Statement by the IMF Staff Representative

This 2004 Article IV Consultation highlights that Zimbabwe’s real GDP declined by 9.3 percent in 2003, and an additional broad-based decline is projected in 2004. Year-over-year inflation reached 600 percent during November 2003–February 2004. However, monthly inflation, which had reached 34 percent in November 2003, fell to 5 percent in April 2004 following a tightening of monetary policy and an appreciation of the exchange rate. Progress has been limited on structural reforms. Most price controls were removed after May 2003, and the fuel market was partially liberalized.

Abstract

This 2004 Article IV Consultation highlights that Zimbabwe’s real GDP declined by 9.3 percent in 2003, and an additional broad-based decline is projected in 2004. Year-over-year inflation reached 600 percent during November 2003–February 2004. However, monthly inflation, which had reached 34 percent in November 2003, fell to 5 percent in April 2004 following a tightening of monetary policy and an appreciation of the exchange rate. Progress has been limited on structural reforms. Most price controls were removed after May 2003, and the fuel market was partially liberalized.

1. This statement reports on information that has become available since the staff report was issued. It does not change the thrust of the staff appraisal.

2. In a continuation of developments since early 2004, monthly inflation remained at 6 percent in May 2004. The year-on-year rate fell to 449 percent, from 505 percent in April (Figures 1 and 2).

Figure 1.
Figure 1.

Monthly inflation

(percent change)

Citation: IMF Staff Country Reports 2004, 297; 10.5089/9781451841497.002.A002

Figure 2.
Figure 2.

Money growth, inflation and parallel exchange rate

Citation: IMF Staff Country Reports 2004, 297; 10.5089/9781451841497.002.A002

3. Broad money grew by 400 percent in the year to May 2004, largely driven by credit to the private sector (Figure 2). Credit was boosted by very large increases in credit from the Reserve Bank of Zimbabwe (RBZ) to domestic money banks under the highly concessional productive sector finance facility. Regarding liquidity management, at end-March 2003 the RBZ stopped issuing the 900-percent effective interest rate paper that it had used to mop up liquidity. When large amounts of the RBZ paper started falling due in mid-June 2003, the RBZ introduced a new liquidity management policy. Contrary to the staff’s advice to move to market-based policies, the RBZ now compulsorily converts any surplus in the money market at the close of each day into new “open market” treasury bills with much longer maturities (up to 2 years) than that of the bulk of outstanding treasury bill (90 days) and at negative real interest rates (nominal effective rates of 70-100 percent).

4. Usable gross official reserves increased from US$18 million at end-2003 to US$76 million at end-May 2004, in response to the clampdown on the parallel market, which brought back foreign transactions into official channels, and with the beginning of the tobacco season in April. Reflecting the heavy management of the tender system, the tender rate, which had depreciated somewhat in March and April 2004, has remained largely unchanged since then at around Z$5,350/US$, even though demand has increased (Figure 3). The exchange rate in the parallel market reportedly depreciated to over Z$6,000 in mid-June 2004, probably as a response to the widening gap between supply and demand of foreign exchange at the tender (Figures 2 and 3).

Figure 3.
Figure 3.

Zimbabwe: Foreign Exchange Tender

Citation: IMF Staff Country Reports 2004, 297; 10.5089/9781451841497.002.A002

5. The fiscal deficit widened through April 2004, as an increase in revenue collection was more than offset by higher expenditure. This resulted in a cumulative deficit over the first four months of the year of 18 percent of GDP, up from a revised deficit of 17 percent of GDP in the first quarter. Little additional detail is available.

6. In early June 2004, Zimbabwe made payments of US$1.5 million to the World Bank and US$1.2 million to the African Development Bank, in line with the RBZ’s recent policy to begin making some payments on arrears to multilateral creditors other than the IMF.

7. In other developments, on June 10, 2004, the government closed down an independent weekly newspaper. Ahead of the general elections in March 2005, the government has reportedly accepted the election guidelines drawn up by the South African Development Community (SADC) which recommend that voting take place in a single day, under the supervision of a new electoral commission.

Zimbabwe: 2004 Article IV Consultation—Staff Report; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund