My authorities are appreciative of the Fund’s support on the ongoing reform process and technical assistance in addressing their policy challenges and strengthening their implementation capacity. They remain committed to the on-going macroeconomic policy reforms, under the staff-monitored program (SMP).
In this regard, they fully re-dedicated to strengthening the economy’s growth momentum and achieving inclusive growth. Specifically, the Government of Zimbabwe has instituted a program of reforms aimed at improving the quality of public expenditures; increasing revenue; raising overall productivity; reducing financial sector vulnerabilities; and improving competitiveness and the business environment. This reform agenda is anchored on a more cohesive cabinet, appointed in September 2013, which is in a better position to formulate and implement strong policies.
Against this background, the SMP continues to play a pivotal role in assisting the Zimbabwean authorities in their reform efforts. However, the authorities are fully aware of the challenges facing their reform agenda.
Recent economic developments and prospects
Economic developments remain positive, but much weaker than desirable. Output growth decelerated from 10.6 percent in 2012 to 3.3 percent in 2013 and is projected to slow further to 3.1 percent in 2014. Real GDP growth is underpinned by developments in key sectors, such as mining and agriculture. Growth in the agriculture sector has been dampened by poor agricultural harvest particularly, in the production of maize, groundnuts and cotton. Meanwhile, the mining sector has become the leading export sector, driven by strong external demand for primary commodities, mainly, platinum and gold. However, the sector faces challenges mainly from low exploration, lack of capital and weakening commodity prices in the international markets.
Inflationary pressures remain subdued largely on account of domestic liquidity conditions and external factors, such as international prices of oil and food, and exchange rate developments between the South African rand (the currency of Zimbabwe’s main trading partner) and the US dollar. Despite a modest increase, the annual rate of inflation, measured by percentage change in the consumer price index, remained negative in April 2014.
In their endeavors to advance Zimbabwe’s growth and development agenda, the authorities have formulated a new five-year blueprint, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM ASSET). This is a results-based development agenda built around four strategic clusters: food security and nutrition; social services and poverty eradication; infrastructure and utilities; and value addition and beneficiation. To finance the implementation of ZIM ASSET, the authorities have approved the establishment of a sovereign wealth fund (SWF) from the country’s
mineral resources3. However, given the current macroeconomic outlook, the authorities have decided to postpone further steps in creating the SWF until the outlook becomes favorable.
Zimbabwe’s fiscal space remains severely constrained by revenue under-performance, the multi-currency regime and the country’s public debt overhang. The situation has been exacerbated by increased recurrent spending driven by employment costs and spending related to the general elections held in July 2013.
The authorities share staff’s view that the wage bill is unsustainable and crowds out spending required for infrastructure development. However, they note that remuneration levels in the public sector are generally inadequate, which affects morale and performance. It is expected that the share of the wage bill in the budget will decline as economic activity improves and the tax base broadens.
Similarly, the Zimbabwean authorities continue to implement reforms aimed at improving revenue performance, including measures to boost diamond-related revenues. As part of these reforms, a joint task force has been constituted, comprising technical staff from the Ministry of Finance and Economic Development, Ministry of Mines and Mining Development, and the Zimbabwe Revenue Authority. The task force is expected to forecast and monitor diamond-related revenues. Furthermore, all diamonds will be sold through auctions at international trading venues to maximize sales revenue.
Monetary Policy and the Financial Sector Developments
Since the introduction of the multi-currency regime, which has constrained the use of monetary policy instruments, the Reserve Bank of Zimbabwe (RBZ) has continued to focus on promoting a strong and stable financial system; and ensuring that the multi-currency system is maintained to restore and enhance confidence and credibility. However, the authorities share staff’s assessment that vulnerabilities still exist in the financial sector. Nonetheless they believe that the recently announced initiatives, such as finalization of the framework for a credit reference bureau, would improve the sector’s performance and stability.
Furthermore, the Zimbabwean authorities have initiated steps to restore the role of the RBZ in the economy, which should enhance financial intermediation. These include the Government’s decision to recapitalize RBZ, transfer the treasury account from the Commercial Bank of Zimbabwe, and thereby capacitate RBZ to play its functions as lender of last resort and banker to the government. With a robust lender of last resort facility, RBZ will be in a position to participate more significantly in the development of the inter-bank market and accommodate solvent institutions that experience temporary liquidity shortages. These measures are expected to stimulate economic activity, in line with the objectives outlined in ZIM ASSET.
In March 2014, a US$100 million interbank facility by Afreximbank was launched to address the liquidity crunch in the system, in accordance with the authorities’ announcement during the 2014 National Budget statement. Through this facility, illiquid but solvent financial institutions will be able to access temporary funding. The authorities hope that this will help restore confidence in the market and encourage interbank activity.
On measures intended to further anchor the multi-currency system, the RBZ in January 2014 added the Australian dollar, Chinese yuan, Indian rupee and Japanese yen to the list of currencies accepted as legal tender alongside the US dollar, South African rand, Botswana pula and British pound. This was prompted by an increase in trade and investment between Zimbabwe and Asia, and is expected to reduce transaction costs and boost trade between Zimbabwe and its partners.
External Sector and Debt Issues
Despite a difficult external environment, the Zimbabwean authorities are determined to address their external debt situation. In this context, they have adopted the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS), which is aimed at accelerating re-engagement with creditors, including International Financial Institutions (IFIs). ZAADDS is defined as a “hybrid debt resolution strategy, which includes the adoption of traditional debt resolution initiatives combined with leveraging the country’s natural resources to achieve sustainable economic development”. Under ZAADDS, the Zimbabwean Government, through the Ministry of Finance, has begun a process of re-engaging with its creditors. This process is aimed at finding ways to clear the country’s outstanding arrears by mobilizing capital from internal resources. The authorities consider the current SMP as a crucial element of ZAADDS and the Zimbabwe Accelerated Re-engagement Economic Program.
Relations with the IMF and Other IFIS
Given the importance of renormalizing relations with the Fund and other IFS, my authorities have continued to make regular repayments to the PRGT in line with previous commitments. They have also committed to gradually increase the size of these repayments as the country’s capacity to repay improves. In addition, going forward, they remain committed to addressing policy challenges identified under the SMP.
Finally, I would like to reiterate that my Zimbabwean authorities regard the SMP as critical to their reform agenda, to revitalize Zimbabwe’s economy and address its external debt arrears.
The government plans to allocate a quarter of the royalties levied on the mining companies to the fund.