IMF Executive Board Concludes 2020 Article IV Consultation with Zimbabwe

February 26, 2020

On February 24, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Zimbabwe. As the Board meeting and the policy discussions with the authorities on which the staff report is based occurred before the COVID-19 became a pandemic, the staff report does not reflect the implications of this development. While highly uncertain at this stage, it is clear that COVID-19 will adversely impact the economic outlook for Zimbabwe and require additional health-related spending and international support. COVID-19 will make it even harder to balance the policies needed to restore macroeconomic stability with those to address urgent social needs.

Zimbabwe is experiencing an economic and humanitarian crisis. Macroeconomic stability remains a challenge: the economy contracted sharply in 2019, amplified by climate shocks that have crippled agriculture and electricity generation; the newly introduced ZWL$ has lost most of its value; inflation is very high; and international reserves are very low. The climate shocks have magnified the social impacts of the fiscal retrenchment, leaving more than half of the population food insecure. With another poor harvest expected, growth in 2020 is projected at near zero, with food shortages continuing.

The government that came to office following the 2018 elections adopted an agenda focused on macro stabilization and reforms. This was supported by a Staff Monitored Program from the IMF, adopted in May 2019, but is now off-track as policy implementation has been mixed. Notable reforms include a significant fiscal consolidation that has helped reduce the monetary financing of the deficit, the introduction of the new domestic currency in February 2019, the creation of an interbank FX market, and the restructuring of the command agriculture financing model to a public-private partnership with commercial banks. However, uneven implementation of reforms, notably delays and missteps in FX and monetary reforms, have failed to restore confidence in the new currency.

Reengagement with the international community continues to face delays. The Zimbabwean government has yet to define the modalities and financing to clear arrears to the World Bank and other multilateral institutions, and to undertake reforms that would facilitate resolution of arrears with bilateral creditors. This continues to constrain Zimbabwe’s access to external official support. As a result, the authorities face a difficult balance of pursuing tight monetary policy to reduce very high inflation and prudent fiscal policy to address the macroeconomic imbalances and build confidence in the currency, while averting a crisis. While the 2020 budget includes a significant increase in social spending, it is likely insufficient to meet the pressing social needs. Absent a scaling up of donor support, the risks of a deep humanitarian crisis are high.

Executive Board Assessment [2]

Executive Directors noted with concern that Zimbabwe is facing an economic and humanitarian crisis exacerbated by policy missteps and climate‑related shocks. These would require difficult policy choices from the authorities and support from the international community. Directors urged the authorities to make a concerted effort to ensure economic and social stability through the adoption of coordinated fiscal, monetary and foreign exchange policies, alongside with efforts to address food insecurity and serious governance challenges. They emphasized the importance of reengagement with the international community to support efforts to achieve economic sustainability and address the humanitarian crisis.

Notwithstanding efforts in 2019 to tighten the fiscal stance and contain quasi‑fiscal operations by the central bank, Directors noted that pervasive deficits remain and could be exacerbated by the need to respond to the humanitarian crisis. Directors called for non‑essential spending cuts, including decisive reforms to agricultural support programs, to allow for social spending needs. They underscored the importance of public financial management and enhanced domestic revenue mobilization efforts.

Directors stressed that eliminating deficit monetization would not only be crucial for fiscal sustainability, but it would also serve as a precondition for the stabilization of hyper‑inflation and the preservation of the external value of the currency.

Directors noted that Zimbabwe remains in debt distress, with large external arrears to official creditors, and encouraged the authorities to give impetus to reengagement efforts and debt management and transparency. In particular, they cautioned against continued recourse to collateralized external borrowing on commercial terms as this may potentially complicate any future arrears clearance operation.

Directors underscored the need to establish credibility in the new currency. They encouraged the authorities to press forward with the establishment of a functional foreign exchange market and to remove distortions that could lead to rent‑seeking behavior in the economy. Directors agreed that given low reserves and hyper‑inflation, limited credibility, and a lack of access to traditional forms of external financing, a monetary targeting regime is appropriate to conduct monetary policy. Enhancing central bank independence and transparency, including by timely publication of monetary statistics, would be important.

