Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Zimbabwe
IMF News, May 6, 2009
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- Published: May 6, 2009
Background: economic collapse and humanitarian crisis
- Real GDP is estimated to have fallen by about 14 percent in 2008 (on top of a 40 percent cumulative decline during the period of 2000–07).
- Poverty and unemployment rose to catastrophic levels, with 70 percent of the population in need of food assistance and a cholera epidemic claiming more than 4,000 lives.
- Quasi-fiscal activities undertaken by the Reserve Bank of Zimbabwe (RBZ) are estimated at US$1.1 billion (36 percent of GDP) in 2008 and included election-related expenses, transfers to parastatals, subsidized directed lending, subsidized provision of equipment and fertilizers to farmers, and allocation of foreign exchange at subsidized exchange rates.
- Financing for these activities included monetization, surrender requirements on export proceeds, retention of foreign exchange earnings of the gold and agricultural sectors in excess of mandatory surrender requirements, a freeze of most foreign currency deposits, external borrowing, and purchases of foreign exchange at parallel market exchange rates.
- Key governance weaknesses at the RBZ included lack of enforcement of the RBZ Act’s accountability requirements and noncompliance with the International Financial Reporting Standards.
- Central government budget outcomes:
- Budget revenue fell from almost US$1 billion (25 percent of GDP) in 2005 to US$133 million (4 percent of GDP) in 2008.
- Expenditure shrank from about US$1.4 billion (37 percent of GDP) in 2005 to US$258 million (8 percent of GDP) in 2008, causing near collapse in public services (electricity generation, water supply, railway services).
- Hyperinflation and financial system contraction:
- Twelve-month CPI inflation is estimated to have peaked in September 2008 at almost 500 billion (109) percent.
- Since October–November 2008 the local currency has virtually disappeared from circulation and dollarization gained momentum.
- Banking system deposits declined from almost US$1 billion at end-2005 to about US$300 million (of which local currency-denominated deposits amounted to an equivalent of US$6 million) at end-2008.
- Transition to multi-currency system:
- De facto dollarization was recognized by the official transition to use of hard currencies and adoption of the rand as the reference currency in early 2009.
- Under this system: transactions in hard currencies are authorized, payments of most taxes are mandatory in foreign exchange, trading at the Zimbabwe Stock Exchange is conducted in foreign exchange, and many foreign exchange restrictions on current account transactions are liberalized.
- During January–February 2009, the CPI in U.S. dollar terms experienced a decline.
- Short-term macroeconomic outlook is uncertain; the Short-Term Emergency Recovery Program (STERP) and the revised 2009 budget contain commitments that could support a private sector-led recovery if fully implemented and supported by donor assistance, but significant downside risks arise from potential policy reversals.
Executive Board assessment and policy recommendations
- Overall judgment:
- Directors deemed Zimbabwe at a critical juncture after a decade of high inflation, severe economic decline, and rising poverty culminating in an acute humanitarian crisis.
- Directors welcomed efforts by the government of national unity to pursue ambitious reforms and forge political consensus.
- Endorsement of STERP principles:
- Directors welcomed the Short-Term Emergency Recovery Program (STERP) as based on sound principles of macroeconomic management.
- Essential STERP commitments highlighted: establish fiscal discipline, eliminate quasi-fiscal activities, maintain a multi-currency monetary framework, and accelerate structural reforms.
- Directors cautioned that downside risks were significant, including potential political instability and limited implementation capacity that could undermine reforms and donor support.
- Fiscal policy and public finances:
- Directors underscored importance of establishing fiscal discipline while ensuring delivery of essential public services.
- Encouraged improvements in tax administration and review of the tax regime to increase budget revenues.
- Emphasized maintaining the budgeted wage bill and resisting spending pressures from parastatals to finance nonessential activities to preserve resources for social needs and infrastructure.
- Called for rapid progress in strengthening the public financial management system.
- Given a sizable unfilled financing gap and necessity to cover humanitarian expenses, Directors encouraged intensifying efforts to establish workable budget aid delivery mechanisms in close cooperation with donors.
- Noted that Zimbabwe is in debt distress and large financing gaps would persist over the medium term even if policies improved.
- Monetary and central bank governance:
- Directors supported the authorities’ decision to anchor inflation expectations by introducing a multi-currency system with the rand as the reference currency.
- Emphasized urgent need for significant strengthening of governance and transparency at the Reserve Bank of Zimbabwe, including an independent audit, to enhance credibility and durability of recent macroeconomic policies.
- Concurred that reintroduction of the national currency should await a credible institutional framework focused on price stability.
- Banking system and payments:
- Directors noted banking system issues need to be addressed to improve payment services and access to credit.
