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Zimbabwe: 2014 Article IV Consultation—Staff Report; Press Release; and Statement by the Executive Director for Zimbabwe

Author(s):
International Monetary Fund. African Dept.
Published Date:
July 2014
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Background and Recent Developments

1. The year 2013 was characterized by a protracted political season which reshaped the political landscape. After long negotiations, in January 2013 the main political parties reached agreement on a new constitution, leading to a constitutional referendum in March and to national elections in July. The elections gave President Mugabe a new term and his ZANU-PF party a super-majority in Parliament. This change prompted a major reshuffle of key policy-makers, with a new cabinet announced only in September 2013. The new government has expressed a commitment to the policies and reforms in the staff-monitored program (SMP), which had been initiated under the previous government. The new government has also unveiled a development blueprint for the next five years, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM ASSET, see ¶46 for further details).

2. With the post-2009 rebound over, sustained growth and poverty reduction will require determined and comprehensive reforms. Economic stabilization under the multicurrency system and efforts at policy reform during the coalition government spurred vigorous growth, mainly in mining and services (see Figure 1). GDP growth averaged 10.5 percent during 2009-2012. The economy that emerged from the ashes of hyperinflation is quite different structurally from the one that preceded it (Figure 2). Over the past decade, little progress has been made towards the Millennium Development Goals, particularly in improving gender equality (Figure 10). At 72 percent in 2011, the poverty rate remains unacceptably high (Figure 11). Formal employment has been shrinking, with an increasing fraction of the labor force in the informal economy. There has been little reduction in inequality, with the Gini coefficient at 0.42 in 2011.

Figure 1.Zimbabwe: Recent Economic Performance

Sources: Zimbabwean authorities and IMF staff estimates.

Figure 2.Zimbabwe: Composition of Real GDP, 2000 and 2012

Sources: Zimbabwean authorities and IMF staff estimates.

Figure 3.Zimbabwe: External Sector Performance

Sources: Zimbabwean authorities and IMF staff estimates.

1/ Structural break in trade data in 2010. Exchange control data are used up to 2009 and customs data are used starting in 2010.

2/ These unregistere flows are likely related to unregistered remittances and exports, which would lower the current account deficit.

3/ Debt stocks and arrears are estimates, except for the 2011 debt stock which is based on preliminary results from the authorities’ external debt reconciliation exercise concluded in January 2013.

Figure 4.Zimbabwe: Quarterly Tax Revenues (2011–13)

(millions of U.S. dollars)

Sources: Zimbabwean authorities and IMF staff estimates.

Figure 5.Zimbabwe: Recent Budgetary Performance

Sources: Zimbabwean authorities and IMF staff estimates.

Note: Quasi-fiscal activities (QFAs) by the Reserve Bank of Zimbabwe (RBZ) include election-related expenses, transfers to parastatals, subsidized direct lending, below-cost provision of equipment and fertilizers to farmers, and allocation of foreign exchange at subsidized exchange rates.

Figure 6.Sub-Saharan Africa: Civil Servant Wages in 2013

(percent of government expenditure)

Sources: Country authorities and IMF staff estimates.

Figure 7.Zimbabwe: Banking System Indicators

Sources: Zimbabwean authorities and IMF staffestimates.

1/The ratio of liquid assets to short-term liabilities Liquid assets are defined as cash, daims on nonresident banks, interbank daims, and clearing balances at the RBZ. Illiquid daims on the RBZ are exduded. Short-term liabilities comprise all deposits, inter bank liabilities, and liabilities to nonresidents. The prudential liquidity ratio was increased from 25% in March 2012 to 30% in June 2012.

Figure 8.Zimbabwe: Banking System Performance and Soundness

Source: Reserve Bank of Zimbabwe.

1/ Illiquid claims on the RBZ count toward capital. The minimum capital ratio was increased from 10 percent to 12 percent in August 2012.

2/ Excludes the Post Office Saving Bank. At end-September there were 21 operational banks s of end-December 2012, minimum capital requirements are $25 million for commercal banks and merchant banks, and $20 million for building societies.

Figure 9.Zimbabwe: Program Scenario

Sources: Zimbabwean authorities and IMF staff estimates.

1/ Debt stocks include arrears and are estimates, except for the 2011 debt stock which is based on preliminary results from the authorities’ external debt reconciliation exercise concluded in January 2013.

Figure 10.Zimbabwe: Progress Towards the Millennium Development Goals

Source: World Development Indicators.

Figure 11.Zimbabwe: Poverty and Extreme Poverty

(percent of population)

Source: ZIMSTAT, PICES 2011-2012.

3. Adverse weather conditions, weak demand for key exports, and election-year uncertainty impacted economic activity during 2013. Real GDP growth is estimated to have decelerated to 3.3 percent (from 10.6 percent in 2012). Erratic rainfalls affected agriculture while manufacturing faced liquidity shortages and a weaker South African rand that undercut competitiveness. Although buoyant, mining activity has been affected by easing global commodity prices and domestic infrastructure challenges. Election-year uncertainty affected private investment and, at critical moments during the year, led to the tightening of liquidity conditions, which affected economic activity.

4. Inflation has recently dipped into negative territory (-0.3 percent year-on-year in April 2014). Amid weak domestic demand, the appreciation of the US dollar against the South African rand (the currency of Zimbabwe’s main trading partner) contributed to an easing of the price level during 2013.

5. The current account deficit deteriorated in 2013 (Figure 3), while reserves remain woefully inadequate. The deterioration reflects lower mining exports, as gold prices and diamond production both declined. Manufacturing exports have continued to shrink reflecting the sector’s declining competitiveness. The current account deficit was mostly financed by private capital inflows. Errors and omissions remain large, although they are on a declining path. The authorities and Fund staff agree that those reflect under-recorded exports, remittances, and FDI inflows. Usable reserves remained below two weeks of imports at end-December (Table 1).

Table 1.Zimbabwe: Selected Economic Indicators, 2011–19
Population (millions):13.0 (2012)Per capita GDP: US$ 961 (2012)
Quota (current, SDR millions, % of total)353.4 (0.15%)Literacy rate (%): 91.9 (2009)
Main products and exports:Platinum, gold, diamonds, tobacco
Key export markets:South Africa, European Union
ActualProjected
201120122013201420152016201720182019
Real GDP growth (annual percentage change) 1/11.910.63.33.13.23.94.34.44.4
Nominal GDP (US$ millions) 2/10,95612,47212,97413,48314,06014,97415,97517,28418,491
GDP deflator (annual percentage change)3.73.00.70.81.12.52.33.62.5
Inflation (annual percentage change)
Consumer price inflation (annual average)3.53.71.60.31.21.82.42.52.5
Consumer price inflation (end-of-period)4.92.90.31.21.72.02.52.52.5
Central government (percent of GDP) 2/
Revenue and grants26.728.028.829.829.629.829.929.930.1
Expenditure and net lending29.029.331.431.929.329.029.629.329.4
Of which: cash expenditure and net lending27.128.631.030.429.529.128.928.628.7
Of which: employment costs (incl. grants & transfers)16.720.121.323.423.022.221.320.219.3
Overall balance (commitment basis)−2.4−1.3−2.5−2.20.30.80.30.60.7
Overall balance (cash basis)−0.5−0.6−2.2−0.60.10.61.01.31.4
Primary balance (cash basis)−0.2−0.4−2.0−0.30.61.11.51.71.8
Money and credit (US$ millions)
Broad money (M3)3,1003,6943,8884,0114,2524,4784,8275,2955,762
Net foreign assets−290−435−809−744−722−625−457−22646
Net domestic assets3,3914,1294,6974,7544,9745,1025,2845,5205,716
Domestic credit (net)2,7543,5593,9933,9934,1724,4074,7185,1215,521
Of which: credit to the private sector2,7113,5243,6183,5513,8214,1214,4574,8545,321
Reserve money186273272280297313337370402
Velocity (M3)3.53.43.33.43.33.33.33.33.2
Balance of payments (US$ millions; unless otherwise indicated)
Merchandise exports 3/4,4213,8083,5723,8124,0914,4384,9085,5636,089
Value growth (annual percentage change) 3/36.1−13.9−6.26.77.38.510.613.49.5
Merchandise imports 3/−7,562−6,710−6,952−7,105−7,368−7,615−7,881−8,341−8,889
Value growth (annual percentage change) 3/46.5−11.33.62.23.73.33.55.86.6
Current account balance (excluding official transfers)−3,269−3,048−3,613−3,796−3,737−3,546−3,235−2,912−2,942
(percent of GDP) 2/−29.8−24.4−27.8−28.2−26.6−23.7−20.2−16.8−15.9
Overall balance 4/194−270−98−676−225−122−132−152−75
Official reserves (end-of-period)
Usable international reserves (US$ millions)5/3663982844645436518091,0091,210
(months of imports of goods and services)0.50.60.40.70.70.91.01.21.4
Debt (end-of-period)
Total external debt (US$ millions, e.o.p.) 6/7/8/8,2079,03110,63212,70015,02217,31219,31120,88322,600
Percent of GDP 2/74.972.482.094.2106.8115.6120.9120.8122.2
PPG external debt (US$ millions, e.o.p.) 6/6,2436,6806,8357,1017,4027,6038,0068,5018,860
Percent of GDP 2/57.053.652.752.752.650.850.149.247.9
Of which: Arrears5,0765,2865,4205,5755,7235,8726,0166,1656,320
Percent of GDP 2/46.342.441.841.340.739.237.735.734.2
Other external debt (US$ millions, e.o.p.) 6/7/8/1,9642,3513,7985,5997,6199,70911,30612,38213,740
Percent of GDP 2/17.918.929.341.554.264.870.871.674.3
Sources: Zimbabwean authorities; IMF staff estimates and projections.

At constant 2009 prices.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Structural break in trade data in 2010. Trade data based on information from exchange control data in 2009 and customs data starting in 2010.

Includes errors and omissions through 2012.

Defined as the higher of Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks’ current/RTGS accounts and statutory reserves, and amounts in SDR escrow account.

Includes arrears.

Debt stocks are estimates, except for the 2011 debt stock which is based on preliminary results of the authorities’ external debt reconciliation exercise concluded in January 2013.

The revisions are due to new information provided by the authorities about their previous projections of withdrawn amounts from approved foreign banks’ overdrafts.

Sources: Zimbabwean authorities; IMF staff estimates and projections.

At constant 2009 prices.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Structural break in trade data in 2010. Trade data based on information from exchange control data in 2009 and customs data starting in 2010.

Includes errors and omissions through 2012.

Defined as the higher of Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks’ current/RTGS accounts and statutory reserves, and amounts in SDR escrow account.

Includes arrears.

Debt stocks are estimates, except for the 2011 debt stock which is based on preliminary results of the authorities’ external debt reconciliation exercise concluded in January 2013.

The revisions are due to new information provided by the authorities about their previous projections of withdrawn amounts from approved foreign banks’ overdrafts.

6. On the spending side of the 2013 budget, the government had to accommodate large election-related spending (1.4 percent of GDP, mostly unbudgeted) and employment cost overruns (0.8 percent of GDP). The political process was funded by one-off revenue measures, cuts in other spending, and accumulation of new arrears to service providers. The government granted only one salary increase during the year. Nevertheless, promotion drift in the civil service and overspending on certain allowances resulted in employment costs exceeding budget levels (Figure 5). The silver lining was the higher-than-budgeted clearance of pre-2013 domestic arrears (Text Table 1).

