Journal Issue

IMF Concludes 2003 Article IV Consultation with Zimbabwe

International Monetary Fund
Published Date:
July 2003
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On June 6, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Zimbabwe.1


The Zimbabwean economy has deteriorated progressively over the past four years. Real output has dropped by one-third, inflation reached 269 percent in the year through April 2003, and social conditions are deteriorating. Severe food shortages have necessitated massive food imports and donor assistance, as two-thirds of the population required food aid in 2002/03 (April-March). The balance of payments has been under severe pressure since 1999, when Zimbabwe began to accumulate payments arrears. There is little productive investment in the economy, and there are reports of significant capital flight and emigration of skilled labor. The economic crisis reflects to a large extent inappropriate economic policies: loose fiscal and monetary policies, the maintenance of a fixed exchange rate in an environment of rising inflation, and administrative controls. Increased regulations and government intervention have driven economic activity underground, and contributed to the chronic shortages of goods and foreign exchange. The impact of these policies have been exacerbated by the fast-track land reform program, recurring droughts, and the HIV/AIDS pandemic. Meanwhile, investor confidence has been eroded by concerns over political developments, weak governance and corruption, problems related to the implementation of the government’s land reform program, the push for an increased indigenization of the business sector, and the selective enforcement of regulations.

Monetary policy remained accommodative throughout 2002. As a result, broad money growth accelerated to 165 percent in 2002, as liquidity growth was fueled by concessional lending at highly negative real interest rates and special support schemes for gold and tobacco producers. Preliminary and partial data point to a further rise in broad money growth to 207 percent in March 2003. These developments provided a strong incentive to borrow, and led to a rapid rise in the prices of assets, such as real estate, stocks, foreign exchange, and consumer durables, that provide a hedge against inflation.

Fiscal policy was expansionary in 2002, reflecting mainly substantial quasi-fiscal rather than budgetary operations. The overall budget deficit declined to 5 percent in 2002 from 10 percent of GDP in 2001. However, quasi-fiscal operations related to support schemes for gold and tobacco producers through the Reserve Bank amounted to more than 5 percent of GDP. Zimbabwe’s external position has become increasingly constrained. Pervasive shortages of foreign exchange in the official market, partly owing to a decline in exports of 35 percent since 2000, have resulted in a compression of nonfood imports of 15 percent. At end-2002, gross usable reserves stood at US$15 million, equivalent to three days of imports, and arrears to external creditors amounted to US$1.5 billion, or 29 percent of total external debt, including to the Fund. The government responded to these pressures in November 2002 by tightening exchange controls, increasing surrender requirements, and closing exchange bureaus. These actions resulted in a slowdown of foreign exchange flows to the official market and an appreciation of the parallel market exchange rate in early 2003.

In response to the deteriorating economic situation, the government adopted the National Economic Revival Program (NERP) at end- February 2003, after consultation with business and labor under the auspices of the Tripartite Negotiating Forum (TNF). Immediate actions included a devaluation of the exchange rate from Z$55 per US$1 to Z$824 per US$1 (although the government will still purchase foreign exchange at the old rate), a doubling, on average, of fuel prices, and sectoral policies to stimulate production. These actions were followed by some rise in interest rates, an increase in the producer prices of grain in March, and another doubling of fuel prices in April. In early May, controls on most prices were removed. Prices of five basic food items remain controlled, but were increased by substantial amounts.

Executive Board Assessment

Executive Directors expressed deep concern about the continued deterioration of Zimbabwe’s economic and social situation, with declining output and per capita income, high and rising inflation, and the further accumulation of external payment arrears. Unemployment and poverty have risen sharply and the HIV/AIDS pandemic is worsening, and Zimbabwe’s economic problems have had repercussions in neighboring countries. Directors observed that this sharp deterioration primarily reflects the government’s inappropriate macroeconomic and structural policies, in particular loose financial policies and increased regulation and government intervention. Moreover, the government’s land reform program, compounded by inclement weather, has resulted in a significant reduction in agricultural output and a lowering of the sector’s medium-term potential.

Against the backdrop of these worrisome developments, Directors urged the authorities to take action urgently to arrest the economic decline, bring inflation under control, and return the economy to a sustainable growth path. Decisive steps to restore confidence in the government’s economic policies, including enhanced governance and transparency and respect for the rule of law, and broad ownership of the reform process, will be key to revamping productive investment, attracting needed foreign direct investment, and regaining the support of foreign creditors and donors.

Directors considered the government’s recent steps to adjust exchange and interest rates and fuel and electricity tariffs, and ease price controls to be steps in the right direction. They stressed, however, that the magnitude and pervasiveness of economic distortions call for a significant further enhancement of the scope and speed of stabilization efforts, which should be implemented within a consistent overall macroeconomic framework, and complemented by the sustained implementation of key structural reforms.

Directors underscored the importance of an early and decisive tightening of monetary policy to contain inflation and establish policy credibility. While progress has been made in raising nominal interest rates, further increases will be needed in view of the still highly negative real interest rates and the acceleration of inflation. Directors also urged the government to sharply curtail concessional lending facilities, which are a significant source of rapid liquidity growth.

