Zimbabwe:2000 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; Statement by the Executive Director for Zimbabwe and Statement by the Authorities of Zimbabwe

Fiscal profligacy, an erosion of competitiveness, and governance problems have undermined investor confidence and curtailed access to foreign financing in Zimbabwe. The new economic team has taken steps in devaluing the currency and raising the awareness of public opinion about the size of the fiscal deficit and its root causes. Steadfast implementation of strong policies, backed by a broad domestic consensus, will help restore Zimbabwe's status as an anchor of stability and prosperity in southern Africa over the medium term.

Abstract

Fiscal profligacy, an erosion of competitiveness, and governance problems have undermined investor confidence and curtailed access to foreign financing in Zimbabwe. The new economic team has taken steps in devaluing the currency and raising the awareness of public opinion about the size of the fiscal deficit and its root causes. Steadfast implementation of strong policies, backed by a broad domestic consensus, will help restore Zimbabwe's status as an anchor of stability and prosperity in southern Africa over the medium term.

I. Introduction

1. Discussions for the 2000 Article IV consultation were held in Harare during August 28-September 12, 2000. The mission met with the Ministers of Finance and Economic Development; Industry and International Trade; Mines and Energy; Lands, Agriculture and Resettlement; Public Service, Labor and Social Welfare; Local Government, Public Works and National Housing; and Rural Resources and Water Development; the Governor of the Reserve Bank (RBZ); and other senior officials. The mission also met with representatives of the private sector, civil society, nongovernmental organizations, and donors.1

2. Zimbabwe is on the standard 12-month consultation cycle. In concluding the last Article IV consultation on May 5, 1999 (EBM/99/51), Directors noted that performance under the 1998 Stand-By Arrangement had suffered from weak implementation of policies and uncertainties about their direction. Directors underlined the importance of fiscal consolidation, improvements in the composition of spending, tight monetary policy, and supporting reforms and liberalization measures. They welcomed the authorities’ stated commitment to the land reform strategy agreed with donors and stakeholders in 1998, and urged continued improvement in governance.

3. On August 2,1999, the Board approved a 14-month Stand-By Arrangement in an amount equivalent to SDR 141.36 million (40 percent of quota). SDR 24.74 million was drawn under the arrangement, but significant deviations emerged soon after the program’s inception and the arrangement expired on October 1, 2000. Zimbabwe’s relations with the Fund and the World Bank are described in Appendices I and II.

II. Recent Economic Performance

4. Zimbabwe launched an economic reform program in 1991 that was instrumental in liberalizing the economy and addressing structural impediments to growth. Nonetheless, fiscal policy in the past decade has been generally weak and monetary policy unsteady, while two serious droughts (in 1992 and 1995) and governance problems have further jeopardized economic performance and shaken investor confidence. Faced with serious pressures on the currency in late 1997, which were fueled by a large increase in benefits to war veterans and uncertainties regarding the direction of land reform, the government adopted emergency measures and designed an adjustment program supported by the June 1998 Stand-By Arrangement. Performance under that program was mixed, owing in part to a failure to contain the nonfinancial public sector deficit (including parastatals), the fallout from the emerging markets financial crisis, involvement in the Democratic Republic of Congo (DRC) conflict from August 1998 onward, and a series of other policy decisions that undermined market confidence. The first review under the arrangement could not be concluded. After the government undertook to address pending issues, including land reform, it reached agreement with the Fund in 1999 on a new program supported by a successor Stand-By Arrangement (see SM/99/93, 4/21/99; and EBS/99/131, 7/19/99).

5. The 1999 program targeted a decline in inflation to 30 percent by year’s end from 47 percent in 1998, real GDP growth of 1.2 percent, and a US$160 million gain in net official international reserves. The government deficit (on a commitment basis and excluding grants) would be contained at 5.3 percent of GDP, versus 4.6 percent in 1998, and parastatal losses would be reduced. Fiscal adjustment was to be supported by tight monetary policy and confidence-building measures, including implementation of land reform under the strategy agreed upon during the 1998 international conference; disclosure of the cost of Zimbabwe’s involvement in the DRC conflict; a rollback of emergency trade and capital controls; and an acceleration of public asset sales.