Text Table 1.Zimbabwe: Government Domestic Payment Arrears(in millions of U.S. dollars)
20122013
End-Dec.

stocks
Net

flows
End-Dec.

stocks
Goods and Service Providers171−8091
Agricultural Input Suppliers30−300
Capital Certificates115667
Total213−55158
Sources: MoFED and IMF staff estimates.
Sources: MoFED and IMF staff estimates.

7. Revenues underperformed, and collections deteriorated markedly toward the end of 2013. Despite some measures taken to cover the costs of the political process, revenue came in lower than budgeted, with an exceptionally low Q4 performance (Figure 4). This was driven by general weakness in the economy and by a liquidity crunch in December, which probably hurt tax compliance. Corporate income tax, VAT, and customs performed particularly badly. Personal income tax and excises held up better, with the latter getting a boost from increases to fuel excises implemented in March 2013. Non-tax revenues were boosted by telecom license fees mobilized to finance the referendum and elections. The government was able to collect only US$18 million in diamond dividends in 2013, compared to a budget estimate of US$70 million. The fiscal year 2013 ended with an overall budget deficit (on a cash basis) of 2.2 percent of GDP. The government’s net issuance of domestic debt securities was equivalent to about 1 percent of GDP in 2013. To close the financing gap, particularly toward the end of the year, the government drew down its deposits in the banking sector, which fell by US$157 million (1.2 percent of GDP) in 2013.

8. The 2014 budget is facing headwinds due to sluggish growth and large salary increases for the civil service. Weak revenue performance carried over into 2014, with the preliminary fiscal outturn for Q1 of 2014 showing total revenues 8 percent below budget projections. The agreement on salary increases reached between the government and its partners in the National Joint Negotiating Council in January 2014 is estimated to result in a 14 percent increase in the overall wage bill this year (assuming broadly unchanged numbers of civil servants), exceeding both budget projections and inflation. Excluding grant-aided institutions and pensions, the civil service wage bill is now projected to claim 53 percent of government expenditures in 2014, placing Zimbabwe at the top in Sub-Saharan Africa (Figure 6).

9. Growth in bank deposits and credit slowed down in 2013, with liquidity conditions tightening around the middle and the end of the year (Figure 7). Banks experienced a liquidity crunch in June-August 2013, amid political and policy uncertainty related to the election and its immediate aftermath. There was also a sharp post-election drop in the stock exchange. A second liquidity crunch in November and December, related in part to withdrawals of year-end bonuses, was most pronounced in a few troubled banks.1 In early 2014, deposits are slowly returning to the banking system, but liquidity conditions remain tight. In March 2014 Afreximbank launched a US$100 million interbank facility (AFTRADES) to help the authorities address some of the liquidity challenges among solvent banks.2

10. The financial sector is marked by poor asset quality and low capitalization, with wide differentiation across banks (Text Table 2; Figure 8). Average non-performing loans (NPLs) rose from 13.8 percent at end-2012 to 15.9 percent at end-2013 (and to 16.6 percent in March 2014). The economic downturn and the impact of temporary measures introduced in March 2013 to reduce the cost of banking services3 further stressed average bank profitability. Capital adequacy ratios averaged 12.4 percent in March 2014, just over the 12 percent minimum requirement. However, there is large variation among banks in all these dimensions (Text Table 2). At end–December 2013, only 14 out of 21 operating financial institutions were compliant with the minimum capital requirements prescribed in December 2012.4 In January 2014, the authorities reaffirmed the current minimum capital requirement (US$25 million) and extended the deadline for meeting the US$100 million minimum from June 2014 to December 2020. With most banks unable to meet the June 2014 deadline, there was a risk of a gap in the regulatory framework, unless a more extended timeframe was adopted. By end-June 2014, all banks are required to submit recapitalization plans, including interim milestones toward meeting the new deadline.

Text Table 2.Zimbabwe: Selected Financial Sector Indicators, December 2013
Share of

assets
Share of

deposits
Loan/

Deposits
Liquidity

Ratio1/
NPLs/

Total

Loans
Capital

Adequacy

Ratio2/
ROAROE
Commercial Banks (16)82.881.5104.437.015.412.3−0.3−3.3
Top five53.253.096.234.87.117.21.711.8
Top domestic bank23.520.0129.031.75.013.81.19.2
Top foreign-owned banks29.733.076.432.09.219.12.212.9
Merchant banks (2)2.12.593.25.284.4−10.8−17.6−131.1
Building societies (4)13.714.198.136.88.129.33.314.4
Post Office Bank (1)1.41.958.939.913.614.10.85.3
Total Banking sector100.0100.0102.437.415.914.00.1−0.8
of which: Troubled Banks9.89.9119.97.768.2−24.2−9.5−148.4
Source: Reserve Bank of Zimbabwe.

Excludes Interfin which is under curatorship.

The minimum capital adequacy ratio was increased from 10 percent to 12 percent effective August 1, 2012.

Source: Reserve Bank of Zimbabwe.

Excludes Interfin which is under curatorship.

The minimum capital adequacy ratio was increased from 10 percent to 12 percent effective August 1, 2012.

11. The authorities have reiterated their commitment to the multicurrency system, which is dominated by the US dollar in practice,and have recently added four new currencies as legal tender.5 They stressed that the regime will remain in place over the medium term (until at least 2018) to ensure macroeconomic stability. The authorities agreed that the full restoration of fiscal, financial, and external sustainability is a pre-requisite before any substantive changes to the exchange rate regime are considered.

12. The record of implementing recommendations from the previous Article IV consultation is mixed. In concluding the 2012 consultation, Executive Directors urged strengthening fiscal management, improving the expenditure mix, increasing diamond sector transparency, containing financial sector vulnerabilities, and resuming payments to external creditors. The authorities’ 2013 budget was based on prudent revenue projections, including diamond dividends. However, revenue under-performed as growth decelerated at year’s end. Old domestic arrears were aggressively resolved in 2013, even as higher-than-budgeted expenditures contributed to the accumulation of new arrears. The wage bill continues to claim a disproportionate share of total spending, crowding out capital and social expenditures. Progress on structural reforms, including measures to increase diamond sector transparency, has been slow. The Reserve Bank of Zimbabwe (RBZ) has intensified monitoring of troubled banks, but vulnerabilities persist. Since 2013, Zimbabwe has been making regular payments to the Poverty Reduction and Growth Trust (PRGT) and to other IFIs.

Performance Under the SMP

13. Discussions on the first and second reviews are at an advanced stage. Program performance has been mixed, and the SMP period, originally scheduled to expire at end-2013, was extended by Fund Management through end-June 2014 to allow time to strengthen policies.6 Of the six quantitative targets for the first review, three were met and three were missed for the end-June 2013 test date (Table 9), although most deviations were moderate. The floor on the primary fiscal balance was missed by 1.3 percent of GDP. The continuous zero ceiling on new domestic arrears was missed, in part because the authorities prioritized the clearance of old verified arrears over payment of unverified new bills. Reflecting fiscal constraints, the floor on usable international reserves was missed by a small margin, as reserves stayed unchanged rather than show the small increase targeted. Non-concessional external debt met the continuous ceiling at end-June, but exceeded it by a relatively small amount at end-November 2013, following the signing of a US$319 million non-concessional loan with China Eximbank to finance an essential infrastructure project (the overhaul of the Kariba hydroelectric plant).

Table 2.Zimbabwe: Balance of Payments, 2011–19
ActualProjected
201120122013201420152016201720182019
Current account (excluding official transfers)−3,269−3,048−3,613−3,796−3,737−3,546−3,235−2,912−2,942
Trade balance−3,141−2,902−3,379−3,293−3,277−3,176−2,974−2,779−2,801
Exports, f.o.b.4,4213,8083,5723,8124,0914,4384,9085,5636,089
Imports, f.o.b.−7,562−6,710−6,952−7,105−7,368−7,615−7,881−8,341−8,889
Food−513−731−658−581−565−541−547−577−617
Nonfood−7,050−5,980−6,294−6,524−6,803−7,074−7,334−7,764−8,272
Nonfactor services (net)−759−866−941−1,008−1,059−1,070−1,078−1,088−1,136
Investment income (net)−906−959−928−1,049−1,085−1,066−1,042−966−988
Interest−9612193196−2−3−30
Receipts168294179197217238262287316
Payments−265−173−87−178−210−240−265−290−316
Other−810−1,080−1,020−1,068−1,091−1,064−1,038−963−988
Private transfers (including transfers to NGOs)1,5381,6791,6351,5551,6831,7661,8581,9211,982
Remittances570646764764840874909945994
Capital account (including official transfers)2,1041,7402,7893,1203,5113,4243,1032,7602,868
Official transfers00005051525455
Direct investment360351373347558579604631659
Portfolio investment9099114119124132141151162
Long-term capital684101,0951,3971,4911,5341,4281,1431,137
Government1−154−11667260342372506574562
Receipts020184336395425559605647
Payments−154−136−116−76−53−53−53−31−85
Public enterprises291413678788
Private sector8091131,0151,1311,1421,154915562567
Short-term capital6255439561,000925910653551620
Public sector000000000
Private sector (loans mediated outside DMBs)539365692885872903667584654
Cash in circulation (non-banks, - denotes increase)000000000
Other short-term capital000000000
Change in NFA of DMBs85178264115537−14−34−34
Change in assets472−62−163−38−59−79−79
Change in liabilities391763261315045454545
SDR Allocation000000000
Errors and omissions21,2871,124580000000
Overall balance123−184−244−676−225−122−132−152−75
Financing−12318424467622512213215275
IMF (net)000000000
Central bank (net)54−27111−180−79−79−79−79−79
Assets69−34109−180−79−79−79−79−79
Change in usable official reserves86−32114−180−79−79−79−79−79
Monetary authorities operations (non-reserve)−17−2−5000000
Liabilities−1671000000
Change in arrears (–denotes decrease)0210134155147149144149155
Debt relief/rescheduling; adjustment for debt reconciliation317700000000
Unidentified financing200070115781145203121
Memorandum items:
Current account balance (percent of GDP)4−29.8−24.4−27.8−28.2−26.6−23.7−20.2−16.8−15.9
Usable international reserves (US$ millions, e.o.p.)3663982844645436518091,0091,210
Months of imports of goods and services0.50.60.40.70.70.91.01.21.4
SDR holdings (US$ millions, e.o.p.)5252143143174236328411414417
Total external debt (US$ millions, e.o.p.)3, 68,2319,05710,64612,79815,04617,28319,26920,92922,530
Percent of GDP375738295107115121121122
PPG external debt (US$ millions, e.o.p.)66,2686,7066,8627,1277,4297,6298,0338,5288,888
Percent of GDP4575453535351504948
Of which: Arrears5,1015,3135,4485,6025,7495,8986,0436,1936,348
Percent of GDP4474342424139383634
Other external debt (US$ millions, e.o.p.)3, 61,9642,3513,7845,6717,6189,65311,23612,40213,642
Percent of GDP4181929425464707274
Nominal GDP (US$ millions)410,95612,47212,97413,48314,06014,97415,97517,28418,491
Percentage change16.013.84.03.94.36.56.78.27.0
Exports of goods and services4,6944,0763,8494,1074,3864,7585,2615,9456,498
Percentage change35.2−13.2−5.66.76.88.510.613.09.3
Imports of goods and services−8,594−7,844−8,169−8,408−8,721−9,004−9,312−9,812−10,435
Percentage change47.9−8.74.12.93.73.23.45.46.3
Sources: Zimbabwean authorities; IMF staff estimates and projections.

