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Zimbabwe

Author(s):
International Monetary Fund
Published Date:
June 2002
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Executive Summary

  • The deterioration of economic activity accelerated during 2001. Inappropriate macroeconomic policies and the general breakdown in law and order have further damaged confidence, destroyed capital, and eroded institutions important for economic development. Output is projected to decline substantially in 2001, bringing the cumulative decline since 1997 in real per capita GDP to 23 percent. Expansionary macroeconomic policies in the context of declining productive capacity have been reflected in inflation accelerating toward triple-digit levels, sharply negative real interest rates, and a bubble in asset prices. The financial position of the banking system has weakened significantly.

  • Poverty and unemployment are increasing. Food shortages stemming from crop destruction, adverse climatic conditions in early 2001, and the inability to import, are becoming increasingly serious. Prices of staples have risen sharply and the re-introduction of price controls on basic consumer goods in October 2001 will exacerbate shortages. One-third of the adult population is infected with the HIV/AIDS virus according to some estimates. Zimbabwe’s severe economic and social problems are spilling over to other countries in the region in the form of illegal immigration, weakened investor confidence, and financial market turmoil.

  • Zimbabwe’s arrears to the Fund amounted to SDR 53.7 million at the end of October. Two payments totaling SDR 0.6 million have been received since late September, far short of what would be required to stabilize the stock of arrears, with another payment of SDR 0.6 million expected before the end of the year.

  • Economic policy adjustments and the adoption of a transparent and orderly land reform program are needed if the process of deindustrialization, a reversion to subsistence agriculture, and collapsing trade is to be halted and reversed. Restoring macroeconomic equilibrium requires restraints on government expenditure, while shifting spending to high priority areas; measures to bolster revenue, strengthen the finances of parastatals, and accelerate privatization; an immediate tightening of monetary policies that would allow real interest rates to rise substantially to positive levels; a significant devaluation of the Zimbabwe dollar in the official market and a return to the crawling peg exchange rate policy that was suspended in October 2000; and the elimination of recently introduced price controls and other distortions.

  • As key economic policy decisions are made by the political leadership, and in view of the intensified electoral campaign, significant changes are not expected before the presidential election that is to be held before April 2002.

I. Introduction

1. The 2001 Article IV consultation discussions between the Zimbabwean authorities and staff were held in Harare during September 3-15, 2001. The staff met with the Ministers of Finance and Economic Development, and Labor and Social Welfare; the Governor of the Reserve Bank of Zimbabwe (RBZ); and other senior government officials. It also met with representatives of the private sector, civil society, nongovernmental organizations, and donors.1

2. Zimbabwe is on the standard 12-month consultation cycle. In concluding the Article IV consultation on December 6, 2000 (EBM/00/120), Directors expressed concern about the decline in per capita incomes and the deterioration in social conditions caused by Zimbabwe’s inappropriate macroeconomic policies, the rapid spread of the HIV/AIDS pandemic, poor governance, and escalating tension and uncertainty related to the government’s land reform program. Directors agreed that the restoration of economic stability—a prerequisite for recovery—would hinge on the implementation of a credible adjustment program, anchored by a return to a sustainable fiscal path and the restoration of external competitiveness. Rebuilding investor confidence would require determined efforts from the government to improve the economic environment, including decisive steps to strengthen governance, ensure a speedy return to the rule of law, and implement an orderly and transparent land reform program that could garner broad domestic and international support.

3. Zimbabwe has been in continuous arrears to the Fund’s General Department and to the Poverty Reduction and Growth Facility (PRGF) Trust since February 2001; its overdue obligations amounted to SDR 53.7 million at end-October. On June 8, 2001, the Executive Board considered a complaint under Rule K-l of the Fund’s Rules and Regulations (EBS/01/67; 5/4/01) and decided that Zimbabwe shall not make use of the general resources of the Fund until such time as it becomes current in its obligations to the General Department of the Fund (EBM/01/59). The Executive Board further reviewed Zimbabwe’s overdue obligations to the Fund on September 24, 2001 (EBM/01/99). While acknowledging Zimbabwe’s intention to make quarterly payments of US$1.5 million (SDR 1.2 million), the Executive Board noted that these payments would represent only 5-6 percent of obligations falling due during the remainder of 2001 and in 2002. In light of the lack of cooperation with the Fund on policies and payments, the Executive Board declared Zimbabwe ineligible to use the general resources of the Fund and removed it from the list of countries eligible to borrow resources from the PRGF Trust. The Executive Board will review the status of Zimbabwe’s arrears to the Fund at the same time it considers this Article IV consultation report.

4. Because of the scarcity of foreign exchange in the official market, Zimbabwe has introduced foreign exchange allocation schemes that are inconsistent with Article VIII, Section 2(a), and Article XIX, Section 7(a). Given that the scarcities which give rise to the restrictions reflect inappropriate policies, the staff does not recommend that the restrictions be approved by the Executive Board.

5. Zimbabwe’s economic data suffer from deficiencies with respect to accuracy, methodology, coverage, and timeliness that hamper Fund surveillance.

II. Recent Economic Performance

6. Zimbabwe’s economic crisis continues to deepen. The deterioration has mainly been the result of inappropriate macroeconomic policies and poor governance, including a general breakdown in law and order in the context of the government’s fast-track land reform program launched in early 2000. This has undermined investor confidence, contributed to the rise in unemployment, destroyed capital, and eroded institutions important for economic development, darkening the longer-term outlook.

7. Real GDP is projected to contract 8½ percent this year, reflecting weaknesses in agriculture, mining, manufacturing, and tourism.2This brings the cumulative decline in real per capita GDP since 1997 to 23 percent. Expansionary monetary policies, reflected in highly negative real interest rates, have pushed inflation toward triple-digit levels and created an asset price bubble. Poverty is rising, and food shortages—stemming from price controls on main commodities and foods, crop destruction and farm occupations, drought and floods, and the lack of foreign exchange—are becoming serious. Zimbabwe may have to import as much as 600,000 metric tons of maize and wheat during the 2001-02 harvest season, about one-fourth of its annual consumption. To cushion the impact of the economic decline on the poor, the government began a “food-for-work” program in 2001. And on October 18, 2001, the government launched an appeal for Z$19.8 billion (US$360 million) of humanitarian assistance.

Selected Economic Indicators
1998199920002001
Est,Proj.
(percent change)
Real GDP (market prices)2. 9-0.7-5.1-8.4
Real per capita GDP (USS)-0.2-3.8-7.9-10.4
CPI inflation (annual average)31.558.255.770.1
CPI inflation (end of period)46.656.955.2102.5
Broad money (M3)14.129.859.979.8
(percent of GDP)
Overall fiscal balance, excluding grants-4.7-10.3-22.9-12.6
Current account balance (excluding official transfers)-5.30.5-1.4-1.2
Sources: Zimbabwean authorities; and staff estimates and projections.
Sources: Zimbabwean authorities; and staff estimates and projections.

8. Unsustainable fiscal policy has been at the center of the deteriorating macro-economic situation. The overall budget deficit (excluding grants) rose sharply to 23 percent of GDP in 2000, mainly on account of large, unbudgeted increases in civil service wages in the runup to parliamentary elections in June 2000; a sharp increase in military spending, reflecting Zimbabwe’s involvement in the Democratic Republic of Congo (DRC) conflict; and a significant rise in government interest payments following a rapid increase in domestic borrowing. Health and education spending, however, declined at a time when the HIV/AIDS pandemic was erasing some of the gains in health and education achieved during the last 20 years: according to some estimates, one-third of the adult population is infected by the HIV/AIDS virus, one of the highest in the world, and this has contributed to a sharp decline in life expectancy from 58 years in 1985 to 40 years in 1999.

Central Government Operations(in percent of GDP)
1998199920002001
Proj.
Total revenues30.527.827.923.5
Of which: tax revenue28.226.426.222.1
Total expenditure and net lending35.238.150.836.1
Of which
Wages and salaries12.313.415.613.5
Interest payments9.610.317.511.0
Budget balance (excluding grants and arrears) 1/-4.7-10.3-22.9-12.6
Of which: primary balance4.90.0-5.4-1.6
Budget balance (including grants and arrears)1/-3.0-9.2-21.1-10.3
Memorandum item:
Domestic financing5.510.317.310.5
Sources: Zimbabwean authorities; and Staff estimates and projections,

Commitments with respect to foreign interest payments,

Sources: Zimbabwean authorities; and Staff estimates and projections,

Commitments with respect to foreign interest payments,

9. The government’s budget for 2001 represented an encouraging step to bring the fiscal position back to a sustainable path. Recurrent expenditure was to be reduced, with particular emphasis on containing the increase in civil service wages and lowering military spending, the latter premised on an early withdrawal from the DRC. In September 2001, parliament approved a supplementary budget that added expenditures of Z$17½ billion,3 equivalent to 3½ percent of GDP, including increases in civil service salaries and higher spending on defense, land reform, drought relief, and medicines. The staff projects that despite a weaker-than-budgeted revenue performance, the overall deficit will be about 12½ percent of GDP in 2001, below the target of 15½ percent of GDP in the initial budget. However, this reduction would be achieved mainly through a sharp decline equivalent to 8¾ percent of GDP in domestic interest payments stemming from a forced restructuring of government debt and inappropriately lax monetary policies. The staff projects a primary deficit of 1⅔ percent of GDP, compared with the budgeted primary surplus of 4⅓ percent of GDP.

10. The finances of public sector enterprises remain precarious. Parastatals have been operating at a loss and have accumulated arrears on their large, government-guaranteed domestic and foreign debt, including arrears to suppliers and to the social security and pension funds. The finances of municipalities are also under pressure, owing to the devolution of functions in the areas of education and health from the central government, as well as limits to their ability to raise revenue and borrow, which are subject to government approval.

Financial Position of the Major Parastatals(in percent of GDP. unless otherwise indicated)
199920002001
Jan-Jun
Profit and loss (including financial charges, loss -)-3.4-5.8-0.1
Total debt stock24.623.814 1
Of which (as percent of total debt stock)
Direct foreign loans46.246.947.4
Government or government-guaranteed loans86.383.483.1
Short-term loans37.836.6
Memorandum items:
Total debt stock (valued at parallel market rate)24.627.328.4
Change in domestic arrears0.4
Change in foreign arrears3.42.6
Source: Zimbabwean authorities; and staff calculations.

11. Monetary policy was relaxed during the second half of 2000 as the government’s domestic borrowing requirement rose rapidly. The RBZ capped the bank rate at 2½ percentage points above the 12-month rate of increase in the consumer price index, and capped treasury bill yields at 1 percentage point below the bank rate. In addition, the RBZ allowed banks to on-lend half of their statutory reserves to exporters at a subsidized rate.4 Consequently, broad money growth accelerated from 30 percent in 1999 to 60 percent in 2000.

Contributions to Broad Money Growth(in percent of broad moency, lagged 12months)
199920002001
DecMarJunSepDecMarJunSep
Net foreign assets21.410.26.021246.35.84.7
Net domestic assets8.431.135.947.857.562068.279.1
Domestic credit23.136.651266.974.886.895.287.3
Of Which
Claims on government (net)10.520.227.729.635.553.254.649.3
Claims on private sector10.513.422.131.633.226.830.032.9
Broad money29.841.341.949.559.968.373.583.5
Sources: Zflnbabwean authorities.
Sources: Zflnbabwean authorities.

