve business environment and foreign investor perceptions to attract investment (¶26).
- Tight fiscal budgetary position limits resources for rehabilitating infrastructure; restoring access to finance from multilateral and bilateral creditors is necessary to improve growth prospects (¶26).

### Staff appraisal — Creditor relations
- Staff welcomes authorities’ decision to raise payments to the WB and AfDB; this opened a constructive dialogue to identify options for clearing arrears and is a key step toward Paris Club rescheduling (¶27).
- Continued strong performance under the SMP is necessary to demonstrate improved capacity to repay and reform implementation that could justify a financial arrangement with the Fund (¶27).
- Authorities should proactively engage creditors and keep them apprised of reform progress while addressing areas of concern that may delay reengagement (¶27).

### Staff appraisal — Fiscal policy recommendations
- Continue progress toward bringing primary fiscal accounts close to balance in 2015; objective is ambitious but within reach given authorities’ commitment to reduce lower-priority spending if revenues fall short (¶28).
- Staff welcomes efforts to tackle the wage bill and keep employment costs below 2015 budgetary projections; any larger-than-expected savings should be devolved to capital and social spending (¶28).
- Medium-term objective: reform the civil service to curb wage costs and improve service delivery and accountability (¶28).
- Continue implementing agreed measures on tax and customs administration; ongoing PFM reform should reduce costs, ensure efficiency in service delivery, and raise transparency in public resource use (¶28).

### Staff appraisal — Financial sector recommendations
- Progress has been substantial: decisive actions against troubled banks and June 2015 deadline for two remaining undercapitalized banks to comply (¶29).
- Achieved significantly lower NPLs; ZAMCO operating according to best practices can further reduce NPL burden and improve confidence and credit extension to the private sector (¶29).
- Sound financial system requires a strong supervisor; staff welcomes RBZ recapitalization progress (¶29).
- FATF removal of Zimbabwe from list of countries subject to enhanced monitoring due to AML/CFT improvements is a significant accomplishment that should aid reintegration into the international financial community (¶29).

### Staff appraisal — Investment climate recommendations
- Amendments to indigenization law can help attract foreign investment; authorities should inform potential investors of changes and reassure that property rights will be fully respected (¶30).
- Publishing a guide summarizing the law to reduce discretion and uncertainty is a positive step (¶30).
- Modifying the Labour Relations Act should reduce labor market rigidities and contribute to a better investment climate (¶30).

### Staff appraisal — Balance of risks
- Continued program implementation is instrumental for successful reengagement with creditors, which could lead to debt rescheduling and resumption of official financing flows; under this favorable scenario growth prospects would rise dramatically (¶31).
- If policy slippages prevent progress toward reengagement, economic issues would remain unattended and prospects unchanged; benefits from successful engagement outweigh costs of possible slippages (¶31).

*Source: IMF staff report content (as provided in the supplied document).*

### 32.      External Loans and Repayments to the IFIs: Staff welcomes the authorities’ intention to

### 32.      External Loans and Repayments to the IFIs: Staff welcomes the authorities’ intention to continue seeking financing through grants or loans that are as concessional as possible, and to

### External financing intention and IFI repayments
- Authorities intend to continue seeking financing through grants or loans that are as concessional as possible.
- Authorities intend to limit contracting nonconcessional loans to within the ceilings set under the program.
- Authorities intend to prioritize investments that would eventually raise Zimbabwe’s capacity to repay.
- Authorities intend to raise payments to all the IFIs as their capacity to repay improves.

### Banking system indicators (as of December 2014)
- Composition of banking sector deposits (percent of total): Long-Term (>30 days) 19%, Savings 13%, Demand Deposits (< 30 days) 49%, Short-Term 19%.
- Composition of private sector credit (percent of total, as of December 2014): Distribution & Transport 16%, Agriculture 18%, Manufacturing 25%, Construction 1%, Trade & Services 2%, Individuals 22%, Energy & Minerals 5%, Other 11%.
- Deposits remain predominantly short-term.
- Liquid assets (percent of total deposits) time series plotted (09-Q1 through Q4-2014); labels shown: Total liquid assets; Liquid assets after provisioning for claims on RBZ.
- Distribution of liquidity ratios (number of banks, as of December 2014): <30%: 9 banks; 30>40%: 4 banks; 40>50%: 3 banks; >50%: 4 banks.
- Note: "Liquidity risks remain... as 9 out of 20 operating financial institutions face tight liquidity."
- Definition note 1/: The ratio of liquid assets to short-term liabilities. Liquid assets are defined as cash, claims on nonresident banks, interbank claims, and clearing balances at the RBZ. Illiquid claims on the RBZ are excluded. Short-term liabilities comprise all deposits, interbank liabilities, and liabilities to nonresidents. The prudential liquidity ratio was increased from 25% in March 2012 to 30% in June 2012.

