SDR windfall no substitute for economic reforms, an upbeat IMF tells Zimbabwe in new report

IMF praises Mthuli Ncube's fiscal measures, but says not enough 'decisive action' (picture: Cynthia R Matonhodze/Bloomberg)

Zimbabwe should not see its recent US$961 million International Monetary Fund (IMF) windfall as a substitute for reforms, the Fund said on Tuesday, as it urged more action to build on what it sees as “economic stabilisation gains” made by the country.

The country plans to use more than half of the money it received in August, as part of the IMF’s global Special Drawing Rights allocation, to support its under-pressure Zimbabwe dollar. Finance Minister Mthuli Ncube says some of the money will also go into critical infrastructure and social services.

But this must not be seen as a replacement for the “structural reforms” that are needed to shore up the currency and sustain recovery, the IMF cautioned in a statement released Tuesday after its latest routine consultations on Zimbabwe.

“The mission notes the authorities’ plans to use the recent SDR allocation to support spending in social, productive, and infrastructure sectors, as well as building reserve buffers,” said the IMF’s Mission Chief for Zimbabwe, Dhaneshwar Ghura. “In this context, the use of the SDR allocation should not substitute for critical reforms, be spent on priority areas within a medium-term plan, and follow good governance and transparency practices.”

On Tuesday, Cabinet announced the first firm allocation of the SDR money, a US$30million revolving fund for horticulture exporters.

IMF: Praise and caution

The IMF says there is some economic recovery, underpinned by good harvests and economic activity.  

“Economic activity is recovering in 2021, with real GDP expected to grow by about 6%, reflecting a bumper agricultural output, increased mining and energy production, buoyant construction and manufacturing activity, and increased infrastructure investment,” the IMF said.

The IMF statement carries an upbeat tone on Zimbabwe’s fiscal measures and its handling of the pandemic.  

“The IMF mission notes the authorities’ significant efforts to stem inflationary pressures. In this regard, contained budget deficits and reserve money growth, higher monetary policy rates, and more flexibility in the RBZ auction exchange rate, are policy measures in the right direction,” said the IMF.

But the Fund says more is needed to build on gains and bring more robust recovery.

“Decisive actions are needed to lock in economic stabilisation gains and accelerate reforms. The near-term macroeconomic imperative is to continue with the close coordination among fiscal, exchange rate, and monetary policies,” IMF said.

Among the key reforms that the IMF wants to see is “greater official exchange rate flexibility and tackling forex market distortions”. This is a reference to the foreign currency auction, widely criticised by leading businesses for overvaluing the Zimdollar and delaying allocations.

Zimbabwe is spending a larger proportion of its budget on infrastructure, but the IMF says there must be a balance between “critical spending” and “containing fiscal deficits”.

The country’s plans under National Development Strategy 1 “are appropriate and need to be fully operationalized and implemented” but “durable macroeconomic stability and structural reforms would support the recovery and Zimbabwe’s development objectives”.

While Zimbabwe has cleared its debts with the IMF, the IMF has again restated that the country cannot get new credit from the Fund due to arrears with other key creditors.

The IMF held virtual meetings under its Article IV consultation from October 25 to November 16, meeting government, businesses, aid agencies and civil society.

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