12. In January 2001, the government unilaterally restructured its domestic debt by limiting the issuance of short-term treasury bills (the bulk of current domestic debt is in 91-day bills), while offering maturities up to five years at low yields. The sharp increase in liquidity as short-term treasury bills were (involuntarily) redeemed, together with heavy government borrowing from the RBZ, caused interest rates to collapse from 65 percent at end-2000 to 14 percent in January 2001. As inflation accelerated after mid-2001, and government borrowing from the RBZ approached the statutory limit of 20 percent of the previous year’s revenue, yields on treasury bills rose somewhat, although remaining sharply negative in real terms. The government has started to enforce a requirement that 45 percent of institutional investors’ portfolios be held in longer-term government paper. This, together with the collapse of interest rates, has weakened the financial positions of insurance companies, pension funds, and banks, which have seen a decline in profitability measured in terms of returns on assets and on equity.

13. Monetary policy became highly expansionary in 2001 as the RBZ passively accommodated the surge in liquidity resulting from the forced restructuring of government domestic debt and heavy government borrowing. The RBZ also released the remaining pool of banks’ statutory reserves for on-lending at concessional rates of 30 percent to the “productive sectors” and 15 percent to exporters, exerted moral suasion on banks to narrow the spread between deposit and lending rates, and increased liquidity support to banks. As a result, reserve money growth increased sharply to 150 percent in the year to September 2001 compared with 22 percent in the same period in 2000. Asset substitution away from money market instruments has created bubbles in equity and residential real estate prices. The deteriorating economic environment has increased financial sector vulnerability (Box 1).

14. In an attempt to contain inflation, particularly the prices of key staples, the government introduced direct controls on prices in 2001. The Grain Marketing Board was reestablished as a monopoly in June to control the pricing and distribution of maize and wheat. Since October 10, the wholesale and retail prices of basic commodities and foods have been administered, resulting in immediate shortages of these commodities. Moreover, private sector minimum wages were increased, in some cases by more than 100 percent, in October.

Box 1.Financial Sector Vulnerabilities

The worsening economic situation has put strains on the banking system. Some banks have weakened considerably and further deterioration is likely. Reported high capital adequacy ratios overstate banks’ capital because of widespread underprovisioning for bad loans. The overall capital loss to the banking system arising from additional provisioning would amount to about one-fifth of total capital.

Credit, liquidity, and interest rate risks are substantial for a number of banks; these risks could be compounded by direct or indirect exposure to equity and real estate price corrections. Credit risk has been magnified by a decline in the quality of borrowers. The reported ratio of nonperforming loans to total loans at commercial banks increased from 14 percent at end-1999 to 19 percent at end-September 2001. However, these figures may understate the problem, as a number of banks could become insolvent if they provisioned for nonperforming loans according to regulatory requirements. The asset quality of merchant banks is particularly worrisome. Some banks have experienced liquidity problems, as indicated by frequent overnight borrowing from the RBZ, while other banks have received substantial liquidity support for extended periods. Liquid asset ratios overstate the actual positions since these include treasury bills that have been pledged to attract deposits, as well as treasury bills held at the RBZ. The current policy of highly negative real interest rates has exposed banks to interest rate risks owing to maturity mismatches. A substantial rise in nominal interest rates by, for example, 40 percentage points or more could result in negative capital for a number of banks

The new Bank Act has strengthened the RBZ’s regulatory rote as well as its ability to supervise banks and deal with problem institutions. However, the authority to license and delicense remains with the Registrar of Banking Institutions in the Ministry of Finance and Economic Development (MFED) and banking regulations have to be approved by the MFED. This poses problems for an effective licensing and supervision of the banking sector: a preliminary assessment of the Basel Core Principles for Effective Banking Supervision indicates that Zimbabwe does not comply with several, primarily owing to the continued separation of the licensing and supervision functions and the lack of central bank autonomy. Furthermore, due to the understaffing and inexperience of the Banking Supervision Department (BSD) in the RBZ, on-site examinations and follow-up are not being conducted in a timely manner. While minimum capital requirements were doubled in 1999, they are not adjusted regularly, and thus their real value has eroded owing to high inflation.

While the BSD is taking steps to deal with problem institutions, these have not been timely, and follow-up and enforcement of remedial measures have been ineffective. On-site examinations are not in compliance with existing policy, including the frequency with which known or suspected banking problems are examined. Liquidity support to some problem banks has violated the RBZ’s policy to provide liquidity only on a temporary and fully secured basis.

15. With the exchange rate fixed in an environment of high inflation, the Zimbabwe dollar has appreciated sharply in real effective terms in the official market. The weakening of external competitiveness, terms of trade losses, and the absence of foreign financing caused the overall current account balance to shift from a small surplus in 1999 to a deficit of 1½ percent of GDP in 2000. Reflecting the severe shortage of foreign exchange and the exhaustion of usable reserves, Zimbabwe started to accumulate external payments arrears in 1999. The authorities estimate that external arrears at the end of October 2001 totaled US$722 million, including to the World Bank of US$81 million and to the African Development Bank of US$102 million. The continued shortage of foreign exchange—usable reserves are currently equivalent to only about four days of imports of goods and nonfactor services—and limited access to foreign financing have also led to widespread import scarcities that are crippling economic activity.5

Balance of Payments(in millions pf USS)
1998199920002001
Proj.
Current account (excluding official transfers)-35527-102-119
Of which
;Exports, fob1,9251,9241,7911,715
;Imports, fob-2,020-1,675-1,520-1,454
Overall balance-15717-185-515
Official reserves (- increase)648251
Memorandum items:
Arrears (end of period stock)01094711,161
Of which
;Trade credit arrears0060155
;Central government arrears05154461
Sources: Zimbabwean authorities; and staff estimates and projections.

16. In the beginning of August 2000, the RBZ announced a 24 percent devaluation of the Zimbabwe dollar to Z$50 per US$1 and introduced a crawling peg with periodic adjustments based on inflation differentials with Zimbabwe’s trading partners. The exchange rate was subsequently adjusted to US$55 per US$1, but in mid-October the RBZ effectively returned to a fixed exchange rate regime. Owing to high and rising inflation and the generalized loss of confidence, the Zimbabwe dollar has depreciated sharply in the parallel market, recently reaching a level roughly six times the official rate.6 Recent developments in Zimbabwe’s trade and exchange rate regimes are discussed in Box 2, and disincentives to trade, including the export surrender requirement at the official rate, are discussed in Box 3.

17. Developments in Zimbabwe are having adverse impacts on neighboring countries, and Zimbabwe’s relations with the international community have become strained.7 Neighboring countries fear that a continuation or worsening of the economic situation could increase illegal immigration, especially as these countries, with the exception of South Africa, are also facing severe grain shortages. Moreover, the Southern African Development Community (SADC), the Commonwealth, the European Union, and the United States have launched initiatives or proposed legislation to put pressure on the Zimbabwean government to restore the rule of law, while suspending all official development assistance except for humanitarian causes. Although the Zimbabwean government agreed to potentially important changes in its approach to land reform following the meeting of Commonwealth Foreign Ministers in Abuja and the SADC summit in Harare, it has also taken steps to accelerate the implementation of its current fast-track land reform program (Box4).

Box 2.Recent Developments in Trade and Exchange Regimes

Zimbabwe’s trade regime continues to be restrictive, with a rating of 8 on the Fund staff restrictiveness scale ranging from zero to 10, with 10 being the most restrictive. The number of tariff lines and maximum tariff rates were reduced in September 2000, but in March 2001 the authorities raised the effective level of protection by increasing tariff rates on certain processed items that have domestically-produced substitutes, such as food, and reducing rates on some raw materials and capital goods, mostly machinery. Zimbabwe maintains a few nontariff barriers to protect agriculture and mining.

Zimbabwe participates in a number of regional arrangements, including the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA), and the Regional Integration Facilitation Forum (RIFF). In June 2001, Zimbabwe passed legislation to fulfill its commitments under the SADC Trade Protocol that facilitates preferential access to SADC markets. Bilateral agreements are maintained with Botswana, Malawi, Namibia, and South Africa. The recent increase in tariffs are inconsistent with Zimbabwe’s commitments to trade liberalization in the context of regional initiatives.

The authorities introduced several ad hoc exchange measures in 2000-01 aimed at mitigating the loss of competitiveness and curbing parallel market activity. With the objective of earmarking scarce foreign exchange for imports of fuel and electricity and government debt-service payments, the RBZ has modified the export surrender requirements. In May 2000, it earmarked one-half of tobacco export proceeds for key imports and public sector debt-service payments, while 20 percent of the proceeds are surrendered and credited to the tobacco growers’ pooled foreign currency account to finance the sector’s imports; the remainder will be sold to authorized foreign exchange dealers. In June 2001, the RBZ increased the surrender requirement for all other export- from 25 percent to 40 percent.

In an attempt to shore up the depressed gold sector and avoid further mine closings, the RBZ in August 2000 allowed gold producers to hold foreign currency accounts; and, in April 200!, it reintroduced a minimum price (in Zimbabwe dollars) for gold that is well above the world market price when valued at the official exchange rate. This subsidy is expected to cost the RBZ at least 0.5 percent of GDP a year. In July 2001, the RBZ halved the allowances for travel to US$2,500 a person a year. The government is also trying to curb parallel foreign exchange market activity, as discussed in Box 3.

18. A presidential election is to be held before April 2002. President Mugabe is expected to stand for reelection as the candidate of the ruling ZANU-PF (Zimbabwe African National Union-Patriotic Front) party, whose campaign is partially based on the fast-track land reform program. Morgan Tsvangirai, a former labor leader and the head of the opposition party, the Movement for Democratic Change (MDC), is expected to be a candidate following the MDC’s strong showing in the June 2000 parliamentary elections, particularly among urban voters. As the campaign intensifies, hopes for corrective actions in economic policies are vanishing rapidly.

Box 3.Disincentives to Trade

Zimbabwe’s recorded international trade has contracted by about 30 percent since 1996-97 During 2001, the authorities introduced several measures aimed at boosting exports and the collection of foreign exchange, while limiting the growth of the parallel market, where the bulk of foreign exchange is traded. Most of these measures are ad hoc, could give rise to large quasi-fiscal losses, and discourage trade through formal channels.

The main disincentive for exports is the unrealistic official exchange rate, pegged at Z$55 to US$1, while the parallel market rate has been as high as ZS350toUS$l in 2001. The across-the-board (except for tobacco) export surrender requirement of 40 percent effectively penalizes exporters who comply by repatriating their receipts through the official market.1/ Given the wide spread between the official and the parallel market exchange rates, the 40 percent surrender requirement is an effective tax on exporters: at a parallel market rate of Z$300 per US$1, for example, the effective tax rate is about 33 percent.