May not match data for government external financing in the fiscal table because this line is on an accrual basis.

Large errors and omissions (past data) and unidentified financing (future projections) are likely generated by under-recording of exports, remittances, and FDI.

Debt stocks are estimates, except for the 2011 debt stock which is based on preliminary results of the authorities’ external debt reconciliation exercise concluded in January 2013.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Excludes amounts in SDR escrow account.

Includes arrears.

Sources: Zimbabwean authorities; IMF staff estimates and projections.

May not match data for government external financing in the fiscal table because this line is on an accrual basis.

Large errors and omissions (past data) and unidentified financing (future projections) are likely generated by under-recording of exports, remittances, and FDI.

Debt stocks are estimates, except for the 2011 debt stock which is based on preliminary results of the authorities’ external debt reconciliation exercise concluded in January 2013.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Excludes amounts in SDR escrow account.

Includes arrears.

Table 3.Zimbabwe: Central Government Operations, 2011–19(Millions of U.S. dollars)
ActualBudget1/Prog.1/ActualBudgetProjected
201120122013201320132014201420152016201720182019
Total revenue & on-budget grants2,9213,4963,8603,8283,7414,1204,0144,1624,4564,7835,1675,561
Tax revenue2,6603,2793,6463,5073,4143,8253,6363,8454,0994,3814,7155,061
Personal income tax5886616857657447608037978499069801048
Corporate income tax296445457418404426405436464495536573
Other direct taxes188287404242227294284309344383432481
Customs333354392376361430558449466478497519
Excise307394483512510569535560596644689737
VAT91210861,1651,1111068123593911811260134614431555
Other indirect taxes3652618498111112112120128138148
Non-tax revenue261217214320327295378318357402451499
Of which: Licensing fees040016415851100000
Of which: Diamond dividends151447017189682107132162192222
Budget grants000000000000
Total expenditure & net lending3,1813,6583,9353,9044,0694,1914,3064,1204,3424,7355,0675,433
Of which: Cash expenditure2,9743,5683,8623,8984,0274,1654,0924,1444,3624,6194,9455,306
Current expenditure2,6293,3033,3703,5213,5863,7093,7913,7683,9224,1284,3244,527
Employment costs1,5442,1342,2602,3402,3442,5432,6962,7632,8322,9032,9763,050
Wages & salaries1,2691,7331,8411,9221,9262,0932,2182,2742,3312,3892,4492,510
Pensions275401419418418450478490502514527540
Interest payments113116118122120142149173186193200206
Foreign113114114114114121121131137142149155
Of which: Paid341818151715162124252628
Domestic0348621284349515151
Of which: Paid0348621284349515151
Goods & services504505407322359397368225270367449536
Grants & transfers468548585737763628579606634664699734
Of which: Employment costs290370402427423455461473485497509522
Of which: Referendum costs002546460000000
Of which: Election costs0001321320000000
Capital expenditure and net lending551355565382483482515351419607743906
Overall balance (commitment basis)−260−162−75−76−328−71−292431144899128
Primary balance (commitment basis) 2/−147−454346−20870−144216300241299334
Overall balance (cash basis)−53−7347−70−286−45−781993164222254
Primary balance (cash basis) 2/−19−5269−47−262−9−3583167241299334
Financing260162267631071292−43−114−48−100−128
Domestic financing (net)−258−466326587145955019−2636
Bank444−46851931521121925019−2636
Non-bank−30−360−2272−6533−980000
Foreign financing (net)−488−65−26−247−266−243−235−262−296−290−438
Disbursements780907272181800000
Amortization due12710112598319254231175172166125233
Of which: Paid04461656830545353533185
Movement in Zimbabwe’s SDR holdings (net)0109−3000−30−30−60−90−8000
Other000000000−50−165−205
Change in arrears333146137392932503919899229216274
Domestic128−6−23−93−55−79109−134−134000
Arrears accumulation128116079123013200000
Arrears clearance0−122−23−172−178−79−23−134−134000
Foreign205152160132347329282231232229216274
Interest7996969997106105109113116122127
Principal12757643325122417712211911394148
Statistical discrepancy / Financing gap00−480−170000000
Sources: Zimbabwean authorities; and IMF staff estimates and projections.

Presentation in keeping with the definitions in the Technical Memorandum of Understanding.

The difference between the primary balance on a commitment and cash basis is the change in domestic arrears.

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

Presentation in keeping with the definitions in the Technical Memorandum of Understanding.

The difference between the primary balance on a commitment and cash basis is the change in domestic arrears.

Table 3.Zimbabwe: Central Government Operations, 2011–19

(Percent of GDP)1/

ActualBudget2/Prog.2/ProjectedBudgetProjected
201120122013201320132014201420152016201720182019
Total revenue & on-budget grants26.728.029.829.528.830.629.829.629.829.929.930.1
Tax revenue24.326.328.127.026.328.427.027.327.427.427.327.4
Personal income tax5.45.35.35.95.75.66.05.75.75.75.75.7
Corporate income tax2.73.63.53.23.13.23.03.13.13.13.13.1
Other direct taxes1.72.33.11.91.82.22.12.22.32.42.52.6
Customs3.02.83.02.92.83.24.13.23.13.02.92.8
Excise2.83.23.73.93.94.24.04.04.04.04.04.0
VAT8.38.79.08.68.29.27.08.48.48.48.48.4
Other indirect taxes0.30.40.50.60.80.80.80.80.80.80.80.8
Non-tax revenue2.41.71.62.52.52.22.82.32.42.52.62.7
Of which: Diamond dividends1.40.40.50.10.10.70.60.80.91.01.11.2
Budget grants0.00.00.00.00.00.00.00.00.00.00.00.0
−0.9
Total expenditure & net lending29.029.330.330.131.431.131.929.329.029.629.329.4
Of which: Cash expenditure27.128.629.830.031.030.930.429.529.128.928.628.7
Current expenditure24.026.526.027.127.627.528.126.826.225.825.024.5
Employment costs14.117.117.418.018.118.920.019.718.918.217.216.5
Wages & salaries11.613.914.214.814.815.516.516.215.615.014.213.6
Pensions2.53.23.23.23.23.33.53.53.43.23.12.9
Interest payments1.00.90.90.90.91.11.11.21.21.21.21.1
Foreign1.00.90.90.90.90.90.90.90.90.90.90.8
Of which: Paid0.30.10.10.10.10.10.10.20.20.20.20.2
Domestic0.00.00.00.10.00.20.20.30.30.30.30.3
Of which: Paid0.00.00.00.10.00.20.20.30.30.30.30.3
Goods & services4.64.03.12.52.82.92.71.61.82.32.62.9
Grants & transfers4.34.44.55.75.94.74.34.34.24.24.04.0
Of which: Employment costs2.63.03.13.33.33.43.43.43.23.12.92.8
Of which: Referendum costs0.00.00.20.40.40.00.00.00.00.00.00.0
Of which: Election costs0.00.00.01.01.00.00.00.00.00.00.00.0
Capital expenditure and net lending5.02.84.42.93.73.63.82.52.83.84.34.9
Overall balance (commitment basis)−2.4−1.3−0.6−0.6−2.5−0.5−2.20.30.80.30.60.7
Primary balance (commitment basis) 3/−1.3−0.40.30.4−1.60.5−1.11.52.01.51.71.8
Overall balance (cash basis)−0.5−0.60.4−0.5−2.2−0.3−0.60.10.61.01.31.4
Primary balance (cash basis) 3/−0.2−0.40.5−0.4−2.0−0.1−0.30.61.11.51.71.8
Financing2.41.30.20.62.40.52.2−0.3−0.8−0.3−0.6−0.7
Domestic financing (net)−0.20.1−0.40.52.00.61.10.70.30.1−0.20.2
Bank0.00.4−0.40.71.51.10.81.40.30.1−0.20.2
Non-bank−0.3−0.30.0−0.20.6−0.50.2−0.70.00.00.00.0
Foreign financing (net)−0.40.1−0.5−0.2−1.9−2.0−1.8−1.7−1.8−1.9−1.7−2.4
Disbursements0.70.00.70.60.60.10.10.00.00.00.00.0
Amortization due1.20.81.00.82.51.91.71.21.21.00.71.3
Of which: Paid0.00.40.50.50.50.20.40.40.40.30.20.5
Movement in Zimbabwe’s SDR holdings (net)0.00.9−0.20.00.0−0.2−0.2−0.4−0.6−0.50.00.0
Other0.00.00.00.00.00.00.00.00.0−0.3−1.0−1.1
Change in arrears3.01.21.10.32.31.92.90.70.71.41.31.5
Domestic1.20.0−0.2−0.7−0.4−0.60.8−0.9−0.90.00.00.0
Arrears accumulation1.20.90.00.61.00.01.00.00.00.00.00.0
Arrears clearance0.0−1.0−0.2−1.3−1.4−0.6−0.2−0.9−0.90.00.00.0
Foreign1.91.21.21.02.72.42.11.61.61.41.31.5
Interest0.70.80.70.80.70.80.80.80.80.70.70.7
Principal1.20.50.50.31.91.71.30.90.80.70.50.8
Statistical discrepancy / Financing gap0.00.0−0.40.0−0.10.00.00.00.00.00.00.0
Sources: Zimbabwean authorities; and IMF staff estimates and projections.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Presentation in keeping with the definitions in the Technical Memorandum of Understanding.

The difference between the primary balance on a commitment and cash basis is the change in domestic arrears.

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

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Presentation in keeping with the definitions in the Technical Memorandum of Understanding.

The difference between the primary balance on a commitment and cash basis is the change in domestic arrears.

