Government is under intense pressure to come up with a credible new economic plan to be partly funded by about US$2 billion that would be availed if its recently crafted debt clearance strategy succeeds.
Cabinet has approved an ambitious external arrears clearance strategy to pay off US$1,8 billion overdue to multilateral creditors by June next year in a bid to break its debt vicious cycle and secure at least US$2 billion in new funding to rescue a crumbling economy ravaged by recession, a liquidity crunch and deflation, among a plethora of chronic problems.
This follows Harare’s presentation of its strategy to multilateral and bilateral creditors in Lima, Peru, on October 8 before over 100 top global financial executives.
But international financial institutions (IFIs) executives say the country will have to implement far-reaching reforms and come up with a new economic plan if it is to secure the much-needed fresh funding.
Government is expected to cut public sector spending, clarify the country’s indigenisation and empowerment law, restructure parastatals, align the country’s laws to the constitution as well as to observe the rule of law and respect property rights, compensate former white commercial farmers displaced under the chaotic land reform programme and implement labour reforms, among other things.
IFIs executives expect the new economic plan should also demonstrate how government intends to use the funds and for what goals.
The funds are likely to come just before the next general elections raising concerns that Treasury could use it to fund the polls.
“It’s (the availability of new funding) dependent on the country producing a new economic plan showing how it is going to use the new money which will come in and the implementation of its own economic programmes and reforms that underpin the whole strategy,” one executive from an IFI said.
This comes as Finance minister Patrick Chinamasa and Reserve Bank governor John Mangudya, who presented the strategy in Lima, have written to the International Monetary Fund indicating that the country faces a number of problems including failure to finance the government’s economic blueprint, ZimAsset.
In the letter to IMF managing director Christine Lagarde, dated September 30 2015, Chinamasa and Mangudya said that economic growth had slowed down, describing the economic situation as “increasingly difficult”.
Zimbabwe’s economy is this year expected to grow by just 1,5% from an initial projection of 3,2% on the back of weakening commodity prices on the international market.
“Growth has slowed down because of the poor 2014/15 agricultural season, low investment levels, scarce liquidity and a drop in international prices of our major exports,” reads the letter.
“Risks remain tilted to the downside. The implementation of our economic blueprint has been delayed by the absence of financing for key projects. Over the medium-term, we expect that ongoing efforts to improve the business environment and investor confidence will attract much-needed capital and help spur private sector growth in a sustainable way.”
Chinamasa and Mangudya noted that the country’s external position remains precarious, but also pointed out that international reserves along with the current account have improved slightly. The current account deficit, they said, has been mainly financed by short and long-term loans to the private sector, which has remained current on its payments.
They said that a shortfall in revenue collection has “intensified fiscal pressures” adding that rationalising expenditure has become an “urgent priority”.
“We are committed to improving our fiscal position by strengthening revenue collection and rationalising expenditure, including savings on employment costs. The objective is to improve our capacity to service debt, deliver better services and increase funding for critical social and infrastructure projects,” the letter said.
“We have made efforts to reduce our employment costs by tightening controls and starting to rationalise the civil service. We will keep the 2015 employment costs below budget projections.”
“Cabinet is currently considering the report by the Civil Service Commission containing proposals to streamline public sector employment. In line with the recently completed audit of the civil service, we have started to eliminate duplications and redundancies. We have set up a wage bill management committee to make proposals to reduce the wage bill to the accepted level of 40% of expenditure over the next few years.
“Moreover, by end-2015, we expect to complete decentralisation and modernisation of the Salary Service Bureau, which would place a payroll assistant in every district, strengthening control over the wage bill and minimising irregularities.”
The two governmental officials said they have met all the structural benchmarks for the second review which include submitting to cabinet both recommendations on reforms to the fiscal regime for the mining sector, and the strategy paper on reducing the wage bill, submitting to parliament the Reserve Bank and Banking Acts and developing the operational framework for the Zimbabwe Asset Management Company (Zamco), which specifies an appropriate legal governance structure as well as a feasible and sustainable funding strategy.
Chinamasa and Mangudya also told the Bretton Woods institution that they have already fulfilled two of the structural benchmarks for the third review of the Staff-Monitored Programme. These, they said, are the amendment of the Labour Act to introduce labour market flexibility, and submitting the amendments to the Reserve Bank of Zimbabwe Act dealing with Zamco to parliament.
On the country’s fiscal policy, Chinamasa and Mangudya said they aim to reduce the primary fiscal deficit to below 0,5% of GDP and aim at a balance in 2016.
“The shortfall reflects the country’s widespread economic difficulties, shrinking corporate profits and earnings, limited ability of companies to pay taxes on time, and increasing informal economic activity,” the letter said.
“We have started work on restructuring parastatals to reduce fiscal costs, improve accountability and service delivery. To this end cabinet has considered turnaround strategies for the Zimbabwe Broadcasting Corporation, Cold Storage Commission, Air Zimbabwe, the National Railways of Zimbabwe and TelOne. Cabinet has already approved strategies for Air Zimbabwe and TelOne.”