To address the risks to the banking system from monetary tightening, Directors urged the Reserve Bank of Zimbabwe to ensure that banks meet all prudential regulations and are adequately capitalized and fully provisioned for nonperforming loans. They noted that strengthened banking supervision and determination in dealing with problem institutions will also be prerequisites for the successful introduction of the planned deposit protection scheme. Directors urged the authorities to bring legislation to combat money laundering and the financing of terrorism to international standards.

Directors expressed concern about the expansionary stance of fiscal policy, including large quasi-fiscal operations, which have weakened the fiscal position and contributed to exchange market distortions. They underscored the importance of restoring fiscal discipline, including to support disinflation efforts. This will require expenditure restraint, in particular on low-priority items, while protecting key social services. Directors saw efforts to streamline the public sector and reduce costs through commercialization and rationalization as steps in the right direction. They urged the government to continue these efforts and accelerate the commercialization and eventual privatization of state enterprises to reduce their burden on the budget.

Directors acknowledged the Zimbabwe Revenue Authority’s efforts to keep up revenue collection in a very difficult economic environment. It will, however, be important to strengthen revenue collection further by widening the tax base, adequately preparing for the introduction of a value-added tax, and applying a unified exchange rate for all customs duty valuations.

Directors noted the recent adjustment of the official exchange rate, but regretted that government transactions continue to be undertaken at a more appreciated exchange rate, which could result in significant distortions and quasi-fiscal losses. They emphasized the need to follow up with further rate adjustments to stem the sharp erosion of external sector competitiveness. The ultimate goal should be to unify the exchange rates as quickly as possible, liberalize the exchange system, and eventually eliminate surrender requirements. Directors also urged the authorities to step up efforts to liberalize Zimbabwe’s external trade.

Directors stressed that structural policies, focused on increasing agricultural production and raising productivity throughout the economy, will be critical to help lay the foundation for a resumption of economic growth. Priorities include the elimination of price controls, which, together with less regulation and government intervention in the economy, will improve economic efficiency and facilitate a reflow of activity back to the formal markets. Efforts to raise productivity in the agricultural sector, in collaboration with the World Bank and the UNDP, and which should include the elimination of the Grain Marketing Board monopoly, will be critical to improving the domestic food supply, increasing exports, and reducing poverty.

While welcoming Zimbabwe’s participation in the General Data Dissemination Standards, Directors urged the authorities to strengthen the country’s data base in order to improve the analytical basis for economic policy formulation and Fund surveillance.

Directors also reviewed the status of Zimbabwe’s overdue financial obligations to the Fund. They welcomed the authorities’ recent efforts in a number of areas, including a resumption of payments to the Fund, which will help slow down the further increase in arrears. Despite this progress, most Directors considered, however, that Zimbabwe’s economic policies have not been sufficient to address the current crisis, and that Zimbabwe has not adequately strengthened its cooperation with the Fund on economic policies and payments to the Fund. The Board therefore decided to suspend Zimbabwe’s voting and related rights in the Fund. Directors urged the authorities to build on their recent efforts to strengthen their cooperation with the Fund on policies and payments, and encouraged the Fund staff to continue to assist the authorities in this regard. They indicated that they would support reinstating Zimbabwe’s voting rights expeditiously should Zimbabwe significantly improve its cooperation with the Fund. Directors will review Zimbabwe’s overdue financial obligations to the IMF again within six months.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2003 Article IV Consultation with Zimbabwe is also available.

Zimbabwe: Selected Economic Indicators, 1999–2002
Real economy (percentage change)
Real GDP (market prices)-4.1-6.8-8.8-12.8
Consumer prices (end of period)56.955.2112.1198.9
Government finances (percent of GDP)
Revenue, excluding grants26.428.226.828.3
Expenditure and net lending36.251.237.333.1
Overall balance, excluding grants and arrears-9.8-23.0-10.4-4.8
Primary balance, excluding grants0.0-5.40.0-0.1
Money and interest rates
Broad money (M3, end of period; percentage change)29.859.9102.7164.8
91-day treasury bills (annualized yield)89.771.625.926.6
Balance of payments (billions of U.S. dollars; unless otherwise indicated)
Current account balance (excluding official transfers)0.010.04-0.39-0.48
(In percent of GDP at the official exchange rate) 1/0.30.6-4.2-2.5
(In percent of GDP at world prices) 2/0.20.5-4.9-6.7
Overall balance-0.03-0.21-0.42-0.42
Usable reserves (millions of U.S. dollars; end of period)46.722.120.015.1
(months of imports of goods and services)
Total external debt (percent of GDP at official exchange rate; end of period) 1/86.573.055.826.8
Total external debt (percent of GDP at world prices; end of period) 2/55.859.364.072.8
Debt service (percent of exports of goods and services)22.824.329.531.0

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

GDP at world prices using real GDP growth and trading partner countries’ inflation (base year is 1996).

Sources: Zimbabwean authorities; and IMF staff estimates and projections.

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

GDP at world prices using real GDP growth and trading partner countries’ inflation (base year is 1996).

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

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