The RBZ administers three schemes aimed at minimizing the impact of the economic crisis and reducing fuel and foreign exchange shortages for exporters: an incremental export incentive scheme, a subsidized credit scheme, and a price floor for gold producers. Under the first, for each incremental U.S. dollar of exports, the exporter receives a certificate for import duty exemption equivalent to 10 cents, converted into Zimbabwe dollars at the year-end exchange rate. Very small amounts have been disbursed under this scheme, primarily because few sectors have recorded any year-on-year export value increases. Under the subsidized credit scheme, the RBZ has released required reserves at commercial banks and on-lent those resources to export-oriented sectors. While this scheme has provided low-cost domestic working capital to exporters, it has also lessened their motivation to repatriate export proceeds. Moreover, this scheme has added liquidity to the financial system and helped to fuel the asset price bubble as these resources have in part been used to buy shares on the local bourse or real estate. Finally, the price floor for gold producers, established as a multiple of the world price (at the official exchange rate), is aimed at limiting further closures in the hard-hit mining sector; however, the overvalued official exchange rate and the RBZ monopsony have rendered most producers unprofitable.

The authorities have also introduced measures to rein in the parallel market in foreign exchange. These include increased capital requirements, a tenfold increase in licensing and renewal fees for foreign exchange bureaus, more stringent reporting requirements, limits on the foreign exchange positions of banks and foreign exchange bureaus, and enhanced supervision by the RBZ.

1/ The collapse of interest rates in early 2001 is discouraging repatriation as firms may choose to borrow from local banks to finance their domestic operations (e.g., the payment of wages) instead of selling foreign exchange for local currency.

Box 4.Recent Developments in Land Reform1

In December 2000, the Supreme Court ruled that the fast-track land reform program violated the constitutional rights of commercial farmers and issued an interdict against further land acquisitions. The interdict gave the government six months to formulate a lawful land reform program, restore law and order, and remove illegal occupants from the farms; none of these conditions have been met. Instead, the government has continued implementing its fast-track program. In July 2001, the government increased the amount of land to be resettled from 5 million hectares to 8.3 million hectares, almost 70 percent of the land used by the large-scale commercial farming sector.

In December 2000, the UNDP proposed a two-stage approach to land reform based on the principles agreed at the 1998 Land Conference. The first stage was aimed at rebuilding confidence by establishing a common reporting system and data base regarding law-and-order issues, establishing a revolving fund to finance land acquisition, and reestablishing the UNDP technical unit to assist with capacity building and planning. The second stage, involving the resettlement of fanners, would be implemented consistent with the capacity to support resettled farmers and subject to a framework consisting of six key principles, including compensation to farmers, support for displaced workers, and respect for the rule of law. The UNDP proposed beginning with an initial tranche of 1 million hectares. The government’s response was noncommittal, and the initiative was not implemented.

Following continued invasions of farmland and escalation of tensions, the Commercial Farmers’ Union (CFU), in conjunction with the private business community, launched the Zimbabwe Joint Resettlement Initiative in May 2001. The initiative was premised on the provision of 1 million hectares of land, which were handed over to the government in November, and financial and logistical support for the new farmers. While the government formally accepted the initiative, it has made no progress toward implementation.

Two regional meetings on land reform have been held recently: the Committee of Commonwealth Foreign Ministers on Zimbabwe met in Abuja on September 6 and the Summit of the Southern African Development Community Task Force on Zimbabwe met in Harare on September 10-11. At the Abuja meeting, Zimbabwe agreed to restore the rule of law to the process of land reform, including by halting further occupation of farm lands, delisting farms that do not meet specified criteria, and removing people from farms that are not designated for acquisition. Zimbabwe also agreed to engage the UNDP in pursuing an effective and sustainable land reform program on the basis of the UNDP proposals of December 2000. The United Kingdom reaffirmed its commitment to a significant financial contribution to such a land reform program and undertook to encourage other international donors to do the same. The SADC summit welcomed Zimbabwe’s commitment at Abuja to undertake land reform in accordance with the country’s laws and emphasized the need to reach an agreement with the UNDP. However, despite reports that the security services have been instructed to enforce the law, as yet there is little evidence that the situation has changed: there have been more farm invasions and occupations, and violence has continued.

Disregarding international concerns, the government accelerated the fast-track land reform program in early November with a presidential decree amending the Land Acquisition Act to allow the government to assume immediate ownership of land targeted for acquisition. The government subsequently ordered the immediate suspension of all work on targeted farms and instructed current owners to vacate farms within three months.

1 The background to land reform in Zimbabwe and the launching of the fast track land reform program were discussed in the staff report for the 2000 Article IV Consultation (SM/00/254).

III. Outlook and Risks

19. A return to a path of sustainable economic growth over the medium term will be critical to permit the authorities to address pressing social needs, including the spread of HIV/AIDS. Progress in stabilizing the economy, however, hinges not only on the implementation of prudent macroeconomic policies, but also on the quick easing of political tensions, a return of law and order, resolution of governance issues, and normalization of relations with foreign creditors.

Staff Projections
2001200220032004-07

average
(percent change)
Real GDP (market prices)-8.4-5.63.25.2
CPI inflation (annual average)701085414
CPI inflation (end of period)1038638
Broad money (M3)87673517
(percent of GDP, unless otherwise)
Overall fiscal balance, excluding grants-12.6-12.9-11.9-43
Total public debt (end of period)91.678.086.976.3
Of which: domestic debt52.537.634.322.7
(in billions of Zimbabwe dollars)256366533714
Current account balance, excluding official transfers-1.3-1.0-4.9-7.3

20. While there is some uncertainty about the direction of policies ahead of the 2002 presidential election, it is likely that economic policies will continue to be guided mainly by political considerations, and hence policy adjustments in line with the staff’s recommendations (see below) are unlikely before the election. Based on the assumption that the implementation of appropriate policies starts in mid-2002 (Box 5,) economic activity is assumed to begin to turn around during the second half of 2002, but to contract a further 5½ percent for the year 2002 as a whole, and to expand in 2003 as policy changes begin to take effect, supply constraints are addressed, and confidence improves. Only modest progress is made to lower inflation in 2002, but a more significant reduction is achieved in 2003. The fiscal position would remain precarious in 2002-03 given the delay in policy adjustments and the weak economy.

21. Over the medium term, and assuming sustained implementation of appropriate policies, output growth is assumed to gradually rise to about 5 percent—comparable to rates of growth in the late 1980s and the early 1990s—as business investment recovers, and inflation declines to single digits. While the primary fiscal surplus may average about 3 percent of GDP during 2004-07, the overall fiscal balance is expected to remain in deficit, as higher spending on land reform, social services, and capital projects are assumed to be financed mainly by foreign grants and concessional loans. This shift to foreign financing helps to reduce substantially the government’s domestic debt over the medium term. The current account deficit (excluding official transfers) could widen to about 7 percent of GDP in 2004, reflecting the recovery of imports. Because of the limited reserve coverage for short-term debt and the assumed partial payment of external arrears in 2003, the external position is expected to remain vulnerable until 2004. As usable foreign exchange reserves are rebuilt, the cover for imports of goods and services increases to about 4 months by 2007. The debt-service ratio also declines from an estimated 27 percent in 2001 to less than 20 percent in 2007.

Box 5.Medium-Term Outlook

The baseline scenario presented in Tables 1-6 assumes that economic and governance problems are effectively addressed following the 2002 presidential election. An orderly and funded land reform program is adopted in cooperation with the UNDP and the World Bank, the rule of law is restored, relations with donors are improved, and an appropriate economic program, including the elimination of price controls and other distortions, is adopted.

The government is assumed to launch an economic adjustment package in mid-2002, perhaps in the context of a staff- or Fund-monitored arrangement. After a period of satisfactory performance, this could result in the clearance of arrears to the Fund, the World Bank, and the African Development Bank; new bilateral financing; and a possible rescheduling under the Paris Club in early 2003. With stronger economic policies, a positive “confidence shock,” and resumption of external assistance, supply bottlenecks begin to ease and the recession bottoms out during the second half of 2002. Over the medium term, improvements in the composition of public spending, troop withdrawal from the DRC, and new concessional foreign financing permit increases in spending on priority social areas and in government investment, thereby easing social tensions and more effectively addressing the HTV/AIDS pandemic. As these improvements take hold, private domestic and foreign investment begins to recover and external viability is gradually restored.

An alternative, crisis scenario would be based on status quo policies that are unable to stem the economic decline or avert serious food shortages, thereby stoking political and social unrest. Tensions escalate and economic problems could spill over to other SADC members, especially South Africa, which increasingly seek to distance themselves from Zimbabwe.

Driven by dwindling confidence and bad economic policies, including a widespread use of administrative price and exchange controls, the output contraction gathers pace while underlying inflation accelerates. The extent of the economic decline—including the reversion to subsistence agriculture, deindustrialization, and collapsing trade—is difficult to predict, but could be substantial and sustained. While official prices are kept in check through the imposition of price controls, prices on the informal market rise rapidly, reflecting shortages and rent-seeking behavior. In this adverse economic situation, property rights are increasingly breached, which impairs the portfolios of banks and institutional investors and increases the risk of a banking crisis, with potentially large fiscal costs. The parallel market for foreign exchange mitigates the economic decline and fosters currency substitution, possibly culminating in dollarization of the economy. External arrears continue to accumulate. Against the backdrop of a shrinking economy and a weak fiscal position, hard-won social gains achieved during the first two decades of independence are reversed, while an unchecked HIV/AIDS pandemic imposes a heavy burden on longer-term growth prospects.

22. There are considerable downside risks surrounding the staff’s baseline scenario:

  • The deteriorating economic environment has increased vulnerabilities in the financial sector (see Box 1). A significant rise in interest rates such as assumed in the baseline scenario will result in solvency problems for a number of banks, with potentially large adverse effects on the government budget and real economy.

  • Although policy adjustments are likely following the presidential elections, the deteriorating political situation and an environment of collapsing output, pervasive unemployment, triple-digit inflation, widespread food shortages, and deepening poverty could be conducive to social unrest prior to the elections, which could become violent as has happened in the past in Zimbabwe. If this were to happen, it is likely that the decline in output would be even more severe, and a recovery would be delayed.

  • If the post-election policy adjustments do not comprehensively address the key macroeconomic, structural, and governance problems, they will not be successful, and the economic situation would deteriorate relative to the staff’s medium-term outlook. With no policy adjustments, the economic crisis would deepen and the trend toward a reversion to subsistence agriculture, deindustrialization, and collapsing trade would accelerate (see Box 5).

On the other hand, there is also upside potential if a new government moved rapidly to implement comprehensive and credible policies, and if this resulted in a rapid restoration of domestic and international confidence in Zimbabwe.

IV. Policy Discussions

23. The authorities’ strategy to overcome the difficult economic situation, as articulated by the Minister of Finance, is to focus on policies that would help restore public confidence, normalize relations with the international community, reduce the fiscal deficit, and stimulate production. A considerable strengthening of policies is clearly needed to achieve these objectives. It will also be important for Zimbabwe to follow through on the commitments made in Abuja to lay a foundation for an orderly land reform program that can be supported by the international community.

A. Fiscal and Public Sector Policies

24. Although the fiscal deficit is expected to decline from 23 percent of GDP in 2000 to 12½ percent in 2001, the government has not been able to meet its budget target for the primary surplus in 2001, as savings have come mainly from the lower interest outlays on domestic public debt. This, and the associated rise in inflation, has resulted in a sharply negative real cost of servicing domestic debt, as reflected in the rapid improvement in the operational balance (Table 2). Thus the reduction in the deficit essentially reflects financial repression and inflationary financing. In response, the authorities noted that monthly cash ceilings had helped to contain spending, while certain outlays had been postponed owing to the shortage of foreign exchange. They also noted that the supplementary budget for 2001 was fully financed out of savings from domestic interest outlays and foreign grants.

