Zimbabwe’s economic reform agenda off-track, says IMF


HARARE – The International Monetary Fund said on Wednesday that Zimbabwe’s economic reform agenda was off-track, and that without further donor support the risks of a deep humanitarian crisis in the country were high.

“The government that came to office following the 2018 elections adopted an agenda focused on macro stabilisation and reforms… but is now off-track as policy implementation has been mixed,” it said in a statement outlining the conclusion of its latest Article IV consultation with the country.

On February 24, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zimbabwe.

The statement issued said: “Zimbabwe is experiencing an economic and humanitarian crisis. Macroeconomic stability remains a challenge: the economy contracted sharply in 2019, amplified by climate shocks that have crippled agriculture and electricity generation; the newly introduced ZWL$ has lost most of its value; inflation is very high; and international reserves are very low.

“The climate shocks have magnified the social impacts of the fiscal retrenchment, leaving more than half of the population food insecure. With another poor harvest expected, growth in 2020 is projected at near zero, with food shortages continuing.

The government that came to office following the 2018 elections adopted an agenda focused on macro stabilization and reforms. This was supported by a Staff Monitored Program from the IMF, adopted in May 2019, but is now off-track as policy implementation has been mixed.

The statement said; “notable reforms include a significant fiscal consolidation that has helped reduce the monetary financing of the deficit, the introduction of the new domestic currency in February 2019, the creation of an interbank FX market, and the restructuring of the command agriculture financing model to a public-private partnership with commercial banks.

“However, uneven implementation of reforms, notably delays and missteps in FX and monetary reforms, have failed to restore confidence in the new currency.

“Reengagement with the international community continues to face delays. The Zimbabwean government has yet to define the modalities and financing to clear arrears to the World Bank and other multilateral institutions, and to undertake reforms that would facilitate resolution of arrears with bilateral creditors. This continues to constrain Zimbabwe’s access to external official support”, the statement said.

“As a result, the authorities face a difficult balance of pursuing tight monetary policy to reduce very high inflation and prudent fiscal policy to address the macroeconomic imbalances and build confidence in the currency, while averting a crisis.

“While the 2020 budget includes a significant increase in social spending, it is likely insufficient to meet the pressing social needs. Absent a scaling up of donor support, the risks of a deep humanitarian crisis are high.

Executive Board Assessment

Executive Directors said they noted with concern that Zimbabwe is facing an economic and humanitarian crisis exacerbated by policy missteps and climate‑related shocks. These would require difficult policy choices from the authorities and support from the international community.

“Directors urged the authorities to make a concerted effort to ensure economic and social stability through the adoption of coordinated fiscal, monetary and foreign exchange policies, alongside with efforts to address food insecurity and serious governance challenges.

“They emphasized the importance of reengagement with the international community to support efforts to achieve economic sustainability and address the humanitarian crisis.

Notwithstanding efforts in 2019 to tighten the fiscal stance and contain quasi‑fiscal operations by the central bank, Directors noted that pervasive deficits remain and could be exacerbated by the need to respond to the humanitarian crisis.

“Directors called for non‑essential spending cuts, including decisive reforms to agricultural support programs, to allow for social spending needs. They underscored the importance of public financial management and enhanced domestic revenue mobilization efforts.

Directors stressed that eliminating deficit monetization would not only be crucial for fiscal sustainability, but it would also serve as a precondition for the stabilization of hyper‑inflation and the preservation of the external value of the currency.

“Directors noted that Zimbabwe remains in debt distress, with large external arrears to official creditors, and encouraged the authorities to give impetus to reengagement efforts and debt management and transparency. In particular, they cautioned against continued recourse to collateralized external borrowing on commercial terms as this may potentially complicate any future arrears clearance operation.

“They underscored the need to establish credibility in the new currency. They encouraged the authorities to press forward with the establishment of a functional foreign exchange market and to remove distortions that could lead to rent‑seeking behavior in the economy.

Directors agreed that given low reserves and hyper‑inflation, limited credibility, and a lack of access to traditional forms of external financing, a monetary targeting regime is appropriate to conduct monetary policy. Enhancing central bank independence and transparency, including by timely publication of monetary statistics, would be important.

They welcomed the progress on financial innovation, supervision and inclusiveness indicators. They noted, however, the need for continued vigilance to ensure financial stability. They encouraged the authorities to conduct asset quality reviews of the banking sector, develop a new framework for managing weak banks, and increase the effectiveness of the AML/CFT framework, including by effectively implementing FAFT standards.

The directors stressed the need to address governance and corruption challenges, entrenched vested interests, and enforcement of the rule of law to improve the business climate and support private‑sector‑led inclusive growth. Such efforts would be instrumental to advance reengagement efforts with the international community and mobilize the needed support.

They noted with regret that the Staff‑Monitored Program was off‑track and underscored the importance of continued engagement between the Fund and the authorities, including through technical assistance, policy advice and other innovative ways, to help immediately stabilize the economy and address the humanitarian crisis