Table 4.Zimbabwe: Central Government Operations (GFSM 2001 Classification), 2011–19(millions of U.S. dollars)
ActualProjected
201120122013201420152016201720182019
Revenue2,9213,4963,7414,0144,1624,4564,7835,1675,561
Taxes2,6603,2793,4143,6363,8454,0994,3814,7155,061
Taxes on income, profits, and capital gain8841,1051,1491,2081,2331,3131,4011,5161,622
Income Tax on Profits296445404405436464495536573
Income Tax on wages and salaries5886617448037978499069801,048
Income Tax on interest income, & capital gains
Penalties on Income Tax000000000
Taxes on goods and services1,2181,4801,5791,4741,7411,8561,9902,1322,292
Net VAT revenues9121,0861,0689391,1811,2601,3461,4431,555
Excises307394510535560596644689737
Taxes on international trade333354361558449466478497519
Other direct and indirect taxes225339326396422464511570629
Grants000000000
Other revenue261217327378318357402451499
Entrepreneurial and property income
Other
Expense2,6293,3033,5863,7913,7683,9224,1284,3244,527
Compensation of employees1,2691,7331,9262,2182,2742,3312,3892,4492,510
Wages and social security payments
Allowances
Purchase of goods and services504505359368225270367449536
Interest payments113116120149173186193200206
Domestic currency debt036284349515151
of which: paid036284349515151
Foreign currency debt113114114121131137142149155
of which: paid341817162124252628
Grants468548763579606634664699734
Social benefits275401418478490502514527540
of which: Pensions275401418478490502514527540
Gross Operating Balance2921931552233945336558431,034
Net acquisition of nonfinancial assets431266411456311371538659803
Acquisition of non-financial assets431266411456311371538659803
Domestically financed431266411456311371538659803
Foreign financed000000000
Disposal of non-financial assets000000000
Net lending/borrowing (Overall Balance)−139−73−257−23483162117184231
Net transactions in financial assets and liabilities−135−73−239−23483161117184231
Net acquisistion of financial assets15077−93120150138199250308
Domestic150186−939090486985103
Currency and deposits3097−16431500000
Loans (net lending)12089715940486985103
Equity and investment share (privatization proceeds)
Debt cancellation
Foreign0−1090306090130165205
Currency and deposits (+ increase in assets)000000000
Monetary gold and SDRs0−1090306090130165205
Equity and investment share000000000
Net incurrence of liabilities−285−150−146−353−6724−82−65−77
Domestic−128−99−46−285−1184−1926−36
Currency and deposits
Debt securities0−93−132−367−145−50−1926−36
T-bills
Loans0−9568900000
Clearance of statutory reserves0832510300000
Change in domestic arrears−128655−109134134000
Foreign−157−51−101−69−56−60−63−91−41
SDRs000000000
Debt securities000000000
Loans48101247213175172166125233
Disbursements−780−72−1800000
Amortization due127101319231175172166125233
of which paid04468545353533185
Change in foreign arrears−205−152−347−282−231−232−229−216−274
Interest−79−96−97−105−109−113−116−122−127
Principal−127−57−251−177−122−119−113−94−148
Memorandum items:
Overall balance (cash basis)−53−73−286−781993164222254
Overall balance (commitment basis)−260−162−328−292431144899128
Cash expenditures2,9743,5684,0274,0924,1444,3624,6194,9455,306
Change in arrears−333−146−293−391−98−99−229−216−274
Sources: Zimbabwean authorities; and IMF staff estimates and projections.
Sources: Zimbabwean authorities; and IMF staff estimates and projections.
Table 5.Zimbabwe: Integrated Balance Sheet, 2011–19(millions of U.S. dollars)
EstimatedProjected
Dec.Dec.Dec.Dec.Dec.Dec.Dec.Dec.Dec.
201120122013201420152016201720182019
Net worth
Nonfinancial assets
Net financial worth−6,880−7,501−7,749−8,357−8,579−8,548−8,851−9,250−9,547
Financial assets7708107248459981,1391,2921,3811,488
Domestic415565479568658706775860963
Currency and deposits1161761950100100100100100
Debt securities000000000
Loans299388459518558606675760863
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts receivable
Foreign354245245277339432517521525
Monetary gold and SDRs 1/354245245277339432517521525
Currency and deposits000000000
Debt securities000000000
Loans000000000
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts receivable
Financial liabilities7,6508,3118,4739,2029,5779,68710,14210,63011,035
Domestic8871,1101,1171,5761,6451,5511,5991,5881,629
Currency and deposits000000000
Debt securities093225592737787806780816
Loans09589000000
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts payable887922803984909764793808813
Of which: Debt owed by the RBZ 2/711709645717775764793808813
Foreign6,7637,2007,3567,6257,9318,1368,5439,0429,406
SDRs520520521524529533538542546
Currency and deposits000000000
Debt securities000000000
Loans1,1671,3941,4151,4261,6401,7311,9902,2322,540
Equity and investment fund shares
Insurance, pensions, and standardized guarantee schemes
Financial derivatives and employee stock options
Other accounts payable5,0765,2865,4205,6755,7635,8726,0166,2686,320
Sources: Zimbabwean authorities; and IMF staff estimates and projections.

Including about $100 million of escrowed SDRs, which will become available once arrears to the PRGT Trust have been settled.

About $150 million of short-term foreign loans reclassified to domestic liabilities

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

Including about $100 million of escrowed SDRs, which will become available once arrears to the PRGT Trust have been settled.

About $150 million of short-term foreign loans reclassified to domestic liabilities

Table 6.Zimbabwe: Monetary Survey, 2011–19(Millions of U.S. dollars; unless otherwise indicated)
ActualProjected
Dec.Dec.Dec.Dec.Dec.Dec.Dec.Dec.Dec.
201120122013201420152016201720182019
Monetary authorities
Net foreign assets−734−700−810−630−555−450−297−99138
Claims on non-residents5165504416217008089651,1661,407
Gross international reserves 1/3663982844645436518091,0091,250
Of which: Other reserve assets114255141290307323398595833
Liabilities to non-residents−1,250−1,250−1,251−1,251−1,255−1,258−1,262−1,265−1,269
Short-term foreign liabilities−662−658−655−652−651−651−650−649−648
Of which: Liabilities to IMF−134−127−126−123−122−121−120−120−119
Other foreign liabilities−588−592−596−599−603−608−612−616−620
Net domestic assets9199731,082910852763634469264
Net domestic claims−1−8143222222
Claims on other depository corporations00141000000
Net claims on central government−2−11−1−1−1−1−1−1−1
Claims on other sectors143444444
Claims on other financial corporations000000000
Claims on state and local government000000000
Claims on public non-financial corporations000000000
Claims on private sector143444444
Other items (net)921980939908850761632467262
Monetary base186273272280297313337370402
Statutory reserves8300000000
Banks’ current/RTGS accounts102273272280297313337370402
Deposit money banks and other banking institutions
Net foreign assets4432661−114−167−174−160−126−93
Foreign assets644642704720716754813892971
Foreign liabilities−200−376−702−834−884−929−974−1,019−1,064
Net domestic assets2,6573,4284,0274,1244,4194,6524,9885,4215,854
Net domestic claims3,1053,8924,3374,3464,5424,7935,1285,5635,996
Claims on RBZ349325347355372388412445477
Currency000000000
Deposits349325347355372388412445477
Net claims on central government0−5315382288221193195126
Claims on other sectors2,7553,5723,6763,6093,8824,1844,5234,9235,393
Claims on public non-financial corporations455261626467707275
Claims on private sector2,7103,5203,6153,5473,8174,1174,4544,8515,318
Other items (net)−448−463−310−222−123−141−141−142−142
Liabilities to RBZ00141000000
Deposits included in broad money3,1003,6943,8884,0114,2524,4784,8275,2955,761
Monetary Survey
Net foreign assets−290−435−809−744−722−625−457−22646
Net domestic assets3,3914,1294,6974,7544,9745,1025,2845,5205,716
Domestic claims2,7543,5593,9933,9934,1724,4074,7185,1215,521
Net claims on central government−2−17314380287220191194125
Claims on other sectors2,7563,5753,6793,6133,8854,1884,5274,9275,396
Claims on public non-financial corporations455261626467707275
Claims on private sector2,7113,5243,6183,5513,8214,1214,4574,8545,321
Other items (net)636570704761802695566400195
Broad money liabilities (M3)3,1003,6943,8884,0114,2524,4784,8275,2955,762
Deposits3,1003,6943,8884,0114,2524,4784,8275,2955,762
(annual percentage change)
Monetary Base−274703658109
Broad Money (M3)331953658109
Currency
Deposits331953658109
Private Sector Credit63303−2888910
Memorandum Items:
Usable international reserves 2/182128143184246338471640848
Loan-to-deposit ratio (in percent)879593889092929292
Reserves-to-deposit ratio (in percent)677777777
Money multiplier (M3/monetary base)171414141414141414
Velocity (GDP/M3) 3/3.53.43.33.43.33.33.33.33.2
Sources: Zimbabwean authorities; and IMF staff estimates and projections.

Defined as Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks’ current/RTGS accounts and statutory reserves, and amounts in SDRs escrow account.

Defined as the higher of Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks’ current/RTGS accounts and statutory reserves, and amounts in SDRs escrow account.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

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

Defined as Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks’ current/RTGS accounts and statutory reserves, and amounts in SDRs escrow account.

Defined as the higher of Zimbabwe’s SDR holdings and gross international reserves less amounts deposited in banks’ current/RTGS accounts and statutory reserves, and amounts in SDRs escrow account.

Zimbabwe’s statistical agency (ZIMSTAT) recently revised the GDP series since 2009. The new GDP series are 25-30 percent higher than the old ones.

Table 7.Zimbabwe: Risk Assessment Matrix1
Source of RiskRelative LikelihoodImpact if RealizedPolicy Advice/Response
Fiscal underperformance (short term)HighHighImplement the announced measures to mobilize diamond dividends and increase diamond revenue transparency. Refrain from further wage increases in 2014 and maintain the hiring freeze, except in critical areas. Be prepared to take necessary actions should revenue fall short of revised projections, while protecting priority infrastructure and social spending.
Further weakening of revenue, whether from lower tax collections or further postponement of the special diamond dividend, or any further increases in civil servants’ pay in 2014 could increase fiscal stress, crowd out social spending and capital investment, and cause the unplanned accumulation of new domestic arrears.
Destabilizing effects from the indigenization and empowerment policy (short to medium term)MediumMediumClarify the indigenization and empowerment policy and enhance predictability and transparency. Give priority to financial sector stability and ensure application of the policy is consistent with existing financial sector laws and prudential regulations.
Continued uncertainties over implementation would limit FDI inflows. Indigenization in the banking sector could exacerbate existing risks to financial stability.
Risks to financial stability from incomplete regulatory reforms (medium term)MediumMedium to HighTake a proactive approach to avoid disorderly resolution of troubled banks. Give serious consideration to closing insolvent, non-systemic banks. Advance the restructuring of the RBZ and other financial sector reforms.
Delays could aggravate vulnerabilities. Further deterioration in corporate governance, asset quality, and bank capitalization would lead to loss of confidence, worsening liquidity conditions, and possible bank runs.
Adverse weather conditions (short term)MediumMediumImplement the authorities’ development agenda which includes plans to build or rehabilitate irrigation schemes, to increase the availability of affordable energy for irrigation, and to create a self-sufficient agricultural sector.
Erratic rainfall and drought have impacted agricultural production in the past. With agriculture accounting for 11 percent of GDP, adverse weather conditions could severely affect growth and food security.
Protracted period of slow growth in advanced and emerging economiesHighMedium to HighMake progress towards fiscal consolidation to build fiscal and external buffers to cushion shocks. Create an enabling business environment, and normalize relations with creditors. Diversify the economy by boosting agriculture, manufacturing, and services.
A protracted slowdown, particularly in Europe and China, could lower commodity prices and hurt Zimbabwe’s key exports. This would undermine the country’s external and fiscal positions and reduce near- and long-term growth prospects, as mining capacity might shrink in response. Such a shock could also reduce financial inflows which would exacerbate liquidity shortages and cause BOP difficulties.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Table 8.Zimbabwe: Financial Soundness Indicators, December 2009–March 20141(In percent, unless otherwise indicated)
Dec-09Mar-10Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14
Capital adequacy
Regulatory capital to risk-weighted assets21.619.017.014.315.314.513.713.213.412.98.17.911.110.510.810.312.312.4
Capital to assets12.011.410.29.19.49.49.29.09.38.45.96.06.67.27.26.87.37.1
Asset quality
Past-due loans to gross loans 2/19.916.916.918.116.117.419.921.521.126.227.226.330.032.232.333.331.636.2
Nonperforming loans 3/1.81.71.92.33.13.54.06.55.99.212.411.513.814.214.815.515.416.9
Watch-listed loans 4/18.015.215.115.813.013.915.915.015.216.914.814.916.318.117.517.716.319.3
Provisions as percent of past-due loans10.87.111.910.010.89.910.512.014.013.425.625.626.125.428.126.026.523.7
Earnings and profitability
Net profit (before tax and extraordinary items) to net income188.1139.5127.7173.3166.0111.1147.8152.5139.7167.664.4208.5221.0−41.675.20.4−47.1101.6
Return on assets0.50.50.81.01.91.01.52.02.70.4−0.61.01.20.0−0.20.00.10.3
Return on equity1.93.05.55.411.07.99.512.517.62.1−9.65.05.4−0.4−2.9−3.3−2.53.0
Expenses to income95.584.688.389.484.177.578.080.380.288.0109.488.789.799.3104.2100.098.887.6
Liquidity
Liquid assets to total assets39.636.233.032.030.828.230.427.627.729.526.324.324.924.426.929.127.828.5
Liquid assets to short-term liabilities96.347.241.440.937.565.036.032.632.634.732.029.729.930.232.934.934.835.1
Loans to deposits48.157.760.751.679.176.877.286.288.085.288.493.892.9105.6103.9103.3104.496.9
Liquid assets to total deposits60.052.849.651.851.842.744.641.241.744.442.539.639.643.347.451.951.250.7
Excess reserves to broad money2.85.37.15.77.45.47.07.07.07.07.07.07.07.07.07.09.07.6
Sensitivity to market risk
funds5.25.26.5−8.97.933.126.626.626.626.626.626.646.937.545.049.553.853.4
Interest rates
Lending rate minus demand deposit rate3.02.92.83.33.12.04.26.29.32.64.97.08.92.14.26.28.62.0
Commercial banks fixed deposits (12 months average)10.39.99.49.19.08.38.611.511.211.411.511.511.211.414.312.420.113.3
Commercial banks lending rate (weighted average)11.07.27.27.37.55.318.018.018.018.018.010.410.09.810.311.89.49.3
Savings deposit rate1.01.11.31.31.41.02.62.62.62.62.63.03.23.23.13.13.24.1
Source: Reserve Bank of Zimbabwe.