25. Given the precarious economic situation and the erosion of the revenue base, the mission underscored that the authorities needed to continue exercising expenditure restraint. For 2002, the mission recommended that the budget should target a primary surplus of at least 2½ percent of GDP, which would be feasible if appropriate macroeconomic policies were promptly implemented.8 Achieving the recommended primary surplus target will require improving revenue collection; restraining noninterest expenditures well below the rate of inflation, which means resisting pressures for large increases in civil service wages; and continued restructuring of the public sector. A withdrawal of troops from the DRC could provide substantial savings in current expenditure and allow a reallocation of resources to priority areas such as health care and education. The authorities indicated that they were aiming for a primary surplus in 2002, although they did not commit to the proposed target of 2½ percent of GDP.

26. On November 1, 2001, the Minister of Finance outlined the 2002 budget to Parliament. The budget proposes an overall deficit of 15 percent of GDP, compared with the expected outcome for this year of 12½ percent and the 8 percent of GDP target set last year in the context of the “three-year rolling budget framework.” The primary balance is projected to be in deficit equivalent to 1 percent of GDP. Expenditures for defense and land reform rise significantly in real terms, in contrast to roughly unchanged real spending for education, health, and other social services. Total government expenditure increases to 42 percent of GDP, compared with 36 percent projected for 2001. The budget also assumes an increase in total revenue of 3-4 percent of GDP, although there are no measures to increase tax collections, which are already under pressure. Consequently, domestic borrowing is expected to remain substantial, and this will be only partially offset by privatization proceeds.9

27. Progress has been made to restructure the public sector through the rationalization of ministries and subcontracting or commercializing certain services.10 More than 6,300 staff positions have already been eliminated, with an additional 6,800 positions targeted for elimination this year and another 8,350 in 2002. The government projects that the restructuring could save Z$3 billion this year and an additional Z$l billion in 2002, although some of these savings reflect a reallocation of resources from the budget to off-budget entities. The mission encouraged the government to continue its efforts to cut costs and increase the efficiency of government operations.

28. The mission emphasized that the Zimbabwe Revenue Authority, established on September 1, 2001, needed to become fully operational as soon as possible in order to bolster revenue. The authorities noted that revenue collections had been hampered by organizational issues and a lack of foreign exchange to upgrade computer and software systems. Although the introduction of a value-added tax (VAT) is planned in 2002, the supporting legislation has not yet been passed. Nevertheless, the authorities thought that the VAT could become operational quickly, reflecting technical assistance from South Africa and Zambia and a public awareness campaign. The staff emphasized that a successful launch of a VAT would be important to boost revenue and further broaden the tax base.

29. As part of its privatization strategy, the government has sold shares worth Z$9 billion this year, mainly from holdings in listed companies. The privatization of the cellular phone operator, NetOne, from which receipts of Z$12 billion were included in the 2001 budget, has been postponed until early 2002, reflecting delays in the due diligence process.11 The authorities are also developing, with assistance from the World Bank, plans to regulate the privatized sectors, including utilities, telecommunications, and the National Railways of Zimbabwe. The mission urged the authorities to accelerate the privatization process, but noted that foreign participation is discouraged by the deteriorating political and economic situation, and by the exchange policy, which makes valuations extremely high in U.S. dollars at the official exchange rate. To strengthen the finances of the parastatals and facilitate privatization, the mission also emphasized the importance of implementing regular formula-based price adjustment in key tariffs, and of developing a strategy to deal with the government-guaranteed debt of the parastatals.

B. Monetary and Exchange Rate Policies

30. Monetary policy has passively accommodated the rapid surge in liquidity associated with the forced lengthening of domestic debt maturities and increased government borrowing from the RBZ. The consequent acceleration of inflation has had devastating effects on the poor, pensioners, and others on fixed incomes. While acknowledging the adverse effects of government policies on inflation, the authorities argued that an expansive monetary policy was needed to stimulate productive activity. The mission noted that there was no evidence to suggest that the government’s strategy was successful, given that business fixed investments and construction have essentially ceased. Instead, sharply negative real interest rates have encouraged individuals to borrow or switch from fixed-interest financial instruments to alternative assets such as foreign currency, shares, and real estate, causing a sharp rise in these asset prices. Negative real interest rates have also encouraged people to buy now rather than wait, further contributing to the acceleration of inflation. The staff urged the authorities to tighten monetary policy immediately by mopping up excess liquidity through open market operations and by dismantling subsidized credit facilities, thereby allowing interest rates to move to positive levels in real terms. It also urged the authorities to refrain from moral suasion aimed at capping the spread between bank deposit and lending interest rates.

31. The mission noted that the sharply negative real interest rates were also undermining the health of the financial system. In particular, institutional investors who are required to hold a substantial portion of their portfolios in government paper have seen their returns decline sharply. The mission emphasized that the RBZ needs to take steps to ensure the soundness of the banking system, and that the supervisory authorities have to fully enforce compliance with prudential regulations and capital adequacy requirements, particularly in view of risks related to the deteriorating economy and consequent weakening in the quality of banks’ assets. Guidelines to deal with troubled banks were introduced earlier this year, and the staff underscored the importance of dealing promptly with nonviable institutions. The authorities noted the usefulness of the July 2001 MAE mission that advised on the modalities of establishing a deposit insurance scheme, and the preconditions that would have to be achieved before going ahead. Despite increasing banking sector vulnerabilities, the authorities are still considering the implementation of such a scheme.

32. The mission urged the authorities to devalue the official exchange rate to a more realistic level, supported by the tighter monetary and fiscal policies described above, and to adjust the exchange rate thereafter on the basis of expected inflation differentials with Zimbabwe’s trading partners. The large gap between the official and the parallel market exchange rates gives rise to opportunities for corruption to anyone with access to foreign exchange at the official rate; the mission noted that experience in other countries suggests that these opportunities will be exploited. The mission stressed that the ultimate objective should be the establishment of a unified, floating exchange rate. If political or other considerations preclude such a move in the short term, the authorities should, in the meantime, tolerate the parallel market, which already handles the bulk of transactions, as it facilitates trade, encourages the repatriation of foreign currency receipts, and minimizes supply-side bottlenecks arising from the shortage of foreign exchange in the official market. The authorities stated that the crawling peg regime introduced in August 2000 continued to be the official policy; at the same time, they acknowledged the adverse consequences arising from the wide spread between the official and the parallel market exchange rates. They observed that although the Minister of Finance and the RBZ had advocated a step devaluation, there was no political support for this or for a move to a floating exchange rate in the present situation. To boost competitiveness, the government has instead introduced several special schemes for gold and tobacco producers, and for other key export sectors (see Box 2). The government has also taken steps to curb activity in the parallel market, although it is not clear that these have had much of an impact.

C. Relations with the Fund and Other Issues

33. The mission raised concerns about the accumulation of payments arrears to the Fund and urged the authorities to make every effort to pay or, at a minimum, stabilize the overdue obligations to the Fund. The authorities stressed their intention to pay fully all of their obligations, but were unable to make any commitment regarding the timing of when Zimbabwe would clear its arrears to the Fund or begin payments due to the shortage of foreign exchange in the official market and pressing needs for fuel, electricity, and food imports. The domestic currency funds that had been included in the 2001 budget for interest payments have been sequestered, although at the parallel market rate, these fall far short of what would be required. In 2002, the authorities plan to use part of the proceeds from privatization to make payments to the Fund and other creditors. The staff encouraged the authorities to develop a plan to clear its arrears to the Fund and other creditors as part of a comprehensive package to stabilize the economy.

34. The mission noted that recent changes in tariff rates had increased the effective rate of protection. The multiple currency practice arising from a discontinued RBZ scheme for forward foreign exchange cover is expected to be phased out by end-2001. The limited availability of foreign exchange from the RBZ has resulted in the accumulation of private sector external payments arrears, the introduction of foreign exchange allocation schemes, and the halving of travel allowances. The mission urged the authorities to eliminate as soon as possible these restrictions and to liberalize Zimbabwe’s trade regime.

35. Zimbabwe’s database continues to suffer from numerous deficiencies with respect to accuracy, methodology, coverage, and timeliness that hamper the Fund’s ability to conduct effective surveillance. The most serious problems are:

  • a lack of transparency and accuracy in reporting foreign reserves, which include sizable amounts of pledged and illiquid foreign assets;

  • budget data, which include off-balance fiscal operations, suffer from discrepancies between fiscal and monetary data on the financing of the government budget deficit, and lack transparency on defense outlays;

  • output, price, and external sector data, which are weak and reported with significant lags; and

  • the absence of data on unemployment.

The staff urged the authorities to address these shortcomings as soon as possible and stressed that accurate and timely statistics and full disclosure were essential to guide economic policy and allow the Fund to discharge properly its surveillance responsibilities.

36. The Fund has provided a substantial amount of technical assistance to Zimbabwe over the past decade, most recently in the context of establishing a deposit insurance scheme. The authorities welcomed the appointment of a STA advisor on real sector statistics, who will be visiting Zimbabwe periodically starting in late 2001, and requested Fund technical assistance in launching the VAT. The UNDP, in consultation with the Fund, is sponsoring a macroeconomic advisor and advisors on budget accounting and debt management to the Ministry of Finance and Economic Development.

V. Staff Appraisal

37. Economic deterioration in Zimbabwe has accelerated. The weakening of law and order, related to the fast-track land reform involving farm invasions and occupations, has damaged confidence, discouraged investment, destroyed capital, and eroded institutions important for economic development. The result has been a sharp decline in economic activity and a reduced potential for future growth.

38. Expansionary macroeconomic policies in the context of declining productive capacity have been reflected in accelerating inflation toward triple-digit levels, sharply negative real interest rates, and a bubble in asset prices, all of which have increased financial sector vulnerability. Fueled by high and rising inflation, the parallel market exchange rate has depreciated rapidly. As the spread between the parallel and the official exchange rates has widened, the surrender requirement on export earnings has acted as an increasingly high export tax, aggravating the shortage of foreign exchange and exacerbating import scarcities.

39. Poverty and unemployment are increasing. Food shortages stemming from recently introduced price controls, crop destruction, drought and floods, and the inability to import have become more serious. By some estimates, one-third of the adult population is infected with HIV/AIDS at a time when budgetary constraints have forced cutbacks in basic social services. Zimbabwe’s economic and social problems are also spilling over into other countries in the region in the form of illegal immigration, weakened investor confidence, and financial market turmoil.

40. Current economic policies in Zimbabwe are largely influenced by political considerations in the run-up to the 2002 presidential election. This is particularly evident in the 2002 budget, which undermines the modest progress made this year, and by the recent imposition of price controls. The authorities have little confidence in market forces, while inflation is viewed as resulting from avaricious profiteering rather than inappropriately loose monetary policy. Instead of implementing a coherent set of policies to reduce inflation and stabilize the economy, the government is introducing ad hoc—but unsuccessful—schemes to encourage production, while imposing price controls and attempting to suppress the parallel foreign exchange market.

