The Authorities are thankful to the Fund for remaining engaged during these difficult times in Zimbabwe, providing valuable policy advice and technical assistance. The authorities acknowledge that economic performance in Zimbabwe has continued to deteriorate, reflecting the impact of both domestic and exogenous factors. They are aware that to salvage the situation, a comprehensive package of policies is required, involving land and other social reforms, monetary tightening, fiscal consolidation, exchange rate adjustment, privatisation, elimination of price controls and other structural distortions and the rescheduling of external debt. In this context, the scenarios explored by the staff for the postelection period are helpful, including the modalities for Fund involvement.
Domestic Factors: Land Reform
On the domestic front, the authorities have maintained that land reform is inevitable to address historical imbalances and deep-rooted poverty, considering that this was a key issue during the struggle for independence, but which has not been resolved for the past 21 years. In this context, their preferred pace is to speed-up land reform, contending that resolving the problem once and for all augurs well for the long-term stability of the country. The authorities will continue to explore all options to reach an amicable solution, including cooperation with regional and non-regional Heads of States and negotiations with farmers and other stakeholders.
While acknowledging the foregoing, the impact of other factors that are exogenous should not be overlooked. These include both the droughts and floods which have contributed to food shortages; continuous terms of trade losses; the ongoing global slowdown, which has significantly compounded difficulties in the tourism sector and has also contributed to a further decline in the prices of Zimbabwe’s major exports. The ensuing foreign exchange shortages have led to a curtailment of essential imports, while crippling the country’s capacity to discharge its external obligations.
The Authorities’ Policy Stance
The confluence of internal and exogenous factors as well as natural calamities has compounded the economic crisis in Zimbabwe, whose salient features have been spiralling inflation; nearing triple digits; acute shortage of foreign exchange and essential imports; company closures and increasing unemployment; rising tension in the country; and the spillover of the crisis to countries in the region. This environment has made the authorities’ policy response a daunting challenge. To worsen the situation, the pressures of an election cycle have tilted the focus of policy towards the short-term and as a result, the adopted policy measures have not been effective in addressing the fundamental causes of the crisis.
Despite the range of negative overall developments, there are also signs of positive steps in other areas. The budget deficit was reduced from 22.9 % in 2000 to 12.6 % in 2001. The lower domestic borrowing requirement contributed to a sharp decline in interest rates and facilitated a restructuring of domestic debt. The authorities were also successful in exercising restraint in public sector wage increases despite tremendous pressures. However, the envisaged withdrawal of Zimbabwean troops from the Democratic Republic of Congo did not materialize, although peace negotiations are advancing.
The budget for 2002 entails an effort to improve services in education and health, including fighting the spread of the HIV/AIDS pandemic, while limiting non-productive, non-social sector related outlays, a task that would be extremely difficult without external assistance. The projected increase in security expenditure reflects the priority being given to enforcing the rule of law and to maintain law and order ahead of the presidential elections. The authorities remain hopeful that consensus will be reached soon in the DRC to facilitate the withdrawal of Zimbabwean troops and to allow redeployment of resources into social sectors and the re-building of infrastructure.
Downsizing the Civil Service
Progress has been made in a number of structural areas, many of which will help to facilitate fiscal consolidation. In this regard, a number of ministries have been rationalised and some services previously performed by Government have been subcontracted or commercialised. Consequently, the civil service was downsized by a total of 13,100 posts during 2000 and 2001 and will be further reduced by 8,350 posts in 2002. This has contributed to budgetary savings of Z$3 billion in the current year and further savings are projected for 2002.
Strengthening Revenue Collection
The authorities concur with staff that revenue performance is being affected by organizational issues. To address these problems and to strengthen revenue collection and administration, the Zimbabwe Revenue Authority was established in September 2001 and efforts are underway to make it fully operational. The authorities are confident that VAT will be introduced in 2002. To assist in these preparations, technical assistance is being received from South Africa and Zambia, while public awareness campaigns are underway. However, it is expected that the shortage of foreign currency will hamper the upgrading of computer and software systems used for revenue collection.