### Banking system performance and soundness (December 2009–December 2014 highlights)
- Regulatory capital to risk-weighted assets: regulatory minimum 12 percent (minimum increased from 10 percent to 12 percent in August 2012).
- Distribution of bank capital (number of banks, as of December 2014): <$20 mn, $20 > $25 mn., > $25 mn. (categories shown for Merchant banks, Building societies, Commercial banks).
- Observation: "Banking system capital has improved, but remains very low... due to a number of weak small banks."
- Nonperforming Loans to Total Loans (in percent): series indicates high NPLs throughout period; label 3/: Nonperforming loans of commercial banks.
- Return on Equity (percent): time series shows negative and low ROE across period.
- Note 1/: Illiquid claims on the RBZ count toward capital. The minimum capital ratio was increased from 10 percent to 12 percent in August 2012.
- Note 2/: Excludes the Post Office Saving Bank. As of December 2013, minimum capital requirements are $25 million for commercial banks and merchant banks, and $20 million for building societies.
- Source: Reserve Bank of Zimbabwe.

### Program scenario—macroeconomic outlook and risks (2010–2015 series and narrative)
- Commodity prices: Gold exports unit value (US$/kg), Platinum exports unit value (US dollar per troy ounce), Tobacco exports unit value shown for 2010–2015 series; narrative: "The prices of Zimbabwe's main exports are expected to stabilize at comfortable levels..."
- GDP growth contributions (2010–2015): contributions by Other sectors, Manufacturing, Transport and communication, Mining and quarrying, Agriculture, hunting, and fishing; narrative: "...but growth in 2015 is projected to be weak, led by mining and key infrastructure projects."
- Fiscal revenues (percent of GDP, 2010–2015): Direct taxes, Indirect taxes, Non-tax revenue — narrative: "As fiscal revenues are projected to stabilize at about 27 percent of GDP..."
- Fiscal expenditures (percent of GDP, 2010–2015): Employment costs, Goods and services, Other current expenditure, Capital expenditure & net lending — narrative: "...employment costs need to be contained, to make space for high-priority capital and social spending."
- Fiscal cash balance and international reserves (2010–2015 series): Cash balance (LHS), International reserves (RHS) — narrative: "An improved fiscal position will allow for the rebuilding of external reserves..."
- External debt and current account (percent of GDP, 2010–2015 series) — narrative: "...but the large current account deficit will persist and total external debt will remain unsustainable. 1/"

### Selected economic indicators (Table 1, 2011–15 highlights)
- Population (millions): 13.1 (2013)
- Per capita GDP: US$ 1028 (2013)
- Quota (current, SDR millions, % of total): 353.4 (0.15%)
- Literacy rate (%): 96 (2011)
- Main products and exports: Tobacco, platinum, gold, diamonds
- Key export markets: South Africa, Mozambique, United Arab Emirates
- Real GDP growth (annual percentage change, 2011–2015): 11.9, 10.6, 4.5, 3.1, 3.2, 2.8 (Program / Est. / Proj. columns as presented)
- Nominal GDP (US$ millions, 2011–2015): 10,956; 12,472; 13,490; 14,012; 13,673; 13,973
- GDP deflator (annual percentage change): 3.7; 3.0; 3.5; 0.8; -1.8; -0.6
- Consumer price inflation (annual average): 3.5; 3.7; 1.6; 0.0; -0.2; -1.0
- Consumer price inflation (end-of-period): 4.9; 2.9; 0.3; 0.4; -0.8; -0.5
- Central government (percent of GDP): Revenue and grants 26.7; 28.0; 27.7; 28.0; 27.6; 27.9
- Expenditure and net lending (percent of GDP): 29.0; 29.3; 30.2; 30.6; 29.3; 29.4
- Of which: employment costs (incl. grants & transfers) (percent of GDP): 16.7; 20.1; 20.5; 22.9; 22.2; 23.4
- Overall balance (commitment basis, percent of GDP): -2.4; -1.3; -2.5; -2.6; -1.7; -1.5
- Overall balance (cash basis, percent of GDP): -0.5; -0.6; -2.1; -0.7; -1.0; -0.7
- Primary balance (cash basis, percent of GDP): -0.2; -0.4; -1.9; -1.0; -0.7; -0.1
- Broad money (M3, US$ millions): 3,100; 3,694; 3,888; 4,215; 4,378; 4,676
- Net foreign assets (US$ millions): -290; -435; -809; -565; -725; -749
- Reserve money (US$ millions): 186; 273; 272; 450; 464; 495
- Merchandise exports (US$ millions): 4,421; 3,808; 3,694; 3,728; 3,590; 3,627
- Merchandise imports (US$ millions): -7,562; -6,710; -6,809; -6,538; -6,306; -6,195
- Current account balance (excluding official transfers, US$ millions): -3,383; -3,062; -3,432; -3,024; -3,034; -2,858
- Current account balance (percent of GDP): -30.9; -24.6; -25.4; -21.6; -22.2; -20.5
- Gross international reserves (US$ millions): 366; 398; 284; 304; 303; 337
- Months of imports (of goods and services): 0.5; 0.6; 0.4; 0.5; 0.5; 0.6
- Public and publicly guaranteed external debt (US$ millions, e.o.p.): 6,268; 6,709; 7,013; 7,249; 7,181; 7,607
- Percent of GDP (PPG external debt): 57.2; 53.8; 52.0; 51.7; 52.5; 54.4
- Of which: Arrears (US$ millions): 5,101; 5,313; 5,607; 5,761; 5,760; 5,903
- Percent of GDP (arrears): 46.6; 42.6; 41.6; 41.1; 42.1; 42.2
- Notes: 1/ Adjusted programmed primary balance is 1 percent of GDP, compared with an estimated outturn of 0.7 percent of GDP. The floor was adjusted by the full amount of domestic borrowing ($77 million) for clearance of domestic arrears. 2/ At constant 2009 prices. 3/ For 2014, the authorities project average inflation of 0.8 percent. 4/ Includes errors and omissions through 2012. 5/ Includes arrears. 6/ Debt stocks are estimates, except for the 2011-13 debt stock which are based on preliminary results of the authorities' external debt reconciliation exercise initiated in 2013.