41. Without significant changes in the government’s economic policies, combined with improvements in governance and the adoption of a transparent and orderly land reform program, the economic crisis will gain momentum. The resultant increase in human suffering will be conducive to disruptive social unrest. A credible return to the rule of law and the introduction of an orderly land reform program that will restore investor confidence and elicit broad support at home and abroad is crucial. Without such a land reform, premised on an agreement between the authorities and the UNDP, the implementation of sound macroeconomic policies will only mitigate the speed and depth of the economic decline. For this reason, the authorities need to implement the commitments made in Abuja.

42. Restoring macroeconomic equilibrium requires that the fiscal deficit be brought under control. Some progress has been made this year, despite faltering revenues and additional spending in the supplementary budget. However, the reduction in noninterest spending envisioned in the 2001 budget has not been achieved. For 2002, the authorities need to continue fiscal consolidation, while shifting spending to high priority areas, such as poverty alleviation, health, and education. Measures are needed to bolster revenue collections, strengthen the finances of parastatals, and accelerate privatization. Targeted social safety nets, such as the current “food-for-work” program or other donor-supported programs, should be expanded to protect the poor. By contrast, the recently reintroduced monopoly of the Grain Marketing Board and the price controls on basic commodities and foods should be abolished as they will only intensify economic imbalances and undermine food security.

43. The monetary authorities must take responsibility for reducing inflation. To do this and maintain low inflation in future, the Reserve Bank of Zimbabwe should be made more independent. The RBZ should immediately move to mop up excess liquidity and allow interest rates to become positive in real terms; dismantle subsidized credit facilities; and refrain from engaging in moral suasion aimed at capping the spread between bank deposit and lending interest rates. The authorities also need to exert strict vigilance on the financial system, particularly with regard to provisioning and capital adequacy. Nonviable institutions will need to be closed without delay.

44. Supported by tighter monetary and fiscal policies, the Zimbabwe dollar should be moved to a more realistic level in the official market, accompanied by a return to the crawling peg arrangement suspended in October 2000. The ultimate objective should be a unified, floating exchange rate, which would allow the elimination of the export surrender requirement and the foreign exchange allocation scheme. This needs to be achieved as soon as possible, not least to eliminate the opportunities for corruption available at present to anyone able to purchase foreign exchange at the official exchange rate. Until the exchange rate is unified, however, the authorities should not suppress the parallel market, which facilitates trade, earns foreign exchange, and minimizes supply-side bottlenecks.

45. The above set of policies, in conjunction with improved “environmental” factors, such as stronger governance and a return to the rule of law, should lead to a resumption of sustainable growth, which, in turn, would allow the government to better address pressing social needs. In any case, an immediate tightening of macroeconomic policies, together with a move to a more realistic official exchange rate and the elimination of price controls and other distortions, will help reduce inflation and set the stage for stronger economic performance. Conversely, a delay in the implementation of comprehensive policies to correct the existing economic distortions will increase the costs of adjustment.

46. Zimbabwe’s trade regime continues to be restrictive, and the tariff changes that were announced in March 2001 have increased protection. The authorities need to take steps to fulfill their earlier commitment to deepen trade liberalization, while eliminating exchange restrictions as soon as possible. The government urgently needs to normalize relations with external creditors and formulate a plan for the elimination of external payments arrears. It is also important to address the serious weaknesses in the coverage and timeliness of economic statistics, which continue to complicate the design and monitoring of economic policies in Zimbabwe and hampers the conduct of Fund surveillance.

47. Reaching understanding on a land reform program that can garner broad domestic support and the support of the donor community, together with improved economic policies, could pave the way for discussions between the staff and the authorities on a staff- or Fund-monitored program and the eventual normalization of relations between Zimbabwe and the Fund, other creditors, and donors.

48. It is proposed that the next Article IV consultation with Zimbabwe be held on the standard 12-month cycle.

Table 1.Zimbabwe Selected Economic Indicators, 1998-2002 1/
19981999200020012002
Est.ProjProj 2/
GDP
Nominal GDP (billions of Zimbabwe dollars)143.42104314.3493.8973.0
Nominal GDP (billions of U S dollars)6.75.57.19.08.3
Real GDP (market prices; percentage change)2.9-0.7-5.1-8.4-5.6
Real per capita GDP (percentage change)-0.2-3.8-7.9-10.4-7.4
Savings and investment (percent of GDP)
Gross national savings (excluding grants)8.49.50.2-2.4-1.7
Gross investment 3/13.79.01.7-1.1-0.7
Prices and interest rates (percent)
Consumer price inflation (annual average)31.558.255.770.1107.5
Consumer price inflation (end of period)46.656.955.2102.585.7
91-day treasury bills (annualized yield; end of period)40.489.771.629.582.5
Central government budget (percent of GDP; calendar-year basis)
Revenue30.527.827.923.522.0
Expenditure and net lending35.238 150.836.134 9
Of which: interest on central government debt9.610.317.511.011.8
Overall balance, excluding grants and arrears4.7-10.3-22.9-12.6-12.9
Primary balance, excluding grants4.90.0-5.4-1.6-1.2
Overall balance, including grants and interest arrears1.7-9.2-21.1-10.3-9.5
Domestic financing (including privatization)-2 510.320.110.59.5
External financing (including principal arrears)0.9-1.11.0-0.20.0
Total public debt (percent of GDP; end of period)81.6104.2105.091 678.0
Domestic debt27.137.151.652.537 6
External debt (public and publicly guaranteed)54.567.253.539.140.4
Money and credit (percentage change; end of period)
Broad money (M3)14.129.859.986.667. 0
Domestic credit22.617.161.275.039.4
Credit to the private sector27.510.539.148.148.5
External trade (percentage change)
Export volume-11.34.7-6.7-1.20.1
Import volume-15.5-18.4-13.8-5.4-6.4
Terms of trade-0.6-6.1-5.2-4.2-3.0
Balance of payments (billions of U.S. dollars, unless otherwise indicated)
Exports1.931.921.791.721.73
Imports-2.02-1.68-1.52-1.45-1.41
Current account balance (excluding official transfers)-0.360.03-0.10-012-0.09
(in percent of GDP)-5.30.5-1.4-1.3-1.0
Overall balance-0.160.02-0.19-0.51-0.16
Official reserves (gold valued at market price)
Usable reserves (millions of U.S. dollars; end of period)54.546.722.120.0272.0
(months of imports of goods and services)0.20.20.10.11.4
(percent of short-term debt)5.44.82.83.461.4
(percent of reserve money)18.410.05.92.149.1
External debt and arrears (including private debt)
Total external debt (percent of GDP; end of period)77.892.568.046.444.3
Debt service (percent of exports of goods and services)21.221.827.427.025.1
Total external arrears (percent of GDP; end of period)0.01.96.819.426.8
Sources: Zimbabwean authorities; and staff estimates and projections.

Foreign currency units are converted into Zimbabwe dollars at the official exchange rate.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Negative gross investment in 2001-02 represents destruction of productive capital

Sources: Zimbabwean authorities; and staff estimates and projections.

Foreign currency units are converted into Zimbabwe dollars at the official exchange rate.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Negative gross investment in 2001-02 represents destruction of productive capital

Table 2.Zimbabwe: Central Government Operations, 1998-2002
19981999200020012002
Jan -Sep.StaffStaff
Act,Est.BudgetEst.Act.1/BudgetEst.Proj.BudgetProj,2/
(In percent of GDP)
Total revenue30.527.829.027.924.326.024.823.527.122.0
Tax revenue28.226.427.526.222.924.623.322.125.920.6
Nontax revenue2.31.41.51.81.51.41.61.41.21.4
Total expenditure and net lending35.238.132.850.834.641.436.336.142.034.9
Current expenditure on goods and services17.519.316.724.719.015.719.019.519.918.2
Of which: wages and salaries12.313.411.315.613.411.413.213.513.012.4
Interest payments9.610.39.417.59.519.710.311.014.011.8
Of which: domestic8.08.67.716.46.817.58.18.813.09.4
Subsidies and transfers5.84.34.16.05.04.34.54.64.63.5
Capital expenditure and net lending2.34.22.72.61.22.02.71.03.51.5
Budget balance, excl. grants (commitment basis)3/-4.7-10.3-3.8-22.9-10.3-15.4-11.5-12.6-14.9-12.9
Of which
Primary balance4.90.05.5-5.4-0.84.3-1.2-1.6-0.9-1.2
Operational balance4/2.4-2.6-7.05.73.8
Grants1.71.01.01.10.30.01.00.10.01.3
Budget balance, incl. grants and interest arrears3/-3.0-9.2-2.9-21.1-7.4-15.4-10.5-10.3-14.9-9.5
Foreign financing (net, including principal arrears)-2.5-1.1-0.61.0-0.2-4.2-4.4-0.2-3.00.0
Domestic financing (net)5.510.33.520.17.619.514.910.517.99.5
Of which: privatization 5/0.40.50.00.94.12.02.04.82.6
Memorandum items:
Health and social welfare6/4.53.22.13.42.23.13 03.0
Of which: wages1.01.00.71.31.11.3
Education outlays8.58.27.410.46.26.56.86.5
Of which: wages6.86.65.38.14.75.2
Military expenditure3.23.43.04.82.53.23.72.7
Of which: wages2.22.42.13.02.02.0
Health, social, and education outlays7/39.733.631.228.621.228.525.628.4
Net savings due to retrenchment0.3
Cost of land reform1.1
Interest cost of the debt of privatized parastatals0.4
(In millions of Zimbabwe dollars)
Total revenue42,77358,56387,21687,82590,153140,284126,517115,864251,886214,230
Tax revenue39.48355,56982,74082,27584,652132,710118,447109,047240,840200,609
Domestic taxes32,37747,06265,97073,73173,227112,460101,89793,742191,725179,027
Customs duties7,1068,50716,7708,54311,42520,25016,55015,30549,11521,582
Nontax revenue3,2902,9954,4765,5505,5017,5748,0706,81611,04613,622
Total expenditure and net lending48,40480,21198,727159,669128,292223,157185,085178,312390,139339,846
Current expenditure on goods and services23,60340,64050,09277,53270,45284,42296,52296,363184,630176,636
Of which: wages and salaries17,19628,17533,89248,93149,61561,32167,00066,571120,417121,113
Interest payments13,46621,63128,20054,89635,032105,87252,46754,506130,000114,426
Of which: domestic11,15318,07123,08051,46025,29794,50141,09643,396120,83591,868
Subsidies and transfers8,1059,00712,43518,98618,42522,93923,09722,62643,16134,481
Capital expenditure and net lending3,2318,9328,0008,2554,3829,92513,0004,81832,34914,302
Budget balance, excl. grants (commitment basis)3/-5,631-21,648-11,511-71,844-38,139-82,873-58,568-62,448-138,253-125,615
Of which
Primary balance7,834-1716,689-16,948-3,10722,999-6,102-7,943-8,253-11,189
Operational balance4/4,152-5,502-21,93228,26136,526
Grants2,3222,1442,9123,51796304,963675012,196
Budget balance (incl. grants and interst arrears)3/-3,309-19,330-8,599-66,447-27,515-82,873-53,605-50,763-138,253-91,989
Foreign financing (net, including principal arrrears)-3,514-2,280-1,8043,130-617-22,382-22,382-945-28,162-258
Domestic financing (net)6,82321,61010,40363,31728,132105,25575,98751,708166,41592,247
Of which: privatization5/8411,58403,18022,00010,00010,00045,00025,485
Memorandum items:
Health and social welfare 6/8,7756,7246,18910,60812,07815,90428,25129,099
Of which: wages1,9482,0872,0413,9855,84512,366
Educational outlays16,65617,22322,10832,63433,16733,16763,29263,311
Of which: wages13,33113,84815,92225,35625,19550,763
Military expenditure6,1617,2029,01715,01113,29216,20834,40326,124
Of which: wages4,3364,9826,2379,44510,61019,080
Net savings due to retrenchment2,509
Cost of land reform10,633
Sources: Zimbabwean authorities; and staff estimates and projections.