Based on commercial banks only.

Past-due loans are defined as the aggregate of special mention, substandard, doubtful, and loss loans, and include RBZ frozen claims.

Non-perfoming assets are defined as the aggregate of substandard, doubtful, and loss loans.

Watch-listed loans are the same as special mention loans.

Source: Reserve Bank of Zimbabwe.

Based on commercial banks only.

Past-due loans are defined as the aggregate of special mention, substandard, doubtful, and loss loans, and include RBZ frozen claims.

Non-perfoming assets are defined as the aggregate of substandard, doubtful, and loss loans.

Watch-listed loans are the same as special mention loans.

Table 9.Zimbabwe: Quantitative Targets under the Staff-Monitored Program(In millions of U.S. dollars, unless otherwise indicated)
20131
MarchJune2Sept.Dec.2
Act.Prog.Act.StatusProg.Act.Prog.Act.Status
1. Floor on primary budget balance of the central government3, 4, 5, 6, 7−261880−47−262
Adjusted floor169−3Not met170−25−53Not met
2. Continuous ceiling on new domestic payment arrears8n.a.0n.a.Not met0n.a.
3. Floor on protected social spending185158Met9398144100Not met
4. Floor on stock of usable international reserves143149143Not met169143143143Met
5. Floor on payments to the PRGT0.450.901.05Met1.351.501.801.80Met
6. Continuous ceiling on the stock of new non-concessional external debt contracted or guaranteed by the general government with original maturity of one year or more033029Met933029350348Met
7. Ceiling on total stock of arrears to domestic service providers, agricultural input suppliers, and on capital certificates17175117158Not met
Memorandum Items:
Broad Money (stock)3,6464,0433,6894,2263,7573,8283,888
Reserve Money (stock)227232337243276283272
Disbursements on medical equipment and supplies loan0903090307272
Unbudgeted costs related to the referendum and elections1814847148153153153
Unbudgeted revenues from telecom licence fees0504050859185

Value of cumulative flows for the calendar year, unless otherwise indicated.

Program performance will be monitored based on the quantitative targets for June and December 2013.

To be adjusted downwards in any quarter and subsequent quarters by the full amount of any new borrowing disbursed and utilized by central government for priority infrastructure projects.

To be adjusted downwards in any quarter and subsequent quarters by the full amount of any domestic debt issuance by central government ring-fenced for clearance of domestic payment arrears.

To be adjusted upwards (downwards) in Q2 and Q3 of 2013 by the full amount of any shortfall (excess) in unbudgeted costs related to the constitutional referendum and national elections and incurred by central government, relative to programme assumptions.

To be adjusted downwards (upwards) in any quarter and subsequent quarters in 2013 by the full amount of any shortfall (excess) in unbudgeted revenues from telecom licence fees received by central government, relative to programme assumptions.

To be adjusted downwards in Q1 of 2013 by the value of the medical equipment and supplies project loan if the loan were disbursed in that quarter. To be adjusted upwards in Q2 and Q3 of 2013 by the shortfall in the cumulative disbursement on the loan effected through these quarters, relative to programme assumptions. To be adjusted downwards (upwards) in Q4 of 2013 by the full amount of any excess (shortfall) in the cumulative disbursement on the loan for the calendar year, relative to programme assumptions.

For the second SMP review, the continuous ceiling on new domestic payment arrears is replaced with a ceiling on the total stock of arrears to domestic service providers, agricultural input suppliers, and on capital certificates.

A US$ 319 million non-concessional loan was signed with the Export-Import Bank of China in November, thus breaching the continuous US$ 330 million

Value of cumulative flows for the calendar year, unless otherwise indicated.

Program performance will be monitored based on the quantitative targets for June and December 2013.

To be adjusted downwards in any quarter and subsequent quarters by the full amount of any new borrowing disbursed and utilized by central government for priority infrastructure projects.

To be adjusted downwards in any quarter and subsequent quarters by the full amount of any domestic debt issuance by central government ring-fenced for clearance of domestic payment arrears.

To be adjusted upwards (downwards) in Q2 and Q3 of 2013 by the full amount of any shortfall (excess) in unbudgeted costs related to the constitutional referendum and national elections and incurred by central government, relative to programme assumptions.

To be adjusted downwards (upwards) in any quarter and subsequent quarters in 2013 by the full amount of any shortfall (excess) in unbudgeted revenues from telecom licence fees received by central government, relative to programme assumptions.

To be adjusted downwards in Q1 of 2013 by the value of the medical equipment and supplies project loan if the loan were disbursed in that quarter. To be adjusted upwards in Q2 and Q3 of 2013 by the shortfall in the cumulative disbursement on the loan effected through these quarters, relative to programme assumptions. To be adjusted downwards (upwards) in Q4 of 2013 by the full amount of any excess (shortfall) in the cumulative disbursement on the loan for the calendar year, relative to programme assumptions.

For the second SMP review, the continuous ceiling on new domestic payment arrears is replaced with a ceiling on the total stock of arrears to domestic service providers, agricultural input suppliers, and on capital certificates.

A US$ 319 million non-concessional loan was signed with the Export-Import Bank of China in November, thus breaching the continuous US$ 330 million

14. For the end–December 2013 test date, the authorities met three of the six revised quantitative targets. They met the floors on the stock of usable international reserves and on PRGT payments, and the continuous ceiling on the stock of new non-concessional external debt. They missed the target for the primary fiscal balance on a cash basis by about 1.6 percent of GDP, due to significant weakness in tax revenues in the last quarter of 2013 (Figure 4). Given the very tight fiscal space in Q4 of 2013, the authorities missed the floor on protected social spending by about 0.3 percent of GDP and the stock of domestic arrears overshot its ceiling by a similar margin.

15. The electoral process and the post-election transition delayed the implementation of structural reforms. Eventually, three of the five structural benchmarks for the first review were met, as was one of the five structural benchmarks for the second review (Table 10):

Table 10.Zimbabwe: Status of Structural Benchmarks for 1st and 2nd SMP Reviews
BenchmarksMacroeconomic RationaleReviewStatus
Tax Policy
1. Submit to Parliament the new Income Tax Bill.Enhance tax administration.1stMet.
2. Issue a Statutory Instrument establishing a clear formula for the calculation and remittance of dividends from entities in which the Government holds shares.Increase transparency and accountability.1stNot met.
3. Submit to Cabinet amendments to the Precious Stones Trade Act to incorporate the principles of the Diamond Policy.Increase transparency and accountability.Not met.
4. Submit to Parliament amendments to the Precious Stones Trade Act.Increase transparency and accountability.Not met.
5. Submit to Parliament a new Mines and Minerals Act.Increase transparency and accountability.Not met.
Public Financial Management
6. PSC to submit to MoFED a time-bound action plan on measures to modernize the human resources and payroll systems.Enhance public expenditure and financial management.1stMet.
7. Publish a report on the stock of verified arrears and a strategy to clear validated arrears by December 2013 on MoFED’s website.Enhance public expenditure and financial management.1stNot met.
Financial Sector
8. Submit to the RBZ Board a framework for contingency planning and systemic crisis management.Reduce financial sector vulnerabilities.1stMet.
9. Submit amendments to the Banking Act to Parliament aimed at strengthening the Troubled Bank Resolution Framework.Strengthen legal and regulatory framework and reduce systemic liquidity risks.2ndNot met.
10. Submit the RBZ Debt Relief Bill to Parliament to complete the restructuring of the RBZ balance sheet.Reduce financial sector vulnerabilities.2ndMet
  • The new Income Tax Bill was submitted to Parliament in May 2013 and passed in June 2013;

  • the new framework for contingency planning and systemic risk management was submitted to the RBZ Board and approved in October 2013;

  • the time-bound action plan by the Public Service Commission7 on measures to modernize human resource management and payroll systems was submitted to the Ministry of Finance and Economic Development (MoFED) in mid-December 2013; and

  • the RBZ Debt Assumption Bill (formerly the RBZ Debt Relief Bill) was approved by Cabinet in November 2013 and submitted to Parliament in April 2014.

16. The report on the stock of verified pre-2013 domestic arrears was finalized in mid-December 2013. While the report itself was not published on MoFED’s website, the total stock of domestic arrears and the strategy to clear it were both made public in the 2014 National Budget Statement submitted to Parliament in December 2013.

17. Regarding a new Mines and Minerals Act, the new government decided to accomplish its objectives through amendments to the Act. After extensive consultations with stakeholders, the amendments will be submitted to Cabinet in June 2014. The authorities also decided to prioritize these amendments over amendments to the Precious Stones Trade Act, which are now expected to be completed in the second half of 2014.

18. The new government is reviewing the amendments to the Banking Act, for which a draft was at an advanced state. The principles for the amendments will be submitted to Cabinet in June 2014 and to Parliament in July 2014.

