Since the last Board meeting the government, together with labor and business under the Tripartite Negotiating Forum (TNF), launched a homegrown national economic revival program (NERP) to address key distortions in the economy. Measures taken since then include;
✓ Exchange rate devaluation from Z$55 to Z$824 to the US$ and a further adjustment is underway.
✓ Significant interest rate movement from an average of 30% in January to between 80–100% in May, signaling monetary policy tightening.
✓ Price controls have largely been lifted.
✓ Importation and pricing of fuel has been decontrolled
✓ Electricity tariffs have been increased to import parity. Government is selling to strategic partners up to 50% of shares in two power stations
✓ Electricity rationing has been abolished, reflecting improved relations with external suppliers
✓ Land reform has been completed and an audit is being undertaken to rectify any irregularities as well as devise programs to assist new farmers
✓ Revenue mobilization remains strong and the deficit for the first quarter is slightly below that of 2002
The authorities have resumed payments to the Fund despite the critical shortage of foreign exchange and the needs for food imports, two installments of US$1.5 million have been paid and two more are being paid in June
The authorities are preparing a macroeconomic framework to be discussed by Cabinet in June and subsequently with Fund staff.
On the political front, the President has toned down political rhetoric in his addresses, has expressed willingness to negotiate with the opposition and to promote succession
Three regional Presidents, namely of Malawi, Nigeria and South Africa are mediating between government and the opposition to promote reconciliation
Government is enforcing the rule of law, fighting corruption, and addressing governance issues in general
The above measurers have inflationary impact in the short-term as shown by the surge in inflation while the poor will be hardest hit as shown by the current strikes and job stay-aways. Monetary and fiscal policies are being geared towards addressing inflation.
The authorities recognize the importance of resolving the economic crisis and are undeterred by domestic labor and political pressures.
Zimbabwe is now demonstrating real and strong political will, commitment and domestic ownership of the right policies.
Suspending Zimbabwe now when the authorities are taking the significant steps and initiatives would not only be sending the wrong signal but also subjecting the ordinary Zimbabweans to further hardships, when there is some evidence of light in the tunnel.
The authorities are therefore asking the Fund Executive Board to give them more time to strengthen their policies and cooperation with the Fund.
1. This discussion was supposed to have taken place in early 2003. In the normal fashion of showing understanding and flexibility by the Board and Fund management and staff, suspension of Zimbabwe’s voting rights was deferred to allow such consideration to be undertaken with full information, in the context of an Article IV Consultation mission. To the authorities, this was a golden chance which they put to good use. They requested staff to delay the Article IV mission to enable them to galvanize domestic consensus and enhance ownership of a home-grown process and program that would steer the country out of the current crisis. The authorities are therefore grateful to the Board, Fund management and staff for this opportunity and the useful discussions during the staff mission. They are broadly in agreement with the thrust of staff analysis and findings and are considering publication once they peruse the staff papers. Indeed, the staff find that a process of reviving the economy has begun in Zimbabwe, with broad domestic consensus and ownership. They have also resumed payments to the Fund despite the acute shortage of foreign currency for essential imports. They are requesting the Fund to give them a further respite, which they will use to strengthen their economic revival program, ease political tensions and re-engage the international community.
Origins of the Current Crisis
2. Zimbabwe has for the past four years experienced a cumulative decline in real GDP per capita of 36 percent, which has contributed to heightened social and political tensions. The cause is a combination of policy lapses and exogenous shocks, including terms of trade shocks, inclement weather and international isolation. At a time when the authorities had decided to fast track land reform, the country, and indeed the whole region was hit by the worst drought in five decades, with a severe impact on agricultural output. The authorities are thankful to the international community for assisting Zimbabwe to avert a humanitarian catastrophe. The economic hardships and disputes arising from vested interests on land contributed to the acute polarization of the country’s political and social panorama, which also affected the parliamentary and presidential electoral process. Consequently, the country’s image abroad was dented and Zimbabwe isolated from the international community, thus further worsening the crisis.
