Introduction

1. Our Zimbabwean authorities appreciate the constructive Fund engagement during the recent Article IV consultations. They broadly share staff’s assessment of key policy challenges and priorities.

2. Macroeconomic conditions in Zimbabwe have continued to deteriorate over the past year, exacerbated by the twin shocks of the severe drought and tropical cyclones experienced in 2019. As a result, economic activity has contracted, and social indicators have deteriorated, with an estimated 8.5 million people (more than half the population) expected to be food insecure in 2020. Meanwhile, subdued exports and limited access to affordable offshore credit lines have compounded the foreign exchange situation, with persistent pressures on the exchange rate and inflation. Against this background, the new government, which assumed power in September 2018, launched Vision 2030 to guide medium term policies aimed to create a competitive and open economy. Consistent with the overarching Vision, they adopted the short-term Transitional Stabilization Program (TSP 2018–2020), to address structural rigidities, restore macroeconomic stability, and accelerate growth.

3. To support the TSP, the authorities requested a Staff Monitored Program (SMP) which was approved in May 2019. The SMP largely focused on establishing a track record of coherent policies to restore macroeconomic stability and facilitate reengagement with the international community. Despite implementation challenges with the SMP, the authorities remain committed to continued reforms supported by a new SMP, which is currently under negotiation.

Recent Economic Developments

4. Economic growth declined from 3.5 percent in 2018 to an estimated -8.3 percent in 2019 due to adverse weather conditions which undermined agricultural production and hydro-power supply with downstream effects on manufacturing and mining activity. Concurrently, persistent foreign exchange shortages constrained critical imports required to support productive sectors. Looking ahead, the authorities are optimistic that economic activity will rebound faster, subject to the moderation of weather-related shocks, as well as improved prospects in mining and tourism. Meanwhile, inflation has increased significantly from 42 percent in December 2018 to an estimated 521 percent by end 2019, amplified by the depreciation of the exchange rate, broad money supply growth, and the recent removal of fuel and electricity subsidies.

5. On the external front, the current account balance is projected to improve from – 4.5 percent of GDP in 2018 to -2.5 percent of GDP in 2019 underpinned by a faster decline in imports and growth in remittance inflows. That said, reserve buffers remain below 1 month of import cover, reflecting the cumulative effects of persistent external imbalances over the years.

Fiscal Policy and Debt Management

6. Since September 2018, the authorities have pursued strict cash budgeting practices, realizing a large fiscal adjustment in 2019. Sustained fiscal consolidation achieved through a combination of revenue enhancing and expenditure containment measures, delivered cash surpluses for the greater part of 2019. At the same time, domestic revenue performance remained impressive on the back of several tax administration measures adopted by the Zimbabwe Revenue Authority (ZIMRA). Other measures being implemented by ZIMRA include an enhanced compliance program focusing on improvements in data matching and integrity, upgrading ICT systems, and strengthening controls. Additional efforts to recover tax arrears and simplify and modernize business processes, are also expected to improve tax compliance, plug leakages, and generate efficiency gains.

7. On the expenditure front, the authorities’ frontloaded fiscal adjustment program has largely focused on containing the public wage bill through restrained wage adjustments. As a result, savings were generated from a 5 percent pay cut in the salaries of senior government officials, rationalization of the civil service, and the limiting of the civil servants 13^th cheque to the basic salary. The authorities also introduced biometric verification of civil servants, which is expected to help further contain the wage bill. They also halted expenditure overruns to rein-in the budget deficit and scaled back central bank borrowing.

8. To further curtail expenditures, the authorities successfully re-set the agricultural financing model in 2019, away from direct government budget allocations, towards lending by private banks. Under the new arrangement, banks are lending to farmers in line with their normal due diligence and creditor scrutiny to minimize NPLs. Further, in the last quarter of 2019, subsidies on fuel and electricity were removed. The authorities are also reviewing the maize meal subsidy for better targeting and prudent management. Furthermore, they have terminated the gold export incentive scheme and replaced it with the Gold Fund, established by the Treasury. This will enhance transparency and minimize the effects of the gold incentives on reserve money and inflation, as the Gold Fund has been established at a much lower cost.

9. To address the worsening debt dynamics, the authorities are also considering non-debt creating sources of finance for major capital projects. At the same time, government has reduced central bank borrowing from the 20 percent statutory limit to 5 percent of the previous year’s revenue, with advances only confined to smoothening short-term cashflow mismatches. Going forward, the resumption of the Treasury Bill (TB) auction system is expected to promote competitive bidding and market pricing of government securities and the eventual reduction of the interest burden.

10. The authorities view the settlement of exchange losses stemming from the currency conversion implemented in February 2019, as essential to retain the private sector’s access to critical off-shore facilities. In this respect, they plan to compensate banks’ net operating positions to enhance financial stability. Already, the central bank has completed verification of the external obligations and plans to firm up on repayment modalities. Nevertheless, the authorities concur with staff that the obligations to be assumed by government, remain subject to resource availability and Parliamentary approval.