### Balance of payments (Table 2, 2011–15 highlights)
- Current account (excluding official transfers, US$ millions): -3,383; -3,062; -3,432; -3,024; -3,034; -2,858
- Trade balance (US$ millions): -3,141; -2,902; -3,115; -2,810; -2,717; -2,568
- Exports, f.o.b. (US$ millions): 4,421; 3,808; 3,694; 3,728; 3,590; 3,627
- Imports, f.o.b. (US$ millions): -7,562; -6,710; -6,809; -6,538; -6,306; -6,195
- Nonfactor services (net, US$ millions): -759; -866; -919; -937; -863; -871
- Investment income (net, US$ millions): -1,021; -973; -1,034; -1,058; -1,116; -1,118
- Current transfers (net, US$ millions): 1,538; 1,679; 1,635; 1,781; 1,663; 1,699
- Remittances (US$ millions): 570; 646; 764; 891; 837; 873
- Capital account (including official transfers, US$ millions): 2,008; 1,772; 2,900; 2,585; 2,894; 2,748
- Official transfers (US$ millions): 346; 738; 251; 256; 368; 342
- Direct investment (US$ millions): 373; 351; 390; 346; 368; 399
- Long-term capital (US$ millions): 654; 431; 1,092; 1,193; 1,150; 1,126
- Short-term capital (US$ millions): 625; 543; 927; 670; 759; 681
- Change in NFA of DMBs (US$ millions): 85; 178; 264; -111; 63; 62
- Errors and omissions (US$ millions): 1,523; 1,104; 127; 0; 99; 0
- Overall balance (US$ millions): 148; -186; -405; -439; -40; -110
- Memorandum items:
  - Gross international reserves (US$ millions, e.o.p.): 366; 398; 284; 304; 303; 337
  - Months of imports of goods and services: 0.5; 0.6; 0.4; 0.5; 0.5; 0.6
  - Total external debt (US$ millions, e.o.p.): 8,231; 9,134; 11,116; 13,137; 13,093; 14,951
  - Total external debt (percent of GDP): 75; 73; 82; 94; 96; 107
  - Other external debt (US$ millions, e.o.p.): 1,964; 2,425; 4,103; 5,889; 5,912; 7,344
  - Other external debt (percent of GDP): 18; 19; 30; 42; 43; 53
- Notes: 1/ May not match data for government external financing in the fiscal table because this line is on an accrual basis. 2/ Large errors and omissions (past data) and unidentified financing (future projections) are likely generated by under-recording of exports, remittances, and FDI. 3/ Debt stocks are estimates, except for the 2011 debt stock which is based on preliminary results of the authorities' external debt reconciliation exercise concluded in January 2013. 4/ Excludes amounts in SDR escrow account. 5/ Includes arrears.

### Central government operations (Table 3, 2011–15 highlights)
- Total revenue & on-budget grants (US$ millions): 2,921; 3,496; 3,741; 3,928; 3,770; 3,990; 3,900 (Program/Est./Budget/Projected columns as presented)
- Tax revenue (US$ millions): 2,660; 3,279; 3,414; 3,608; 3,519; 3,763; 3,747
- Personal income tax (US$ millions): 588; 661; 744; 929; 900; 835; 855
- Corporate income tax (US$ millions): 296; 445; 404; 417; 365; 448; 380
- VAT (US$ millions): 912; 1,086; 1,068; 968; 972; 1,051; 1,045
- Total expenditure & net lending (US$ millions): 3,181; 3,656; 4,075; 4,290; 4,007; 4,179; 4,104
- Cash expenditure (US$ millions): 2,974; 3,568; 4,027; 4,030; 3,912; 4,065; 3,993
- Employment costs (US$ millions): 1,544; 2,134; 2,344; 2,728; 2,583; 2,798; 2,778
- Wages & salaries (US$ millions): 1,269; 1,732; 1,926; 2,251; 2,106; 2,320; 2,300
- Interest payments (US$ millions): 113; 115; 126; 147; 145; 188; 183
  - Foreign interest (US$ millions): 113; 112; 120; 121; 118; 129; 124
  - Of which: Paid (US$ millions): 34; 18; 17; 15; 17; 14; 14
- Capital expenditure and net lending (US$ millions): 551; 355; 483; 484; 370; 340; 342
- Overall balance (commitment basis, US$ millions): -260; -160; -334; -361; -237; -189; -203
- Primary balance (commitment basis, US$ millions): -147; -45; -208; -214; -92; -1; -20
- Overall balance (cash basis, US$ millions): -53; -72; -286; -102; -142; -75; -93
- Financing (US$ millions): 260; 160; 322; 361; 237; 189; 203
- Domestic financing (net, US$ millions): -251; 327; 0; 178; 197; 72; 160
- Bank financing (US$ millions): 449; 198; 175; 304; 318; 40
- Foreign financing (net, US$ millions): -486; -127; -255; -151; -168; -134
- Disbursements (US$ millions): 78; 0; 72; 80; 108
- Amortization due (US$ millions): 127; 102; 199; 234; 151; 178; 142
- Change in arrears (US$ millions, – denotes decrease): 33; 314; 179; 439; 192; 80; 177
- Change in domestic arrears (US$ millions): 128; -6; -55; 154; -6; -159; 0
- Change in foreign arrears (US$ millions): 205; 147; 233; 285; 198; 239; 177
- Notes: 1/ Adjusters to primary balance target in TMU of SMP; adjusted programmed primary balance is 1.0 percent of GDP, compared with estimated outturn of 0.7 percent. The floor was adjusted by the full amount of domestic borrowing ($77 million) for clearance of domestic arrears. 2/ The difference between the primary balance on a commitment and cash basis is the change in domestic arrears.

