8 July 2010
Zimbabwe is in a state of "debt distress" and is preparing a request for debt relief under the Heavily Indebted Poor Countries (HIPC) initiative established by international financial institutions, says the International Monetary Fund (IMF).
In a report released on Wednesday, the IMF says after "intense internal debate" within the Zimbabwean government, "consensus is emerging among key government officials that mineral wealth alone would not be sufficient to achieve debt sustainability.
"As a result, the government is working on a comprehensive 'hybrid' strategy involving both a request for debt relief under the HIPC Initiative to resolve external payments arrears and use of fresh IFI financing and mineral wealth to achieve sustainable development."
An IMF staff appraisal and summary of the report, drawn up by an IMF delegation which visited Zimbabwe in March, follows:
The nascent economic recovery, underpinned by significant improvements in policies in 2009, remains very fragile.
Mining underground at Ngezi, a Zimbabwean platinum mine
The previously implemented liberalization of prices, goods markets, and foreign exchange transactions would support economic activity in 2010. Significant improvements in tax policy and administration have increased available fiscal space. However, rapid unsustainable government expenditure growth, including of wages, a large reduction in capital inflows because of increased uncertainty about the indigenization process, and exuberant credit growth have negatively affected the macroeconomic outlook and intensified external and banking system vulnerabilities.
In light of these vulnerabilities, policies need to be strengthened to sustain the economic recovery:
The approved 2010 budgetary expenditures would need to be curtailed by about 3 percent of GDP to return to a path toward medium-term fiscal and external sustainability and reduce the economy’s vulnerability to shocks. This would also help maintain a fiscal reserve of at least $250 million of SDR holdings (2 months of expenditures). Although reaching consensus on the recommended fiscal measures is a major political challenge, delaying their implementation could increase the social and economic costs of the future necessary adjustment.
The key fiscal challenge is to reduce the wage bill relative to revenues in 2010 and beyond to leave sufficient fiscal space for urgent infrastructure upkeep expenses (e.g., electricity, water, and sanitation), maintain competitiveness, and prevent an unsustainable buildup of domestic expenditure arrears. The recent payroll audit presents an opportunity to eliminate ghost workers, and political support needs to be forged for additional measures for 2010 and the medium term to further reduce the wage bill.
To address increasing systemic vulnerabilities in the banking system, urgent measures need to be implemented: (i) improving Reserve Bank of Zimbabwe (RBZ) governance, and downsizing and restructuring it; (ii) reducing banks’ exposure to the financially distressed RBZ; (iii) containing credit and liquidity risks; and (iv) discontinuing moral suasion on banks to lend to specific sectors. The authorities’ stated intentions to implement these recommendations need to be followed through with speedy implementation.
The multi-currency system would serve Zimbabwe well during its intended lifespan (2010–12). The Zimbabwe dollar can be reintroduced as sole legal tender only once a track record of sound policies is established and a credible central bank governance framework focused on price stability is adopted.
Sound macroeconomic policies, a significant improvement in the business climate, in particular regarding enforcement of property rights and labor legislation, and debt relief are essential for moving toward external and domestic stability.
Zimbabwe is in debt distress, and the debt overhang cannot be resolved without debt relief even if policies are improved and mineral extraction is increased. The government needs to reach consensus on a resolution strategy for external debt arrears and to improve relations with the international community, whose support would be vital for obtaining debt relief and rebuilding the Zimbabwe economy.