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The following item is a Memorandum of Economic Policies of the government of Zimbabwe which describes the policies that Zimbabwe intends to implement in the context of its request for financial support from the IMF. It is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Harare, July 16, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

1.  Despite the implementation of tight demand management policies, Zimbabwe has continued to experience acute balance of payments pressures. In response, we have formulated, and are now executing, a strengthened stabilization programme, the major elements of which are described in the attached "Memorandum on the Economic Policies of the Government of Zimbabwe for 1999."

2.  We are seeking assistance from the Fund in support of our programme in order to provide a strong framework for policy implementation and to establish a bridge to an arrangement under the Enhanced Structural Adjustment Facility (ESAF). However, because of delays that have occurred in finalizing programme discussions with your staff, the first review under the Stand-By Arrangement, which expired on June 30, 1999, could not be completed as scheduled. We are, therefore, requesting a new 14-month Stand-By Arrangement, for the equivalent of SDR 141.36 million (40 percent of quota).

3.  We believe that the policies and measures described in the attached memorandum are adequate to achieve the objectives of the programme. We stand ready to take whatever additional measures may be necessary to keep the programme on track. We will consult with the Fund on the adoption of any measures that may be appropriate in accordance with the policies of the Fund on such consultations. There will be four programme reviews, which are to be completed no later than November 14, 1999, February 14, 2000, May 14, 2000, and August 14, 2000, respectively. The Government of Zimbabwe will provide the Fund with any information that may be requested for the purpose of monitoring progress under the programme.

Sincerely yours,

Herbert Murerwa, M.P.
Minister of Finance

Memorandum on the Economic Policies of the Government of Zimbabwe for 1999

1.  Background and recent performance

  • The budget deficit for the 18-month period ended December 1998 was cut to 6.4 percent of GDP, or 1.1 percentage points of GDP below target. Despite this, however, inflation increased in 1998 to 46.6 percent from 20.1 percent in 1997, and the currency lost half of its external value. Inflation rose further to 53 percent in May 1999. Highly depressed export demand, a shortfall in foreign assistance, and speculation against the Zimbabwe dollar contributed to these developments.

2.  Objectives of economic programme and policy strategy for 1999

  • The immediate goals of the programme are to restore confidence, bring inflation under control, stabilize the exchange rate, and rebuild international reserves.

  • The macroeconomic objectives for 1999 are the following:

      --   real GDP growth of 1.2 percent.
      --   a sharp reduction in inflation to 30 percent by the end of the year; and
      --   an external current account deficit of 6.3 percent of GDP, which, together with additional external financing, should allow gross reserves to increase to 1.6 months of imports by the end of the year.

  • Money will continue to be used as the nominal anchor, and monetary growth will be cut to 10 percent in 1999. Interest rates and the exchange rate will be allowed to adjust freely in order to meet the programme's monetary and international reserve targets.

  • Fiscal restraint will help to further bolster confidence, contain aggregate demand, and maintain a competitive exchange rate while easing upward pressure on interest rates.

3.  Fiscal policy

  • A tight fiscal stance will be maintained in 1999, and the budget deficit will be targeted at 5.3 percent of GDP, which is equivalent to a primary surplus of 3.2 percent of GDP.

  • The 1999 budget takes into account increases in income tax thresholds and a widening of tax bands, removal of the development levy, and suspension of a temporary surcharge of 2 percent on the regular sales tax. On the other hand, excise duties have been raised and withholding taxes on capital gains introduced.

  • The civil service pay award for 1999, including a midyear supplementary, has been limited to 42 percent. By accelerating the retrenchment program, the government will contain the wage bill to under 12 percent of GDP in 1999.

  • To alleviate the impact of rising food prices, social safety net measures are being expanded through a loan programme for the purchase of maize in the poorest rural areas. In addition, the budget includes an appropriation for the purchase of land for the purpose of resettlement.

  • Legislation to establish the National Revenue Authority has been drafted and was approved by Cabinet at the end of March 1999 and presented to Parliament in May 1999.

  • Preparations for the introduction of a value-added tax (VAT) are proceeding. Extensive consultations with the private sector are about to commence with a view to adoption of the tax by 2001.

4.  Military spending

  • The DRC is covering the bulk of the cost of our military involvement in the DRC, which includes fuel, transport, and ammunition. The outlays borne directly by Zimbabwe's budget were limited to US$1.3 million per month in 1998, or 0.4 percent of GDP at an annual rate. Because of the deployment of additional troops, outlays for the DRC campaign will rise to US$3 million per month in 1999, or 0.6 percent of GDP.

