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 What is happening in Zimbabwe is quite difficult to decipher. In the International Monetary Fund’s (IMF) latest Article IV report on the country’s economy, it paints a gloomy picture suggesting a GDP growth of a paltry 1,5% annually over the next six years - unless the government makes fundamental policy changes
The Minister of Finance Tendai Biti forecast 7% growth in 2010 against the IMF figure of 2.2%. The latter points out that the outlook for 2010 is ‘highly uncertain’ as a result of large budgetary wage increases crowding out growth-oriented expenditures.
Zimbabwe also experienced a significant slowdown in private capital inflows because of increased uncertainties about the indigenisation process while strong credit growth has intensified external and banking system vulnerabilities.
“In the absence of timely corrective policy measures, economic growth will slow down significantly in 2010 and risks in the banking system will continue to rise,” warns the IMF.
While there has been some improvement in Zimbabwe’s macroeconomic performance and humanitarian conditions following a decade of economic decline and high inflation, it is critical that the authorities undertake decisive policy measures.
“Sound policies and good governance will be critical to pave the way for eventual debt-relief and access to donor financing. In this context, the IMF strongly encouraged the authorities to improve their cooperation with the Fund on policies and payments.”
The government needs to create sufficient space for social and developmental expenditure. Additionally, the IMF encouraged the authorities to return to cash budgeting, and reduce the wage bill and other low-priority expenditures. However, with civil servants getting paid US$150-200 per month and prices rising almost 5% annually, freezing public sector pay is a non-starter politically.
The IMF warns that Zimbabwe is “in debt distress” with some US$7.2 billion in external debt, and should urgently seek a debt-relief package. It recommended government cut spending by about 3% of GDP; that it strengthen its fragile financial sector, initially by downsizing and restructuring the Reserve Bank of Zimbabwe; and that it should not revive the defunct Zimbabwe dollar for the foreseeable future.
The IMF also wants to have a Staff Monitored Programme (SMP), which it said could help establish a track-record of sound policies - but says the authorities must demonstrate clear progress in economic policies and data reporting before a SMP could be considered.
In February, the Executive Board of the International Monetary Fund (IMF) restored Zimbabwe’s voting and related rights, and its eligibility to use resources from the IMF’s General Resources Account (GRA), following a request from Biti.
However, notwithstanding the restoration of its eligibility to use GRA resources, Zimbabwe will not be able to use resources from the GRA or the Poverty Reduction and Growth Trust (PRGT) until it fully settles its arrears with the PRGT of about US$140 million. Also, access to IMF lending resources is also subject to IMF policies on the use of such resources, including a track-record of sound policies and the resolution of arrears to official creditors - which would require donor support.
Biti is due to present his mid-term budget review next month, which would give clear indications of whether or not the government will take the IMF’s advice.
The suggestions of a SMP have already caused friction within the unity government, with Prime Minister Morgan Tsvangirai and his MDC faction which controls the finance and economic planning ministries welcoming the IMF recommendations and launching consultations for a medium-term economic recovery blueprint.
However, the ZANU-PF party of President Robert Mugabe feels that agreeing to IMF staff monitoring would erode the country’s independence and instead favours tapping domestic resources to fund capital requirements estimated at US$11 billion.
The mid-term budget will show whether prudence will prevail over political expediency.
PULL-QUOTE
The IMF warns that Zimbabwe is “in debt distress” with some US$7.2 billion in external debt, and should urgently seek a debt-relief package. It recommended government cut spending by about 3% of GDP; that it strengthen its fragile financial sector, initially by downsizing and restructuring the Reserve Bank of Zimbabwe; and that it should not revive the defunct Zimbabwe dollar for the foreseeable future.
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