6. The program veered sharply off track soon after inception. Several performance criteria for September and December 1999 were missed by wide margins, as policies were weaker and terms of trade losses larger than envisaged. Also, progress in adoption of reforms and confidence-building measures, including liberalization of exchange controls, was limited, and several structural performance criteria were breached as well (Table 1 and Box 1). As a result, inflation rose to a peak of 70 percent in October before easing to 57 percent by end-1999, while real GDP fell by 0.2 percent as a 7 percent decline in manufacturing output more than offset gains in agriculture and tourism (Table 2). Net international reserves increased by US$314 million in 1999, but usable reserves were virtually depleted owing to substantial pledging and collateralization of foreign assets. The government’s primary balance shifted from a surplus of 5 percent of GDP in 1998 to a deficit of 1½ percent in 1999 (versus a 3.2 percent surplus in the program), driven by wage and defense overruns and a weak revenue performance. Sharply higher domestic borrowing exacerbated by a shortfall in foreign financing led to a surge in domestic interest payments, such that the overall deficit widened from 4½ percent of GDP to 11½ percent and the operational balance (i.e., the overall deficit corrected for accelerated amortization of domestic debt owing to inflation) shifted from a surplus of 2½ percent to a deficit of 4 percent (Tables 3a. and 3b. and Figures 1 and 2). By contrast, losses of the nine major parastatals declined from 5 percent of GDP in 1998 to 3 percent in 1999 because of periodic adjustments in utility prices, although the combined net worth of these enterprises at the end of the year stood at minus 2 percent of GDP.

Table 1.

Zimbabwe: Performance Criteria Under the 1999-2000 Stand-By Arrangement 1/

article image

Unadjusted performance criteria. No performance criteria were set for 2000 as the midterm review under the arrangement could not be completed.

Cumulative from January 1, 1999.

Includes external payments arrears as a liability. Does not account for collateralization of reserves.

Public sector consists of the Reserve Bank of Zimbabwe, central government, and local authorities.

Excluding normal import-related credits.

Includes domestic borrowing in foreign currency.

Maize meal price controls are not enforced.

Table 2.

Zimbabwe: Selected Economic Indicators, 1995-2001

article image
Sources: Zimbabwean authorities; and staff estimates and projections.
Table 3a.

Zimbabwe: Central Government Operations, 1998-2001

article image
Sources: Zimbabwean authorities; and staff estimates and projections.

Commitments with respect to foreign interest payments.

Operational balance equals overall balance minus the inflation component of interest payments on domestic debt.

Table 3b.

Zimbabwe: Central Government Operations, 1998-2001

article image
Sources: Zimbabwean authorities; and staff estimates and projections.

Commitments with respect to foreign interest payments.

Operational balance equals overall balance minus the inflation component of interest payments on domestic debt.

Figure 1.
Figure 1.

Zimbabwe: Selected Indicators, 1990-2000

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2001, 005; 10.5089/9781451841428.002.A001

Sources: Zimbabwean authorities; and staff estimates and projections.
Figure 2.
Figure 2.

Zimbabwe: Macroeconomic Indicators, 1995-2005 1/

Citation: IMF Staff Country Reports 2001, 005; 10.5089/9781451841428.002.A001

Sources: Zimbabwean authorities; and staff estimates and projections.1/ Shaded areas indicate staff projections.

Structural Reforms in 1999-2000

Under the 1999 Stand-By Arrangement, the authorities committed themselves to implementing several structural reforms, including a phased liberalization of foreign currency accounts (FCAs) and reversal of the September 1998 increase in import duties and surcharges; issuance of guidelines to deal with troubled banks; removal of maize-meal price controls; a cap on the size of the civil service; and liquidation of a number of parastatals. Progress in these areas has been limited:

  • The authorization to retain all export proceeds in FCAs, reintroduced in August 1999, was partially reversed in February 2000, and, since May, exporters have been required to sell 25 percent of their proceeds, which the RBZ earmarks for priority energy imports. Tobacco exporters, however, must sell 75 percent of their receipts in proportions specified by the RBZ to the state oil and power companies, to the RBZ (for exclusive use for debt-service payments), and to the tobacco growers’ association (ZTA) to finance imports of raw materials.

  • The new tariff structure effective September 2000 reduced the unweighted average tariff (including surcharges) from 39 percent to 36 percent and the maximum rate from 100 percent to 70 percent, but failed to lower the duty surcharge as planned or to make the envisaged sectoral tariff reductions.