- Payments system, banking supervision, and liquidity management must be attuned to requirements of the multi-currency framework.
- Structural and external confidence factors:
- Revival depends critically on attracting private domestic and foreign investors and improving competitiveness.
- Essential policy environment elements: protection of property rights, maintenance of the rule of law, avoidance of protectionism, and prudent wage and income policies.
- Sustained liberalization of prices and current account exchange restrictions needed.
- Importance of improving quality and timeliness of data stressed.
- Role of Fund and donors:
- A track record of sound policy implementation, supported by targeted technical assistance (including statistics) from the Fund and other international financial institutions, is critical to secure donor financial support and regularize arrears to official creditors.
Key economic indicators (Zimbabwe: Selected Economic Indicators, 2007–09)
- Real GDP growth (annual percent change):
- 2007: -6.9
- 2008: -14.1
- 2009 (Proj.): 2.8
- Nominal GDP (US$ millions):
- 2007: 3,553
- 2008: 3,180
- 2009 (Proj.): 3,498
- Inflation (annual percent change):
- Consumer price inflation (annual average) 1/:
- 2007: 10,452.6
- 2008: 556*108
- 2009 (Proj.): 6.9
- Consumer price inflation (end-of-period) 2/:
- 2007: 108,844.1
- 2008: 489*109
- 2009 (Proj.): ...
- Central government (percent of GDP, measured in US$):
- Revenue:
- 2007: 5.7
- 2008: 4.2
- 2009 (Proj.): 25.2
- Expenditure and net lending:
- 2007: 10.8
- 2008: 8.1
- 2009 (Proj.): 35.7
- Quasi-fiscal activity by RBZ:
- 2007: 22.9
- 2008: 0.0
- 2009 (Proj.): (blank)
- Primary balance (including quasi-fiscal activity):
- 2007: -24.5
- 2008: -35.2
- 2009 (Proj.): -5.9
- Overall balance (including quasi-fiscal activity):
- 2007: -28.0
- 2008: -39.6
- 2009 (Proj.): -10.5
- Money and credit (US$ millions) 3/:
- Broad money (M3):
- 2007: 603.1
- 2008: 313.9
- 2009 (Proj.): 513.0
- Net foreign assets:
- 2007: 61.0
- 2008: -707.0
- 2009 (Proj.): -650.7
- Net domestic assets:
- 2007: 542.1
- 2008: 1,020.9
- 2009 (Proj.): 1,163.7
- Reserve money:
- 2007: 51.7
- 2008: 6.8
- 2009 (Proj.): 58.1
- Velocity (M3):
- 2007: 5.9
- 2008: 10.1
- 2009 (Proj.): (blank)
- External trade (US$ millions; annual percent change):
- Merchandise exports:
- 2007: 4.8
- 2008: -8.5
- 2009 (Proj.): -8.1
- Merchandise imports:
- 2007: -3.8
- 2008: 24.4
- 2009 (Proj.): 0.4
- Balance of payments (US$ millions; unless otherwise indicated):
- (Row entries in table show)
- 2007: 1,804
- 2008: 1,651
- 2009 (Proj.): 1,518
- 2007: -2,113
- 2008: -2,630
- 2009 (Proj.): -2,641
- Current account balance (excluding official transfers):
- 2007: -383
- 2008: -906
- 2009 (Proj.): -666
- (Percent of GDP):
- 2007: -11
- 2008: -28
- 2009 (Proj.): -19
- Overall balance:
- 2007: -647
- 2008: -612
- 2009 (Proj.): -1,090
- Official reserves:
- Gross official reserves (US$ millions; end-of-period):
- 2007: 58.0
- 2008: 5.8
- 2009 (Proj.): (blank)
- Gross official reserves (months of imports of goods and services):
- 2007: 0.3
- 2008: 0.2
- 2009 (Proj.): (blank)
- Debt:
- Total external debt (US$ millions; end-of-period) 4/:
- 2007: 5,285
- 2008: 6,027
- 2009 (Proj.): 6,719
- Total external debt (percent of GDP; end-of-period) 4/:
- 2007: 149
- 2008: 189
- 2009 (Proj.): 192
Notes from the table:
- Sources: Zimbabwean authorities; IMF staff estimates and projections.
- 1/ For 2008, annual average January–September 2008.
- 2/ For 2008, inflation at end-September 2008.
- 3/ Zimbabwe dollar values converted into U.S. dollars at the UN exchange rates at end-2007 and end-2008.
- 4/ Including arrears and estimated interest charges on arrears.
Public Information Notice (PIN) No. 09/53; On May 4, 2009 the Executive Board concluded the Article IV consultation with Zimbabwe.