19. The statutory instrument establishing a formula for diamond dividends was not issued due to the lack of enabling legislation, but broadly equivalent measures have been introduced in 2014 to increase diamond revenues and boost transparency in the industry. First, the 2014 Finance Act, signed into law in April 2014, introduced the withholding of a special dividend equal to 15 percent of the gross proceeds from diamond sales.8 Second, the authorities constituted a joint task force composed of technical staff from MoFED, the Ministry of Mines and Mining Development (MoMMD), and the Zimbabwe Revenue Authority to forecast and monitor diamond-related revenue flows. Third, the authorities submitted to Parliament the 2012 audited financial accounts of the Zimbabwe Mining Development Corporation (ZMDC) and published them online in May 2014. Finally, following the lifting of EU sanctions against the ZMDC, the Minerals Marketing Corporation of Zimbabwe successfully conducted two diamond auctions in Antwerp (in December 2013 and February 2014) and one in Dubai (March 2014). Going forward, the authorities intend to ensure that all diamonds are sold through auctions at international trading centers. More fundamentally, the authorities are analyzing the structure of the diamond sector to streamline the number of companies in it. They also intend to undertake a thorough reassessment of the fiscal regime for mining, including diamond mining.

Outlook and Risks

20. Growth is projected to be sluggish over the short to medium term (Figure 9). A comprehensive and determined reform program would be necessary to foster investment, especially foreign, and boost productivity beyond the baseline. Given the weak momentum coming out of 2013, it is hard to see a vigorous economic recovery in 2014. Agricultural and mining exports are projected to accelerate in 2014, due to another strong tobacco season and increased output of gold and platinum. This will offset the continued shrinking of the industrial sector, under pressure from competing imports from South Africa. (A key fact is that, despite the status of the South African rand as legal tender under the multi-currency regime, labor contracts in Zimbabwe are universally denominated in U.S. dollars.) The current account balance should improve over the medium term as export capacity increases, but the current account deficit is expected to remain high, averaging around 15 percent of GDP in the medium term. Fiscal consolidation should permit a modest re-building of international reserves. Inflation is projected to remain very low during 2014 (0.2 percent), picking up to 1.2 percent in 2015.

Box 1.Zimbabwe: Deflation Risks

Zimbabwe’s 12-month inflation rate decelerated from 2.9 percent at end-2012 to -0.3 percent in April 2014. The deceleration is partly driven by weak aggregate demand. A closer inspection of CPI components indicates that deflationary pressures have been stronger in traded sectors (Box Figure 1), suggesting that pass-through from a depreciating rand also plays an important role. There are benefits and costs from deflation for Zimbabwe.

Box Figure 1.Zimbabwe: Consumer Price Index by Category, January 2009-March 2014

(Index, June 2009=100)

Sources: Zimbabwean authorities and IMF staff estimates.

On the upside, temporarily falling prices benefit consumers with job security. By delivering a boost to aggregate demand, falling prices may contribute to eroding the country’s negative output gap. Deflation could also correct the existing overvaluation in the real exchange rate, although that would require prices of non-traded inputs (notably labor) and final goods to fall faster than the prices of traded goods, which has not been the case so far. Finally, falling prices boost the real money supply and could alleviate somewhat the persistent liquidity shortages.

On the downside, persistent deflation may increase the real burden of existing debt in a country that is already under financial stress. However, Zimbabwe’s financial underdevelopment (low stocks of loans and deposits, with short maturities) may mitigate this effect. Deflation hurts producers and might reduce Zimbabwe’s productive capacity, if it leads to widespread company downsizing and closures, given downward wage rigidity.

In the medium term, structural reforms that improve the business environment and stimulate domestic and foreign investment could offset the deflationary impulse. In the near term, in the absence of monetary policy tools, the authorities must avoid exacerbating the distortions and imbalances, for example, by resisting the impulse to restrict imports and by avoiding further public sector wage increases, which put pressure on salary negotiations elsewhere in the economy.

21. Risks to the outlook remain tilted to the downside (see Risk Assessment Matrix, Table 7). The most immediate risk is failure to set government finances on a sustainable path. Absent measures to re-prioritize government spending, vital government functions could suffer and stability may be jeopardized. Significant uncertainty still surrounds the implementation of the indigenization policy, which has a chilling effect on foreign investment. While the rhetoric on this issue has been toned down somewhat and a new approach has been mooted, it is still not clear what this will imply outside the extractive sectors, as a case-by-case approach seems to be the government’s preferred choice. Financial sector vulnerabilities and adverse weather conditions present other significant domestic risks. A protracted period of lower growth in advanced and emerging economies (particularly Europe and China) could lower global demand for key mineral exports (gold, platinum, diamonds) and dampen growth. Real spillovers from South Africa are unlikely to be significant, although persistent weakness in the rand would hurt Zimbabwean light manufacturing, already under stress. There are also risks of sustained deflation in Zimbabwe (Box 1).

Authorities’ views

22. The authorities broadly agreed with staff’s medium-term outlook and risk assessment.

However, the authorities remained confident that the timely and full implementation of ZIM ASSET, their development blueprint for the next five years, could result in better growth prospects over the medium term. The authorities expressed their commitment to set government finances on a sustainable footing, implement financial sector reforms, and clarify their indigenization and empowerment policy. They reaffirmed their commitment to continued engagement with the IFIs and their interest in a successor SMP.

Restoring Fiscal Sustainability and Advancing the Fiscal Reform Agenda

23. The 2014 budget targets are in doubt in the context of the weaker economic forecast and wage pressures. The target for total revenue in the 2014 budget statement (US$4,120 million or 30.6 percent of GDP, including US$96 million in diamond dividends) is at risk following weak revenue performance in Q1 and the downward revision in growth projections for 2014. The agreed 14 percent increase to the overall wage bill is another source of stress to the budget. Finally, the need to rebuild depleted government deposits, amortize domestic and selected external debt, and modestly increase international reserves all raise the government’s gross financing requirements in 2014.

24. To offset these pressures, the government has identified revenue and expenditure measures, and plans on a modest amount of net domestic financing. The Minister of Finance and Economic Development is expected to present the fiscal adjustment package to Cabinet in early-June 2014. The revenue measures are worth about 2.8 percent of GDP and include selective increases in customs duties, targeted tax compliance operations, non-tax revenues (surplus resources generated by several extra-budgetary funds), as well as additional customs revenues from a determined effort to address identified leakages. Expenditure measures are worth 1.8 percent of GDP and include re-prioritizing non-personnel, non-interest current expenditure, while ring-fencing high-value social spending. As a result of these measures, the authorities now project total revenues to reach a conservative US$4,014 million (29.8 percent of GDP) in 2014, while total cash expenditures are projected at US$4,092 (30.4 percent of GDP). If fully implemented, these measures could result in a small budget deficit of US$78 million (around 0.6 percent of GDP) in 2014, on a cash basis.

25. The main degree of freedom left relates to diamond dividends. Unlocking this revenue source will require full and prompt implementation of the measures announced in the 2014 budget. These measures include disallowing royalty as a deductible expense against taxable income, withholding a 2.5 percent depletion fee, withholding royalties on diamond sales (15 percent of gross sales), and withholding 15 percent of gross proceeds from diamond sales as interim (“special”) dividends for direct payment to the Treasury. All these measures were included in the 2014 Finance Act signed by the President in April. The implementation of the 15 percent special dividend withholding has been suspended for now, pending further consultations with mining companies, which are resisting it on grounds that it would reduce their ability to invest in new production. The consultations are scheduled for June, and the authorities are keen to start collecting these dividends soon. As a result, the authorities still project diamond dividends of US$82 million in 2014 (versus the original US$96 million in the 2014 budget), but there are risks of further delays.

Staff recommendations

26. Staff sees the revised fiscal target for 2014 (a cash deficit of 0.6 percent of GDP) as broadly appropriate. It represents a significant fiscal adjustment relative to 2013 (which closed with a deficit of 2.2 percent of GDP). Staff welcomes recent steps to increase diamond revenue transparency and urges the authorities to speedily implement the announced measures to mobilize diamond dividends, including by defining a clear date to lift the current suspension on them. Staff encourages the authorities to also consider tax reforms in line with previous Fund TA recommendations (for example, by increasing excises on some alcoholic beverages and by changing the VAT status of some goods from zero-rated to exempt). Staff further encourages the authorities to identify additional potential revenue and financing sources which may need to be mobilized if risks to current revenue projections materialize.

27. Rebalancing the expenditure mix and advancing public financial management (PFM) reforms remain critical for medium-term fiscal sustainability. With employment costs (including grant-aided institutions and pensions) accounting for 79 percent of projected total revenue and a similar fraction of proposed spending in 2014, the expenditure mix is clearly unsustainable. A large public sector wage bill and unclear remuneration policies going forward put at risk the government’s ability to achieve its objectives under ZIM ASSET. Staff urges the adoption of a medium-term fiscal strategy aimed at rebalancing expenditure away from employment costs in order to increase capital investment and spending on social programs. Going forward, staff supports the authorities’ commitment to hold nominal wage increases in line with inflation and to maintain the hiring freeze, except in critical areas and only if these vacancies cannot be filled through internal mobility. To minimize the risk of additional fiscal stress in 2014, it is also essential that the authorities refrain from further wage increases this year. If these recommendations are implemented, total employment costs (including pensions and grant-aided institutions) could decline under 20 percent of GDP by 2019. The authorities should also continue to protect high-value, high-impact social spending, and they should aim to gradually raise capital spending and net lending to around 4-5 percent of GDP in the medium term.

28. Staff encourages targeting a gradual strengthening of the fiscal balances over the medium term. Targeting a medium-term primary cash balance between 1.5 and 2 percent of GDP will help the government rebuild fiscal and external buffers and generate debt servicing capacity, which will be needed to move ahead with debt restructuring. Staff welcomes the authorities’ plans to strengthen financial monitoring and oversight of state-owned enterprises (SOEs) and local authorities.

29. Tackling the stock of domestic payments arrears should remain a priority, but significant progress in 2014 is unlikely. Given the very tight resource constraints in 2014, the authorities plan to prioritize the clearance of pre-2013 domestic arrears (some $23 million) by year-end. On the other hand, given the inadequate provisions for service providers in the 2014 budget (US$56 million versus projected bills of US$126 million), 2014 is likely to see a net accumulation of domestic arrears of about 0.8 percent of GDP. There is a risk that arrears will grow further if tax and nontax collections fall short of projections and the authorities are unable to take offsetting revenue and financing measures. The authorities are committed to eliminating the total stock of end-2014 domestic arrears by end-2016. Going forward, progress on this issue will require more realistic budgeting, combined with improved expenditure controls and measures to curb consumption.

Authorities’ views

30. The authorities acknowledged that 2013 was a difficult year, agreed that their fiscal plans face significant short-term risks, and concurred that strengthening fiscal balances in the medium term is an important objective. They are determined to unlock diamond revenues and make the sector more transparent. They emphasized that they have considered advice from previous TA on tax policy and have implemented many of the recommendations. Making further progress in this area is conditioned on a stronger economic outlook. The authorities welcome further Fund TA on reforming the fiscal regime for extractive industries and on medium-term expenditure frameworks. Although agreeing that the wage bill represents a large fraction of overall spending, the authorities indicated that the new government had campaigned on the promise of higher pay for civil servants, which needed to be fulfilled this year. They have expressed their intention to reduce the weight of the public sector wage bill in total spending over time, noting that the speed with which they can achieve this objective will be affected in part by the growth rate of the economy. The authorities are prepared to implement further expenditure reprioritization measures, in case revenues underperform, relative to revised 2014 projections. Finally, they have expressed their determination to improve the oversight of SOEs and local authorities, which are a significant source of fiscal risk.