### Central government operations (percent of GDP, 2011–15 highlights)
- Total revenue & on-budget grants (percent of GDP): 26.7; 28.0; 27.7; 28.0; 27.6; 28.6; 27.9
- Total expenditure & net lending (percent of GDP): 29.0; 29.3; 30.2; 30.6; 29.3; 29.9; 29.4
- Employment costs (percent of GDP): 14.1; 17.1; 17.4; 19.5; 18.9; 20.0; 19.9
- Overall balance (commitment basis, percent of GDP): -2.4; -1.3; -2.5; -2.6; -1.7; -1.4; -1.5
- Primary balance (commitment basis, percent of GDP): -1.3; -0.4; -1.5; -1.5; -0.7; 0.0; -0.1
- Financing (percent of GDP): 2.4; 1.3; 2.4; 2.6; 1.7; 1.4; 1.5
- Change in arrears (percent of GDP): 3.0; 1.1; 1.3; 3.1; 1.4; 0.6; 1.3
- Interest (percent of GDP): 0.7; 0.8; 0.8; 0.8; 0.7; 0.8; 0.8
- Principal (percent of GDP): 1.2; 0.4; 1.0; 1.3; 0.7; 0.9; 0.5

### Monetary survey (Table 4, 2011–15 highlights)
- Monetary authorities net foreign assets (US$ millions): -734; -700; -810; -677; -663; -625
- Monetary base (US$ millions): 186; 273; 272; 450; 464; 495
- Banks' current/RTGS accounts (US$ millions): 102; 273; 272; 450; 463; 495
- Deposit money banks: Net foreign assets (US$ millions): 443; 266; 111; 2; -62; -124
- Net domestic assets (deposit money banks, US$ millions): 2,657; 3,428; 3,886; 4,102; 4,438; 4,799
- Claims on private sector (deposit money banks, US$ millions): 2,710; 3,520; 3,615; 3,495; 3,762; 3,971
- Broad money liabilities (M3, US$ millions): 3,100; 3,694; 3,888; 4,215; 4,377; 4,676
- Monetary survey net foreign assets (US$ millions): -290; -435; -809; -565; -725; -749
- Monetary survey net domestic assets (US$ millions): 3,390; 4,129; 4,697; 4,779; 5,103; 5,424
- Domestic claims (US$ millions): 2,754; 3,559; 3,993; 4,106; 4,321; 4,502
- Deposits included in broad money (US$ millions): 3,100; 3,694; 3,888; 4,215; 4,377; 4,675
- Memorandum items:
  - Loan-to-deposit ratio (in percent): 87; 95; 93; 83; 86; 85
  - Reserves-to-deposit ratio (in percent): 6; 77; 11; 11; 11; 11
- Sources: Zimbabwean authorities; IMF staff estimates and projections.

*IMF staff report excerpt (content unit: _cr15105 - 32).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Policies for the Remainder of the Year
- The programme remains on track; Government requests approval to complete the first review under the 15-month SMP and to modify quantitative targets for 2015.
- Macroeconomic conditions described:
  - Growth: "Growth continues to slow down" due to low business and investment confidence, scarce liquidity, and a substantial decline in international prices for major exports; "Risks are tilted to the downside."
  - External position: "precarious" with low international reserves, a large current account deficit and growing external arrears; financing of the current account deficit mainly through short- and long-term loans to the private sector which "has continued to access international credit and has remained current on its payments."
  - Inflation: "continues to be quite low" reflecting depreciation of the South Africa rand and weak domestic demand.
- Policy priorities:
  - Improve growth prospects and capacity to repay.
  - Lower the wage bill and protect priority social spending.
  - Carefully monitor external borrowing and "step-up our efforts to mobilize international support for clearing our external arrears."
  - Progress in structural reforms to improve business climate, boost productivity and competitiveness, and restore financial sector confidence.