Effort to Revive the Economy
3. The authorities have learnt important lessons from the evolution of events, including from their own policy mistakes, especially on price controls, foreign exchange restrictions, some shortcomings during the massive land reform program and the tensions that arise in a democratic society when policies fail to deliver. The authorities have embarked on an effort to steer the country out of the turmoil, under the auspices of the Tripartite Negotiating Forum (TNF), which comprises the three stake holders; government, business and labor in a participative arrangement. Although the TNF was formed in 1998, real consensus was reached in February 2003 with the adoption of the National Economic Revival Program (NERP).
4. To the domestic stakeholders, the NERP represents a crisis intervention program and therefore targeted areas where imbalances had reached acute proportions, thus confirming staff’s observation that the NERP has a sectoral approach. The key areas targeted were: addressing the acute shortage of foreign currency by promoting exports through adjustment of the exchange rate, removing distortions and investment disincentives arising from price controls, tightening accommodative financial policies to fight inflation, addressing the consequences of high inflation on the poor and reviving the agricultural sector. Experience with Tripartite forums elsewhere reveals that it takes time to reach consensus and implementation of agreed policies is gradual in the initial phases reflecting the divergent interests of stakeholders. Momentum is gained as the parties gain trust in each other and as the implemented measures show benefits that cut across vested interests. Eventually as the crisis subsides, the tripartite process dissolves itself, usually labor opts out first in cases where there are political tensions as in Zimbabwe, and the government takes the center stage in policy formulation.
5. This is where the Zimbabwean tripartite process is heading. Important measures have been taken so far as detailed below, at a pace and magnitude that can deliver quick results. Momentum is accelerating on follow-up measures, particularly on exchange rate, energy pricing and supply, general price decontrol, tightening monetary and fiscal policies and supporting new farmers. Naturally, given the required steep adjustments, labor has become restive, contributing to tensions in the TNF. Nevertheless, the authorities are convinced that the TNF has for the first time galvanized domestic ownership that has always been lacking in Zimbabwe. That the policies being agreed under the TNF are irreversible, the steep adjustment in the price of fuel is a clear example, strong opposition from labor notwithstanding. The authorities are aware that, at this stage, any effort to resolve the economic crisis can only have a positive impact in a stable political environment and initiatives are underway to diffuse political tensions and enhance transparency. The authorities’ commitment to resume payments to the Fund in the face of acute shortage of foreign currency and food crisis is a genuine demonstration of their resolve to cooperate with the Fund and with the international community.
6. The authorities fully agree with the staff that they now need to couch their efforts in a consistent macroeconomic framework, and in this connection, progress is being made and the IMF Resident Representative is being consulted. The authorities are convinced that the next six months will witness the beginning of the reversal of the economic decline, easing of political and social tensions and meaningful re-engagement of the Fund and the international community.
Economic Measures Being Implemented
i) Monetary Policy
7. The authorities agree with the staff that any attempt to resolve the current crisis should begin with a credible anti-inflation strategy in order to reverse the entrenched inflationary expectations. Such a strategy is emerging. While most of the measures being implemented now will increase inflation in the short-term, the authorities are convinced that their strong determination to tighten monetary policies will soon begin to show results.
8. The stance of monetary policy is being increasingly tightened to contain monetary expansion. In this regard, interest rates have generally been rising from below 30% at the end of January 2003 to averages of 80–100% by end-May 2003. While these rates remain substantially negative in real terms, the authorities are strongly determined to continue tightening, even though gradually, to signal the future direction of monetary policy. To support increased savings mobilization, as highlighted in the authorities’ NERP, deposit rates have also risen, with 30-day deposit rates currently around 75% and expected to firm up further in line with inflation developments.