Directors welcomed the progress on financial innovation, supervision and inclusiveness indicators. They noted, however, the need for continued vigilance to ensure financial stability. They encouraged the authorities to conduct asset quality reviews of the banking sector, develop a new framework for managing weak banks, and increase the effectiveness of the AML/CFT framework, including by effectively implementing FAFT standards.

Directors stressed the need to address governance and corruption challenges, entrenched vested interests, and enforcement of the rule of law to improve the business climate and support private‑sector‑led inclusive growth. Such efforts would be instrumental to advance reengagement efforts with the international community and mobilize the needed support. They noted with regret that the Staff‑Monitored Program was off‑track and underscored the importance of continued engagement between the Fund and the authorities, including through technical assistance, policy advice and other innovative ways, to help immediately stabilize the economy and address the humanitarian crisis.

 

Table 1. Zimbabwe: Selected Economic Indicators, 2016–20

2016

2017

2018

2019

2020

Act

Prel

(annual percentage change, unless otherwise indicated)

Output and prices

Real GDP growth1/

0.7

4.7

3.5

-8.3

0.8

Nominal GDP (US$ millions)

20,549

22,041

22,946

20,703

20,563

Nominal GDP (ZWL millions)

20,806

27,438

42,468

156,165

390,666

GDP deflator

3.5

26.0

49.5

300.9

148.1

CPI (annual average)

-1.6

0.9

10.6

255.3

221.1

CPI (end-of-period)

-0.9

3.4

42.1

521.1

52.0

Money and credit

Money supply (M2)

18.8

39.0

24.0

127.5

24.4

Credit to the private sector

-3.9

5.9

9.1

174.1

56.7

Credit to the central government

51.6

74.5

59.2

62.3

27.5

(ZWL$ per US$)

Official Exchange rate

ZWL: USD exchange rate (annual average)

1.0

1.3

2.0

8.5

…

ZWL: USD exchange rate (end-of-period)

1.0

1.3

3.5

16.8

…

(percent of GDP)

Central government

Revenue and grants

16.8

14.1

12.9

13.5

12.8

Expenditure and net lending

23.9

24.0

18.6

16.9

17.8

Of which: Employment costs

15.5

12.7

9.3

4.9

4.3

Of which: Capital transfers and net lending

4.1

5.8

5.0

3.3

4.0

Overall balance

-7.1

-9.9

-5.7

-3.4

-5.0

Primary balance

-6.4

-9.0

-4.8

-3.0

-4.6

(US$ millions, unless otherwise indicated)

Balance of payments

Exports of goods and services

4,060

4,734

5,304

4,634

5,038

(annual percentage change)

1.5

16.6

12.1

-12.6

8.7

Imports of goods and services

6,427

6,555

7,617

5,455

6,417

(annual percentage change)

-14.4

2.0

16.2

-28.4

17.7

Current account balance (excluding official transfers)

-718

-284

-1,229

155

-204

(percent of GDP)

-3.5

-1.3

-5.4

0.7

-1.0

Gross international reserves

310

293

87

111

109

(months of imports of goods and services)

0.6

0.5

0.1

0.2

0.2

Public debt

Consolidated public sector debt (e.o.p.)

10,089

11,998

14,459

10,372

11,082

(percent of GDP)

49.1

54.4

44.2

50.1

53.9

Public and publicly guaranteed external debt (e.o.p.)

7,997

8,829

8,672

9,865

10,591

(percent of GDP)

38.9

40.1

37.8

47.6

51.5

Of which: Arrears

5,157

5,652

6,109

6,284

6,421

(percent of GDP)

25.1

25.6

26.6

30.4

31.2

Sources: Zimbabwean authorities; IMF staff estimates and projections.

1/ At constant 2012 prices.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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