After some improvement in 2004, Zimbabwe’s economic and social conditions deteriorated further in 2005, the IMF said in its annual economic review. Continued sharp declines in agricultural output, as well as accelerating inflation—projected to increase beyond 400 percent annually by year’s end—and shortages of foreign exchange are expected to cause real GDP to contract by more than 7 percent this year. An overvalued official exchange rate and import restrictions have produced pervasive shortages of basic goods in the economy.
The IMF Executive Board expressed deep concern over Zimbabwe’s continued sharp economic and social decline, prospects for continuing triple-digit inflation, and further increases in poverty. It urged the authorities to implement a comprehensive package of macroeconomic policies and structural reforms without delay. Decisive fiscal adjustment, particularly through cuts in the public sector wage bill, is essential in the near term, the Board said, although adequate food security and social safety nets would need to be provided to vulnerable groups, especially those affected by HIV/AIDS and “Operation Restore Order” (the government’s recent effort to remove unauthorized dwellings). The Board stressed the need to fully liberalize the exchange rate regime for current account transactions and leave the determination of the exchange rate to the market while establishing a strong, credible monetary anchor. Although it welcomed the recent monetary tightening, the Board noted that further sustained tightening would still be needed. The Board commended the Reserve Bank of Zimbabwe’s efforts to strengthen banking supervision, while underscoring the need to ensure that supervisors remain independent.
|CPI (12-month change to year-end)||198.9||598.7||132.7||404.6|
|(percent of GDP)|
|Overall fiscal balance1||-2.8||-0.4||-7.1||-14.2|
The Board stressed that fundamental structural reforms will be essential for sustaining macroeconomic stability and achieving durable growth. It called on the authorities to act decisively in a number of areas, including: deregulation; public enterprise reform, fiscal reform, and particularly civil service reform; land and agricultural reform; and improvements in governance to increase investor confidence.
The Board welcomed Zimbabwe’s recent payment to the Fund, which has substantially reduced arrears, but sought clarification regarding the source of funds for this payment. It agreed to review Zimbabwe’s overdue financial obligations again in six months, providing the authorities with more time to strengthen cooperation with the Fund in terms of policies and payments.