Monetary and Financial Sector Policies

11. To anchor inflation expectations and stabilize the exchange rate, the authorities concur that adoption of reserve money targeting (RMT) would be critical. In this regard, the new Monetary Policy Committee is planning to establish monthly reserve money targets consistent with low inflation. Concurrently, the Reserve Bank of Zimbabwe (RBZ) is planning to operationalize the RMT framework through deployment of open market operations tools including Treasury Bills, Savings Bonds, Corporate Bonds, and reserve requirements to support active liquidity management. Consistent with Fund advice, the authorities introduced the interbank market for foreign exchange in February 2019 which allows for the greater role of market forces. They also launched the Reuters Electronic Trading Platform (RETP) to enhance the efficiency of the interbank market. The RETP is expected to promote realistic price discovery and help remove distortions while the market determined exchange rate is expected to help eliminate the need for the gold export incentive.

12. The banking sector remains generally stable with sustained earnings performance, fairly liquid positions, and reasonably good asset quality. In light of emerging vulnerabilities faced by banks, the authorities recently directed banks to increase their minimum capital requirements. In addition, the RBZ is developing guidance on the implementation of the Basel III capital and liquidity framework to support ongoing measures to enhance the stability and resilience of the financial system. Relatedly, the central bank is in the process of operationalizing the macro-prudential policy framework to improve identification of financial vulnerabilities.

13. The authorities have also advanced work to implement recommendations of the 2019 Financial Sector Stability Review (FSSR). In this regard, they have made steady progress in strengthening off-site examinations, capacitating the financial stability unit of the RBZ, and revamping the supervisory toolkit. Further, the authorities are currently reviewing the regulatory and supervisory framework to strengthen consolidated supervision, cross-border cooperation, and crisis management.

14. Satisfactory progress has been made in improving the coverage and usage of the web-based Credit Registry. In parallel, work is advancing to establish a collateral registry for movable assets, which is expected to promote access to credit including by SMEs. The RBZ has also directed banks to appropriately review their risk management systems to mitigate financial stability risks stemming from adverse climate events. The authorities are also pressing ahead with the implementation of the National Financial Inclusion Strategy (NFIS) which was launched in 2016. Under the NFIS, efforts are being made to promote product diversification, innovation and human centered design of financial services and delivery channels, financial literacy, consumer protection, micro-insurance, and support for SMEs. As a result, access to financial services has more than doubled between 2016 and 2019, underpinned by increased access by women, the youth, and SMEs, as well as the opening of low-cost accounts.

Structural Reforms

15. The authorities are making determined efforts to implement comprehensive structural reforms to promote private sector development and improve the business environment. In this vein, they are advancing work to identify, evaluate, and determine appropriate restructuring models that are suitable for various state-owned enterprises (SOEs). Already, work has commenced to restructure the Grain Marketing Board, re-bundle the power utility company (ZESA), and review government’s shareholding in the telephone and mobile phone SOEs. Further, government has earmarked 43 out of 107 enterprises for privatization, liquidation, or merger. At the same time, the Public Entities Corporate Governance (PECG) Act was approved in November 2018, while the Corporate Governance Unit was established in the President’s office.

16. The authorities are at an advanced stage to establish the Zimbabwe Investment Development Authority (ZIDA) which is expected to integrate the various investment-supporting institutions into a one-stop investment shop. In addition, work is advancing to review about 40 pieces of legislation aimed to improve the business climate and enhance the country’s investment appeal. On AML/CFT, the authorities are currently addressing deficiencies identified in the 2016 Mutual Evaluation Report, to safeguard the integrity of the financial system.

17. The authorities are planning to develop a roadmap for the implementation of recommendations of the recent Governance and Vulnerabilities Assessment conducted jointly by the IMF and the World Bank. Meanwhile, progress has been made on governance reforms targeting improvements in individual and media freedoms. In this context, the Public Order and Security Act (POSA) has been repealed and replaced with the Maintenance of Peace and Order Act (MOPA). On the other hand, work to review the Access to Information and Privacy Protection Act (AIPPA) has advanced. Furthermore, the Zimbabwe Anti-Corruption Commission (ZACC) has been reconfigured and capacitated to intensify the fight against corruption.

18. The authorities attach great importance to ensuring adequate social spending to cushion vulnerable households and creating fiscal space for growth-enhancing public investment. External support, however, remains essential to complement government’s efforts to strengthen social safety nets and mitigate the pain of adjustment on vulnerable households. The compression of real wages over the recent past, extreme poverty levels, and the adverse impact of weather shocks, underline the need for stronger social safety nets to avert the humanitarian crisis. Although government has increased budgetary allocations for social assistance, the remaining financing requirements are significant, thereby, underlining the need for donor support to avoid further impoverishment of vulnerable segments of the population. This is particularly important given that the drought conditions are expected to persist into 2020.

Conclusion

19. The authorities acknowledge the pressures exerted by high money supply growth on inflation and the exchange rate in the past year. Going forward, they are determined to rein-in monetary expansion while pursuing further fiscal consolidation. At the same time, they remain committed to reforms under a Fund supported SMP, which remains a critical step towards amicable resolution of the country’s debt arrears and re-engagement with the international community. They are determined to implement corrective measures including through sustained fiscal consolidation and supportive monetary and structural reforms. They however, require support from the international community to sustain reforms, alleviate poverty, and ensure food security. That said, the authorities remain optimistic that the Fund can help explore more innovative ways to assist them overcome attendant challenges. They look forward to continued Fund engagement and technical support to sustain the reform momentum.