  • As in 1998, any excess spending over appropriation for 1999 will be met through enforced savings in the military budget on outlays, such as housing and capital expenditure. The unallocated contingency reserve will not be used for this purpose.

5.  Monetary policy and the banking system

  • The monetary targets will be met by open market operations, including use of the repo market. Reduced reliance will be placed on reserve requirements.

  • A major source of liquidity expansion in 1998 was support extended by the Reserve Bank to a few financial institutions experiencing difficulties. Strengthening the financial system will be necessary to reduce monetary growth.

  • Minimum capital adequacy requirements were increased and new guidelines for loan classification and provisioning introduced in October 1998. Certain banks facing acute financial problems were issued corrective orders to comply with Basle Committee guidelines on minimum capital adequacy. In addition, on-site examinations of financial institutions are ongoing. At present, the problem faced by the few banks does not appear to be systemic, but timely action is required. If any of these banks are found to be insolvent, they will be restructured or closed; no public funds will be used other than for the provision of short-term collaterized liquidity support.

  • Guidelines will be drawn up to render procedures for dealing with troubled banks more speedy, transparent, and consistent across banks. The guidelines, which include use of a "CAMELS" rating system, will be implemented by end-September 1999.

  • New banking legislation, which empowers the Reserve Bank to supervise and regulate the banks, has been passed by parliament. The authorities are undertaking a study to review the legislation governing the operations of the building societies and the Post Office Savings Bank, with a view to rationalizing their activities.

6.  Maize-meal pricing policies

  • In June 1997, the government imposed controls on maize-meal prices in response to concerns about the adverse social impact of rapidly rising food prices. Retail prices were raised by 20 percent in June and a further 20 percent in July. An independent report sponsored by the World Bank on the marketing of basic foods will shortly be finalized and, unless it indicates the presence of widespread oligopolistic practices, the price controls on maize-meal will be removed by the end of the year. The government has no intention of imposing price controls on any other commodities.

7.  Land reform

  • In February 1999, the government publicly reaffirmed its intention to pursue the land reform strategy set out at the donors' conference in September 1998. The two-year inception phase of this strategy was endorsed by cabinet in April. The strategy will involve fully transparent procedures governing the acquisition and redistribution of land, the payment of fair compensation for land acquired, and immediate commencement of the inception phase that will focus on the resettlement of uncontested farms.

  • Implementation of land reform will be undertaken in close consultation with stakeholders and beneficiaries.

  • In view of the limited availability of domestically generated funds, the government is seeking donor support to help fund the land reform programme.

8.  Civil service reform

  • The process of restructuring the civil service will continue and the number of personnel will be cut from 163,986 at the end of 1998 to 149,600 at the end of 1999 (Table 2).

9.  Parastatals and privatization

  • The government has suspended top NOCZIM management, appointed a new management team, and initiated an audit, with a view to improving its operational efficiency. NOCZIM is presently breaking even on its operations, but it has made large losses over the past 18 months. On June 3, 1999 the prices of petrol and diesel were raised by 27 percent and 32 percent, respectively. Further price adjustments, to be reviewed on a quarterly basis, will be made to recoup these losses and to cover any increases in imported costs.

  • The government will increase electricity tariffs by 20 percent every quarter between April 1999 and June 2000. The government is not proceeding with the Hwange Power Plant Privatization and Extension Project in its initial form as articulated in the award letter of October 15, 1998. The project is currently under review with the aim of concluding arrangements with investors that are economically and financially sound for Zimbabwe.

  • The Government will strengthen the monitoring of public enterprises by

    (a)obtaining monthly financial returns from the eight largest enterprises, including outstanding domestic and external debt; and
    (b)Reporting the results of the monitoring effort in the monthly Treasury Bulletin.

  • The privatization and divestiture program will be accelerated, with a view to

    (a)attracting sufficient fiscal revenues to reduce the domestic debt to sustainable levels over a three-year period;
    (b)building market confidence'by sending a strong signal to the markets that the government is committed to a market economy;
    (c)promoting indigenisation and increasing share prices of the privatized companies by creating extra liquidity (through retiring treasury-bills); and
    (d)improving economic efficiency by attracting foreign direct investment which will bring in new technology and management skills.

