IMF wants Zimbabwe central bank to dump monetary policies

THE International Monetary Fund (IMF) has advised government to cut the Reserve Bank of Zimbabwe's (RBZ) role in crafting monetary policies to just its core functions, after the local currency depreciated by more than 70% year to date.

This comes after the IMF downgraded Zimbabwe's gross domestic products (GDP) growth performance for 2024 by 0,35 percentage points to 3,25% owing mostly to the local currency's depreciation.

The Zimdollar was officially trading at ZWL$6 104,72 to the greenback on December 31, 2023 and had dropped to US$1:ZWL$11 906,91 by Wednesday this week.

The local currency's depreciation is blamed on a massive increase in the money supply to fund government's ZWL$60 trillion budget for the year, an increase of slightly over 1 200% from the 2023 fiscal year.

According to the IMF, the increase in money supply is being aggravated by quasi-fiscal activities at the central bank, which the government has used to fund its bloated budgets.

"The mission encourages the authorities to accelerate the FX (foreign exchange) market reform by promoting a more transparent and market-driven price discovery in the official exchange rate and by removing existing exchange restrictions and distortions," IMF European department deputy chief Wojciech Maliszewski said at a Press conference in Harare yesterday.

"In particular, the restriction on the 10% allowable trading margin for pricing domestic transactions should be eliminated. The FX market reform should be accompanied by establishing an effective framework for exchange rate and monetary policies."

He continued: "Establishing such a framework requires careful preparations, including, among other steps, comprehensively addressing underlying sources of fiscal pressures. The RBZ Act should be amended, including to narrow its legal mandate to core functions."

Maliszewski was speaking at the conclusion of a two-week visit to Zimbabwe, where he and an IMF team were on a fact-finding mission to develop a Staff-Monitored Programme (SMP) at the request of the government.

The idea to limit the RBZ's role to just its core functions was first espoused by renowned American economist, Steve Hanke, in September 2022.

Hanke argued that most of the official and parallel forex markets currency distortion could be traced to the central bank's quasi fiscal activities which had contributed to a national debt of over US$20 billion.

Maliszewski, however, said economic activity in Zimbabwe continued to show resilience in the face of currency instability and high inflation.

"GDP growth is estimated at 5,3% in 2023, on the back of expansion in agriculture and mining, and — buoyed by related foreign currency inflows and by remittances — in the highly-dollarised domestic trade and services.

"Growth is expected to decelerate to about 3,25% in 2024, partly reflecting the impact of a drought on agriculture production and lower commodity prices.

"These factors are also expected to reduce foreign currency inflows, but remittance will likely remain strong, and the current account is projected to be in small surplus," Maliszewski said.

He noted that this should support liquidity in the dollarised part of the economy, sustaining growth in domestic trade, services and construction.

"The gap to the parallel market rate remains wide (above 30%); ZWL inflation is still very high. This instability weighs on sentiment, while exchange rate restrictions (prescribing retailers to use the official ZWL exchange rate with up to a 10% margin — inflating the US dollar prices) continue to be a burden on the formal sector," he said.

Maliszewski said structural reforms aimed at improving the business climate, strengthening economic governance and reducing corruption vulnerabilities were key for promoting sustained and inclusive growth.

Thus, a SMP, an informal agreement between an IMF member country and the fund's staff to monitor the member country's economic programme, was entered into with government.

The IMF was also in Zimbabwe to conclude Article IV consultations, a mechanism in which the fund advises its members on economic policies.

Maliszewski said risks remain skewed to the downside, and that the outlook depended on progress toward macroeconomic stabilisation and transformational structural reforms.

"Discussions covered policies to restore macroeconomic stability and improve growth prospects, focusing on addressing the sources of fiscal pressures including quasi-fiscal operations of the Reserve Bank of Zimbabwe, liberalising the foreign exchange markets and establishing an effective framework for exchange rate and monetary policies; and progressing on reforms to improve economic governance and reduce corruption vulnerabilities," he added.