9. Against the background of steep decline in GDP, weakening domestic demand, reduced export growth and rising external payments arrears, the perceived country risk increased sharply and it became difficult for the export sector to access trade financing facilities at terms that would preserve their competitiveness. In an attempt to arrest further economic decline and sustain the export sectors, the central bank released statutory reserves under the export and productive sector facilities at concessional rates. These facilities, which are primarily for working capital purposes, are disbursed on presentation of supplier’s invoices to minimize misuse, are capped at Z$ 50 billion. The authorities have made it clear that these are temporary facilities and they have now decided to start raising interest rates on these facilities in line with the general tightening of monetary policy.
ii) Exchange Rate Policy
10. The authorities acknowledge that among the key obstacles affecting export performance was the maintenance of an overvalued exchange rate for long periods as well as politicization of exchange rate policy. Against this background, the very first measure implemented by government under the TNF obligations was the steep devaluation of the Zimbabwe dollar from Z$55 to Z$ 824 to the US dollar. In this context, and to ensure continued external sector competitiveness, the NERP provides for a review of the exchange rate on a quarterly basis and the first review for the quarter ending May 2003 is already underway. As the situation stabilizes and confidence improves, the exchange rate regime will be unified and determined by market forces.
iii) Fiscal Policy
11. Under the NERP, fiscal policy will complement monetary policy in order to bring down inflation. Despite the little room for maneuver on expenditures, fiscal tightening will protect the proportion of resources targeted towards the social sectors of education, health, fighting the HIV/AIDS pandemic and poverty alleviation programs. Taking into account the impact of ongoing measures under the NERP to stabilize the economy, especially exchange rate adjustment, increase in interest rates and rising inflation, a supplementary budget will be tabled in parliament shortly. The intention is to limit public expenditures to core services of government, social sectors and poverty alleviation programmes. Quasi-fiscal deficits will be contained by: applying the new exchange rate to customs valuation thereby raising more revenue; purchasing of all the country’s foreign exchange requirements at the new rate; liberalizing energy imports and pricing. Measures are also being taken to address the financial performance of other public enterprises to avoid any recourse to the budget and to resuscitate the privatization program.
12. Government borrowing from the Reserve Bank will continue to be restricted to levels consistent with the statutory limit. Additional revenue measures include valuation of imports at the new exchange rate to enable Government to improve revenue collection and thereby reduce its reliance on borrowings from the banking system.
iv) Structural Policies
Monopoly of the Grain Marketing Board (GMB)
13. In the midst of a severe drought, government invoked monopoly status to the GMB to discourage exports of food and maximize grain deliveries for government to avert famine. Under the NERP, this monopoly status is being removed and agricultural producer prices are being increased to provide incentives to farmers and ensure food security. Already, Government announced new producer prices in consultation with the farming community, and is ready to effect any necessary further reviews.
14. Government has acknowledged that price controls are not the best mechanism for controlling inflation or protecting the poor. In fact, price controls have led to business closures, acute shortages, and the development of informal economy where prices are exorbitant for the poor. The NERP recognizes the need to revert to determination of prices by market forces. As a first step, most prices have been decontrolled, and the remaining few essential items will be monitored closely meantime. In response to these measures, many commodities are resurfacing on the market at prices substantially lower than those in the parallel market. This positive response is providing an incentive for abolishing price controls altogether, and the Ministry of labor is developing better methods of targeting and protecting the poor in collaboration with the fiscal authorities.
Fuel Pricing and Imports
15. Last week, Cabinet took a decision to decontrol importation and pricing of fuel and the authorities are expecting a positive supply response given that private sector players have their own foreign exchange resources but were discouraged in the past by the prices and import controls. As fuel supplies normalize, fuel prices will reflect changes in international prices and procurement costs.
16. Electricity tariffs have also been increased substantially to regional parity levels Furthermore, voluntary payment of electricity charges in foreign currency has allowed the electricity company to reduce arrears to external suppliers and secure more supplies and the rationing of electricity has since been abolished. In addition, government has also approved the privatization of two domestic power stations.
17. The staff report provides useful background information to the land question in Zimbabwe. The primary objectives of land reform were to reduce the extent and intensity of poverty among the rural population and farm workers, increase the contribution of agriculture to GDP and exports, develop small-scale farms into viable commercial enterprises, ensure food security and develop a new class of indigenous commercial farmers and create a middle class that would buttress economic growth and social stability.