  • Guidelines on dealing with troubled banks await finalization.

  • Retail price controls on maize meal have not been dismantled, although they have not been enforced strictly.

  • Little progress has been made in reducing the civil service (see para. 17).

  • The programmed liquidation of parastatals has not taken place.

Regarding other structural measures, the situation is as follows:

  • The government established a Competition Commission in January and a Privatization Agency in August 1999.

  • In January 2000, the government imposed a 3 percent levy on personal incomes earmarked to fight AIDS, but the introduction of VAT was postponed until 2002.

  • Fuel prices have been raised periodically, most recently in early November 2000, but are still below cost recovery levels. The state electricity company ZESA has moved to a formula-based pricing, and local governments have been authorized to charge economic tariffs from January 1, 2001 onward on water, sewerage and other services, which currently are subsidized.

  • Government procurement procedures are under review, but no new legislation has been passed.

7. Monetary policy was accommodative during the first half of 1999, but as inflationary pressures intensified, the RBZ began to tighten liquidity in July, mainly by doubling reserve requirements to 30 percent. Reserve money growth, which peaked at 96 percent in the 12 months ended August 1999, slowed to 61 percent by year’s end, and treasury bill yields and bank lending rates soared in real terms (to 17 percent), although deposit rates remained negative. Crowded out by mounting government borrowing, credit to the private sector declined sharply in real terms for the second consecutive year (Tables 4a. and 4b.).

Table 4a.

Zimbabwe. Monetary Survey, 1997-2001

article image
Sources: Zimbabwean authorities; and staff estimates and projections.

Reserve Bank of Zimbabwe’s net foreign assets and net domestic assets have been adjusted for memorandum of deposits.

Table 4b.

Zimbabwe: Monetary Survey, 1997-2001

article image
Sources. Zimbabwean authorities; and staff estimates and projections.

Reserve Bank of Zimbabwe’s net foreign assets and net domestic assets have been adjusted for memorandum of deposits.

8. The spillover to the external sector of lax domestic policies and investor skepticism was compounded by the de facto pegging of the currency from January 1999 onward. As the erosion of competitiveness, depressed commodity prices, and a shortfall in foreign financing weakened foreign exchange receipts, usable foreign reserves dwindled. An unavoidable compression of imports and service payments turned the current account into a small surplus in 1999 from a deficit of 5½ percent of GDP in 1998 (Table 5). Increasing shortages of essential imports and queues for private sector foreign exchange payments developed and a parallel market spread emerged. The public sector started to build external arrears that totaled about US$110 million by year’s end (of which three-fourths were owed by the oil and power companies).

Table 5.

Zimbabwe Balance of Paymenis, 1997 - 2005

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources Zimbabwean authorities; and staff estimates and projections.

On the basis of preliminary projections, exceptional financing needs in 2001 can be filled by a combination of official and commercial debt rescheduling (US$0.86 billion) and balance of payments support (US$0. 35 billion) from official creditors.

Gross reserves reported by the Reserve Bank of Zimbabwe includes substantial amounts of pledged and illiquid assets.

Short-term debt includes medium- and long-term amortizalion due within 12 months.

Debt service (principal and interest) and exports of goods and services.

9. The economic crisis deepened during 2000, fueled by mounting fiscal imbalances, a further erosion of competitiveness, election-related violence (including farm invasions and casualties), and uncertainties related to the government’s program of compulsory land acquisition, all of which have further undermined confidence.2 The authorities took some steps to tackle governance issues as agreed under the 1999 Fund-supported program3, especially by intensifying enforcement of the 1985 Prevention of Corruption Act and correcting irregularities that had been uncovered in the state oil company. However, progress in these areas was overshadowed by the emergence of other serious governance problems and breaches in property rights since early 2000, in connection with the government’s defeat in a constitutional referendum in February and the launching of an accelerated land resettlement program in June (Box 2). Inflation rose to 61 percent in the year ended October and may exceed 80 percent by year’s end. Activity and employment have faltered, especially in manufacturing, mining, and tourism,4 and despite a good agricultural harvest, real GDP is projected to contract by more than 5 percent during the year, which would result in a 12 percent cumulative decline in per capita income over the past three years.

