Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with Zimbabwe
IMF News, May 25, 2010
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- Published: May 25, 2010
Background and recent developments
- Real gross domestic product (GDP) is estimated to have grown by about 4 percent in 2009, following a contraction of about 14 percent in 2008.
- Strong growth was reported in manufacturing and services.
- The officially reported 12-month consumer price index (CPI) in U.S. dollar terms declined by about 8 percent in December 2009.
- Humanitarian situation improvements:
- Most schools and hospitals have been re-opened.
- Food security improved owing to good rainfall and positive effects of better policies in 2009.
- Incidence of cholera has declined.
- Donor support in 2009: about US$540 million, or 12 percent of GDP, provided as off-budget financing for social services and humanitarian assistance.
- Fiscal and public financial management:
- Government broadly adhered to cash budgeting in 2009.
- Budget revenue and grants increased to an estimated 22 percent of GDP (US$975 million) in 2009, from less than 4 percent of GDP during hyperinflation in 2008—mainly on account of indirect taxes.
- Improved revenue performance partly attributable to tax policy and administration measures (1.3 percent of GDP) implemented following IMF technical assistance advice.
- Budgetary cash expenditures were 21 percent of GDP (US$920 million) in 2009, with employment costs absorbing 53 percent of revenue.
- Capital expenditures accounted for 1 percent of GDP; many social programs remained underfunded.
- Public financial management system strengthened with World Bank assistance.
- Financial intermediation and banking:
- Multi-currency regime helped promote financial intermediation.
- Deposits with banks tripled between end-March and end-December 2009.
- Banks’ loan portfolios grew six-fold (from a very low base).
- Strong credit growth supported recovery but contributed to a widening current account deficit and rising banking system vulnerabilities.
- Reserve Bank of Zimbabwe (RBZ) governance and quasi-fiscal activity:
- Serious governance problems remained at RBZ: weak accounting and internal controls; no approved budget for RBZ operations in 2009.
- RBZ quasi-fiscal activities amounted to 0.5 percent of GDP in 2009; substantial resources used for debt repayments to selected creditors; arrears on operating expenses increased significantly in 2009.
- Appointment of an RBZ Board on May 3, 2010 noted as a step toward resolving governance issues and refocusing RBZ on core functions under the multi-currency regime.
- External position:
- Current account deficit estimated to have widened to 30 percent of GDP in 2009, from 24 percent in 2008.
- External debt estimated at US$7.1 billion (162 percent of GDP) by end-2009, driven by new payment arrears, interest and penalty charges on existing arrears, and new private sector short-term borrowing.
- Volatile short-term capital inflows and external payment arrears financed the current account deficit.
- Outlook and risks for 2010:
- Highly uncertain outlook for 2010.
- Large budgetary wage increases crowding out growth-oriented expenditures.
- Potential significant slowdown in private capital inflows due to increased uncertainties about the indigenization process.
- Strong credit growth intensifying external and banking system vulnerabilities.
- Without timely corrective policy measures, economic growth could slow significantly in 2010 and banking system risks could continue to rise.
Executive Board assessment and policy recommendations
- General assessment:
- Executive Directors welcomed recent improvement in macroeconomic performance and humanitarian conditions following a decade of economic decline and high inflation.
- To solidify gains and reduce external and financial vulnerabilities, decisive policy measures by the authorities are critical.
- Fiscal policy and public spending:
- Main fiscal challenge: create sufficient space for social and developmental expenditure.
- Strong encouragement to return to cash budgeting, and to reduce the wage bill and other low-priority expenditures.
- Directors welcomed the significant improvement in revenue performance and emphasized that additional revenue measures would be necessary.
- Urged authorities to refrain from further use of nonconcessional special drawing rights (SDR)-related funds for budget financing and to save Zimbabwe’s SDR holdings as part of the country’s international reserves.
- Banking sector, RBZ governance, and supervision:
- Expressed concern about increasing systemic vulnerabilities in the banking system.
- Addressing RBZ governance weaknesses is crucial for banking system stability.
- Welcomed appointment of the RBZ governing Board to oversee strengthening RBZ governance and implementation of downsizing and restructuring.
- Called for stepping up prudential supervision to contain credit and liquidity risks.
- Cautioned against moral suasion on banks to lend to specific sectors.
- Monetary regime and currency:
- Considered that the multi-currency system would serve Zimbabwe well in the coming years.
- Agreed that the Zimbabwe dollar can be reintroduced as sole legal tender only after a track record of sound policies is established and a central bank governance framework with a focus on price stability is adopted.
