/ 20 April 2004

What the IMF really said about Zim’s economic performance

Zimbabwe’s government-controlled media made headline news of the few positive points that could be extracted from the International Monetary Fund’s (IMF) press statement at the end of their two-week visit last month.

The first points highlighted by the IMF team were skimmed over for local readers, if mentioned at all. These were the IMF’s key findings:

  • Zimbabwe’s economy’s deterioration in the past five years had reduced its gross domestic product by about 30% and it was still contracting.

  • Inflation had doubled in each of the past three years to reach 600% at the end of last year. This had dire social consequences, including high and rising unemployment that made the poverty measures twice as serious, and school enrolments had been cut by 35% in 2003.

  • Structural changes in agriculture relating to land reform negatively affected agricultural production.

  • Foreign donors have provided large amounts of humanitarian aid, but donor assistance has been curtailed because of concerns about the quality of governance.

  • Loose monetary policies had intensified inflationary pressures. They had also left interest rates highly negative in real terms, which imposed a heavy tax on savers, encouraged excessive borrowing, and increased the vulnerability of the financial sector.

  • Flight to alternative assets had been caused by the excessive liquidity growth, and this had contributed to record increases in real estate and share prices and hoarding of goods. Exports had suffered because of the uncompetitive official exchange rate, and official imports were severely constrained.

  • Acknowledging that the government’s budgetary operations were almost balanced last year, the IMF found this to be because of higher sales-tax collections after the mid-year price-control liberalisation and further cuts in government spending.

    The IMF team did welcome steps taken in the 2004 Budget, in the December Monetary Policy Statement and in more recent moves to strengthen banking supervision. It encouraged the authorities to accelerate and broaden these efforts.

    The IMF team was in the country to start the process of its so-called Article IV Consultation Report, a detailed economic statement of each member country’s performance and prospects. Normally the information gathered will be used to set guidelines for the various forms of assistance that the IMF might offer to the country and the criteria that a recipient country would have to meet to qualify for the facilities.

    Conditions laid down normally focus on the basic issues directly affecting the stability of a country’s exchange rate. This means that sources of inflation, such as large Budget deficits, distorted interest-rate structures, dual exchange rates or the use of borrowed funds for consumption rather than investment would all be targeted for correction.

    Once it has persuaded the country to deal effectively with these potential hazards, the IMF will typically show a strong preference for leaving market forces to determine exchange and interest rates, hopefully helped by a low inflation environment that has been achieved by rigorously applying strict fiscal and monetary policies.

    Although Zimbabwe no longer qualifies for the IMF’s technical assistance, the team listed a number of recommendations to the Zimbabwe government. These were:

  • To focus monetary policy on taming inflation and on reducing pressure on the exchange rate, taking into account the vulnerability of the banking system.

  • To gear fiscal policy to the support of tighter monetary policies.

  • To use the exchange rate to decisively reinvigorate exports and contain the demand for imports, and to restart the comprehensive discussions that link private and public-sector efforts to meet Zimbabwe’s economic challenges.

    While Zimbabwe’s arrears to the IMF, which stood at US$290-million at the end of February, place the country beyond the reach of IMF lending, the staff team welcomed Zimbabwe’s recent repayment of $6-million and its commitment to make quarterly payments of $1,5-million. The IMF team closed its press statement with the assurance that its executive board will closely examine the progress made on policies and payments when it considers the team’s Article IV Consultation Report in July.

    The almost token instalments of $1,5-million a quarter that Zimbabwe has promised to pay off its arrears are intended to stave off the next stage on the road to Zimbabwe’s expulsion from the IMF — the ultimate step in a sequence that started with Zimbabwe losing its right of access to IMF funds, then its right to technical assistance, and thereafter its voting rights as a member country.

    The feared compulsory withdrawal of Zimbabwe’s membership now appears to be on hold, but much more progress will be needed before funds will be offered or the country’s voting rights on the Board of Governors can be restored.

    Records show that Zimbabwe has been in continuous arrears to the IMF since February 2001 and by the end of November last year, the arrears amounted to $273-million, (about 53% of its IMF quota). Of the total amount, $110-million was overdue to the Poverty Reduction and Growth Facility Trust. The IMF revealed at the time that Zimbabwe was the first and only country to have protracted overdue obligations to this trust.

    Zimbabwe has doubled the measurable levels of poverty while shrinking the economy to only 70% of its size five years ago. It now has to repay $120-million to this facility. But as export revenues have dropped by half as a result of destructive policies, the country can barely manage the quarterly token instalment to keep its IMF membership on life support.

    John Robertson is an economic consultant in Harare