At annualized rate.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Commitments with respect to foreign interest payments.

Operational balance equals overall balance minus the inflation component of interest payments on domestic debt.

Gross proceeds from privatization, that do not take into account possible debt-equity swaps and debt takeovers.

Included m the 2001 budget is Z$2.9 billion, or 0.5 percent of GDP, allocated for drought relief.

As percent of current expenditure.

Sources: Zimbabwean authorities; and staff estimates and projections.

At annualized rate.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Commitments with respect to foreign interest payments.

Operational balance equals overall balance minus the inflation component of interest payments on domestic debt.

Gross proceeds from privatization, that do not take into account possible debt-equity swaps and debt takeovers.

Included m the 2001 budget is Z$2.9 billion, or 0.5 percent of GDP, allocated for drought relief.

As percent of current expenditure.

Table 3.Zimbabwe: Monetary Survey, 1998-2002
19981999200020012002
Dec.Dec.Dec.Mar.Jun.Sep.Dec.Dec
StaffStaff
Act.Act.ActActAct.Act.Proj.Proj,1/
Monetary authorities(Annual percentage change)
Net foreign assets of reserve bank2/175.0-37.39.9-5.82.4-14.5-18.9362.0
Net domestic assets of reserve bank2/100.5-1.013 633,336.879.786.313.6
Credit to government (net)4.0-45.517.7104.797.7197.7518.117.0
Credit to nonfinancial public enterprises258.5-3.1-0.4-14.274.5211.5330.435.7
Credit to private sector325.054.353.963.653.786.123.913.3
Other items (net)140.9-7.4-21.5-23.1-32.3-18.7-12.7-3.4
Reserve money37.160.916.064.056.4150.1152.789.6
Currency outside banks25.661.437.349.566.8146.4162.966 9
Nonbank deposits381.113.7-45.7-49 6628.2-11.480 067.0
Other banking institution reserves38.825.414.113.79433,580.067.0
Deposit money bank reserves43.264.62.977.648 9162.0148.9112.6
Monetary survey
Net foreign assets115.6-44.3-11.5-31.4-366-32.2-19.4-373 7
Net domestic assets34.85.647.651.758.969.174.946.4
Domestic credit22.617.161.572.979 770.875.039.4
Claims on government (net)1.736.8117.6148.8141.1125.3115.334.6
Claims on nonfinancial public enterprises82.534.498.2113.5204,256.9118.25.0
Claims on private sector27.510.539.034.739.743.948.148.5
Other items (net)9,536.5-108.12,049.0-2,836.7721.192.376.7-29 2
Broad money (M3)14 129.859.968.373.983.586.667 0
Currency25.661.437.349.566.8146.6162.966.9
Deposits13.227.362.269.974.678.380.067.0
Monetary authorities(In percent of lagged reserve money)
Net foreign assets of reserve bank2/-149.263.8-6.64.5-1.410.811.973.3
Net domestic assets of reserve bank2/186.2-2.722.659.457.7139.3140.816 3
Of which; credit to government (net)34-29.73.943.747.091.611639.3
Reserve money37.160.916.064.056.4150.1152,789 6
Of which: currency outside banks10.823.714.419.325.362.874.6319
Monetary survey(In percent of lagged broad money)
Net foreign assets-29.621.42.46.35.84.72.218.5
Net domestic assets43.78.457.562 068.279.183 448 5
Domestic credit28.323.174 886.895.287.392.245.3
Claims on government (net)0.610.535,553.254.649.347.316 4
Claims on nonfinancial public enterprises3.12.16.26.910.65.19.20.5
Claims on private sector24.610.533.226.830.032.935,628 5
Other items (net)15.4-14.7-17.3-24.8-27.1-8.2-8.73.1
Broad money (M3)14.129.859.968.373.983.586.667 0
Currency1.84,63.53.95.711.213.17.6
Deposits12.325.256.464468.272.373.559 4
(Annual percentage change)
Memorandum items:
Private sector credit growth (real)-13.0-29.6-10.4-13.6-15.0-22.7-26 8-20 0
Adjusted net domestic assets of reserve bank3/19.112.429.443.558.3-56 2
Monetary authorities(In millions of Zimbabwe dollars)
Net foreign assets of reserve bank2/-18,893-11,845-13,021-12,702-12,502-12,407-10,56027,665
Net domestic assets of reserve bank2/29,93229,63133,65940,85346,18760,91662,72371,229
Credit to government (net)7,2163,9364,63314,65820,49526,74228,63333,506
Credit to nonfinancial public enterprises6746536516502,0342,0342,8003,800
Credit to private sector7,49711,56917,80315,80615,38822,04622,05624,999
Credit to deposit money banks6,68910,47515,76613,82213,38920,02320,01922,462
Credit to nonbank private sector8081,0952,0371,9842,0002,0232,0372,537
Other items (net)14,54513,47310,5739,7408,27010,0949,2358,925
Reserve money11,04017,78620,63928,15233,68548,50952,16398,894
Currency outside banks4,2656,8849,45110,01613,58520,48424,85141,466
Nonbank deposits17820211037428183198331
Other banking institution reserves.4555836666425396901,1982,001
Deposit money bank reserves6,14110,11610,41117,45619,13327,15225,91755,097
Deposit money banks and other banking institutions
Net foreign assets-8,489-3,413-4821,0572,9151,758-3302,142
Reserves6,51210,69310,39219,01420,58428,23727,11557,098
Net credit from the reserve bank (asset+)-6,689-10,495-16,168-14,625-13,858-16,929-20,019-22,462
Total credit67,63083,716137,098158,395181,784198,693219,295312,411
Credit to government (net)8,99718,23943,61961,23269,16669,76975,235106,352
Credit to nonfinancial public enterprises2,7763,9858,54210,36713,11213,29617,25617,256
Credit to private sector55,85761,49384,93886,79699,505115,628126,803188,803
Other iiems (net)-6,778-14,068-22,843-30,282-38,321-32,538-31,743-24,543
Total deposits52,18566,433107,997133,559153,103179,220194,357324,644
Monetary survey
Net foreign assets-27,382-15,258-13.503-11,644-9,587-10,649-9,75830,898
Net domestic assets84,03788,778131,062155,257176,703210,795229,164335,543
Domestic credit76,32789,399144,418175,687206,312229,492252,764352,253
Claims on government (net)16,21322,17448,25175,88989,66196,511103,868139,858
Claims on nonfinancial public enterprises3,4504,6389,19211,01715,14615,33020,05621,056
Claims on private sector56,66562,58786,97588,780101,505117,651128,840191,340
Other items (net)7,709-622-13,357-20,430-29,609-18,697-23,601-16,711
Broad money (M3)56,62873,520117,559143,612167,116199,888219,406366,441
Currency4,2656,8849,45110,01613,58520,48424,85141,466
Deposits52,36366,636108,107133,597153,532179,403194,555324,975
(In millions of US dollars)
Memorandum Hems:
Net foreign assets of reserve bank-448-121-375-192155
0f which: usable reserves55472220272
Net foreign assets of deposit money banks and
other banking institutions-229-89-9-612
Sources: Zimbabwean authorities; and staff estimates and projections.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Reserve Bank of Zimbabwe’s net foreign assets and net domestic assets have been adjusted for memorandum of deposits.

Net domestic assets of Reserve Bank of Zimbabwe minus reserve balances.

Sources: Zimbabwean authorities; and staff estimates and projections.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Reserve Bank of Zimbabwe’s net foreign assets and net domestic assets have been adjusted for memorandum of deposits.

Net domestic assets of Reserve Bank of Zimbabwe minus reserve balances.

Table 4.Zimbabwe: Balance of Payments, 1998-2002(In millions of U.S. dollars, unless otherwise indicated)
19981999200020012002
Prel.Proj.Proj.1/
Current account (excluding official transfers)-35527-102-119-87
Trade balance-95248272261317
Exports, f.o.b.1,9251,9241,7911,7151,730
Imports, f.o.b.-2,020-1,675-1,520-1,454-1,413
Of which: emergency food imports75100
Nonfactor services-4021-109-155-153
Receipts630621327262269
Payments-670-600-436-417-422
Investment income-348-357-387-380-354
Interest-147-142-174-176-167
Receipts3036252525
Payments-177-178-199-201-192
Other-201-215-213-204-187
Private transfers128115122156103
Capital account (including official transfers)157-10-332-396-69
Official transfers77101532667
Direct investment88501510153
Portfolio investment1121-1-81-20
Long-term capital5534-238-286-249
Government-50-60-177-204-177
Public enterprises5470-33-63-57
Private sector5124-29-19-15
Short-term capital-74-216-161-65-20
Errors and omissions41024900
Overall balance-15717-185-515-156
Financing157-17185515156
Gross official reserves (- increase)648252-252
Net use of Fund resources5-27-72-76-66
Drawings5335000
Repayments-48-62-72-76-66
Other short-term liabilities (net)88-107-130-1010
Change in arrears (decrease, -)0109362690474
Debt and arrears rescheduling00000
Unidentified financing2/00000
Memorandum items:
Gross official reserves2/, 3/55472220272
In months of imports of goods and services0.20.20.10.11.5
External arrears2/01094711,1611,635
Foreign liabilities (reported by reserve bank) 2/744599397220154
Net international reserves (reported by reserve bank);-690-552-375-200118
Current account balance (percent of GDP)-5.60.5-1.5-1 3-1.0
Reserves / short-term debt (percent)4/5.44.82.83.461.4
External debt service5/576588620582535
Sources: Zimbabwean authorities; and staff estimates and projections.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

End of period.

Gold valued at market prices.

Short-term debt includes medium- and long-term amortization due within 12 months.

Scheduled medium- and long-term amortization plus all interest payments.

Sources: Zimbabwean authorities; and staff estimates and projections.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

End of period.

Gold valued at market prices.

Short-term debt includes medium- and long-term amortization due within 12 months.

Scheduled medium- and long-term amortization plus all interest payments.