18. The land reform has now been completed. The authorities agree with staff recommendations on the measures needed for Zimbabwe to achieve its land reform objectives and for the country to revert to its former prestigious position as the bread basket of the region. In this connection, the President has constituted a team to audit the land reform exercise with a view to rectifying any irregularities in the process, and to recommend measures needed to support new farmers, and to address the key issue of land title. The audit team was given three months to submit its report.
19. The authorities agree with the staff on the need to implement policies in a consistent macroeconomic framework. Work in this area is at an advanced stage and the new framework will be discussed by Cabinet in June and submitted to parliament, along with a supplementary budget, in July. The authorities are consulting various stakeholders on the new framework.
Easing Political Tensions
20. Government recognizes that defusing inter-party political tensions is critical for increased investor confidence in the economy, as well as reducing country risk, improving the image of the country and re-engaging the international community. Steps undertaken in this regard include toning down political rhetoric even by the President, developing a platform for negotiations with the opposition, promoting a road map for succession within the ruling party, fighting corruption, prohibition of politically motivated violence and enforcement of the rule of law. The President has made announcements regarding his intentions to retire and for the ruling party to discuss his successor as well as the desirability of negotiating with the opposition. Regional and international mediators are fully engaged in promoting political reconciliation in Zimbabwe, including the determined efforts of the Presidents of Malawi, Nigeria and South Africa.
Fighting the HIV/AIDS Pandemic
21. Zimbabwe has been severely affected by this pandemic and ranks the third most affected country in the world, with also the highest number of orphans. At this pace, Zimbabwe will be unable to achieve the millennium development goals of health and education for all. The impact on the economy is already very severe. Government has taken a number of steps to mitigate the impact of the pandemic which have even been commended by the UN Relief and Recovery Unit. The authorities are appreciative of support of the UN and UN agencies, the USAID, the DFID-UK Center for Disease Control, the European Union and others who remain engaged in assisting the authorities in fighting the HIV/AIDS pandemic. They hope they would continue to intensify their efforts in this regard.
Payments to the Fund
22. The balance of payments has been under severe pressure, reflecting large food import requirements and acute shortage of foreign currency. This year’s season was affected by a dry spell in November/December, which wiped out the entire crop. However, rainfall improved in the second half of the season and the late planted crop of January/early February did well. Current estimates project an increase in food production although imports will still be required, though at a reduced scale. The authorities believe that the measures being taken to revive the economy in general, and exports in particular, will increase foreign exchange supply, enabling the country to begin addressing arrears to creditors. In the meantime, Zimbabwe recognizes the preferred creditor status of the Fund and regrets its arrears to the PRGF Trust Fund. In spite of the problems to be faced in honoring their commitment to make quarterly payments of US$1.5 million to the Fund, they have resumed payments with a US$3 million on May 28. Further payments are being made to bring them current on their commitments by end-June. These payments will be increased to eventually clear arrears and normalize their relations with the Fund and the rest of the creditor community. They ask for recognition of this commitment under difficult circumstances.
23. In conclusion, I wish to urge the Executive Board to defer the decision to suspend Zimbabwe’s voting and related rights in the Fund and to give the country another chance. In the last four months, the authorities have demonstrated strong political will and commitment to take painful measures, strong political and social sensitivities and opposition notwithstanding. A critical mass of measures under the NERP have been implemented and follow-up actions and further measures are under way. In the recently launched homegrown effort, the authorities are addressing these issues by taking courageous steps in implementing the conventional adjustment and reform measures that the Fund would normally ask them to implement. They need to be given the benefit of the doubt and their modest efforts need to be recognized if only in the interest of fair and equitable treatment in relation to other members in similar situation in the past, politics apart. In this connection, I note a major difference on policy performance, cooperation and commitment comparing Zimbabwe, with such cases as Zaire in recent past and Liberia recently. Zimbabwe deserves the sympathetic consideration of this Board to help them accelerate these positive changes.