COMMENTS ON THE IMF STAFF REPORT FOR THE 2001 ARTICLE IV CONSULTATION
SUMMARY OF ISSUES RAISED BY IMF
The IMF team, which visited Zimbabwe from September 3 to 15, 2001 on Article IV, has produced its report. The report raised the following issues.
The economic decline in Zimbabwe was accelerating;
Loose fiscal policy was making it difficult for Government to meet budget targets on the primary deficit;
The 2002 budget projected an Increase in revenue in 2002 in the absence of measures to increase tax collections.
The introduction of Value Added Tax (VAT) in 2002 may not be feasible given that VAT legislation is not yet in place.
It may not be possible to accelerate privatisation when foreign participation is discouraged by a deteriorating political and economic situation;
Pursuit of a loose monetary policy, subsidized credit lines and negative real interest rates will worsen;
Status of the banking system in view of the low interest rates and the deteriorating economic situation;
The Zimbabwe dollar needs to be devalued to realistic levels and implementation of the August 2000 Exchange Rate policy resumed;
The parallel market should be tolerated in the absence of devaluation because it facilitates trade and other foreign currency transactions;
The Government should make an effort to pay arrears to the Fund or at least stabilize the arrears;
The tariff rates charged by Zimbabwe are inconsistent with trade liberalization and regional initiatives;
The Zimbabwe database still suffers from deficiencies regarding accuracy, methodology, coverage and timeliness; and
That price controls cause shortages and the collapse of businesses.
The mission expressed concern over the accelerated economic deterioration in Zimbabwe and attributed this to weakening law and order in the context of the fast-track land reform programme, damaged confidence, discouraged investment and destroyed capital.
The performance of the economy continue to deteriorate in 2001 owing to:
High inflation that increased cost of production and reduced export competitiveness;
Low commodity prices mainly for agriculture and minings;
Acute foreign currency shortages, which resulted in reduced Imports of raw materials, spare parts and machinery;
The fixed exchange rate; and
Shrinking domestic demand, due to increased unemployment and declining purchasing power.
To arrest the economic decline, Government is currently working on a package for economic stabilisation, recovery and sustainable growth and development. To address inflation, fiscal policy shall focus on strict control of Government Expenditures, especially recurrent or consumption expenditure. However, the budget is under severe pressure due to the current draught. As such, Government’s immediate priority will be to ensure enough food supplies in the country. Government is revising the 2002 budget and reprioritizing expenditures towards food importation and distribution with the intention of containing the fiscal deficit at the budgeted level of 14.9% of GDP. The current measures to support tobacco prices will not have an impact on the budget deficit as Government is looking for non-budgetary resources of financing.
Further, the 2002 Budget contains various measures, which are aimed at rejuvenating performance by the major sectors of the economy. The measures in the budget Include:
ZS10.64 billion to finance the agricultural input scheme and Infrastructure development under the land reform programme;
Z$2 billion for Small to Medium Enterprises and micro projects;
Z$2 billion for resuscitation of closed businesses; and
Z$1.5 billion for public works programmes.
In addition, Government introduced export Incentives to stimulate exports. Further, the Government still maintains special windows under which concessional finance is provided to exporters and productive sectors.
The IMF were concerned that although the budget Deficit is expected to decline from 24% of GDP In 2000 to 12.5% in 2001, the Government has not been able to meet its budget target for the primary surplus in 2001 of 4,3% of GDP.
Government has not been able to meet its targeted primary surplus (Revenues less Expenditure excluding interest bill) in 2001 because there were no reductions in total expenditure despite Interest payments savings on domestic debt. In fact, other expenditure items actually increased and a supplementary budget of $17.5 billion was incurred, which was wholly financed from savings from the 2001 budget.
However, Government has attained an operational budget deficit of about 9%, tower than the original target of 15.5% of GDP. It should be noted that the decline in the deficit was largely due to deferred expenditures on external payments, rather than actual expenditure cuts. As soon as the balance of payments situation improves, most of these expenditures will have to be met, thus creating pressures in the economy.
The IMF expressed concern that the Budget assumes an increase in total revenue of 3-4% of GDP in 2002 while there are no measures to increase tax collections, which are already under pressure.
