What you need to know about latest IMF report on Zimbabwe

The International Monetary Fund (IMF) has just released a report on Zimbabwe.

In the report, the IMF acknowledges the commitment by President Emmerson Mnangagwa’s government to stabilise Zimbabwe’s economy.

The Fund also reveals that the IMF-Zimbabwe Staff Monitored Programme (SMP) – which entails close technical collaboration on the country’s economic reform, but without funding – will run for a year, starting on May 15, 2019.

The latest report has some 23,000 words and includes a press release from the IMF, a staff report, a letter of intent jointly signed by Finance Minister Mthuli Ncube and Reserve Bank governor John Mangudya, as well as a memorandum of the government’s economic and financial policies.


“The economic policies of the new administration as described in the Transitional Stabilisation Programme and detailed in the attached Letter Of Intent constitute a comprehensive stabilization and structural reform program to address Zimbabwe’s deep macroeconomic imbalances.”

IMF Staff Report, May 30 2019

Here is what you need to know about the report:

What is a Staff Monitored Programme?

An SMP is a programme agreed between the IMF and a member state to co-operate in the implementation and monitoring of the implementation of the said country’s economic reforms. SMPs are at the member state’s request.

In Zimbabwe’s case, the IMF will collaborate with the country as it pursues its 18-month Transitional Stabilisation Plan (TSP), which will run until the end of 2020.

Embarking on an SMP does not mean a member state gets IMF funding. However, the programme seeks to assist Zimbabwe to build a track record of sound economic management and restore macroeconomic stability, ultimately leading to the unlocking of international capital for the country.

The SMP will monitor Zimbabwe’s economic performance on a quarterly basis.

Which period does the latest report cover?

Given the economic volatility in Zimbabwe, which means conditions change rapidly, the timing of assessments of the economy is an important consideration. The latest report is largely based on discussions held by an IMF staff team with the Zimbabwean authorities between April 1-5, 2019. The report was, however, completed on May 21, 2019 and circulated to the IMF executive board on May 22, 2019.

What does the IMF say?

  1. Zimbabwe has deep macroeconomic imbalances arising from excessive spending, particularly between 2016-2018, financed by Treasury Bills and borrowing from the RBZ.
  2. The Mnangagwa government is significantly reforming the economy, chiefly through cutting spending, removing distortions caused by a fixed exchange rate and seeking to promote investment in pursuit of a private-sector led economy.
  3. Economic reforms will be difficult to implement due to political and social considerations.

Economic growth?

The IMF projects the economy to contract by 2.1% in 2019, due to the impact of the ongoing fiscal consolidation as well as a poor farming season. The Fund, however, expects a rebound in 2020, with GDP forecast to expand by 3.3%.

“A rebound in economic activity is expected in 2020 and over the medium term, as uncertainty declines, distortions from multiple exchange rates are removed, and relations with external creditors normalize,” the Fund says.

Inflation

The IMF expects headline year-on-year inflation to remain high throughout 2019, averaging 81%. Monthly inflation is, however, forecast to start coming down from mid-2019.

Interest rates

The MF says while the Zimbabwean authorities realise that interest rates have to go up to stabilise the money and forex markets, they were reluctant to do so over fears of the potential impact on economic activity as well as public debt. In his February monetary policy, Mangudya left rates unchanged, but said he planned to introduce a bank rate – the rate at which banks borrow from central bank – as a guide for rates to the market.

Amid a clamour by banks for the central bank to remove a cap on rates introduced in 2017, the Fund warns that any further delay on the interest rate decision could further undermine confidence.

The IMF recommends that the RBZ gradually replaces its savings bonds, whose maturity ranges from one year to five years, with short-term instruments of up to seven days.

Export retentions and the interbank market

The IMF advises the authorities to take measures to increase the supply of forex in the market.

The Fund urges the RBZ to allow exporters to retain all their earnings, on condition that they sell directly on the interbank market what they are currently required to surrender to the central bank. The IMF believes this would allow for an effective price formation.

“Existing exchange controls, which limit FX purchases in the official interbank market for current account transactions, would continue to control demand for FX, but the sanctioning and enforcement framework would be applied transparently and uniformly,” says the IMF. The Fund also advises that any subsidies for specific goods or sectors, such as fuel and medicine, be channeled through the budget, not through administered exchange rates.

In talks with the IMF, the Zimbabwean authorities said they envisage gradually eliminating exchange controls to eventually allow for a full unification of the exchange rate.

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