Unpacking IMF’s SMP on Zim

THE International Monetary Fund (IMF) approved the Staff-Monitored Programme (SMP) for Zimbabwe on May 15, 2019, with the programme covering a period of one fiscal year from May 2019 to March 2020.

Victor Bhoroma

The SMP was designed to support the Zimbabwean government’s reform agenda following successive years of budget deficits (averaging US$2,26 billion from 2016 to 2018), monetary instability, growing public debt (US$17,69 billion as of September 2018) and various structural distortions that negatively impacted on economic growth.

The programme was monitored on a quarterly basis with visiting IMF staff reviewing progress on the implementation of key economic reforms. The key objective for SMP was to facilitate Zimbabwe’s return to macro-economic stability and assist in re-engagement efforts to the international community.

Economic policies under the SMP emphasised the restoration of macro-economic and financial sector stability through implementation of austerity reforms, elimination of central bank financing of the budget deficits and adoption of market-based foreign exchange and debt markets.

Structural reforms included steps to reform and privatise state entities, improving governance (especially in public procurement and allocation of public funds) and to improve the ease of doing business. The SMP also included social reforms to protect the interests of the vulnerable and reduce poverty levels.
The SMP did not entail financial assistance or endorsement from the IMF even though expectations were very high in Harare that the programme would unlock a bailout package to boost economic productivity.

The IMF report pointed that the SMP on Zimbabwe was off-track as little progress recorded on fiscal reforms was overshadowed by costly missteps on monetary and foreign exchange market reforms among others.

However notable progress has been made in the ease of doing business where the newly established Zimbabwe Investment and Development Agency (Zida) is championing the streamlining of procedures involved in registering new businesses and getting various permits or licenses through the one-stop-shop (OSS) model.

The amendments to the Indigenisation and Empowerment Act (through the Finance Act of March 2018) was also key on the improvement in the ease of doing business rank from 155 in 2018 to 140 in 2019. The introduction of the open auction system on the issuance of Treasury Bills (TBs) is helping to bring transparency in government deficit financing (domestic debt) even though a lot still needs to be done in terms of external debt repayment and transparency in public finance management.

The return of the interbank market and bureaux de change houses has also provided a cue to market driven policies in the financial sector on the trading of currencies, even though concerns remain on the underhand influence of the central bank, which recently fixed the Interbank rate at ZW$25 to 1US$.

More than US$1,5 billion was traded on the interbank market in 2019, despite industry concerns that the interbank market is ineffective and falls short of their demands which amount to more than US$300 million per month.

Zimbabwe also managed to record a budget surplus or savings worth ZW$1,4 billion (From January to August 2019) for the first time since 2011 and restrict its wage bill to 37% of the budget. However, the surplus came as a result of serious public sector wage compression, which has left most civil servants taking home less than US$1 000 per year and further increasing poverty levels to a majority of employed citizens.

The introduction of the 2% intermediated money transfer (IMT) tax has helped improve government’s domestic revenue mobilisation efforts and reduce the need to borrow from the central bank overdraft window. In line with this, the government managed to reduce its budget deficit to within 3,5% of the budget (below the targeted 4%). As of November 2019, the budget deficit was at ZW$3,2 billion.

Despite government forecasts for economic growth, Zimbabwe’s economy declined by 8% in 2019 as a result of adverse monetary reforms, policy inconsistencies, failure to tackle rampant corruption, governance challenges on agriculture subsidies, climate shocks that crippled agriculture production and electricity generation at Kariba Dam.

Cyclone Idai, which ravaged the eastern parts of the country, also left a trail of disaster on the country. As a result, about eight million people (approximately 60% of the population) faced starvation and have to rely on external food aid. The impact of climate change (droughts) calls for the redirection of government funding from rain fed agriculture inputs to small-scale irrigation funding to utilise abundant water bodies in the country. Command agriculture programme created serious governance vulnerabilities due to lack of clarity, transparency and its opaque nature in design and implementation.
The IMF (like most local economic analysts) raised serious concerns about the Zimbabwe’s economic policies. These concerns drove the SMP off track and are discussed individually below:

Inflation spike, rising poverty

Zimbabwe’s annual inflation spiked from 57% in January 2019 to 521% in December 2019 as a result of exchange rate depreciation caused by legacy budget deficits and unabated quasi-fiscal activities by the central bank.

The spike in inflation has increased poverty levels with the poor now unable to access basic foodstuffs, health care, water and amenities. The country’s economic hardship has also eroding human capital, with education and health indicators deteriorating. In October, the World Bank noted that extreme poverty in Zimbabwe is estimated to have risen from 29 percent in 2018 to 34% in 2019 (An increase from 4,7 to 5,7 million people).

Transparency, quasi fiscal activities

The IMF has recommended significant cuts to non-essential expenditure by the government and redirecting of funding on social welfare needs. Similarly the central bank has been advised to discontinue its Gold incentive scheme and funding of various subsidies which saw reserve money increase from Z$3,3 billion in January 2019 to Z$9 billion in December 2019.

The gold incentives would have an annual cost of 1% of Zimbabwe’s GDP, which declined from US$23 billion in 2018 to US$20,7 billion in 2019. The central bank has been urged to incentivise gold producers via foreign exchange liberalisation reforms which in turn reduce the parallel market premiums.

The central bank has also been urged to cut various subsidies that entail preferential foreign currency allocation and lead to market distortions in the economy. The IMF reports reiterated calls for central bank independence, transparency and timely publication of monetary statistics.

Low import cover

Zimbabwe’s import cover as at December 2019 stood at a precarious US$109 million and covering only 1 week instead of the recommended three months. In line with this IMF urged the central bank to build reserves which would also be strategic in backing the value of the local currency.

Weak institutions, corruption

The IMF urged policy clarify on land tenure, improved guarantees to property rights and rule of law as key issues to the international re-engagement effort and growth in foreign investment inflows. The report raised concerns on vested interests in the allocation of foreign currency and implementation of various economic reforms.

The recommendation was for the Zimbabwean government to address governance challenges and tackle widespread corruption that is costing the country billions of dollars each year. The Zimbabwe Anti-Corruption Commission recently pointed that over US$7 billion in cash and properties have been stashed in foreign countries by various government officials and private players.

Slow privatisation pace

The IMF report also pointed to the slow pace of progress on public sector governance reforms and privatisation of State Entities. The government has earmarked 43 enterprises for privatisation and restructuring but so far there has been little progress.

Most State entities continue to operate on government handouts, while incurring losses and increasing liabilities. Tenets of good governance are constantly ignored on board appointments and submission of quarterly and annual reports as required by the Public Finance Act.

Rent-seeking loopholes and political interference are very rife in the management of state entities.Overall, the protracted external debt overhang of over US$8,5 billion constrains access to external support while additional domestic debt piles sovereign debt burden on the country.

Zimbabwe’s score on governance, transparency and corruption perception are well below its regional peers such as Zambia, Botswana and South Africa who are faring better in terms of foreign investment and economic management. The consensus from the public, private, civil society sectors and the international community is that Zimbabwe has serious governance and structural weaknesses which have proliferated corruption, thus dampening prospects for the sustained long-term economic growth.

Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.