Zim needs policy consistency

I RECENTLY attended a breakfast meeting hosted by Finance minister Patrick Chinamasa and head of the International Monetary Fund (IMF) delegation to Zimbabwe, Domenico Fanizza.

The Ritesh Anand Column

I was encouraged by the discussion and pleased to see that some progress has been made in restoring our relations with the IMF.
After more than a decade, the IMF approved the implementation of a Staff Monitored Programme (SMP) on June 13, 2013.

An SMP is an informal agreement between country authorities and IMF staff to monitor the implementation of the authorities’ economic programmes. SMPs do not entail financial assistance or endorsement by the IMF executive board.

Successful implementation of the SMP would be an important stepping stone toward helping Zimbabwe re-engage with the international community.

The SMP focuses on:
Putting public finances on a sustainable course, while protecting infrastructure investment and priority social spending;
Strengthening public financial management;
Increasing diamond revenue transparency;
Reducing financial sector vulnerabilities; and
Restructuring the central bank.
In particular, fiscal consolidation efforts aim to move the primary budget balance from a deficit in 2012 to a small surplus in 2013, helping start what should be a gradual rebuilding of fiscal buffers and international reserves.

Zimbabwe’s external debt is high and largely in arrears, cutting off the country from access to most external financing sources.

Zimbabwe also remains unable to access IMF resources because of its continued arrears to the fund.

A strong track record of maintaining macro-economic stability and implementing reforms, together with a comprehensive arrears clearance strategy supported by development partners, will be essential for resolving Zimbabwe’s large debt overhang.

The IMF was established in 1944 after the Second World War for the purpose of ensuring international monetary stability. The IMF’s fundamental mission is to help ensure stability in the international system.

It does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members.

The recent IMF mission, led by Fanizza, visited Harare from September 17 to October 1, to conduct the third and last review under the SMP and subsequently to hold discussions on a 15-month successor SMP.

Zimbabwe met all June 2014 quantitative targets and structural benchmarks under the programme and the mission reached a staff level agreement on policies for a successor SMP. This is extremely positive for Zimbabwe and reflects government commitment towards reform.

At the conclusion of the visit, Fanizza issued a statement part of which read:

“The Zimbabwe government has redoubled its efforts to rebalance policies toward a stable macro-economic environment conducive to private sector-led growth. Nonetheless, economic conditions remain difficult. Growth has slowed down because of inadequate financial flows, despite a very favourable agricultural season. This and the appreciation of the South African rand, the major currency of Zimbabwe’s trading partner, has caused a liquidity crunch that has weakened economic activity.

“The external position remains precarious with low levels of international reserves, a large current account deficit, and external arrears. The authorities took decisive fiscal measures on the revenue and expenditure sides to keep fiscal policy on track and to protect social expenditures, despite the large civil service wage increase earlier in 2014. The authorities intend to re-engage with the international community. The mission welcomes Zimbabwe’s decision to start working with the international financial institutions to prepare a plan for clearing the outstanding arrears, as a step toward resolving the country’s debt challenge.”

Zimbabwe has made significant progress in restoring its relationship with the IMF, which is critical to the long-term success of the country.

While Zimbabwe does not qualify for Highly Indebted Poor Country status, its economy remains in critical condition. Zimbabwe’s outstanding debt as well as trade deficit poses significant external risks especially given the recent decline in commodity prices.

Zimbabwe needs to aggressively re-engage with its creditors with the support of the IMF to reschedule its debt to provide some breathing space and fresh injection of capital. Without this, its economy remains extremely vulnerable to exogenous shocks. It will also need to provide greater clarity and transparency on the indigenisation laws.

The policy needs to reflect government’s increasing willingness to attract foreign direct investment.
Though government has made significant progress in recent months, but much more needs to be done to restore confidence in the economy.