Table 5.Zimbabwe: Medium-Term Outlook, 2002-071/
200220032004200520062007
Proj.Proj.Proj.ProjProjProj.
GDP
Nominal GDP (billions of Zimbabwe dollars)973.01,553.22,060.52,477 82,824.63,141.8
Nominal GDP (billions of U.S. dollars)8.37.27.7849.19.8
Real GDP (market prices; percentage change)-5.63.25.65.05.15.1
Real per capita GDP (percentage change)-7.41.54.03.84.14.4
Savings and investment (percent of GDP)
Gross national savings (excluding grants)-1.74.15.67.15.76.9
Gross investment2/-0.79.013.515.013.013.0
Prices and interest rates (percent)
Consumer price inflation (annual average)107.554.226.214.3886.2
Consumer price inflation (end of period)85.738.019.211.17.35.5
91-day treasury bills (annualized yield; end of period)82.542.124.517.012.78.2
Central government budget (percent of GDP; calendar-year basis)
Revenue22.024.225.826.627.027.2
Expenditure and net lending34.936.232.530.729.830.9
Of which: interest on central government debt11.812.39.27.86.55.4
Overall balance, excluding grants and arrears-12.9-11.9-6.7-4.1-2.8-3.7
Primary balance, excluding grants-1.20.42.53.73.71.7
Overall balance, including grants and interest arrears-9.5-8.8-4.5-2.1-0.9-2.3
Domestic financing (including privatization)9.53.01.1-0.2-1.003
External financing (including principal arrears)0.05.83.42.31.92.0
Total public debt (percent of GDP; end of period)78.086.977.578.974.076 3
Domestic debt37.634.324.425 620.522 7
External debt (public and publicly guaranteed)40.452 653.153 353 553 6
Money and credit (percentage change; end of period)
Broad money (M3)67.034.623.019.713.811.0
Domestic credit39.430.819.015.99.710.7
Credit to the private sector48.553.741.231.323.818.2
External trade (percentage change)
Export volume0.17.99.86.27.57.5
Import volume-6.421.223.57.58.36.7
Terms of trade-3.0-1.61.7-0.61.11.1
Balance of payments (billions of U.S. dollars; unless otherwise indicated)
Exports1.731.942.212.422.682.96
Imports-1.41-1.81-2.28-2.55-2.81-3.04
Current account balance (excluding official transfers)-0.09-0.35-0.61-0.66-0.66-0.60
(in percent of GDP)-1.0-4.9-7.9-7.9-7.3-6.1
Overall balance-0.160.010 070.150.13022
Official reserves (gold valued at market price)
Usable reserves (millions of U.S. dollars; end of period)272.0365.9931.01,175.21,268.91,450 4
(months of imports of goods and services)1.41.63.43.83.84.0
(percent of short-term debt)61.467.7140.3147.7215.4219.4
(percent of reserve money)49.193.1226.1268.9275.2301.1
External debt and arrears (including private debt)
Total external debt (percent of GDP; end of period)44.357.659.461.362.563.5
Debt service (percent of exports of goods and services)25.123.621.620.318.217.2
Total external arrears (percent of GDP; end of period)26.80.00.00.00.00.0
Sources: Zimbabwean authorities; and staff estimates and projections.

Staff projections represent the baseline scenario discussed in Section III.

Negative gross investment in 2002 represents destruction of productive capital.

Sources: Zimbabwean authorities; and staff estimates and projections.

Staff projections represent the baseline scenario discussed in Section III.

Negative gross investment in 2002 represents destruction of productive capital.

Table 6.Zimbabwe: Indicators of Debt-Servicing Capacity, 1998-2002 1/
19981999200020012002
Est.Est.Proj.Proj.2/
(In percent of GDP)
External debt outstanding82.191.369.646.444.3
Medium- and long-term debt66.876.361.342.942.9
Of which: Fund6.26.54.12.21.6
other multilaterals28.232.828.821.523.2
Short-term debt15.315.08.33.51.4
Of which: non-trade related5.34.11.50.00.0
Debt service3/9.110.59.06.56.5
Of which: Fund0.91.21.20.90.8
other multilaterals1.92.72.11.31.3
(In percent of exports of goods and services)
External debt outstanding191.9190.0211.8193.2172.4
Medium- and long-term debt156.1155.8186.5178.6167.0
Of which: Fund14.513.512.59.16.3
other multilaterals65.968.287.589.590.2
Short-term debt35.931.225.214.65.4
Of which: non-trade related12.48.54.40.00.0
Debt service 3/21.221.827.427.025.1
Of which: Fund2.12.63.63.83.3
other multilaterals4.45.76.45.45.0
(In millions of SDRs)
Debt service due to Fund42.951.561.064.754.4
Principal35.645.153.460.250.8
Interest and charges7.36.47.64.53.6
(In percent)
Ratio of outstanding Fund credit to:
Quota110.776.161.043.929.5
Total debt7.57.15.94.73.7
Ratio of debt service due to Fund to:
Quota4/16.414.617.318.315.4
Total debt service10.111.913.014.113.1
Gross official reserves5/106.6149.5364.0409.425.8
Memorandum items:
Ratio of short-term debt to gross reserves6/415.2427.9307.9172.025.5
Of which: non-trade related343.8116.953.9-0.5-0.2
Sources: Zimbawean authorities; and staff estimates and projections.

On accrual basis.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Principal on medium- and long-term debt plus interest payments on all debts.

Zimbabwe’s quota was raised from SDR 261.3 million to SDR 353.4 million in February 1999.

Gold valued at full market prices.

Official reserves plus reserves of deposit money banks.

Sources: Zimbawean authorities; and staff estimates and projections.

On accrual basis.

Staff projections for 2002 represent the baseline scenario discussed in Section III.

Principal on medium- and long-term debt plus interest payments on all debts.

Zimbabwe’s quota was raised from SDR 261.3 million to SDR 353.4 million in February 1999.

Gold valued at full market prices.

Official reserves plus reserves of deposit money banks.

Figure 1.Zimbabwe: Selected Indicators 1/

Sources:Zimbabwean authorities; and staff estimates.

1/ Foreign currency units are converted into Zimbabwe dollars at the official exchange rate.

Figure 2.Zimbabwe: Macroeconomic Indicators, 1997-2007

Sources:Zimbabwean authorities; and staff estimates and projection

Figure 3.Zimbabwe: Effective Exchange Rates, January 1990 to September 2001

(Official market; period average, 1990 = 100)

Sources:IMF, Information Notice System.

Appendix I Zimbabwe: Relations with the Fund

(as of October-31,2001)

I. Membership Status: Joined: 09/29/1980; Article VIII
II. General Resources Account:SDR Million% Quota
Quota353.40100.0
Fund holdings of currency472.03133.6
Reserve position in Fund0.330.1
III.SDR Department:SDR Million% Allocation
Net cumulative allocation10.20100.0
Holdings0.090.9
IV. Outstanding Purchases and Loans:SDR Million% Quota
Stand-By Arrangements63.9418.1
Extended Arrangements55.0115.6
Poverty Reduction Growth Facility90.0725.5
(PRGF) Arrangements

V.Financial Arrangements:

ApprovalExpirationAmountAmount Drawn
Approved
TypeDateDate(SDR Million)(SDR Million)
Stand-By Arrangement08/02/199910/01/2000141.3624.74
Stand-By Arrangement06/01/199806/30/1999130.6539.20
Extended Fund Facility09/11/199209/10/1995114.6086.90
(EFF)

VI.Projected Obligations to Fund:(SDR Million; based on existing use of resources and present holdings of SDRs):

OverdueForthcoming
09/30/200120012002200320042005
Principal50.89.473.546.424.14.9
Charges/interest3.01.63 62.31.41.1
Total53.811.077.148.725.56.0

VII. Exchange Rate Arrangement

From January 1999 to July 2000, the exchange rate was fixed de facto by the Reserve Bank of Zimbabwe (RBZ) at US$1=Z$38. On August 1, 2000 the exchange rate was allowed to fluctuate in a range of +/- 5 percent around the central rate set by the RBZ, to be adjusted periodically in light of inflation differentials with trading partners. However, since mid-October 2000, the central rate has remained unchanged at US$1=Z$55.

Zimbabwe accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement on February 3, 1995. The RBZ maintains a multiple currency practice arising from outstanding contracts under a discontinued RBZ scheme for forward foreign exchange cover (to be cleared by end-2001). Fund approval of this measure, pursuant to Article VIII, Section 2 (a) and Section 3, lapsed in March 2000. Moreover, limitation on the availability of foreign exchange from the RBZ (as evidenced by the accumulation of external payments arrears by the private sector), gives rise to an exchange restriction subject to Fund approval under Article VIII, Section 2(a) and Article XIX, Section 7(a).

VIII Article IV Consultations

Zimbabwe is on the standard 12-month consultation cycle. The last Article IV consultation was concluded on December 6, 2000 (EBM/00/120).

IX. Technical Assistance

Fund technical assistance to Zimbabwe has been limited during the past 12 months. An MAE-sponsored long-term advisor arrived in Zimbabwe in August 1996 to assist in the area of banking supervision; his appointment was not extended beyond October 1999. Another MAE expert on monetary operations provided advice and trained staff in the implementation of open market operations and the use of repurchase agreements from October 1998 until October 2000. A third MAE expert on the payments system, who also advised the RBZ on the array of monetary instruments to be used to monitor and manage liquidity in the financial sector, completed a one-year assignment in October 1999.

Technical assistance is summarized in the attached table.

X. Resident Representative

A resident representative office was opened in July 1993. Mr. G. G. Johnson has been the Senior Resident Representative since January 2001.

Zimbabwe: Technical Assistance from the Fund (Since the Inception of the PRGF/EFF Arrangements in September 1992)
DateDepartmentPurposeResult
November 1992STARevise monetary statistics.Revision initiated.
April 1993MAELiberalize foreign exchange system.Comprehensive reforms launched; completed in July 1994.
Spring 1994LEGRevise the Reserve Bank Act and the Banking Act.Completed.
Spring 1995FADImprove the system of budgeting and public expenditure control.Initial steps taken.
Spring 1995STAHarmonize the reporting system for monetary statistics.Harmonization completed.
Winter 1995STAProvide training in balance of payments methodology.Seminar provided.
January 1996STAImprove foreign trade statistics.Advice being implemented.
August 1996MAE (long term)Strengthen banking supervision.Some of the advice being implemented.
October 1996STAImprove national accounts.Some of the advice being implemented.
January 1996, November 1996MAEImprove monetary and foreign exchange operations.Some of the advice being implemented.
November 1997MAEImprove monetary operations.Some of the advice being implemented.
May 1999MAEReview and advise on monetary operations, the payments system, and supervision; assess vulnerability of the financial sector.Report recommendations being reviewed.
July 2001MAEDeposit insurance scheme.Report recommendations being reviewed.
Appendix II Zimbabwe: Relations with the World Bank Group

Arrears to the Bank, which were US$27 million as of end-October 2000, expanded to US$82 million by end-October 2001 and are expected to accumulate further in the next several months. Due to the accumulation of arrears, disbursements were suspended on May 15, 2000. A resumption of disbursements would be contingent upon clearance of arrears, and the scale of the Bank’s subsequent reengagement will depend on progress in the following issues: (a) governance, (b) land reform, and (c) macroeconomic stability. In the absence of adequate progress on these fronts, Bank support to Zimbabwe will be limited primarily to social protection and AIDS-related activities, as well as the dialogue on land reform.

The second structural adjustment loan was closed on December 31, 1997 after release of the third tranche earlier in the month. A third structural adjustment credit has been prepared but put on hold, owing to the weakening in economic performance and governance.