Reducing Financial Sector Vulnerabilities

31. Despite efforts to enhance the legal and regulatory framework, financial sector vulnerabilities persist. The RBZ has intensified monitoring of troubled banks, with a particular focus on loan provisioning practices and risk management. Most of these banks are insolvent, but continue to intermediate. While the troubled banks are not systemically important, there is a risk of disorderly resolution of these banks, which could further affect already weak confidence in the system. The new framework for contingency planning and systemic crisis management, which was approved by the RBZ Board in October 2013, will provide a set of policies and processes necessary for prevention and management of banking crises. The framework is to be shared with the Multidisciplinary Financial Stability Committee. Furthermore, the planned amendments to the Banking Act, which are aimed at improving corporate governance and strengthening the Troubled and Insolvent Bank Resolution Framework, will help to enhance stability.

32. To address deteriorating asset quality and restore confidence, serious consideration should be given to closing troubled banks (if non-systemic), or at least ring-fencing them, for example, by restricting their ability to take new deposits from the public. With the help of outside consultants, the RBZ is developing a framework for NPL resolution. Any strategy to deal with this issue should avoid rewarding poor past lending decisions and should be accompanied by a strong focus on the risk that current economic conditions and poor lending practices could result in further growth in NPLs. In January 2014, the RBZ announced an immediate end to new insider and related-party loans: banks’ boards are required to review the levels of insider loans, ensure adequate provisioning, and report regularly to the RBZ.9 The RBZ’s decision to allow more time to meet the increase in the minimum capital requirements is justified, as the June 2014 deadline for reaching a minimum capital of US$100 million was looming with most banks being far below that level. In the period ahead, the RBZ will need to closely monitor observance of the interim milestones for progress towards the December 2020 minimum capital requirements. The AFTRADES interbank liquidity facility is a worthwhile policy experiment and offers potential for improving the operations of the interbank market without significant fiscal risks.

33. Steps are being taken to recapitalize the RBZ, to allow it to resume some of its core functions. The authorities announced plans for the central government to assume all of RBZ’s non-core debt (some 10 percent of GDP, largely non-performing). In addition, they announced plans for the RBZ to resume its function as banker to the government, and to establish a fully-funded lender-of-last resort (LOLR) facility to accommodate solvent banks. As an initial step, in March and April 2014 the authorities issued $146 million in debt instruments to settle RBZ legacy debts related to old foreign currency accounts. The authorities believe that these measures will strengthen financial stability. Staff recommends that the timing of the implementation of these steps take into account fiscal pressures. In particular, the LOLR facility should be implemented only after the present period of high fiscal stress is over, and liquidity support should only be provided to solvent banks.

34. Staff supports a cautious and gradual approach to the transfer of the treasury account from the Commercial Bank of Zimbabwe (CBZ) to the RBZ. The transfer carries implementation risk, as the RBZ has not performed this function for several years, is not able to provide an overdraft facility, and its information systems are still not fully linked to the Treasury systems. Thus, it should take place only after the RBZ balance sheet has been sufficiently strengthened and its IT systems have been linked to the government’s own public financial management information system. There should be a sufficiently long transition period during which clear arrangements are maintained with CBZ to back-stop and cover any cash-flow gaps. Furthermore, this change will require of MoFED and RBZ close coordination and stronger cash management.

35. In designing and implementing the indigenization policy for the financial sector, priority must be given to financial sector stability. Staff urges the authorities to ensure that the application of the indigenization policy is consistent with existing financial sector laws and prudential regulations, in order not to endanger bank access to external sources of financing.

Authorities’ views

36. The authorities concurred that financial sector vulnerabilities remain but emphasized that recently announced initiatives should enhance stability. The RBZ considers the financial sector to be generally stable, despite the challenging macroeconomic environment and institution-specific deficiencies. The RBZ plans to request Fund TA on its NPL resolution strategy. Work is under way to finalize the framework for a credit reference bureau which is expected to reduce asymmetric information and improve credit risk management. The authorities emphasized that the troubled banks are not systemic, but agreed that disorderly unwinding of any of these banks would further undermine confidence. The authorities indicated that the efficient resolution of troubled banks is hampered by the RBZ’s lack of direct administrative authority to take necessary actions. For both curatorships and liquidations, the RBZ must consult with MoFED, and banks have the right to appeal to the finance minister, all of which tend to cause delays. (The Fund is providing TA in these areas.) The authorities expect financial institutions facing challenges to raise capital, consolidate their operations, merge with healthier banks, or convert their banking licenses to become deposit-taking microfinance institutions.

37. The authorities remain committed to restoring the role of the central bank in their efforts to enhance financial intermediation. They emphasized that the recapitalization of the RBZ is a precondition for the safe transfer of the treasury account to the RBZ. These steps in turn will enable the RBZ to support the reactivation of the interbank market, thereby enhancing stability and increasing confidence. On indigenization of the banking system, the authorities remain committed to implementing this policy in a flexible way that safeguards financial stability.

Resolving External Payments Arrears, Restoring External Sustainability and Competitiveness

38. Zimbabwe’s external arrears are large and increasing. Estimated external debt obligations at end-2013 amount to US$10.6 billion (over 80 percent of GDP, of which more than half represents arrears). The authorities have concluded a second round of debt data assessment as of end-2012. Following their first reconciliation exercise in 2011, all official creditors were contacted, but only one creditor responded and agreed with the results. Greater effort is needed to seek agreements with all official creditors, including multilaterals. At the authorities’ request, the African Development Bank (AfDB) is providing technical assistance to explore the path to re-engagement with international creditors.

39. The authorities have continued to make regular payments to the IFIs. The authorities have been making monthly payments of US$150,000 to the PRGT. The authorities are also making quarterly payments to the World Bank (US$900,000) and to the AfDB (US$500,000). The authorities have continued the discussion with the IFIs on the appropriate size of payments going forward. They remain committed to gradually increasing the size of IFI payments as the country’s capacity to pay improves. While the authorities are committed to avoid selective debt servicing, they will continue to make payments to those creditors providing positive net financing.

40. Since the approval of the SMP in June 2013, two new external loans for infrastructure development have been signed. The new loans are with China Eximbank (US$319 million) and with India Eximbank (US$28.6 million). The weighted average concessionality of the loans is 26.5 percent, falling short of the minimum 35 percent requirement.10 Although the authorities needed to urgently address energy and water supply constraints, a more proactive collaboration with Fund staff could have prevented the marginal breach of the SMP continuous ceiling on non-concessional external debt of $330 million in November 2013. Moreover, new non-concessional borrowing poses risks for debt relief discussions with creditors down the road.

41. Given the large outstanding external arrears, Zimbabwe will remain in debt distress in the absence of debt relief. The updated Debt Sustainability Analysis (DSA, EBS 14/139, Supplement 2) confirmed that debt indicators exceed the relevant indicative thresholds. Zimbabwe’s debt situation remains vulnerable to shocks, particularly to lower export and GDP growth. The country’s debt outlook is also sensitive to negative shocks to financial terms and to non-debt creating flows.

42. The authorities have expressed their commitment to re-engaging with all creditors and to minimizing new non-concessional external debt. With regard to possible external financing options, they will primarily seek grants and concessional borrowing to finance critical development projects with high economic returns. If grants and concessional borrowing are not available or insufficient, limited new non-concessional external debt could be considered for growth-enhancing projects, subject to a continuous ceiling of 3 percent of GDP in 2014 (unchanged from 2013). Currently, the authorities are discussing with China Eximbank another loan of about US$220 million to expand telecommunication coverage. The authorities have re-affirmed their commitment to seek independent assessment of the economic and social impact of projects funded with non-concessional loans. They will also consult with Fund staff if and when new feasible projects and borrowing opportunities emerge.

43. Continued strengthening of debt management legislation is critical. The first step is Cabinet approval of the principles for a Public Debt Management Bill. When enacted, the new bill will provide MoFED with a stronger and more effective mandate to plan, negotiate, and monitor external borrowing operations. It will also bolster the institutional role of the Debt Management Office at MoFED.

44. Zimbabwe’s external position remains precarious (Appendix I). In the last few years, the current account deficit has been very large, but it is projected to moderate in the medium term as mining production accelerates. Long-term external borrowing is likely to remain the key source of financing for the current account. IMF staff estimates an overvaluation of Zimbabwe’s real exchange rate of between 21 and 23 percent. In a fully dollarized economy, macroeconomic adjustment could come from relative price adjustments or from productivity growth. At less than one month of import cover, usable international reserves are currently well below the standard 3-month threshold and the Low-Income Country (LIC) metric which indicates that Zimbabwe’s foreign reserves should cover 6 to 16 months of imports. A more ambitious pace of reserve accumulation is urgently needed to rebuild external buffers. Zimbabwe’s external competitiveness remains weak. Protracted policy uncertainty and poor governance present serious obstacles to foreign investors interested in doing business in Zimbabwe. Obsolete infrastructure and cumbersome administrative barriers undermine the business environment and overburden the private sector. Zimbabwe ranks very low in the World Bank’s Doing Business indicators (170th) and below average for Sub-Saharan African countries in the World Economic Forum’s Global Competitiveness Index.

Authorities’ views

45. The authorities reaffirmed their strategy to continue to seek non-concessional external financing for critical development projects only, while pointing out how challenging it is to obtain grants and concessional loans for their development agenda in the context of their large external arrears. They reaffirmed their objective to reach agreements with creditors on reconciled external debt data, ideally before September 2014. The authorities also shared staff’s views about the need to speed up the implementation of structural reforms, particularly those which do not incur significant budgetary costs, in order to regain external competitiveness.

Unlocking Potential for Sustained Inclusive Growth and Poverty Reduction

46. The new government has formulated an ambitious agenda for development (ZIM ASSET). The plan is built around four main clusters: food security and nutrition, social services and poverty eradication, infrastructure and utilities, and value addition and beneficiation. ZIM ASSET targets a medium-term growth rate of around 6 percent, driven by large infrastructure investments. However, large levels of financing would be needed to implement ZIM ASSET. Implementation is also likely to run into domestic capacity constraints. The authorities’ financing plan is premised on joint ventures, diaspora resources, external financing, and, most importantly, an abundance of domestic mineral resources, some of which would be channeled via a Sovereign Wealth Fund (SWF). However, access to external financing is very limited and recourse to new non-concessional external debt to fund these projects would exacerbate debt distress and complicate the process of arrears clearance and debt restructuring. In addition, while the beneficiation objectives of ZIM ASSET contain positive elements, sufficient consideration should be given to domestic capacity constraints.11

47. Staff recommends delaying the introduction of the SWF. The authorities propose a SWF funded with 25 percent of mining royalties and dedicated to financing selective investment projects and accumulating financial assets. Although such a mechanism might be helpful over the medium term, the present fiscal stress makes it imperative that the government avoid tying its hands by earmarking revenues. Staff encourages the authorities to re-examine the fiscal regime for extractive industries before launching the SWF.

48. Addressing infrastructure deficits, enhancing the business climate, and improving governance and policy consistency are critical for boosting productivity and competitiveness. Uncertainty about the implementation of the indigenization and empowerment policy, together with weak enforcement of property rights remain powerful deterrents to private investment, both foreign and domestic. More clarity about land property rights could enhance agricultural productivity by facilitating access to credit. Staff welcomes the authorities’ increased emphasis on the empowerment component of the indigenization and empowerment policy, and encourages them to enhance the predictability and transparency of the indigenization component. Staff welcomes recent announcements about the authorities’ intention to reform labor laws in order to make them more flexible and to link compensation to productivity. In pursuing these reforms, care should be taking not to undermine basic labor protections.

