The International Monetary Fund says that the Staff Monitored Programme is now off track and that Zimbabwe is experiencing an economic and humanitarian crisis, which requires difficult policy choices and international support.

As was moved on this service this week, the IMF Board forecast a near zero growth for the country this year and said the SMP which had been adopted in May 2019 was now off track as policy implementation has been mixed.

Previous successes with the SMP were achieved under Finance Ministers; Tendai Biti and Patrick Chinamasa who got to successor programme stages. Current Finance Minister Mthuli Ncube adopted the SMP in May 2019 but it was dependent on the implementation of significant reforms and sustainable policies backed by political will.

Over the past year, there have been policy missteps and unfortunately climate-related shocks which led to an estimated contraction of -8.3% (initial estimates at -5.2%).  “Macroeconomic stability remains a challenge: the economy contracted sharply in 2019, amplified by climate shocks that have crippled agriculture and electricity generation; the newly introduced ZWL$ has lost most of its value; inflation is very high; and international reserves are very low,” said the IMF at the conclusion of its 2020 Article IV Consultation with Zimbabwe.

Some reforms had been done, notably a  significant fiscal consolidation that has helped reduce the monetary financing of the deficit, the introduction of the new domestic currency in February 2019, the creation of an interbank FX market, and the restructuring of the command agriculture financing model to a public-private partnership with commercial banks.

However the reforms were done unevenly and this included notable delays and missteps in FX and monetary reforms, which had failed to restore confidence in the new currency.  The IMF said the drought and floods had magnified the impacts of the fiscal retrenchment, leaving more than half of the population food insecure.

With another poor harvest expected, growth is not projected at 0.8% for this year from initial projection of 3.3%, while a further deterioration of the exchange rate is forecast to a close of 24.5x.

GDP in US dollars is projected to be at US$20.56 billion, which is a marginal decline from last year’s US$20.7 billion and $22.94 billion the previous year. In line with RBZ estimates, inflation is forecast at 52% at year end. The current account balance is expected to remain in deficit at -1% of GDP, exports of goods and services are projected to improve 8.7% while imports are set to grow 17.7%.

Challenges highlighted by the IMF

– Delays in re-engagement with international community due to a lack of plan to clear arrears to the World Bank and other multilateral institutions. Without external support the IMF says the country faces a deep humanitarian crisis and a difficult balance of pursuing tight monetary policy to reduce very high inflation and prudent fiscal policy to address the macroeconomic imbalances and build confidence in the currency, while averting a crisis.

– Pervasive deficits remain and would call for non-essential spending cuts  including decisive reforms to agricultural support programs, to allow for social spending needs.

– Continued recourse to collaterised external borrowing on commercial terms which may potentially complicate any future arrears clearance operation.

Recommendations

– The country needs to eliminate deficit monetization which would not only be crucial for fiscal sustainability, but it would also serve as a precondition for the stabilisation of hyper‑inflation and the preservation of the external value of the currency.

– Need to establish credibility in the new currency. This entails pressing forward with the establishment of a functional foreign exchange market and to remove distortions that could lead to rent‑seeking behaviour in the economy.

– Continue with monetary targeting regime to conduct monetary policy given low reserves and hyper‑inflation, limited credibility, and a lack of access to traditional forms of external financing

– Enhancing central bank independence and transparency, including by timely publication of monetary statistics, would be important.

– The central bank needs to conduct asset quality reviews of the banking sector, develop a new framework for managing weak banks, and increase the effectiveness of the AML/CFT framework, including by effectively implementing FAFT standards.

– Address governance and corruption challenges, entrenched vested interests, and enforcement of the rule of law to improve the business climate and support private‑sector‑led inclusive growth.