Government projects an Increase in total revenue owing to the fact that tax efforts and tax administration are expected to improve now that the Zimbabwe Revenue Authority (ZIMRA) is operational. The structure of the Authority is such that loopholes that were inherent in the then Department of Customs and Taxes will be closed. Administration has been decentralized to regional commissioners who are in charge of regions. This will ensure the netting of defectors as well as close monitoring of activities of companies in the regions.
A good example on the closure of loopholes is on the abuse of sales tax numbers by companies and Individuals. An ST3 form validation exercise has already been carried out by ZIMRA. Under the exercise, traders were required to complete ST3 forms with names of suppliers written thereon, and submit original ST2 forms and sales tax receipts for the past 12 months. The Intention of the exercise was to update the sales tax register thereby closing loopholes Inherent in the sales tax system, where traders use those forms to purchase goods for personal use. It will also stamp out false sales tax certificates that are unscrupulously forged for the same purpose.
The mission encouraged the Government to continue its efforts to cut costs and increase the efficiency of Government operations.
Although the scope for expenditure reduction is limited due to increased cost in service delivery as well as the major programmes being implemented (like the land reform programme), Government is committed to reorienting the expenditure distribution by reducing the proportion of recurrent expenditure, while increasing capital expenditure from about 7% of the total expenditure and net lending in 2001 to 20% by 2004. The cumulative budget outturn to end of April 2002 show that the capital expenditure as a percentage of total expenditure and net lending was 8,6%, Government is in consultation with the World Bank with a view to carrying out a Public Expenditure Review, Efficiency gains are expected through:
Strengthening of Overall Financial Management through appointment of professional Finance Directors. So far Government has appointed Finance Directors in all Ministries except for one.
Public Financial Management System (PFMS). So far the Government has rolled over nine ministries. Others are indirectly connected through the Central Payments Office. it should however be noted that Government will have to shoulder additional responsibilities especially those pertaining to drought mitigation, food relief, AIDS control and management and poverty reduction. This will Inevitably put pressure on the budget.
The IMF was concerned that although the introduction of VAT is planned in 2002, the supporting legislation has not yet been passed.
The VAT system will be introduced once the-legislation is in place. The VAT Bill has been approved by Cabinet and will be tabled before Parliament in the second half of 2002.
When the Bill passes through Parliament, Government will finalise preparatory work of carrying out awareness campaigns, registration of traders and putting in place the necessary computer networks In both the public and private sectors,
Below is a summary of activities that ZIMRA has engaged in preparation for the implementation of VAT:
The Information Technology teams are working with the Central Computing Services on computerization system for VAT. The team is in the process of floating an international tender for both software and hardware for the computerization of the system.
An exercise to update the sales tax database which would be used under VAT in order to smoothen the registration process, is underway.
The VAT staff training team has been expanded from 15 to 30. Internal staff training is currently underway and is expected to be finalized by the end of June. South Africa and Zambia have agreed to hold mentorship programmes with ZIMRA staff in July.
Industry is meeting with the VAT trainers during the first two weeks of June in order to map up training methodologies using industry structures. Seminars will be based on the gazetted VAT Bill and will agree on how VAT will affect different sectors.
Preparations for publicity campaigns are at an advanced stage.
Registration forms and certificates have been drafted but will be finalized once the software is in place while 25 pamphlets in various forms and targeted to different sectors are now ready.
The mission urged the authorities to accelerate the privatisation process but noted that foreign participation is discouraged by the deteriorating political and economic situation, and by the exchange rate policy, which makes valuations extremely high in US dollars at the official exchange rate.
Government is still committed to the privatisation/commercialization of state owned enterprises. About seventeen parastatals are targeted for privatisation in 2002, and the required technical groundwork for this has already been carried out Despite the difficult economic situation the privatization process has received the support of foreign investors. TelOne, the telecommunications entity is now considering offers from four prospective investors.
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.
While low interest rate regime has provided relief to the productive and export sectors and enabled the restructuring of public domestic debt, it has also resulted in shifting of funds from the money market towards speculative activities in equity and property markets.
In order to reduce money supply growth and inflation, Government will relate domestic money supply growth to developments in output production in the economy. The concessional facilities introduced in August 2000 to support export and productive sectors will be converted into a revolving fund, and this will prevent a second round effect on monetary expansion. The Reserve Bank will ensure that Interest rates adjust to levels which are attractive to the saving public but at the same time do not discourage investment. Positive real interest rate will eventually be obtained through reduction in inflation.
