ZIMBABWE’S distressing economic prospects will further deteriorate this year despite government moving ahead with its limited reform agenda connected to the Staff-Monitored Programme (SMP), the International Monetary Fund (IMF) has revealed.
The Bretton Woods institution also underlined that Zimbabwe needs to create a friendly investment climate and attract foreign direct investment (FDI) as well as capital from other sources if the economy is recover and grow.It however warned Zimbabweans to brace for a difficult remainder of the year.
“Economic difficulties have intensified this year. Growth has slowed more than anticipated and we expect it to remain weak in 2015,” an IMF team, which was in the country for the SMP review, said in its latest statement, ahead of its departure today.
“Despite the favourable impact of lower oil prices, the external position remains precarious and the country in debt distress.”
The IMF delegation, led by Domenico Fanizza, arrived on August 31 for the second review of the Zimbabwe’s SMP — an informal arrangement between a country’s government and the IMF to monitor the implementation of the government’s economic programmes.
On improving the investment climate, the IMF, like it highlighted in the first review, said there is need for clarity to the much-maligned indigenisation policy to woo investors who have shunned the country due to hostile policies.
“The authorities’ intention to publish on the website of the Zimbabwe Investment Authority clear guidelines on the implementation of the Indigenisation and Economic Empowerment Laws should help reduce uncertainty for both domestic and foreign investors,” the IMF said.
The law, which requires foreign firms to cede at least 51% equity to locals, has been regularly condemned for its rough edges and damaging impact.
The IMF also pointed out that plans by the government to come up with a debt clearance strategy are critical. Zimbabwe has an external debt of about US$8 billion.
“The authorities’ efforts to discuss their strategy on resolving the external arrears with multilateral creditors at the dedicated stakeholders meeting in October will be instrumental in highlighting the authorities’ reform agenda on the path toward normalising relations with the international community,” said the team.
Government has developed a proposal for resolving Zimbabwe’s external arrears to international financial institutions, for which it intends to seek support from creditors at a dedicated stakeholders meeting to be held next month on the sidelines of this year’s Annual Meetings of the IMF and the World Bank in Lima, Peru.
The IMF noted the efforts government has made in restoring confidence in the financial sector, but pointed out the need for further reduction of non-performing loans.
“Completing the recapitalisation of the RBZ (Reserve Bank of Zimbabwe) will enhance its ability to supervise the banking sector. There are no longer any distressed banks, all banks now fully comply with capital requirements, non-performing loans have declined, and the interbank market is now functioning. As a result, banks are now in a better position to extend credit to the private sector, which should help economic activity,” it said.
“However, to cement financial stability and confidence, non-performing loans need to decline further.”
The IMF said while government has taken important steps which include strengthening of the financial sector and rationalising the public sector, it warned that these measures will take time to make a notable impact on the economy.
“In the context of their reform programme, the authorities have taken important steps to strengthen the financial sector and liberalise the labour market.
“They have also prepared plans to rationalise public expenditure and reduce public sector employment costs,” it said. “However, these reforms will require time and deeper efforts before their beneficial impact is felt on the economy.”
The IMF said the policy reform agenda for the remainder of the SMP includes mitigating the impact of this year’s adverse shocks on the external position and growth, emphasising the need to cut government’s astronomical wage bill which gobbles more than 80% of government revenue.
“The authorities plan to further reduce the primary deficit and to achieve balance by 2016. This will help increase international reserves, despite the worse-than-expected global and domestic environment,” it said.
“The top priority remains to reduce public sector employment costs to make room for (a) much-needed capital spending to raise growth; and (b) social spending to protect the poor.”
The delegation had a series of meetings during its visit to the country. They held meetings with Finance minister Patrick Chinamasa, RBZ governor John Mangudya, and Chief Secretary to the President and Cabinet Misheck Sibanda, among other senior government officials as well as members of the Parliamentary Committee on Finance and Economic Development.
The IMF team also met representatives of the private sector, civil society and development partners.
Presenting the mid-term fiscal policy review statement in July, Chinamasa said he planned to reduce the wage bill from more than 80% to less than 40% in line with IMF recommendations. Government has also amended the labour laws in a bid to make them more flexible.