The authorities have also moved ahead with privatisation. Government has sold its holdings in a number of listed companies. A major privatisation exercise, involving the telecommunication company, NetOne, has been delayed to 2002, to allow for the completion of the due diligence process. To facilitate further acceleration of the privatisation process, the World Bank is assisting in developing the regulatory environment in the privatised sectors, including utilities, telecommunications and the railway system. The medium term objective of the privatisation is not only to promote foreign direct investment and encourage the transfer of technology, managerial and technical skills as well as to mobilize foreign exchange resources, but also to encourage, as much as possible, local participation so as to avoid a skewed distribution of assets as has been the case in regard to land.
On price controls, it is important to note that the authorities have been cognisant of the need to allow the free interplay of market forces and efficient utilization of resources. In this connection, a full cost recovery system was introduced for most government services during the year. Those sectors that were commercialised were allowed to charge market prices for their services. The price of fuel was also increased consecutively, towards the end of 2000 and during the first half of 2001, to reflect both the cost of importing and scarcity. However, these measures, taken in the context of a deepening recession, contributed to an exacerbation of inflationary pressures.
The authorities have engaged stakeholders in tripartite negotiations involving labour, employers and government with a view to agreeing on a social contract that would end the inflation spiral. Although agreement has not yet been reached and the social contract in not fully operational, the authorities have taken a lead by moving in to monitor the behaviour of prices of basics and key inputs. They have also provided a strong signal for wage negotiations during 2002, by granting civil servants a wage increase below the rate of inflation. The authorities are aware that these measures do not provide a long-term solution but feel that they are necessary in the short-term to avert major social upheaval. The authorities have expressed commitment to eliminate prices controls once the environment allows them to take credible measures that have a lasting impact on inflationary expectations.
Monetary and Exchange Rate Polices
Monetary policy has placed priority on mitigating the economic recession and sustaining the export sectors. In this connection subsidized facilities for the productive and export sectors were put in place. These were adopted on a temporary basis and the authorities expressed their intention to unwind these facilities once the economic and foreign exchange situation improves. The authorities believe that without these facilities, the economic situation would have been worse. Nevertheless, they have also realized the impact of these accommodatory monetary policy on inflation and agree with the staff on the need to tighten monetary policy. Since the staff mission in September 2001, interest rates have started increasing gradually. The authorities are also mindful that the ongoing economic decline will have serious consequences for the health of the financial system and the central bank in strengthening its supervisory functions to enforce standards and to deal with problem banks.
Exchange rate adjustments in Zimbabwe have been adopted against the background of fiscal problems, deteriorating terms of trade losses, sluggish growth in exports despite several devaluations since 1996, spiralling inflation and a lack of confidence in the economy. In these circumstances, currency devaluation has not resulted in the expected benefits. Further devaluation of the currency has been the subject of protracted internal debates, that have also put a hold on the necessary adjustments to the crawling peg regime that was adopted in August 2000. The authorities consider that further exchange rate adjustments will have the desired effect only if taken in the context of a comprehensive package of measures that are anti-inflationary and confidence building. They consider that their preferred exchange rate regime remains the crawling peg but do not preclude moving to a float once macroeconomic stability has been secured.
External Payment Arrears
The foreign exchange situation remains very tight and has worsened since the last Board discussion on Zimbabwe, reflecting the lack of improvement in the economic situation and the added impact of the adverse global environment. Nevertheless, the authorities are according high priority to normalize relations with Fund and have made a commitment to making payments to the Fund on a quarterly basis. Since the last Board meeting they have cleared their arrears in the SDR department. The authorities intend to increase payments with a view to stabilize and eventually eliminate arrears to the Fund and to other creditors, once the foreign situation improves.
Capacity Building and Statistical Issues
The authorities have been concerned about the weaknesses in their capacity for macroeconomic management and in the country’s economic database. Measures are being taken to address these issues. The authorities have requested and welcomed an STA advisor on real sector statistics. Technical assistance from the Fund has also been received to evaluate the health of the banking system in conjunction with the intention to establish a deposit insurance scheme. Technical assistance has also been requested to launch the VAT. The UNDP, in consultation with the Fund, is sponsoring a macroeconomic advisor, as well as an advisor on budget accounting and debt management. The authorities intend to put this technical assistance and advice to good use.