  • The government will proceed with the sale of its interests in the enterprises indicated in Table 2. In doing so, it will rely on competitive public tendering and bidding procedures.

  • In contrast with previous policy, the commercialization of enterprises will not now be a prerequisite for their privatization.

  • In addition, a Broadcasting, Postal and Telecommunications Bill to prepare for the privatization of the telecommunications wing of PTC has been approved by cabinet and will be submitted to Parliament by September 1999. The postal wing will be commercialized. Timetables for the privatization of Air Zimbabwe, ZISCO, the National Railways of Zimbabwe, the Cold Storage Company, and the Forestry Commission will be developed by the time of the first programme review.

10.  External policies

  • The exchange rate will be determined by market forces, with the Reserve Bank intervening only to smooth out fluctuations and achieve its international reserve objectives.

  • The increase in import duties and surcharges announced in September 1998 will be fully reversed and corporate foreign currency accounts reintroduced in two stages. The first before August 11, 1999 (see Table 3) and the second before end-December 1999. Major tariff liberalization will be a primary focus of the forthcoming ESAF arrangement.

  • Forward cover contracts will be allowed to be opened once the balance of payments situation sufficiently improves.

  • Because of the extremely tight foreign exchange situation, arrears totaling US$32 million as of mid-May were incurred on external debt. The arrears to multilateral creditors (which amounted to about US$11 million) have been cleared and the remainder will be paid over a period of six months.

  • A Tariff Commission was established in April 1998 "to provide for the investigation of the effect of tariff changes and unfair trade practices in foreign trade and the provision of assistance or protection to local industry." A timetable of tariff reductions which takes into account the various trade agreements entered into (SADC, CBI, WTO, and COMESA) will be a primary focus of the ESAF arrangement, but the process of trade liberalization will begin early in 2000 once a review of tariffs has been completed. Details of tariffs changes will be established at the time of the first programme review.

  • An external financing gap of just over US$190 million is projected for 1999. This is expected to be filled by disbursements from the World Bank (US$100 million), the African Development Bank (ADB) (US$45 million), and the remainder from other multilateral and bilateral sources. A Consultative Group meeting to mobilize resources is planned for later in the year. Any additional assistance, other than that received to fund the land reform program, will be added to international reserves.

  • A legal framework for private participation in infrastructure (PPI) will be adopted by end-1999, and guidelines finalized on procedures and criteria for classifying potential projects (e.g. BOOT) by end-1999.

11.  Improving the quality of economic management

  • The government is taking a number of steps to improve the quality of its economic management policies.

  • Information was released to the Parliamentary Budgetary Committee in June 1999 detailing the cost of the DRC activities borne directly by the Zimbabwean budget.

  • A statement was issued in February 1999 clarifying government policy on land reform and reaffirming the principles agreed at the international donors' conference of September 1998.

  • Government procurement procedures and mechanisms are being reviewed and will be strengthened under new legislation that will be sent to Cabinet by the end of 1999.

  • The Central Tender Board will be converted into a semi-autonomous body during 1999 and its activities rendered more transparent and accountable.

  • A Commission of Inquiry to investigate serious abuse of the War Victims' Compensation Fund has completed its work, and culprits are now being prosecuted in court.

  • The government is intensifying enforcement of the Prevention of Corruption Act (1985), which provides stiff penalties for those convicted of corruptive practices. This legislation was invoked to close down a merchant bank in April 1998.

  • Extensive corruption has been uncovered in NOCZIM and its management removed. Appropriate legal action is being taken.

  • As from December 1998, data detailing government performance under its economic programme are being released quarterly to the public.

12.  Program monitoring

  • Financial performance criteria for the period until the end of 1999 are presented in Table 1 and structural performance criteria in Table 2.

  • There will be four program reviews to be completed not later than November 14, 1999, February 14, 2000, May 14, 2000, and August 14, 2000, respectively. The first review will focus on the implementation of guidelines for dealing with troubled banks and on an assessment of the viability of reopening forward-cover contracts. It will also examine progress in implementing civil service reforms, preparing for the introduction of a VAT, and moving ahead with trade liberalization. An updated examination of the financial position of the largest parastatals will also be undertaken at that time.