### A. Fiscal Policy
- Target: "bring the central government primary account close to balance in 2015"; offset revenue shortfalls through cuts in lower priority current and capital spending while protecting priority social spending.
- Revenue measures and administration reforms:
  - Increased excise duties on fuel, cigarettes and beer, and the levy on tobacco growers.
  - Efforts to collect tax arrears and strengthen revenue administration with partner support (World Bank and AFRITAC South).
  - Planned measures: (i) develop an incentive system for small and medium businesses to remain formal; (ii) strengthen mechanism for monitoring and evaluating the tax expenditure regime; (iii) enhance revenue forecasting capacity of ZIMRA and MoFED. Technical assistance will be requested.
- Mining sector fiscal regime:
  - Review completed; a fiscal model presented to stakeholders.
  - Draft amendments to the Mines and Minerals Act (MMA) and new fiscal regime to be submitted to Cabinet after stakeholder consultations; regulations supporting implementation underway.
  - Temporary suspension of collection of the special dividend on diamond sales due to drop in production and adverse price developments.
- Wage bill and payroll controls:
  - Kept overall wage bill below 2014 budget projections; intend to lower it as a share of GDP in 2015.
  - Measures to reduce the wage bill to be presented to Cabinet.
  - Civil Service Commission conducting restructuring; decentralization and modernization of the Salary Service Bureau expected by end-2015, placing a payroll assistant in every district.
  - Develop a medium term strategy to bring the wage bill to a level that creates sufficient room for development spending.
- Public financial management and procurement:
  - Public Finance Management Act amendments: principles approved by Cabinet on March 3, 2015; to be forwarded to the Attorney General’s office for drafting.
  - Stakeholder consultations on public procurement held in February 2015; implementation road map targets a new procurement bill enacted by end December 2015.
- Parastatals restructuring:
  - Identified 10 state-owned enterprises for restructuring; performance audits underway to prepare restructuring strategies.
  - Continue to publish audited financial statements of the Zimbabwe Mining Development Corporation.

### B. Restoring Confidence in the Financial Sector
- Key actions taken:
  - "In December 2014, the MoFED issued Government securities to the Reserve Bank of Zimbabwe (RBZ) for its recapitalization."
  - RBZ Debt Assumption Bill is being discussed in Parliament; validation and reconciliation of debt ongoing; medium-term securities being issued to cover valid debts following Government decision to assume these debts.
- Non-performing loans (NPLs):
  - NPLs declined from "20.4 percent at the end of September 2014" to "15.4 percent at the end of December 2014."
  - RBZ placed three troubled banks into liquidation; continues to work with remaining two distressed banks to resolve positions "by the end of June 2015."
- ZAMCO mandate and operations:
  - ZAMCO tasked to acquire and resolve NPLs on commercial terms; mandate, strategy and specific objectives developed; Board appointed.
  - Draft operational guidelines and manuals prepared; corporate governance strategy being defined.
  - Will develop draft principles of the ZAMCO Bill (structural benchmark).
  - ZAMCO to be provided with long-term government securities; will explore private investor funding and establish a sinking fund with proceeds of NPL sales to help meet debt servicing obligations for Government bonds.
- Credit information and supervision:
  - Established a credit registry unit in the RBZ to coordinate credit information; collaborating with the World Bank to set up credit reference bureaus.
  - Amendments to the Banking Act aimed at strengthening problem bank resolution, corporate governance, risk management and compliance: to be submitted to Parliament "by June 2015" after Cabinet approval; expected outcomes include reduced systemic risks and facilitation of licensing and regulation of private credit reference bureaus.
- Interbank liquidity and AML/CFT:
  - Afreximbank-guaranteed interbank liquidity facility is operational to augment inter-market trade and unlock the interbank market via securities (Aftrades).
  - FATF has acknowledged progress on AML/CFT; "Zimbabwe has been removed from the FATF monitored list."
- Demonetization:
  - Steps to demonetize Zimbabwe dollar (Z$) balances: "All Zimbabwe dollar balances as at December 31, 2008 (excluding loan accounts) will be compensated using the United Nations exchange rate." Government will publicize the modus operandi.

