ZIMBABWE’S economic situation, currently plagued by inexorably slumping business activity and low capital inflows, has further deteriorated due to embedded structural problems in the economy, the International Monetary Fund said this week.
Despite approving the country’s arrears clearance plan, the Bretton Woods institution said robust measures are required to halt decline and stimulate economic activity.
The multilateral lender said the country urgently requires bold economic reforms that include clarity on the indigenisation policy, reducing corruption and containing the public sector wage bill to reverse the worsening economic situation characterised by low exports and a widening current account deficit, among other challenges.
Weakening commodity prices, massive company closures and lack of competitiveness have retarded the country’s economic growth prospects despite an ill-informed bullish sentiment by government.
“Zimbabwe’s economic difficulties have deepened. Drought, erratic rains, and increasing temperatures, have reduced agricultural output and disrupted hydropower production and water supplies. Economic activity is severely constrained by tight liquidity conditions resulting from limited external inflows and lower commodity prices,” the IMF says in its latest report on Zimbabwe.
“A profound economic transformation programme is needed to reverse this adverse trend and unleash the country’s potential. Policies need to address the underlying impediments to growth as soon as possible, and redirect the economy toward private sector-led growth.
“The lack of external financial support cannot be a reason for inaction. To the contrary, an ambitious, comprehensive, and frontloaded economic reform programme is essential for Zimbabwe to regain access to financing from both multilateral and bilateral creditors. Without such financing, reform efforts will not be successful.
According to the IMF Staff Report for the 2016 Article IV Consultation and the third review of the Staff-Monitored Programme on Zimbabwe, government should lower the public sector wage bill, clarify the controversial indigenisation policy and ensure that growth is led by the private sector.
The report says if Zimbabwe was to catch-up with its regional peers, the government also needed to address the debt overhang, normalise relationship with the international community and speedily implement bold policies and reforms to tackle the country’s structural impediments as well as facilitate sustainable long-term growth.
The country’s output is also constrained by infrastructural bottlenecks, among them the shortage of electricity, water and transport as well as the unavailability and high cost of long-term capital, high cost of doing business, low productivity and an uncompetitive manufacturing sector.
Inflation remains in negative territory, because of the appreciating United States dollar — the country’s main currency — and lower commodity prices. Besides, Zimbabwe is still in debt distress with low levels of international reserves or import covers.
The report says Zimbabwe cannot use fiscal policy to deal with adverse shocks or its social and development needs because it lacks the necessary resources and spends too much for wage outlays.
“For the time-being, the budget needs to target a broadly balanced fiscal position, while reprioritising spending toward social and development outlays. This stance will help restore fiscal sustainability and increase the capacity to repay the country’s external debt.” The objective, the report says, is to unlock foreign financing that could allow the government to run small-to-moderate deficits in response to adverse shocks and raise the spending levels for social and infrastructure needs.
“Zimbabwe’s economic revival cannot take place without a vibrant private sector. There are still too many obstacles to private entrepreneurship. The imminent establishment of a one-stop shop window for private investors could simplify procedures significantly,” the report says.
“The consistent and transparent implementation of the indigenisation policy will be critical to attract both foreign and domestic investment by limiting the scope for discretion and reducing uncertainty about the regulatory framework.”
Commenting on country’s arrears clearance plan, the report says while the fund has approved the debt plan more should be done to honour bilateral obligations.
“Staff welcomes the authorities’ plan to repay their arrears to the IFIs, but stresses that a sufficiently ambitious reform programme and broad support from creditors are also prerequisite for a financial arrangement with the Fund, as this support from creditors is essential to the success of the reengagement strategy,” the report reads.
“Staff urges the authorities to redouble their efforts to mobilise this support by reaching out to creditors to explain their medium-term reform agenda and keep them abreast of the progress in its implementation. In particular, the transparent and business-friendly implementation of the indigenisation policy will be key to secure support from development partners.”
On public sector spending, the report says government must establish a clear wage bill target. Government sees wages accounting 50% of the expenditure from 66%.
It, however, notes that deepening of reforms and progress in reengaging with creditors could reopen access to financial support, reverse the adverse economic trend and improve the economic outlook.