Table 1. Zimbabwe: Quantitative Performance Criteria
Under the 1999-2000 Stand-By Arrangement

1998 1999


Estimate Performance criteria

A. Quantitative performance criteria

(In millions of Zimbabwe dollars)

   Ceiling on net domestic financing of the
   central government budget, including
   receipts from asset sales 1/ 2/








   Ceiling on reserve money 3/






(In millions of U.S. dollars)

   Floor on net international reserves of the
   Reserve Bank of Zimbabwe 4/ 5/










   Ceiling on new nonconcessional external borrowing
   contracted or guaranteed by the public sector

   (one year or more maturity) 1/ 6/ 7/ 8/






   Ceiling on stock of short-term external borrowing
   by the public sector or guaranteed by the public

   sector (less than one year) 6/ 7/ 8/






   Ceiling on outstanding external payments arrears 9/






B. Adjusters for quantitative performance criteria

(In millions of Zimbabwe dollars)

   Net external financing of the government budget 1/






   Reduction in the reserve money ceiling for each
   1 percentage point reduction in the statutory

   required reserve ratio for deposit money banks






(In millions of U.S. dollars)

   Cash and commodity balance of payments support 1/






1/ Cumulative from January 1, 1999.
2/ To be adjusted downward (or upward) by the excess (or shortfall) of net external (cash and commodity) financing of the central government budget (loans and grants), excluding funds to finance land reform, as shown in section B. For 1999, the cumulative upward adjustment will not exceed Z$1,260 million at end-September and Z$1,750 million at end-December.
3/ For the purposes of program monitoring, reserve money from end-September 1999 onward will be measured on the basis of the average of the stock at the end of each week over the previous quarters.
Reserve money is defined to exclude the Reserve Bank's foreign currency liabilities to residents. For each reduction of one percentage point in the minimum required reserve ratio for deposit money banks, the reserve money target will be lowered by the amount indicated in Section B.
Reserve money is defined to exclude the Reserve Bank's foreign currency liabilities to residents.
4/ Includes external payments arrears as a liability. To be adjusted upward (or downward) to the extent that cash and commodity balance of payments support, excluding funds to finance land reform, at the end of the same quarter exceeds (or falls short of ) the programmed amounts shown in section B. In 1999, the cumulative downward adjustment will not exceed US$35 million at end-September and US$50 million at end-December.
5/ Gold valued at full market price for December 1998. For 1999, gold valued at market price as of end-February 1999; foreign currency assets and liabilities valued at bilateral U.S. dollar exchange rates as of end-February 1999.
6/ Public sector consists of the Reserve Bank, central government, and local authorities.
7/ Excluding normal import-related credits.
8/ Includes domestic borrowing in foreign currency.
9/ The nonaccumulation of new external arrears is also a continuous performance criterion.

Table 2. Zimbabwe: Structural Performance Criteria
Under the 1999-2000 Stand-By Arrangement

Action Test Dates


Lifting of import restrictions and liberalization of foreign currency accounts (as indicated in Table 3)

August 11, 1999


Issuance to public of guidelines to deal with troubled banks 1/

End-September 1999


Removal of all remaining import restrictions imposed in September 1998

End-December 1999


Maize-meal to be sold at a controlled retail price no lower than Z$393 per 50 kilo bag

End-September 1999


Cap on size of civil service 2/


End-September 1999


End-December 1999


Sale of government shares in or liquidation of enterprises as specified:


The sale of 30 percent of ZIMRE shares held by the government; the sale of all subsidiaries in the Zimbabwe Development Corporation and its dissolution; and the sale of the Zimbabwe State Trading Corporation; and liquidation of the Central Purchasing Authority

End-September 1999


The sale of all remaining government holdings in Hwange Colliery

End-December 1999

1/ The guidelines will be based on the "CAMELS" rating system.

2/ Quarterly average of end-month data. Excludes military, police, and prison personnel, as well as personnel of the following self-financing funds: the Central Mechanical Equipment Department, Printing and Stationary, National Park Service, and Medical Stores. End-December and end-March data were 163,986 and 155,372, respectively. The decline in the latter reflects seasonal factors.

Table 3. Zimbabwe: First Phase of Lifting of Import Restrictions and
Opening of Foreign Currency Accounts

1. Import restrictions

Tariff Reductions on Selected Imports
(In percent)


Pre-September 1998


First Phase

Motor vehicles





Other commercial vehicle




Private vehicles




Motor vehicle parts




Bicycle parts








Selected shoe components




Surtax on above commodities




2. Foreign Currency Accounts

Exporters will be allowed to retain 50 percent of foreign currency proceeds in foreign currency accounts.