### C. Addressing Zimbabwe’s Substantial Debt Burden
- Debt and arrears strategy:
  - Without a strategy to clear outstanding arrears, Zimbabwe cannot reach growth potential or debt sustainability.
  - Increased payments to the World Bank "in line with its pari passu requirement" and to the African Development Bank (AfDB); started to pay the European Investment Bank.
  - Commitment to increase payments to IFIs as payment capacity improves and to reengage with all creditors to garner support for bilateral debt resolution.
  - Plan to meet with bilateral creditors on the sidelines of the Spring Meetings; the European Union has lifted some sanctions and resumed development assistance.
- Reserve and servicing policy:
  - During the remainder of the SMP, current SDR holdings will be treated as "our core international reserves."
  - Will "avoid selective debt servicing to bilateral creditors" but will continue repayments to creditors providing "positive net new financing."
- Recent loan and guarantee transactions (last quarter of 2014 and February 2015):
  - Concessional loan of "US$3 million" to finance micro, small and medium enterprises.
  - Non-concessional loan of "US$50 million" for essential equipment to fight wildlife poaching and enhance tourism activities.
  - Guaranteed two loans:
    - a commercial facility of "US$100 million" to finance purchase of equipment for small-scale miners;
    - in February 2015, a "US$13 million" non-concessional loan for purchase of coal mining equipment.
- Policy on contracting and guarantees:
  - Continue best efforts to contract or guarantee concessional loans; resort to non-concessional loans only if grants and concessional financing are not available, "subject to the limits proposed in Table 1," and for critical growth-enhancing projects that can improve capacity to repay.
  - For large projects, commit to consult with reputable and independent institutions such as the WB or AfDB before signing loan agreements.
  - Current projects under consideration:
    - Feasibility studies for construction and rehabilitation of schools amounting to "US$18 million."
    - Considering guaranteeing two facilities: (a) "US$98 million" for fibre optic expansion; and (b) "US$939 million" for expansion of power generation in Hwange.
- Institutional debt management:
  - Public Debt Management Bill approved by Cabinet and will soon be submitted to Parliament; passage will statutorily establish the debt management office within MoFED and outline legal and institutional framework for debt management operations.

### D. Other Structural Reforms
- Indigenisation and Economic Empowerment Act:
  - Government committed to provide policy clarity and consistency to improve business climate and attract capital.
  - In January 2015 published an amendment to the Act in the Government gazzette; negotiations, approvals and certification now executed by respective line ministries.
  - By the third review, will produce a guide on the Indigenisation and Economic Empowerment Law (structural benchmark) and publish it on the Zimbabwe Investment Authority website.
- Labour law reforms:
  - Labour Relations Act (dating to 1985) under review to modernize and align with international standards; principles for amendment approved by Cabinet and amendments being prepared for submission to Cabinet (structural benchmark).
  - Reform aim: improve labour productivity and facilitate economic growth in line with ZIM ASSET.
- Job creation and competitiveness:
  - ZIM ASSET's overarching goal is job creation and equal opportunities; priority to invigorate domestic industry and improve competitiveness.

### Programme Monitoring
- SMP monitoring:
  - SMP to be monitored through quantitative targets and structural benchmarks; updated quantitative targets in Table 1 and structural benchmarks in Table 3 (note: tables referenced in the LOI).
  - Review schedule: semi-annual; end-June 2015 and end-December 2015 will be test dates for quantitative targets.
  - Technical definitions and reporting requirements specified in the attached Technical Memorandum of Understanding (TMU, Attachment 1).
- Programme governance:
  - Political-level monitoring coordinated by the Office of the President and Cabinet via monthly meetings.
  - Technical monitoring committee comprises officials from the Ministry of Finance and Economic Development, the Reserve Bank of Zimbabwe, the Zimbabwe National Statistics Agency, and the Zimbabwe Revenue Authority; committee meets regularly.

*April 17, 2015. Letter signed by Patrick A. Chinamasa, Minister of Finance & Economic Development, Government of Zimbabwe; and John P. Mangudya, Governor, Reserve Bank of Zimbabwe.*

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

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

### Quantitative targets and outturns (selected table entries)
- Floor on primary budget balance of the central government:
  - 3,4
  - -60
  - -10
  - -142
  - -103
  - -20
  - Adjusted floor
  - -137
  - -98
  - Met
- Floor on protected social spending:
  - 60
  - 95
  - Met
  - 15
  - 35
  - 57
  - 72
- Floor on stock of net international reserves:
  - 172
  - 178
  - Met
  - 177
  - 189
  - 219
  - 214
- Floor on payments to the PRGT:
  - 1.80
  - 1.95
  - Met
  - 0.45
  - 0.90
  - 1.35
  - 1.80
- Continuous ceiling on the stock of new non-concessional external debt contracted or guaranteed by the general government with original maturity of one year or more:
  - 400
  - 369
  - Met
  - 400
  - 400
  - 400
  - 400
- Memorandum Items: Ceiling on total stock of arrears to domestic service providers, agricultural input suppliers, and on capital certificates:
  - 312
  - 235
  - 304
  - 341
  - 317
  - 235
  - 2015
  - 1
  - 2014
  - 1
  - 1
  - Value of cumulative flows for the calendar year, unless otherwise indicated.

### Key clarifications on the primary balance target
- The primary budget balance of the central government is measured on a cash basis and defined as revenues and grants minus non-interest expenditures.
- The central government primary balance will be measured from above the line using budget execution data.
- Adjusters for the primary balance floor:
  - The floor on the cumulative primary budget balance in any quarter and subsequent quarters will be adjusted downwards by the full amount of any new borrowing disbursed and utilized by central government for priority infrastructure projects.
  - The floor on the cumulative primary budget balance in any quarter and subsequent quarters will be adjusted downwards by the full amount of any domestic debt issued by central government ring-fenced for clearance of domestic payment arrears.
  - For end-December 2014, the adjusted floor reflects $76 million borrowed to clear domestic arrears.

