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IMF: Zimbabwe Facing Economic Downturn

  • Tatenda Gumbo

The International Monetary Fund (IMF) says Zimbabwe faces serious medium-term challenges in achieving sustainable growth due to policy inconsistencies.

In a statement released Monday following the completion of recent its staff consultations in the country, the international finance organization concluded that these challenges require strong macroeconomic and financial policies, an enabling business environment, and normalized relations with creditors.

The IMF board noted that “Zimbabwe’s fragile economic situation is characterized by a growth slowdown, a large external deficit, and low international reserves. With risks on the downside, they (IMF team) highlighted the need to restore fiscal and external sustainability and reduce financial vulnerabilities.”

The executives stressed the need for enhancing financial sector stability, through monitoring weak banks and restructuring and recapitalizing the reserve bank, which they said remain a priority for Zimbabwe.

Though Zimbabwe has recently started to acknowledge some need for change in economic policies, especially on the implementation of its black economic empowerment program, the IMF said risk factors to growth relate to policy inconsistencies that could affect investment and financial sector vulnerabilities.

It further said the economic rebound experienced since the end of hyperinflation in 2009 has ended. After averaging 10 percent from 2009-2012, growth fell to an estimated 3.3 percent in 2013, reflecting tight liquidity conditions, election-year uncertainty, weak demand for key exports, competitiveness pressures, and the impact of adverse weather.

Inflation, siad the IMF, continued its downward trend from 2.9 percent (year-on-year) at end-2012 to -0.3 percent in April 2014, mainly reflecting the appreciation of the US dollar against the South African rand and weak domestic demand.

"Zimbabwe’s external position remains precarious, with usable international reserves covering less than two weeks of imports. The current account deficit widened to 28.7 percent of GDP in 2013, as the trade deficit deteriorated, reflecting lower mineral exports. The main financing item in the capital account was private loans.

"Fiscal pressures continued into 2014, with the budget targets in doubt in the context of sluggish growth and a 14- percent increase in the wage bill relative to 2013. To offset these pressures, the government has identified various revenue and expenditure measures valued at some 4.6 percent of GDP in 2014. If fully implemented, these measures could result in a reduction in the 2014 budget deficit to 0.6 percent of GDP, consistent with the available financing."

IMF directors took note of the staff’s assessment that the real exchange rate is overvalued. "They underscored the importance of addressing structural bottlenecks to boost competitiveness and promote a sustainable external position, and highlighted the need to improve the business environment and basic infrastructure."

It further said, "The directors also saw a need to reduce uncertainty regarding the indigenization policy, including in the financial sector, to avoid deterring investment."

IMF directors urged the authorities to fully implement the recent measures to boost transparency in the diamond sector and to modernize mining legislation.

Reporter Tatenda Gumbo spoke to economist Prosper Chitambara of the Labour and Economic Development Research Institute of Zimbabwe, who said the recommendations by the IMF are in line with what many economists have been proposing.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.