IMF projects gloomy year, says SMP off track

Minister Mthuli Ncube

The International Monetary Fund (IMF) says Zimbabwe’s economic reform agenda has gone off the rails, and warned that the country needed donor support to prevent a deepening humanitarian crisis.


An IMF team was recently in the country for Article IV 2020 consultation which coincided with Staff-Monitored Programme (SMP) review and met Treasury bosses, central bank officials among other top government and business leaders.

The southern African country is facing its worst economic crisis in a decade, with a critical shortage of hard currency triggering increases in prices of basic goods, shortages of medicine and fuel.

The country is also experiencing rolling power cuts that have decimated industry as hopes of economic recovery under President Emmerson Mnangagwa continue to fade.

After the meetings on Wednesday, IMF said the SMP, adopted in May last year to monitor the implementation of the authorities’ economic programme by the Bretton Woods institution, was now off-track due to failed policy implementation.

“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 Programme from the IMF, adopted in May 2019, but is now off-track as policy implementation has been mixed. 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 [forex] 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,” the IMF said.

The economy contracted by 8,3% in 2019, amplified by climate shocks that have crippled agriculture and electricity generation while the newly-introduced Zimbabwe dollar has lost 87% since February last year. Inflation closed last year at 575% and the economy is seen growing by 0,8% this year, much lower than official projections of 3,3%.

“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 IMF said in a statement.

IMF noted that Zimbabwe remains in debt distress, with large external arrears to official creditors, and encouraged the authorities to re-engineer re-engagement efforts and debt management and transparency.

In particular, the IMF cautioned against continued recourse to collateralised external borrowing on commercial terms as this may potentially complicate any future arrears clearance operations.

“Directors 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 behaviour 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,” IMF said.

It noted that re-engagement with the international community continues to face delays as authorities are 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.

The country’s foreign debt is estimated at US$8 billion and continues to constrain access to external official support.

“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,” the IMF said.

IMF urged Harare 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.

More so, it emphasised the importance of re-engagement 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 programmes, to allow for social spending needs. They underscored the importance of public financial management and enhanced domestic revenue mobilization efforts,” IMF said.

The Bretton Woods institution stressed that eliminating deficit monetisation (use of bonds, Treasury Bills to cover deficits) would not only be crucial for fiscal sustainability, but it would also serve as a precondition for the stabilisation of hyper inflation and the preservation of the external value of the currency.

“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 re-engagement efforts with the international community and mobilise the needed support,” the IMF noted.