ON May 15, 2019, the managing director of International Monetary Fund approved a Staff-Monitored Programme (SMP) for Zimbabwe, covering the 10-month period from May 15, 2019 to March 15, 2020.
An SMP is an informal agreement between country authorities and IMF staff to monitor the implementation of the authorities’ economic programme. It typically helps align a country’s economic programme with global financiers’ expectations.
Zimbabwe is facing a humanitarian and economic crisis and consequently the country’s economic reform agenda is now off track. Delays and missteps in the implementation of monetary and foreign exchange reforms have failed to restore confidence in the currency.
The Zimbabwean government is yet to define its modalities for clearing World Bank debt arrears and reforms that would facilitate resolution of arrears with bilateral creditors. The 2020 budget is likely to be insufficient to meet pressing social needs. Challenges faced require difficult choices and support from the international community, together with the adoption of coordinated fiscal, monetary and foreign exchange policies.
Deficit threats linger. The IMF recommended a cut in spending, including agricultural subsidies, to allow for social spending. The IMF highlighted that elimination of deficit monetisation will not only allow for fiscal sustainability, but will form the basis for inflation and exchange rate stabilisation.
Misteps and delays in reforms
The very foundation of Zimbabwe’s de-dollarised economy is very shaky and this observation is premised on the assumption that the re-introduction of the Zimdollar was not fundamentally backed. In essence, there was no need for the government to rush its return at a time the economy was particularly undergoing austerity in pursuit of realignment.
World Bank debt clearance
The country carries known foreign debt of US$10 billion, part of it owed to the World Bank and bilateral creditors such as the Paris Club. The new administration has failed to unlock the impasse and no meaningful payments have been made against the debt.
2020 budget inadequate
The 2020 budget has been set at ZW$63 billion, with less commitment to recurrent expenditure. The most immediate demands point to the fact that hunger is more pressing and therefore needs to be addressed directly by offering food-related subsidies to avert the humanitarian crisis. The status quo also demands that government raises the minimum wage as the cost of living rises in line with inflation and exchange rate losses. It is therefore inevitable that the 2020 budget will soon be revised to address these challenges, failure of which the RBZ will be overly exposed.
I believe the target of ZW$63 billion is attainable given the rate of inflation and the level of money supply in the economy, but we see government’s cost function burgeoning at a much faster pace.
Deficit monetisation has emerged as one of the biggest threats to economic stability. The Reserve Bank in its first Monetary policy Statement of 2020 highlighted that it has been financing the purchase of grain and power, among other pressing needs as per government’s demand, and this has caused base money growth. The injection of high -powered money has rattled the markets, sending the Zimdollar exchange rate into a tumble. The threat remains and we are of the view that at a target of ZW$10 billion in M0 (cash itself) by year-end, the exchange rate could move to circa 1:40.
Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org