Authorities’ views

49. The authorities agree that the business climate continues to be constrained by policy inconsistency and uncertainty, as well as by slow progress in implementing key policies, while adding that external sanctions also affect Zimbabwean businesses. To ensure the effective implementation, monitoring, and evaluation of ZIM ASSET, overall leadership and guidance is provided by the Office of the President and Cabinet. The authorities plan to implement reforms to improve procedures for starting a business, registering property, paying taxes, resolving insolvency, and trading across borders. They are determined to improve contract enforcement and reform the labor market to make it more flexible. They have decided to postpone further steps on creating a SWF until the macroeconomic outlook improves. The authorities are also concerned that power shortages might thwart the beneficiation objectives of ZIM ASSET, and plan to require that future beneficiation projects include new power-generating capacity for their own use. They also point out that external sanctions have a chilling effect that, in practice, reaches well beyond the individuals and firms specifically designated as their targets.

Staff Appraisal

50. Sustaining growth will require a renewed commitment to reform. As the rebound effect wanes, achieving fast and inclusive growth over the medium term will require a determined push to strengthen macroeconomic and financial policies, create an enabling business environment, and normalize relations with creditors. Staff welcomes the authorities’ plans to preserve the multicurrency system until at least 2018, which will help reduce uncertainty. On the indigenization and empowerment policy, the more differentiated approach (by sector) and the de-emphasizing of equity-holding targets mooted by the authorities seem positive steps, but the current case-by-case negotiated approach is still problematic. More predictability and clarity on sector-specific policies are needed to attract foreign investment.

51. External imbalances and vulnerabilities remain high. The persistent large current account deficit, continued unresolved arrears, and insufficient international reserves are all clear signs of a precarious and fragile external position. It is further complicated by an overvalued real exchange rate. Staff supports the authorities’ strategy to primarily seek grants and highly concessional resources while limiting non-concessional financing to a few critical development projects. Staff continues to recommend early consultation on proposals for new non-concessional external debt.

52. The SMP provided a useful macroeconomic anchor for Zimbabwe in a difficult election year, and the new authorities’ commitment to the program is welcome. In the context of a lengthy electoral process and post-election transition, progress in implementing the policies under the SMP was limited, as many policy decisions were postponed. Nevertheless, budgetary stability, although tested, was broadly preserved, usable external reserves were maintained, important structural reforms took place, and others have been restarted in early 2014. A successor SMP should build on past achievements, be anchored on significant progress in the implementation of key structural reforms, and support a stronger policy framework.

53. The immediate challenge for the authorities is to execute their revised fiscal plan for 2014. The authorities must implement their adjustment program fully, and be ready to take additional actions should revenue fall short of revised projections, while protecting priority infrastructure and social spending. Good progress was made in 2013 in reducing the stock of domestic arrears. Unfortunately, 2014 is likely to bring new domestic arrears. To prevent the accumulation of future domestic arrears, the authorities need to further strengthen expenditure controls, implement measures to curb consumption, and ensure adequate budgetary provisions for domestic service providers.

54. Addressing the unsustainable expenditure mix is the key medium-term challenge in the fiscal sector, with implications that go beyond the public finances. Large employment costs are crowding out social and investment spending—in fact, competing for resources with ZIM ASSET. High salary increases in the public sector influence wage negotiations elsewhere, exacerbating imbalances in the real exchange rate. While this situation cannot be resolved overnight, it is essential to begin addressing it as soon as possible and to maintain the focus over the medium term.

55. Increasing transparency in the diamond sector remains critical for improving fiscal management and good governance. Recent measures to increase diamond sector transparency are steps in the right direction. The authorities should follow through on their commitments to modernize mining legislation and implement the withholding of interim diamond dividends.

56. Enhancing financial sector stability and restoring confidence in the banking system must remain a priority. Staff urges continued vigilance in monitoring weak banks and a proactive approach to avoid the disorderly resolution of insolvent, non-systemic banks. Advancing the restructuring of the financially distressed RBZ will help mitigate financial sector vulnerabilities and bolster the medium-term viability of the multicurrency system. Staff strongly urges the authorities to give priority to financial stability in designing and implementing the indigenization policy for the financial sector.

57. While Zimbabwe remains in debt distress, staff welcomes the authorities’ commitment to continue making regular payments to the PRGT, to rebuild external buffers, and to refrain from drawing down their remaining SDR holdings. Strong macroeconomic policies and a comprehensive arrears clearance framework, supported by development partners, will be essential to addressing Zimbabwe’s debt problems. Staff urges the authorities to engage in coordinated discussions with the World Bank Group and the other IFIs on future payments, to increase the size of payments as capacity to repay improves, and to respect the preferred creditor status of the IFIs. Selective debt service to bilateral creditors should be avoided, as this will complicate reaching an agreement with creditors on a debt resolution strategy. Staff encourages the authorities to continue to minimize new non-concessional external debt and to seek external financing on terms as favorable as possible for critical development projects with high economic returns.

58. Staff recommends that the next Article IV consultation be held on the regular 12-month cycle.

Figure 12.Zimbabwe: Doing Business Indicators, 2013–14

Source: The World Bank.

Appendix I. Zimbabwe: Assessment of External Stability and Competitiveness

1. An assessment of Zimbabwe’s competitiveness and external stability is complicated by insufficient data availability and large structural changes. Dollarization rules out the nominal exchange rate as a tool of macroeconomic adjustment, and exchange rate misalignment can only be addressed through relative prices changes and productivity gains. In the last few years, the current account deficit has been very large, but it is projected to moderate in the medium term as mining production accelerates (Figure 1). Long-term external borrowing is likely to remain the key source of financing for the current account (Figure 2).

Figure 1.Current Account Components

(in % of GDP)

Sources: Zimbabwean authorities and IMF staff estimates.

Figure 2.Capital Account Components

(in % GDP)

Sources: Zimbabwean authorities and IMF staff estimates.

2. Boosting competitiveness requires a strong push to address structural bottlenecks. Substantial efforts are needed to improve the business environment, which plays a crucial role in catalyzing domestic and foreign investment. Improving basic infrastructure and removing legal and regulatory obstacles are essential to creating favorable investment conditions and boosting external competitiveness.

3. Limited progress has been made in boosting competitiveness. Zimbabwe’s rank in qualitative competitiveness indicators has remained near the bottom of the list. While Zimbabwe is above the Sub-Saharan Africa average, only marginal gains have been made in The World Bank’s Ease of Doing Business rankings (Figure 3).1 In the case of the World Economic Forum’s Global Competitiveness Index (Figure 4), Zimbabwe’s ranking deteriorated in 2013-14. Limited progress has been made in improving government effectiveness and perceptions of corruption remain high, with some deterioration in the area of voice and accountability. Governance indicators show limited progress in crucial areas, including the judiciary, property rights, and government effectiveness (Figure 5).

Figure 3.Sub-Saharan Africa: Ease of Doing Business

(ranking out of 189 countries; lower value is better)

Source: The World Bank, Ease of Doing Business.

Figure 4.Sub-Saharan Africa: Global Competitiveness Index

(lower value is better)

Source: World Eonomic Forum, Global Competitiveness Report.

Figure 5.Zimbabwe: Governance Indicators, 2007-2012

Sources: The World Bank, Worldwide Governance Indicators.

4. The exchange rate assessment confirms substantial risks for competitiveness in the medium term, despite the projected decline in the current account deficit. A more sustainable external position could only be achieved with a strong and timely implementation of structural reforms aimed at expanding productive capacity and diversifying the economy.

5. Standard methodologies2indicate that the real effective exchange rate is overvalued. The macroeconomic balance approach points to an overvaluation of between 21 and 23 percent depending on estimated parameters, while the external sustainability assessment indicates an overvaluation of 23 percent. However, these imbalances are expected to decline in the medium-term, due to accelerating exports and slower import growth as domestic production expands. In light of data limitations, these results should be interpreted with caution.

MethodologyDegree of overvaluation
Macro-balance approach21-23 percent
External sustainability approach23 percent

6. At less than one month of import cover, Zimbabwe’s usable reserves are well below all standard thresholds. The standard minimum is 3 months of import coverage, while the Low-Income Country (LIC) metric3 indicates that reserves should cover 6 to 16 months of imports in Zimbabwe’s case, assuming an opportunity cost to holding reserves in the range of 2-6 percent (Figures 6 and 7). Currently, remaining SDR holdings are the main component of usable international reserves. A more ambitious pace of reserve accumulation is urgently needed to rebuild external buffers.

Figure 6.Zimbabwe: Reserve Coverage, 2010-19

(months of next year’s imports)

Sources: Zimbabwean authorities and IMF staff estimates.

Figure 7.Zimbabwe: Reserve Coverage, 2010-19

(months of next year’s imports)

Sources: Zimbabwean authorities and IMF staff estimates.

7. The LIC metric might underestimate Zimbabwe’s need for external buffers. In a dollarized economy, international reserves play an important role not only in mitigating the impact of external shocks, but also in providing adequate resources to ensure a stable financial system. However, the LIC metric does not take into account this second factor. On the other hand, the opportunity cost to holding reserves in a country like Zimbabwe could be higher than 6 percent, given large infrastructure needs.

There are several “troubled banks” on the RBZ’s watch list, jointly accounting for 15 percent of total banking sector assets and 10 percent of deposits at end-2013.

The government’s maximum contingent exposure would be US$20 million over two years if this facility was used in full.

In early 2013, the Reserve Bank of Zimbabwe (RBZ) and the Bankers Association of Zimbabwe (BAZ) signed a Memorandum of Understanding (MOU) on a package of measures aimed at promoting savings and strengthening consumer protection, including caps on the fees for various services and floors on the rates paid on time deposits. Following a review of the operating environment and consultation with representatives of the BAZ, the RBZ decided not to renew the MOU, which expired at end-2013.

As of end-December 2012, minimum capital requirements are US$25 million for commercial and merchant banks, and US$20 million for building societies. There is no minimum capital requirement for People’s Own Saving Bank (POSB).

The currencies of China, India, Japan, and Australia were added as legal tender in February 2014.

Fund Management granted the extension in December 2013, prior to the expiration of the SMP period, and the Board was informed via EBS/14/1.

The Public Service Commission was renamed the Civil Service Commission under the new Constitution.

The withholding has been suspended until further consultations with mining companies are completed.

Out of a total of US$175.3 million in insider loans at end-December 2013, US$117.4 million (67 percent) are NPLs.

The China Eximbank has a 20-year maturity, with a grace period of 5-7 years, and a 2-percent interest rate, which is equivalent to a grant element of 28.3 percent. The India Eximbank loan has a grant elements of 4.1 percent.

For example, domestic smelting of minerals in Zimbabwe could backfire because smelting is energy-intensive whereas Zimbabwe suffers from limited generation capacity, resulting already in frequent power shortages.

These indicators should be interpreted with caution, due to the limited number of respondents, limited geographical coverage, and standardized assumptions on business constraints and information availability.

A. Prati et al., External Performance in Low-Income Countries, IMF Occasional Paper 272; J. Lee et al., Exchange Rate Assessments: CGER Methodologies, IMF Occasional Paper 261.

Assessing Reserve Adequacy: Further Considerations, SM/13/301.

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