There are three ongoing IDA investment projects in Zimbabwe, covering (a) Agricultural Services and Management, providing for improved extension services; (b) Sexually Transmitted Infections, aimed at arresting the spread of STDs and HIV/AIDS and providing care for those already infected; (c) Enterprise Development, to promote exports and industrial growth; (d) Community Action, aimed at alleviating structural causes of poverty in rural areas; (e) Park Rehabilitation and Conservation, focused on transforming the management of national parks, and recently amended to support rehabilitation of infrastructure in flood- affected areas; and (f) the Land Reform Project, already approved but not yet effective, to support pilot land improvement interventions (physical and social infrastructure) on already-acquired lands, which would then be distributed to landless farmers. Moreover, an Enhanced Social Protection Project is under preparation.

The IFC’s investment portfolio in Zimbabwe represents one of its largest exposures in Africa, with commitments (as of October 2000) of US$70 million (loans of US$54 million and equity of US$16 million) and an outstanding portfolio of US$48 million (loans of US$33 million and equity of US$15 million). These IFC investments cover over 25 companies in a wide range of sectors. The IFC’s specific strategy for Zimbabwe is to assist private sector development by (a) helping to enhance export-generating activities; (b) assisting in corporate restructuring, privatization (subject to the government’s majority divestiture, the IFC would consider participating in the privatization of the insurance company, ZIMRE), and modernization; (c) strengthening the financial sector; and (d) supporting small and medium-sized enterprises.

IBRD/IDA Status of (Active) Operations in Zimbabwe(in millions of SDRs; as of October 2,2001)
FinancierProject namePrincipalUndisbursedDisbursedClosing Date
IDAEnterprise Development47.5024.8622.6431-Dec-02
IDACommunity Action Project45.0042.272.7331-Dec-03
IDAPark Rehab. & Conservation46.3044.761.5430-Sep-05
IDALand Reform3.893.890.0031-Dec-01
World Bank Loan/Credit Summary for Zimbabwe(in millions of U.S. dollars; as of August 31, 2001)
IBRDIDATOTAL
Original principal896.20661.951558.15
Cancellations52.0728.1780.25
Disbursed842.99459.711302.70
Undisbursed1.14163.29164.43
Repaid:412.815.31418.12
Due:430.18428.57858.75
Exchange adjustment-23.640.00-23.64
Borrowers’ obligation406.54428.57835.11
Appendix III Zimbabwe: Statistical Issues

The statistical database in Zimbabwe is inadequate, and deficiencies have emerged in the timely provision of data to the Fund. While some monetary data are of high quality, the Reserve Bank of Zimbabwe (RBZ) does not report its foreign reserves in a meaningful fashion, data on external arrears are sketchy, budgetary data are reported to the staff with a substantial lag, and there is a significant discrepancy between above-the-line budgetary data and financing data compiled from other sources. The Central Statistical Office (CSO) conducts and updates regularly a wide array of sectoral surveys, but GDP data are reported with a substantial lag. There are shortcomings in external trade and finance data, and no information is available about unemployment.

Prices, production, labor

The CSO produces a monthly consumer price index. The base year was changed from 1990 to 1995, with new weights based on a 1995-96 survey. It also reports a monthly manufacturing index with a 1990 base, but with a long lag. Quarterly data on employment and wages are published with a substantial lag and limited coverage. A comprehensive labor market survey is long overdue.

National accounts

Having benefited from substantial technical assistance from the Fund, the World Bank, and the United Kingdom in 1996-97, the CSO published revised national accounts in late 1997, covering the period 1985-96, with 1990 as the base year for constant price estimates. While the revised national accounts are a significant improvement over the previous estimates, the coverage of economic activity in the informal sector remains inadequate. National accounts data for 1999 were not published until June 2001.

Public finance

Key weaknesses continue to impair the analysis of fiscal developments and the formulation of appropriate adjustment policies. Monthly revenue and expenditure data for the central government are available with a lag of four-six weeks. There are large discrepancies between the fiscal and monetary accounts, and a substantial unexplained discrepancy between the budget financing need (computed from the income expenditure side) and financing data from banking and other sources. In addition, a significant part of donor-financed development expenditure is off budget, the economic classification of expenditure is insufficiently disaggregated, and a functional classification of expenditure is not available.

The authorities do not provide Fund staff with budget data according to organizational classification on a regular basis, and they also provide limited access to source data, forcing staff to rely on aggregated data of unverifiable quality. Also, the operations of the social security fund and several self-financing funds under the purview of the central government are not included in reported data. Furthermore, although operating targets for public enterprises are provided regularly, it is still not possible to compile reliable consolidated accounts for the nonfinancial public sector, since financial operations of public enterprises are neither reported nor audited regularly, the accounts of local governments become available only with a lag of many years, and consolidated general government accounts are not compiled.

In 1999, the Ministry of Finance resumed reporting detailed data for publication in the Government Finance Statistics (GFS) Yearbook. However, no data have been reported since then, and the latest published data are for 1997. No more recent data are provided for publication in International Financial Statistics (1FS).

External sector

Merchandise trade statistics are still being reported with a four- to five-month lag, even though, following installation of the new ASYCUDA computer system at the customs department, data are being provided by customs to the CSO within seven days of the end of each month.

Compilation of capital and financial account transactions suffers from a considerable delay, and there is a significant lag in reporting balance of payments data to the Fund. While the RBZ provides reasonably reliable estimates of the balance of payments for program and surveillance purposes, measures are needed to shorten the lag in the compilation and reporting of such data. Balance of payments data reported for publication in the IFS and Balance of Payments Yearbook are even less timely—the latest published data are for 1994.

Data on short-term external debt are reported to the Fund by the RBZ with a one- to two-month lag. Because of encumbrances on reserves, official reserve data are not reported to the Fund in a meaningful manner. Recently the RBZ has started to report “usable RBZ reserves” on a more timely basis. Comprehensive external debt data (including breakdowns of maturities, debtors, and creditors) are forthcoming only with a considerable lag. The authorities have provided staff only with partial information on the extent of their collateralized external borrowing, and they have not released comprehensive data on external arrears (including a detailed breakdown either by creditor and debtor or by principal and interest), which became significant in 1999 and have grown substantially since mid-2001. There is a pressing need for the authorities to provide comprehensive external sector data on a more timely basis.

Monetary accounts

Significant progress has been made in developing a unified system for reporting monetary statistics to the Fund based on international standards of data classification, and in improving the collection and reporting of financial data. However, there continues to be some difficulty in reconciling the balance sheet of the RBZ provided in the monetary control program, which is produced within two weeks of the end of each month, with the monetary survey, which is produced within six weeks of the end of each month.

Zimbabwe: Core Statistical Indicators(as of October 31, 2001)
Exchange RatesInternational Reserves1/Central Bank Balance SheetReserve/ Base MoneyBroad MoneyInterest RatesConsumer Price IndexExports/ ImportsCurrent Account BalanceOverall Government BalanceGDP/ GNPExternal Debt/ Debt Service2/
Date of latest observation10/31/0110/05/0109/0110/05/0108/0110/31/0109/0112/0012/0009/0119991999
Date received10/31/0110/22/0110/05/0110/22/0110/0110/31/0110/0109/0109/0110/0109/0109/01
Frequency of data3/DWMWMDMQQMYY
Frequency of reporting3/DWMWMWMVVMVV
Source of update4/CAAAAAAAAAAA
Mode of reporting 5/ECCCCCCVVCVV
Confidentiality4/CAAAAAAAAAAA
Frequency of publication3/DWMWMWMVVMVV

Data on reserves as reported by the authorities include substantial amounts of pledged or illiquid assets that are not identified clearly in official reports.

The authorities do not provide comprehensive data on external arrears.

D = daily; W = weekly; M = monthly; Q = quarterly; A = annual; V = on mission or staff visits.

A = direct reporting by central bank or relevant ministry (including reports forwarded by World Bank); C = cable or fax (including reports forwarded by World Bank).

C = unrestricted use; E = embargoed for a period of time.

Data on reserves as reported by the authorities include substantial amounts of pledged or illiquid assets that are not identified clearly in official reports.

The authorities do not provide comprehensive data on external arrears.

D = daily; W = weekly; M = monthly; Q = quarterly; A = annual; V = on mission or staff visits.

A = direct reporting by central bank or relevant ministry (including reports forwarded by World Bank); C = cable or fax (including reports forwarded by World Bank).

C = unrestricted use; E = embargoed for a period of time.

Appendix IV
Zimbabwe: Selected Social and Demographic Indicators(1999, unless otherwise indicated)
AreaPopulationDensity
386,850 sq. km.11,904 thousand30.77 per sq. km.
Population characteristicsHealth
Population growth rate1.8Population per physician (1996)8517
Life expectancy at birth40.4Public health expenditure
Infant mortality rate (per thousand)70.1(percent of GDP)2.9
Total fertility rate (births per woman)3.6HlV-incidence
Urban population (percent of total)34.6(percent of population, age 15-49)25
Education
GNP per capitaUS$ 652
Adult literacy rate88
Access to safe water (1996)Primary school enrollment rate
(1997, percent of school-age group)93
Percent of population77.0
Urban99.0Poverty indicators (latest year)
Rural64.0
Poorest 40 percent
Labor statisticsShare of income
Per adult equivalent consumption
Labor force (millions)5.5
Of which: agriculture1.3
(in percent)25.5
Formal employment
Private sector
Informal sector
Sources: World Bank, World Development Indicators, 2001.

The Mission comprised Messrs. Coe (head), Kovanen, Erasmus, Bagattini (all AFR), and Bulir (PDR). Mr. Neuhaus (ADR. Outgoing head) participated in the discussions during September 3-5. The mission was assisted by Mr. Johnson, the Fund’s Senior Resident Representative in Harare. Mr. Yagei (World Bank) participated in several meetings.

Manufacturing production declined by 6½ percent in the year to July 2001; 204 companies ceased operations in the first quarter of 2001, following the closure of 400 companies in 2000. Mining output declined by 9 percent in the year to June, and tourism arrivals fell by 23 percent over the same period.

Of which Z$4 billion will be financed from foreign grants already received.

In August 2000, the RBZ released through this scheme the equivalent of about 30 percent of reserve money at an interest rate of 30 percent, compared with the bank rate of 56 percent and year-on-year inflation of 54 percent.

Recently, Zimbabwe reached an agreement to procure fuels from Libya, which will provide a one-year revolving credit facility of US$90 million per quarter.

There are no official data on the parallel exchange rate. However, the price differential of Old Mutual, which is the only stock that is traded both on the Zimbabwe Stock Exchange and the London Stock Exchange, provides an indication of the spread between the official and parallel market exchange rates, and has moved in line with parallel market quotations.

For example, developments in Zimbabwe have contributed to the recent depreciation in the South African rand.

The 2½ percent primary surplus target for 2002 is not met in the staff’s baseline projections because the adjustment of interest and exchange rates is assumed to be delayed until mid-2002.

The staff’s baseline projections implicitly assume that a supplementary budget will be adopted in mid-2002.

The Zimbabwe National Water Authority, the Zimbabwe Revenue Authority, and the government’s medical stores have been commercialized and some food services at schools and universities have been subcontracted out. In addition, a full cost recovery system has been introduced for a number of public services.

The sale of NetOne is expected to result in more than US$100 million direct investment in 2002.

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