The mission emphasized that the RBZ needs to take steps to ensure the soundness of the banking system, as well as deal with troubled banks promptly.
The Banking Act and the Banking Regulations have widened the supervisory scope and empowered the RBZ to carry out more affective supervision through both offsite and onsite means. This effective monitoring has led to an improved overall health and financial conditions of banks. The Act also provides for the establishment of a Deposit Protection Fund for purposes of compensating depositors for losses incurred in the event of bank insolvency. Although the Fund is not yet operational, plans on its implementation have reached an advanced stage. The Troubled Bank Policy has also been developed to enable timely and effective responses by the RBZ to problems at banking institutions. To date six institutions have been subjected to supervisory actions consistent with this policy. One institution, which has been under curatorship for about one year, has been successfully taken over by new shareholders.
The mission urged the authorities to devalue the official exchange rate to a more realistic level, supported by the tighter monetary and fiscal policies, and to adjust the exchange rate thereafter based on expected inflation differentials with Zimbabwe’s trading partners.
The exchange rate has remained fixed since October 2000, in spite of high inflation of above 100% by last quarter of 2001. Government as a whole does not recognise that there is an urgent need to adjust the exchange rate in fine with key fundamentals, as part of efforts to recover and grow the economy. Currently, discussions on the appropriate exchange rate level in line with the already announced August 2000 exchange rate policy are underway.
The mission stressed that the ultimate objective should be the establishment of a unified, floating exchange rate. Where devaluation is not feasible in the short term, the IMF urges Government to tolerate the parallel market. The parallel market, already handles the bulk of transactions, 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.
Government is committed to a unified exchange rate for all transactions in Zimbabwe. However, the prevailing divergence between the official and parallel rates would imply a long-term horizon for the convergence of the two rates.
The mission raised concerns about the accumulation of payment arrears to the Fund and urged the authorities to make every effort to pay on at a minimum, stabilize the overdue obligations to the Fund.
Government remains committed to stabilising its arrears to the 2001 level. However, this would require additional measures to generate foreign exchange through increased exports and stabilizing macroeconomic fundamentals.
Measures to support the export as well as increased investment, both domestic and external, are being pursued on an on-going basis. Some of the privatisation proceeds would also support increased foreign exchange availability, thus creating additional capacity for meeting our external arrears. It should be noted that Government made an interim commitment to pay US$1.5 million quarterly payments to the Fund. The payments for the last quarter of 2001 as well as the first and second quarter of 2002 have been made.
The mission was concerned that the changes in tariff rates in March 2001 had increased the effective rate of protection and that these tariff changes were inconsistent with Zimbabwe’s commitments to trade liberalisation in the context of regional initiatives.
Zimbabwe remains committed to fulfilling its international trade obligations under bilateral and multi-lateral agreements and treaties. Tariffs continue to be in line with the abovementioned agreements and treaties.
There was an increase in tariffs in 2001 on certain products deemed to be luxury goods. The increases were necessitated by the need to curtail Import demand in a bid to reduce the outflow of foreign currency at a time when the level of foreign currency in the country had dropped to unprecedented levels.
Zimbabwe has complied with COMESA decision to establish a Free Trade Area (FTA) by October 2000 and is among member states, which form the FTA. Under the SADC Trade Protocol, a commitment to move to Free Trade Area has been made. Zimbabwe gazetted its first scheme of tariff reduction In June 2001 and will meet further obligations as they arise.
The IMF were concerned about the state of the Zimbabwe’s database, which continues to suffer from numerous deficiencies with respect to accuracy, methodology, coverage, and timelines.
Government is aware of the problems with our data and measures are being taken to improve the availability and reliability of data. The country subscribed to the General Data Dissemination System (GDDS) in February 2002 and the relevant departments, which include the Central Statistical Office (CSO), Treasury and the Reserve Bank, are now working on improving the quality and the dissemination of data.
Efforts to strengthen the relevant data gathering institutions such as CSO are already under way.