- Structural reforms and business climate:
- Welcomed authorities’ intentions to improve the business climate.
- Emphasized importance of enforcing property rights and maintaining the rule of law, ensuring security of land tenure, and increasing flexibility of the labor market, in particular with respect to wage levels.
- Sustained progress in these areas essential for improving competitiveness, boosting private sector investment, and increasing growth potential.
- Debt, cooperation, and Fund engagement:
- Directors agreed that Zimbabwe is in debt distress.
- Sound policies and good governance will be critical to pave the way for eventual debt relief and access to donor financing.
- Strong encouragement for authorities to improve cooperation with the Fund on policies and payments.
- Most Directors supported continuation of Fund technical assistance in targeted areas.
- Many Directors viewed a Staff Monitored Program (SMP) as potentially helpful to establish a track record of sound policies; some Directors stressed authorities must demonstrate clear progress in economic policies and data reporting before an SMP could be considered.
- Data and statistics:
- Noted significant deficiencies in the quality and timeliness of data reporting, largely explained by capacity constraints.
- Underscored the need for rapidly improving macroeconomic statistics with Fund technical assistance.
Key statistics and selected economic indicators (2008–10)
- Real GDP growth (annual percent change) 1/:
- 2008: -14.5
- 2009: 4.0
- 2010: 2.2
- Nominal GDP (US$ millions):
- 2008: 3,929
- 2009: 4,397
- 2010: 5,144
- GDP deflator (annual percent change) 1/:
- 2008: -1.3
- 2009: 7.6
- 2010: 14.4
- Inflation (annual percent change) — Consumer price inflation (annual average) 2/:
- 2008: 556 x 108
- 2009: 6.5
- 2010: 5.0
- Central government (percent of GDP, measured in US$) — Revenue and grants:
- 2008: 3.4
- 2009: 22.2
- 2010: 26.1
- Central government — Expenditure and net lending:
- 2008: 25.0
- 2009: 33.7
- 2010: (not shown separately)
- Central government — Of which: cash expenditure and net lending:
- 2008: 3.1
- 2009: 20.9
- 2010: 30.7
- Quasi-fiscal activity by RBZ:
- 2008: 28.9
- 2009: 0.5
- 2010: 0.0
- Overall balance (including quasi-fiscal activity):
- 2008: -32.1
- 2009: -3.3
- 2010: -7.6
- Primary balance (including quasi-fiscal activity):
- 2008: -28.5
- 2009: 0.1
- 2010: -4.4
- Cash balance:
- 2008: 0.3
- 2009: 1.2
- 2010: -4.5
- Money and credit (US$ millions) 3/ — Broad money (M3):
- 2008: 314
- 2009: 1,276
- 2010: 1,511
- Net foreign assets:
- 2008: -314
- 2009: -256
- 2010: -647
- Net domestic assets:
- 2008: 628
- 2009: 1,531
- 2010: 2,158
- Domestic credit:
- 2008: 140
- 2009: 602
- 2010: 1,048
- Reserve money:
- 2008: 7
- 2009: 125
- 2010: 145
- Velocity (M3):
- 2008: 12.5
- External trade (US$ millions; annual percent change) — Merchandise exports:
- 2008: -9.3
- 2009: -0.5
- 2010: 28.2
- Merchandise imports:
- 2008: 24.4
- 2009: 22.9
- 2010: 7.7
- Balance of payments (US$ millions; unless otherwise indicated):
- Exports and imports totals: 1,633 (2008), 1,625 (2009), 2,083 (2010)
- Current account balance (excluding official transfers):
- 2008: -945
- 2009: -1,323
- 2010: -1,183
- (percent of GDP): 2008: -24.0; 2009: -30.1; 2010: -23.0
- Overall balance:
- 2008: -624
- 2009: 29
- 2010: -725
- Official reserves 4/ — Gross official reserves (US$ millions; end-of-period):
- 2008: 6
- 2009: 312
- 2010: 114
- Gross official reserves (months of imports of goods and services):
- 2008: 1.0
- Debt — Total external debt (US$ millions; end-of-period) 5/:
- 2008: 5,794
- 2009: 7,145
- 2010: 7,662
- (percent of GDP): 2008: 147.5; 2009: 162.5; 2010: 149.0
- Total external arrears:
- 2008: 3,781
- 2009: 4,575
- 2010: 5,132
- (percent of GDP): 2008: 96.2; 2009: 104.0; 2010: 99.8
Public Information Notice (PIN) No. 10/62 — May 17, 2010. Executive Board concluded Article IV consultation with Zimbabwe.