ECONOMIC GOVERNANCE WATCH 5/2022
[18th May 2022]
IMF Report on its 2022 Consultation with Zimbabwe :
The Main Points
In our Economic Governance Watch 1/2022 we reported that the International Monetary Fund [IMF] had published its Executive Board’s report on its 2022 Article IV consultation with Zimbabwe. The report can be accessed on the Veritas website [link].
In this Bulletin we shall outline the main points made in the report, but before doing so we should explain how and why the IMF came to issue a report on Zimbabwe.
IMF Surveillance and Reports
The IMF explains on its website why it reports on member States such as Zimbabwe and how its reports are prepared:
“When a country joins the IMF, it agrees to … provide the IMF with data about its economy. The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance.
Country surveillance is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries … The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labour unions, and civil society.
The team reports its findings to IMF management and then presents them for discussion to the Executive Board, which represents all of the IMF’s member countries. A summary of the Board’s views is subsequently transmitted to the country’s government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. Summaries of most discussions are released in Press Releases and are posted on the IMF’s web site, as are most of the country reports prepared by the staff.”
Outline of the 2022 Consultation Report
The report covers the period 2020 to 2021 and is the result of consultations with the Treasury, government officials, civil society and other stakeholders, in which issues relating to Zimbabwe’s economic performance were discussed.
The report begins by pointing out that Zimbabwe’s economic problems have been caused, at least partially, by external factors:
“Zimbabwe experienced severe exogenous shocks (cyclone Idai, protracted drought, and the Covid-19 pandemic) during 2019-20, which along with policy missteps in 2019, led to a deep recession and high inflation.”
As a result, real GDP [Gross Domestic Product, the total value of all goods and services produced within the country] contracted cumulatively by 11,7 per cent during 2019-20 and inflation reached 837 per cent (year on year) by July 2020.
The IMF noted that the Government’s commendably swift response to the COVID pandemic helped to contain its adverse impact:
- In 2020 pandemic-related spending, equivalent to 2 per cent of GDP, was financed by reallocation within the budget.
- In 2021, such outlays represented about 1,6 per cent of GDP and were partially financed by a Special Drawing Rights allocation from the IMF.
- Expenditure was increased to bolster food security and farm inputs to vulnerable households.
- The Reserve Bank of Zimbabwe introduced a medium-term bank accommodation lending facility and a private sector lending facility.
The report notes that GDP rose by 6,3 per cent in 2021 buoyed by a bumper harvest, increased mining output and a buoyant construction industry. By the end of 2021 inflation had fallen to 60,7 per cent year on year. Fiscal policy was tightened in 2020-2021 and the current account balance turned into a surplus.
The report also noted however that high double-digit inflation persisted and there were parallel foreign currency markets with widely different exchange rates. Poverty levels rose and about a third of the population was at risk of food insecurity.
The IMF expected the output recovery to continue, though at a slower pace, with GDP growing by 3,5 per cent in 2022 and by 3 per cent in the medium term. The Government hoped to limit the budget deficit to 1,5 per cent of GDP in 2022 and below 2 per cent in the medium term. On the other hand:
- Increasing imports and declining overseas remittances meant the current account surplus was expected to decline over the medium term.
- The effects of drought and the COVID pandemic would have a persistently adverse effect on the economy.
- International re-engagement had faltered, with western countries seeking political and economic reforms. The Government had made token payments to overseas creditors in a bid to make progress on re-engagement.
- The IMF’s 2019 Staff-Monitored Programme was patchily implemented and came to an end without a review.
The IMF Board made the following recommendations:
- The Government should implement the necessary reforms to foster higher, more inclusive growth and pave the way for re-engagement with the international community.
- More Government revenue should be generated from domestic sources, particularly through broadening the tax base and improving tax administration and compliance.
- Reforms of State-owned enterprises should be accelerated.
- Fiscal controls should be enhanced in order to limit fiscal risks [i.e. government overspending].
- The Government should use its IMF Special Drawing Rights allocation prudently and transparently.
- The Government should make further efforts to enhance debt management and transparency.
- There should be further monetary tightening, given persistently high inflation.
- The operational independence of the Reserve Bank should be enhanced; at the same time, the Bank should discontinue its quasi-fiscal operations.
- There should be greater exchange rate flexibility, with a more transparent and market-driven process for determining the rate of exchange between the Zimbabwe dollar and foreign currencies. Exchange restrictions and multiple currency practices should be phased out as soon as conditions permit.
While the recommendations are undoubtedly sound, they mean that Zimbabwe will have to go back to austerity and more liberalisation of the economy. This will be difficult for the authorities to implement, bearing in mind that Zimbabwe is just over a year away from the 2023 general elections and that a bad harvest is expected this year. As we move towards elections, the Government is likely to pursue populist policies – increasing money supply, protecting its voters from food insecurity and building more infrastructure – rather than embracing the austerity and fiscal prudence on which our long-term economic health depends.