### Protected social spending (definition)
- Protected social spending is measured on a cash basis and comprises central government spending in:
  - education (recurrent spending on teaching and learning materials, on student stipend support from the National Education and Training Fund; and capital spending on upgrading of schools and other facilities);
  - health (recurrent spending on government hospitals and health centres, on grant-aided institutions such as Parirenyatwa Hospital, mission hospitals, and local authorities, on maternal and child health, on results-based financing, on preventive health programmes, on procurement of ARVs and TB drugs; and capital spending on revitalization of health institutions, on medical equipment, and on procurement of ambulances and service vehicles);
  - social protection (recurrent spending on the Basic Education Assistance Module (BEAM), on the harmonized cash transfer, on health assistance, on rehabilitation of disabled persons, on government social protection institutions; and capital spending on refurbishment of rehabilitation centres);
  - water and sanitation (capital spending on water and sewer infrastructure for local authorities, on water supply infrastructure for small towns and growth points, and on water and sanitation for rural areas);
  - agriculture (recurrent spending on animal diseases and risk management, and capital spending on irrigation rehabilitation and development and on input support for disadvantaged households);
  - other (capital spending on construction and rehabilitation of rural roads).

### Net official international reserves (NIR) — definition and valuation
- NIR are defined as the difference between the RBZ’s liquid, convertible gross official foreign reserve assets and its short-term official foreign reserve liabilities.
- For the purpose of the programme, SDR-denominated accounts will be valued at the programme exchange rate of US$ 1.52 per SDR.
- Gross official reserve assets of the RBZ include:
  - Zimbabwe’s SDR holdings (excluding SDRs allocated under the Fourth Amendment of the IMF's Articles of agreement and placed in escrow account at the IMF (SDR 66.4 million));
  - refined gold;
  - balances with foreign banks;
  - foreign treasury bills, securities and investments, and foreign currency held by the Reserve Bank of Zimbabwe;
  - Zimbabwe’s reserve position in the Fund.
- Pledged or otherwise encumbered assets, including but not limited to, assets used as collateral or as guarantee for third-party external liabilities are excluded.
- Short-term official reserve liabilities include:
  - outstanding credit from the IMF;
  - short-term foreign currency liabilities to non-residents with maturity of up to and including one year.
- Official foreign liabilities used to calculate the NIR do not include long-term liabilities such as SDR allocations.

### Ceiling on new non-concessional external debt — definitions and criteria
- “Debt” follows the Guidelines on Performance Criteria with Respect to External Debt (Decision No. 6230-(79/140) as revised on August 31, 2009 (Decision No. 14416-(09/91))).
- Debt is defined as concessional if, at the time of contracting, PV/face value < 65 percent (equivalent to a grant element of at least 35 percent).
- The PV of debt at contracting is calculated by discounting the future stream of debt-service payments at a discount rate of 5 percent.
- New non-concessional debt will be contracted or guaranteed only as financing for critical growth-enhancing projects consistent with ZIM ASSET sectors. Large projects (above $100 million) will be assessed in consultation with a reputable and independent financial institution prior to signing.

---

### Structural benchmarks (selected entries and status)
- Benchmarks are to be completed by the earlier of: (i) the time of the relevant review; or (ii) end-December 2015, the end of the SMP.
- Debt Management:
  - 1. Approval of the Public Debt Management Bill by Cabinet. Rationale: Enhance public debt management. Review: 1st. Status: Met.
- Financial Sector:
  - 2. Approval of the mandate, strategy, and specific objectives of ZAMCO by the RBZ Executive Committee/Board. Rationale: Address the problem of NPLs and strengthen banks’ balance sheet. Review: 1st. Status: Met.
- Table 3. Zimbabwe: Structural Benchmarks 2015 (selected):
  - Tax Policy:
    - 1. Submit to Cabinet a report with MoFED’s recommendations on reforms to the fiscal regime for the mining sector. Rationale: Enhance tax administration and improve revenue collection. Review: 2nd.
  - Public Financial Management:
    - 2. Submit to Cabinet a strategy paper on reducing the wage bill. Rationale: To manage the wage bill to allocate more resources towards the capital budget. Review: 2nd.
    - 3. Submit to Cabinet amendments to the Public Finance Management Act to strengthen Treasury’s financial oversight of SOEs and local authorities. Rationale: Enhance public expenditure and financial management. Review: 3rd.
    - 4. Submit to Cabinet amendments to the Procurement Act to tighten the public procurement framework and make it more efficient and transparent. Rationale: Strengthen governance and accountability. Review: 3rd.
  - Financial Sector (additional):
    - 5. Develop the operational framework for ZAMCO, specifying legal/governance structure, asset valuation and transfer pricing strategy, and feasible funding strategy. Rationale: Address NPLs and strengthen banks’ balance sheet. Review: 2nd.
    - 6. Develop draft principles of the ZAMCO Bill for submission to Cabinet. Rationale: Strengthen the mandate of ZAMCO. Review: 3rd.
    - 7. Submit to Parliament the amendments to the Reserve Bank of Zimbabwe Act. Rationale: Strengthen legal and regulatory framework and reduce financial sector vulnerability. Review: 2nd.
    - 8. Submit to Parliament the amendments to the Banking Act. Rationale: Strengthen legal and regulatory framework and reduce financial sector vulnerability. Review: 2nd.
  - Investment Climate:
    - 9. Produce a guide on the Indigenisation and Economic Empowerment Law for publication on the ZIA website. Rationale: Increase transparency and boost investor confidence. Review: 3rd.
    - 10. Submit to Cabinet amendments to the Labour Relations Act. Rationale: Improve the business climate by promoting labour market flexibility, as well as enhancing productivity and competitiveness. Review: 3rd.

