ON September 21, 2012, the Executive Board of the International Monetary Fund (IMF) concluded Article IV consultation with Zimbabwe. Find below an abridged summary of its findings.
AFTER a prolonged period of economic and political crisis, Zimbabwe’s economic stabilisation and recovery began with the end of hyperinflation in 2009, supported by the formation of a coalition government, a favourable external environment, the adoption of a multicurrency system and cash budgeting, and the discontinuation of quasi-fiscal activities by the Reserve Bank of Zimbabwe (RBZ).
The economic rebound is moderating following a period of robust growth, with real gross domestic product (GDP) growth averaging 9,5% during 2010–11, sustained by strong external demand for key mineral exports and continued recovery in domestic demand. Real GDP growth in 2012 is projected to slow to 5%, reflecting the impact of adverse weather conditions on agriculture, erratic electricity supply, and tight liquidity conditions.
Mining production is expected to benefit from the lifting of restrictions on diamond exports from the Marange fields as a result of certification by the Kimberley process. Inflation slowed to 4% in June 2012 from 4,9% in December 2011, reflecting in part some moderation in imported goods inflation.
The external position remained precarious, albeit with some recent moderation in the current account deficit. Despite higher exports, the current account deficit widened to 36% of GDP in 2011 (from 29% of GDP in 2010), due in part to a spike in imports associated with some one-off factors.
The deficit was financed by debt-related flows, arrears, and a drawdown of special drawing rights (SDR) holdings, as uncertainties regarding policy implementation continued to affect foreign investment flows. Usable international reserves remained very low at 0,3 months of imports at end-2011, amplifying the country’s vulnerability to shocks.
The current account deficit is projected to narrow to 20,5% of GDP in 2012, as the 2011 import spike is reversed and exports continue to expand. Zimbabwe remains in debt distress with total external debt estimated at US$10,7 billion (113,5% of GDP) at end-2011, of which 67% of GDP are in arrears.
The large debt overhang remains a serious impediment to medium-term fiscal and external sustainability.
The public finances came under pressure in 2011 and early-2012.
Despite better-than-expected revenue performance, central government operations recorded a cash deficit of 0,6% of GDP in 2011 and domestic arrears accumulation of about 1% of GDP, due mainly to two salary increases that raised employment costs by 22%, crowding out social and capital investment. The effect of the salary hikes was compounded in early-2012 by an increase in employee allowances and unbudgeted recruitment.
Fiscal pressures were exacerbated by significant underperformance of diamond revenues during the first half of 2012. In response to the fiscal slippages, in July the government announced expenditure and revenue measures, as well as a reassessment of diamond revenue flows. The measures include a hiring freeze, suspension of a number of diamond-revenue-financed projects, increases in excises on fuel, and enhanced monitoring of the mineral resources.
The financial regulatory framework is being enhanced after a long period of forbearance, but financial system vulnerabilities persist.
The banking system is recovering from a recent liquidity crunch, following a period of rapid credit growth funded by unstable short-term deposits, but liquidity remains relatively low and unequally distributed across banks.
The RBZ raised the prudential liquidity ratio from 25% to 30% by end-June 2012. Some banks, particularly the small ones, show weak capitalisation, insufficient liquidity, and low asset quality, reflecting unsound lending practices and poor risk management. The situation of three troubled banks came to a head in mid-2012, with the RBZ placing one in recuperative curatorship and two surrendering their licenses.
In August 2012, the RBZ announced steep increases in the minimum capital requirements to be phased over a two-year period.
The medium-term outlook, under an unchanged policy scenario, is for growth to moderate to average some 4%, although constraints on energy supply and weak competitiveness may pose a challenge to achieving these rates.
Foreign investment is likely to be hampered by a poor business climate, uncertainties over the implementation of the indigenisation policy and political instability, while domestic investors may face difficulties accessing long-term credit. A vigorous programme of structural reform and strengthened macroeconomic management would allow the country to sustain higher rates of growth.
Executive Board Assessment
Executive directors welcomed Zimbabwe’s economic recovery and stabilisation in recent years. Progress has however been uneven, and the impact of adverse weather conditions on agriculture, an uncertain political situation ahead of elections, and a difficult global environment pose further risks to the outlook.
To achieve sustained and inclusive growth, directors stressed the importance of full commitment to policies focusing on strengthening fiscal management, reducing financial sector vulnerabilities, and improving the business climate.
Directors urged the authorities to fully implement the measures announced in the mid-year fiscal policy review, and take additional measures if necessary, to address earlier slippages and close the financing gap. They underscored the need to rebalance the expenditure mix, especially by containing growth of the wage bill, to create the fiscal space needed for increased social spending and public investment. Improving public financial management would help reinforce expenditure control.
Directors emphasised that enhancing transparency in the diamond sector, including timely finalisation and implementation of the Diamond Act, is key to strengthening revenues and reducing fiscal pressures. They noted that a prudent medium-term fiscal framework remains critical for restoring fiscal sustainability.
Directors welcomed actions taken to strengthen the financial regulatory framework and address systemic liquidity. Noting recent bank failures and persistent vulnerabilities in the banking system, they called for more proactive banking supervision and enforcement of prudential regulations, focusing on banks with low liquidity buffers and high risk exposures.