Land Reform in Zimbabwe

Background. Land reform has been a contentious issue since independence in 1980, as most prime lands are owned by about 4,000 white commercial farmers, while the majority indigenous population engages in subsistence farming. In the first half of the 1980s, resettlement of over 3 million hectares was based on the government’s “first option to buy” at market prices. Subsequently, the 1992 Land Acquisition Act provided for compulsory purchase of farms, as long as the property was derelict, located on underutilized land, owned by absentee landlords, or surrounded by communal areas, and the owner had multiple farms. The act required fair compensation and provided a right of appeal. To add momentum, in 1997 the government gazetted 1,471 commercial farms (representing a significant share of the commercial farming area) for compulsory purchase, meeting strong opposition from owners and jolting investor confidence. These developments prompted the launching of an international conference in September 1998, which forged a consensus on the principles that should guide the land redistribution process, namely, poverty reduction, transparency, respect for the rule of law, beneficiary participation, and consultation with stakeholders. In return, donors agreed to provide substantial financial support and the “inception phase” of the program was launched, involving uncontested acquisition of 130,000 hectares and resettlement of 200 farms.

In November 1998, however, the government issued acquisition orders to 841 farmers who had contested the 1997 compulsory purchases. Donors considered this at odds with the agreed principles and scaled back assistance. Following the government’s defeat in the February 2000 constitutional referendum that featured land reform as a key plank, war veterans began to occupy commercial farms—often violently—and an estimated 1,600 farms were invaded at some point. In April, the government secured parliamentary approval of a constitutional amendment allowing compulsory acquisitions, which was incorporated formally into the Land Acquisition Act in May.

Recent developments. In June, the government announced a fast-track resettlement program covering 5 million hectares and 150,000 families in 2000, compared with the 3.3 million hectares and 73,000 families resettled since independence (in the process, 2,455 farms were gazetted for acquisition, some of which are being delisted because of errors). The government undertook to provide compensation for capital improvements but not for the value of land, although it invited donors to provide resources voluntarily for the latter purpose. About 1,000 farms remain occupied at present, and owners face a short deadline if they wish to appeal the gazetting on certain grounds. The resettlement process will likely be protracted because of legal procedures, complex logistics, and budgetary constraints, and neither the budgetary costs nor the financing for the program from domestic or foreign sources have been identified to date. Meanwhile the Commercial Farmers’ Union has challenged the government’s legal authority to carry out compulsory land purchases, with a Supreme Court decision expected in November 2000. The UNDP and the World Bank are coordinating efforts to try to advise the authorities to implement a more orderly land reform program that respects the rule of law. Meanwhile, there appears to be a broad consensus that, over the medium term, the program will lead to increased acreage for subsistence crops, especially maize, at the expense of tradable outputs such as tobacco, wheat, and horticulture. The effects on total farm output will depend on whether resettled farmers receive adequate support (infrastructure, seeds, fertilizer, credit, etc.) to avert a decline in yields, but the present support system does not appear up to this task. In the immediate future, disruptions and uncertainties in commercial farming (including with respect to property rights and availability of crop financing) could result in sizable losses in output, employment, and export earnings in that sector and the rest of the economy, and a rise in relative foodstuff prices.

10. Fiscal performance in 2000 has again deviated sharply from the original target (a deficit of 3.8 percent of GDP), owing to overruns in wages, defense, and domestic interest outlays. The deficit stood at 18 percent of GDP at an annualized rate during the first nine months of the year, and in early September parliament passed a supplementary budget authorizing additional expenditures, mainly for defense, which would widen the deficit to about 23 percent for the year. In that case, the primary deficit would widen to 6 percent of GDP and the operational deficit to 8.7 percent. The government wage bill would reach 16.5 percent of GDP, an unusually high level compared with the sub-Saharan region (Figure 3) as a result of a 60-90 percent wage increase granted before the elections (versus 30 percent in the original budget) and the full-year effect of increases to certain categories granted in late 1999. Defense outlays would rise to about 5 percent of GDP from an estimated 3 percent in 1999, fanned by continued involvement in the DRC conflict. Despite the imposition of caps on interest rates in August, the government’s domestic interest bill would rise to 17 percent of GDP. Major parastatals and municipalities, which are outside the budget, are also in a weak, financial position.5

Figure 3.
Figure 3.

Government Wage Bill of Selected Countries, 1998-2000 1/

Citation: IMF Staff Country Reports 2001, 005;