Friday, March 5, 2010

First steps taken to restore working relationship with the IMF

The International Monetary Fund Executive Board has agreed to restore Zimbabwe's voting rights after a seven-year suspension and has agreed that if Zimbabwe settles its arrears to the Poverty Reduction and Growth Trust, the country will be permitted access to the IMF’s General Resource Account.
In other words, the arrangements permit Zimbabwe to apply for new IMF loan facilities, but IMF regulations will not permit it to actually release loan funding until Zimbabwe qualifies for the assistance by settling its debts.

The outstanding amount owed to the IMF is about US$136 million, but more precisely, it is 89,4 million Special Drawing Rights. The exchange rate at the end of last week was SDR1=US$1,52464. However, the IMF has also reminded Zimbabwe of two critical issues:

Firstly, the country’s eligibility for new loans will not be fully restored until it has paid off a total of US$1,3 billion, the combined debts to the IMF, the World Bank and the African Development Bank.

And secondly, access to IMF resources is also subject to IMF policies on the use of such resources and to the country achieving a track record of sound policies. In this regard, the IMF and other organisations are keen to see evidence that Zimbabwe will accept policy changes that will help restore the country’s ability to earn foreign exchange.

Before Land Reform caused a massive shrinkage in foreign earnings, Zimbabwe had achieved an excellent credit rating and it benefited from extensive credit lines as well as investor support because its prospects of meeting debt settlement obligations were considered excellent. If tobacco production alone had continued at the 1999/2000 levels through to 2009, the amount earned would have considerably exceeded the total debt of almost US$6 billion now outstanding.

To the dismay of many development institutions, Zimbabwe’s authorities have so far done nothing to revise the policy decisions that caused these and many consequential declines in economic activity in Zimbabwe. Also, Zanu PF politicians’ efforts to divert attention from their errors of judgement by claiming that the economic collapse was caused by sanctions have not persuaded the same institutions, so evidence of actual change remains a prerequisite for more meaningful assistance.

For the present, as a result of the Voting Rights decision, Zimbabwe can now participate in the procedures for appointing Governors to the IMF and in the election of Executive Directors for the IMF’s Board. Zimbabwe can now also cast its vote in decisions on IMF policies or matters concerning other member countries.

Zimbabwe came close to losing its membership status at the end of 2003, when the country’s failure to either adopt acceptable policies, or to meet its financial obligations, led to the initiation compulsory withdrawal procedures. However, time was offered to permit Zimbabwe to achieve the levels of “co-operation” called for, and in 2006, the country achieved a degree of success by fully setting its GRA arrears to the IMF.

This led to the procedures for the country’s compulsory withdrawal being cancelled, but much to the disappointment of the Reserve Bank, the amounts still owed to the Poverty Reduction and Growth Trust meant that the payments made were not enough to restore Zimbabwe’s access to IMF financial resources.

The IMF Executive Board did debate Zimbabwe’s position at meetings in 2006 and 2007, but the continuing difficulties forced them to agree to return to the issues at a later date, but as soaring inflation became hyperinflation, the Reserve Bank was obliged to legalise the use of foreign currency notes when it could no longer keep up with the production volume requirements of inflation that reached 100 percent per day. The Zimbabwe dollar collapsed completely early in February 2009 and decisions had to be made to rely almost completely on the limited quantities of US dollars and South African rand available in the country.

As the Reserve Bank could no longer sustain the subsidies and other expenditures that had caused most of the financial distortions, discipline was imposed on the Reserve Bank, as a result of which, by May 2009, its conduct could be described as having significantly improved, so Zimbabwe’s improved co-operation on economic policies was said to have been achieved.

This generous recognition by the IMF led to the Executive Board approving the reinstatement of technical assistance in some targeted areas. Now, another step back up the ladder has been agreed to and Zimbabwe’s voting rights and direct participation in IMF meetings and decision-making have been reinstated.

According to the IMF announcement, the move recognises the country's efforts to repair its economy and improve relations with donors. However, it would be helpful to know which of the efforts the IMF believes has actually made a difference. On the ground, the facts are that the Government of National Unity is barely functional, property rights are no closer to being restored, civil rights abuses are still taking place and now government is proposing to enforce legislation that will dispossess every non-indigenous business owner of their controlling interests in their companies.

Far from amounting to efforts to repair the economy, these latest moves appear to have been designed to destroy the businesses that somehow survived the earlier moves.

Of some interest is the fact that the IMF decision was reached a few days after the European Union decided to renewed sanctions against identified Zimbabwean individuals for another 12 months. This was done because of their assessment that the new inclusive Government was making no actual progress. That assessment is much closer to the mark.

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