Zimbabwe was among fourteen countries invited to the two-week IMF workshop held in Namibia in February/March 2002 to prepare metadata to be put on the IMF Bulletin Board. Each of the country teams worked with the team of consultants. The Zimbabwe team comprised of two officials from the CSO, one official from the Ministry of Finance and Economic Development and one officer from the Reserve Bank of Zimbabwe. The CSO, Ministry of Finance and Economic Development and the Reserve Bank of Zimbabwe brought the metadata back to Zimbabwe for further improvements.
The final metadata templates which describe all the current statistics systems and plans for improvement were submitted to the IMF for inclusion on IMF Bulletin Board within the time set by the IMF. Each of the institutions concerned is working on the implementation of plans for improvement.
The IMF and the Department for international Development are offering assistance to all member countries in the GDDS project and the GDDS Project Manager is expected to visit Zimbabwe before the end of June 2002. The CSO requested for technical assistance from the International Monetary Fund. An IMF statistics expert, Mr. Andel, came on a mission to the CSO in December 2001 and the office worked with him. Mr. Andel is expected to come back to Zimbabwe in the second half of 2002.
The IMF expressed concern that price controls would cause food shortages and collapse of businesses. in the same context, they were also concerned about the increase in the minimum wage in October 2001.
The hyperinflationary environment coupled with some monopolistic tendencies necessitated the introduction of a fairly restrictive price control regime for basic commodities to protect consumers from the unfair trade practices.
Government recognises that prices should be determined rationally and realistically to ensure viability of producers taking into account production and distribution costs, in line with this, Government will progressively move away from price controls to price monitoring and surveillance.
3. MONETARY POLICY ISSUES
3.1 Monetary Policy Stance
The IMF expresses concern on the RBZ’s accommodative and perceived expansionary monetary policy stance. The report highlights the potential negative implications of this stance on the wider macro economy, particularly on money supply growth, exchange rate stability and economic growth.
Government is aware of the inflationary implications of rapid money supply growth implied by concessional financial facilities at the Reserve Bank. Focus is therefore on limiting resources to such windows by transforming them into once-off revolving fund facilities. This would contain the secondary effects of the current facilities on money supply growth and inflation.
3.2 Low Interest Rates
The IMF expressed concern over the prevailing negative real rates of interest on the market, as well as the large spreads between the lending and deposit rates. The report highlights the potential implications of low interest on savings mobilization as well as shifting funds towards speculative activities-which fuel asset price inflation.
Notwithstanding the positive effects of low interest rates such as saving highly geared businesses, which were on the verge of collapse, the policy also led to reduced savings and spawned high money supply growth and consequent speculative behaviour. Greater flexibility in interest rate determination is now allowing interest rates to adjust upwards in support of savings mobilization without undermining the recovery of investment.
3.3 High Inflation
The IMF expressed concern with the impact of government’s domestic borrowing requirements and the accommodative monetary policy on inflation. Inflation remained high last year, against the background of significant slow down in economic activity, entrenched inflation expectations, supply bottlenecks, wage inflation spiral and the discretionary pricing by retailers. These factors, together with a sharp growth in monetary supply, have combined to contribute to the build up in underlying inflationary pressures.
The Reserve Bank of Zimbabwe will continue to pursue monetary policy measures designed to counter the inflationary surge in the economy, The surge in Inflation, however, calls for concerted effort by all stakeholders in order to break the inflation spiral and further aggressively reduce inflation. In this regard, Government has engaged stakeholders in tripartite negotiations involving labour and employers. The objective of the negotiations is to agree on a social contract and adopt a stakeholder driven anti- Inflation programme, necessary to end Inflation spiral,
3.4 Banking Sector soundness
The IMF raises concern about the financial position of the banking system in light of the prevailing difficult economic conditions, low interest rates and the impact of the land reform.
Despite the low interest rate environment, financial institutions have generally maintained their spreads between deposit and lending rates. Hence, the financial sector has remained among those sectors that have continued to post positive financial results.
Furthermore, the banks have increasingly been reducing reliance on interest income by diversifying Into other sources of income
Despite the country’s problems in settling its obligations to the Fund in time, the Government of Zimbabwe continued to benefit from the Fund through the staff visits on Article IV Consultations as well as through Technical Assistance offered,
It is hoped that the continued assistance will enable the country to weather through the current crisis.
GOVERNMENT OF THE REPUBLIC OF ZIMBABWE.
June 4, 2002