Back Matter

The paper has benefited from comments by officials in Zimbabwe and South Africa, as well as Xavier Debrun, Alexandre Chailloux, Sharmini Coorey, Mark Horton, Michael Moore, Carel Oosthuizen, Catherine Pattillo, Rodney Ramcharan, Nikki Sodsriwiboon (all IMF); and Praveen Kumar, (World Bank); and editorial assistance from Colin Brewer, Karen Coyne, Jenny Di Biase, and Breda Robertson. The authors would also like to thank Paul Masson for sharing his Gauss programs, Gian Maria Milesi-Ferreti for updating the NFA data for Zimbabwe to 2008, and the Zimbabwe Chamber of Mines for useful information on the mining sector. The authors are responsible for any errors.

1

Prepared by V. Kramarenko, African Department (AFR), E. Oppers, Monetary and Capital Markets Department (MCM), W. Coats (Consultant), L. Engstrom, and G. Verdier (both AFR).

2

All but one exchange restrictions for current account transactions have been abolished, and the capital account largely has been liberalized.

3

Taxes and other public liabilities can only be paid in one of the five foreign currencies (the U.S. dollar, the South African rand, the euro, the pound sterling, and the Botswana pula). The Short-Term Emergency Recovery Program (STERP) adopted by the Inclusive Government in March 2009 presented the rand as Zimbabwe’s “reference currency,” (Paragraph #310 of the STERP document) but both the government and the private scetor have shown strong preference for the U.S. dollar.

4

In this paper, dollarization is shorthand for use of any foreign currency. Full official dollarization is considered as the extreme variant of a hard peg.

5

Flexible wages and labor markets play an essential role in reducing the output cost in case of an adjustment to unfavorable shocks. The adjustment could become protracted and costly with large, persistent output gaps, if wages react only gradually to increasing and long-lasting unemployment.

6

Frankel and Rose (2000) use a gravity model to argue that countries with currency unions trade two to three times as much with each other as countries with separate currencies.

7

Frankel and Rose (1998) argue that the correlation of shocks cannot be considered as a given fact that remains constant over time. A monetary union between two countries is likely to boost trade integration and in turn make the business cycles and the shocks affecting both countries more symmetric. As a result, the cost of losing monetary independence would decline over time.

8

Among SACU’s five member countries, three members (Lesotho, Namibia, and Swaziland) have their currencies pegged to South Africa (the largest member), while Botswana has a crawling peg to a basket of currencies.

9

Centre for Development and Enterprise (2008). Data on migration is notoriously difficult to collect and understand. Porous borders, corrupt officials, poor record keeping, and migrants who come and go make migration numbers for Zimbabwe and South Africa even more unreliable than normal. Some observers claim that the actual number of migrants is significantly higher. Unverifiable estimates have presented numbers as high as 3 million.

10

As a current member of COMESA (the Common Market for Eastern and Southern Africa), an issue arises whether Zimbabwes membership in this organization would be compatible with joining SACU.

11

Extensive analysis is provided in Salvatore et al. (2003).

12

The calibration of the model is summarized in Appendix II—3.

13

CMA Agreement, Article 2.

15

For a discussion of currency board rules see Coats (2007).

16

Credibility and resilience of the currency board could be enhanced by a larger than 100 percent reserve coverage of base money, but at a significant fiscal cost.

18

Prepared by G. Fernandez, Strategy, Policy, and Review Department (SPR) and G. Verdier, African Department (AFR).

19

External arrears include principal and interest obligations in arrears and estimated penalties on interest and principal arrears.

20

Long-term flows include long-term capital and foreign direct investment whereas short-term flows are comprised of portfolio investment, capital transfers and short-term capital (e.g., changes in banks’ net foreign assets).

21

We follow Lane and Milesi-Ferretti (2000, 2007) by computing net foreign assets as the stock of the NFA in 2008 available in the database plus the cumulative current account between 2009 and 2015. In addition, we make adjustments for capital transfers and for changes in the stock of debt unrelated to annual transactions.

22

A similar approach to estimating the NPV of resource wealth is taken in Delechat and Gaertner (2008).

23

For constant production levels, one can show that the amount of time n it takes to reach a percent of the net present value computed over Tperiods is n=(log(1α(1(11+r)r))log(1+r))

24

The level of the discount factor fully accounts for the uncertainty associated with the production stream. Using a simplified consumption-based capital asset pricing model, one can show that the appropriate discount rate for a risky asset is composed of a risk-free rate plus a covariance term that captures the premium an investor must be paid for the additional risk. (See Appendix III-1 for details.) The appendix also discusses a range of possible discount rates for Zimbabwe. To check the robustness of our results we also compute wealth with discount rates of 15 and 20 percent. In all likelihood the rates at 20 percent and below underestimate the appropriate discount factor since the sum of standard discount rates for mining projects and country risk premia for countries with low credit ratings could be as high as 30 percent.

25

The non-discounted gross value of the minerals that are assumed to be extracted during the next 20 years— over $33 billion or about 650 percent of 2010 GDP— is large, but for the purpose of assessing external stability only the NPV is of direct relevance.

26

nxtt5=gtrt(1+gt)nfabis the non-mineral primary (non-interest) current account required to keep the ratio of NFA to GDP at nfab where g is real GDP growth and r is the real interest rate. We assume that g=7 percent and r=8 percent. See Lee et al. (2008) for details on external sustainability assessment methods.

27

In principle, the non-mineral primary external current account balance should exclude mineral-related imports. However, we have little information on the size of imports related to mining. Assuming that all 2009 FDI into mining ($200 million or 5 percent of GDP) are related to the mining sector imports, the non-mineral primary current account balance is still 29 percent of GDP.

28

Prepared by R. Hughes and J. McHugh, both Fiscal Affairs Department (FAD).

29

Excluding transportation and housing allowances ($9 per month for both) and a “13th month” annual bonus.

30

Staff projections of revenues.

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Zimbabwe: Challenges and Policy Options after Hyperinflation
Author: International Monetary Fund