On Friday, the IMF released a detailed staff report on the state of the Zimbabwe economy. This is part of the IMF’s routine Article IV consultations.
In the report, the IMF assesses the state of the economy and gives its recommendations.
We summarise some of the report’s key points here:
Economic recovery will be slower this year than in 2021
Zimbabwe’s economy grew by 6.3% in 2021, but recovery will be much slower at 3.5% this year, the IMF says.
“Adverse climatic shocks could slow energy and agriculture production. Possible policy slippages, including in the run-up to the 2023 elections, could jeopardize macroeconomic stability and increase financial sector vulnerabilities. Commodity price volatility could adversely affect the external position and global inflation risks could compound domestic price pressures.”
The IMF says Zimbabwe needs political and economic reforms to win the international support that it needs to sustain growth and solve its debt crisis.
The IMF has tough proposals on taxes
The IMF says Zimbabwe needs to raise more tax revenue, because it is collecting less than other economies in the region.
Zimbabwe’s tax-to-GDP ratio was 15.5% of GDP in 2020, which is 3.3 percentage points below African peers. Revenue collections in 2020 were 2.3 percentage points of GDP less than others in the region. The IMF says Zimbabwe must aim to raise revenues by about 1.5 percentage points of GDP from 2021 to 2026.
The IMF proposes VAT on e-commerce. This would add to an already unpopular 2% tax on electronic transactions.
Zimbabwe must limit tax exemptions and zero-rating. Capital gains taxes must be paid on all realised capital gains, and capital gains tax must apply to all capital assets. Zimbabwe must also charge VAT on fee-based financial services
The IMF also recommends that Zimbabwe “subject fuels to VAT and provide an exempt lifeline to VAT on electricity”.
But government is cautious about too many new tax measures. IMF says: “They (government) indicated that political-economy constraints could prevent the elimination of zero-rating schemes given that earlier reform attempts were reversed following public protests.”
In 2019, Zimbabwe suffered violent protests when government dropped subsidies on fuel.
IMF doubts Govt’s revenue projections
The IMF fears that, if Zimbabwe fails to raise the revenue it expects this year, government will resort to printing money to plug the gap and pay wages.
But the Treasury says if there is a shortfall, it will cut spending on infrastructure instead.
“In case the 2022 projected revenues fall short, the authorities plan to cut capital project outlays, while leaving the wage bill intact. They noted that there is scope to raise more revenues by addressing VAT and corporate tax leakages, reforming the mining sector fiscal regime, and implementing the new Integrated Tax Management System.”
The exchange rate was overvalued by 27% in 2021
The IMF says its calculations, based on demand and forex flows, showed that the Zimdollar was overvalued by up to 27% at the end of December last year.
The auction, IMF says, amounts to a transfer subsidy of up to 5.5% of GDP for those getting forex on that market.
Authorities told the IMF that “parallel market rates are largely driven by behavioral factors rather than economic fundamentals, and thus overshoot the equilibrium exchange rate.”
Zimbabwe doing worse than peers on fighting corruption
Zimbabwe’s systems on fighting corruption lag that of peers, the IMF says.
“Prosecution against corruption is low. Zimbabwe’s mining sector governance and transparency weaknesses constrain the sector’s fiscal take and contributions to economic development,” the IMF finds.
Elections may reverse progress on fiscal discipline
Elections due next year are a threat to progress made by Treasury.
“The recent history of Zimbabwe shows that periods of overly expansionary policies were closely related to election cycles. With a few exceptions, fiscal deficits have generally increased sharply in the runup to elections, accompanied by large inflationary pressures,” the IMF says.
Reform agric support programmes
The IMF says Zimbabwe must “reorient and rationalize” farm subsidies, such as Command Agriculture.
Zimbabwe must instead adopt a “formula-based determination of the procurement price, based on futures prices in US dollars”.
Farmers must be free to sell crops on the open market, and not only to the Grain marketing Board. Government spending, the IMF says, must instead be focused on research, extension, and animal disease control.