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### Definitions of institutional units and fiscal concepts (selected)
- Central government: single institutional unit consolidating all accounts whose total revenues and expenditures are authorized through the Blue Book (including line ministries, the Parliament of Zimbabwe, the Auditor General’s Office, and Vote of Credit). Excludes public entities with autonomous legal personae whose own budgets are not included in the central government budget.
- General government: central government, the Reserve Bank of Zimbabwe (RBZ), extra-budgetary funds, social security, and local governments.
- Public sector: general government and all state-owned enterprises.
- Non-interest expenditures: measured on a cash basis; include current expenditures (wages and salaries, pensions, goods and services, grants and transfers), capital expenditures, and net lending. Net lending comprises loans granted by the central government, except on-lending of externally borrowed funds (which is included as a negative domestic financing item).
- Domestic arrears: overdue domestic payment obligations of the central government to domestic service providers, agricultural input suppliers, and on capital certificates; payments for goods and services are in arrears if not made within 90 days after invoice receipt; for contractors executing capital projects, arrears measured after the invoice date.

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### Data reporting requirements (selected modalities and lags)
- Monetary and financial sector (reporting institution and frequency examples):
  - NIR, NFA, monetary control programme — RBZ, Weekly, 1 week.
  - Broad money survey — RBZ, Monthly, 2 months.
  - RTGS transactions — RBZ, Monthly, 1 month.
  - Prudential liquid asset ratios — RBZ, Monthly, 1 month.
  - Balance sheets and income statements for financial institutions — RBZ, Quarterly, 2 months.
- External sector:
  - RBZ purchases and sales of foreign currency — RBZ, Monthly, 1 month.
  - Balance of payments — RBZ/ZIMSTAT, Quarterly, 3 months.
  - Net international reserves (incl. reserve assets/liabilities by currency) — RBZ, Monthly, 1 week.
  - Detailed terms and conditions of all new contracted and government-guaranteed external borrowing; and committed undisbursed balances — MoFED, Monthly, 1 month.
- Fiscal sector:
  - Central government operations – revenue, expenditure, and financing — MoFED, Monthly, 1 month.
  - Total stock of arrears to domestic service providers, agricultural input suppliers, and on capital certificates at end-month — MoFED, Monthly, 1 month.
  - Detailed data on the execution of the recurrent budget (by economic and administrative classification and by line ministry) — MoFED, Monthly, 1 month.
  - Detailed data on the budget execution of protected social spending (as defined in this document) — MoFED, Quarterly, 1 month.
- Structural benchmarks:
  - Update on the status of implementation of the structural benchmarks specified in Table 3 of the LOI — MoFED/RBZ, Quarterly, 3 weeks.

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### Adjusters (summary)
- The quantitative target on the primary budget balance is subject to explicit downward adjusters:
  - Full amount of any new borrowing disbursed and utilized by central government for priority infrastructure projects.
  - Full amount of any domestic debt issued by central government ring-fenced for clearance of domestic payment arrears.

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### IMF Press Release highlights (Press Release No. 15/175, April 21, 2015)
- On April 8, 2015, the Management of the International Monetary Fund (IMF) completed the first review under the Staff-Monitored Program (SMP) with Zimbabwe.
- The 15-month SMP approved in October 2014 constitutes the lynchpin of the authorities’ roadmap for building a strong track record towards normalizing the relationship with Zimbabwe’s creditors and mobilizing development partners’ support.
- Main objective of the programme: strengthen Zimbabwe’s external position as a prerequisite towards arrears clearance, normalization of debt servicing, and restoring access to external financing.
- Key policy priorities for 2015:
  - reducing the primary fiscal deficit to raise Zimbabwe’s capacity to repay;
  - restoring confidence in the financial system;
  - improving the business climate;
  - garnering support for an arrears clearance strategy.
- Economic outlook and risks:
  - Zimbabwe’s economic prospects remain difficult. Growth has slowed and is expected to weaken further in 2015.
  - Despite the favorable impact of lower oil prices, the external position remains precarious and the country is in debt distress.
  - Key risks: further decline in global commodity prices, fiscal challenges, and possible difficulties in policy implementation.
- Progress and engagement:
  - Authorities have made progress on clarifying indigenization policy, restoring confidence and improving financial sector soundness, and strengthening public financial management.
  - Authorities stepped up reengagement with creditors, including by increasing payments to the World Bank and the African Development Bank.
  - IMF staff will continue to support Zimbabwe’s economic reforms, monitor progress, and provide targeted technical assistance.

*Source: IMF staff report and Technical Memorandum of Understanding (SMP documentation).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15105.pdf_