IMF SMP team gives damning review on Zimbabwe finances

IMF Team in Harare with Mthuli Ncube and Mnangagwa

The IMF delegation has left the country following a visit to review the SMP. The team is expected back in the country in November to check progress against the December targets

*Below is a summary of key issues that emerged from the meeting ( A press release is still to be issued)*

• The delegation was concerned about the growth in reserve money ( bank balances with RBZ, RTGS balances and fiat money in circulation)

• Reserve money has been growing at about 80% since January and IMF believes that if RBZ brings the growth rate to under 50% by December that would be a big achievement. RBZ says it’s targeting 8%-10% by December which evidently seems unlikely. Reserve money is inflationary as it can be used for transacting

• The delegation directed that the President curtail Command Agriculture except the Presidential Input Scheme for the vulnerable members. This will inevitably be a tough decision to make as the banking sector is currently not too keen to increase exposure to primary agriculture.

• The IMF believes that Zimbabwe only has a 15% chance of meeting the SMP targets by December.

• There has also been a demand to completely unwind the blocked funds/ legacy debt assumption by RBZ as Gvt has no means to finance that debt in real terms. The recommendation is that anyone exposed to Zimbabwe should take a haircut on their exposure and no one should be compensated on 1:1 basis as they were all taking profit risk

• The IMF has also recommended that the RBZ abandon the Forex linked Savings Bond as it has neither the use for the money nor the means to generate revenue to pay the interest obligations. The IMF is also of the belief that there will be no takers for the bond but still recommends RBZ not to even proceed otherwise the issuance

• The IMF also demanded a brief on who the beneficiaries of the Sakunda TBs translated were. Sakunda translated about $300m worth of TBs that had been issued to it two years back under Command Agriculture into an estimated ZWL3 billion and went on a FX buying spree culminating in the supposed accounts freeze.

Apparently, at the time of issuance, the Finance Minister, Patrick Chinamasa wrote to Sakunda that these TBs represented a foreign liability and that letter was the basis upon which the RBZ converted the TBs at approximately 9.5. Whether it was part of an elaborate plan at the time to siphon resources or the Minister was simply naïve is yet to be known. The beneficiaries of the transaction is unlikely to be published.

• The IMF also demanded that Government remove all subsidies by December except possibly electricity for domestic power users.

• The IMF also emphasized that Zimbabwe faces a significant risk of being moved into the Gray area of the Anti Money Laundering Framework. Being placed in the grey zone under AML/CFT reporting has catastrophic consequences especially on Balance of Payments improvement and FDI mobilization and takes at least 3 years to come off the list.

Angola took 3 years but had the advantage of solid FX reserves from oil exports. Zimbabwe with no meaningful exports to carry it through the phase will take much longer and will face substantially high country risk premium

Possible outcomes

• The IMF may extend the Program some more into 2020 given it has been working hard to ensure Zimbabwe is a success story.

• However, given the Government actions, there is already talk of the program being brought to an end and that would have dire economic results. The country would rapidly spiral into the 2007/2008 period of currency depreciation and hyperinflation

This determination on whether to continue or end the SMP will come in December when the delegation comes back.

In summary, either the President takes drastic action on matters raised or he risks a severe economic tailspin. Political expediency may likely win and the outcome may swing either way but the risk of a deterioration is what is much more pronounced at this stage.

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