IMF notes show no appetite for reform

The Executive Board of the International Monetary Fund (IMF) concluded its Article IV Consultation with Zimbabwe on 21 March 2022. The press release noted that real Gross Domestic Product (GDP) rose by 6.3% in 2021 on the back of above normal rainfall and grain harvest, firm mining commodity prices and buoyant construction sector. This followed cumulative decline of 11.7% in 2019 and 2020 when annual inflation peaked to 838% in July 2020. The Zimbabwean government points that the economy grew by 7.8% in 2021 while the World Bank estimated that it grew by 5.1% in the same period. The World Bank estimate for Zimbabwe's GDP in 2020 was US$18 billion, while treasury puts it at US$26 billion.

Notable achievements
The IMF Board applauded the government on the swift response in managing the COVID-19 pandemic with mass vaccination and social support which helped contain the adverse impact. In 2021, the government spent about 1.6% of GDP on vaccinations and COVID-19 related interventions which were partially financed by the Special Drawing Rights (SDR) allocation. Zimbabwe received about US$961 million from the IMF SDR allocations in August 2021. As of November 2021, US$311 million had been utilized. The Reserve Bank of Zimbabwe (RBZ) also introduced a medium-term bank accommodation lending facility and private sector lending facility to cushion the economy from the pandemic induced losses.

Forecast and Risks for 2022
The Zimbabwean government forecasts a 5.5% economic growth in 2022 while the IMF predicts a modest growth of 3.1% in 2022. Major drivers for the growth will be the reopening of the economy (particularly the tourism sector) as COVID-19 subsides, bullish mining commodity prices, improved capacity utilization from industry and infrastructure spending by the government.

Notable risks emanate from the impact of the Russia-Ukraine war which exert imported inflationary pressures, high levels of inflation on the back of unabated money supply growth and foreign exchange market instability. Similarly, the country has already entered the election season where agriculture inputs subsidies and infrastructure spending will likely push money supply growth northwards and election related violence might dent investor sentiments on the country.  

However, IMF press releases show a similar pattern in recommendations on structural weaknesses and constraints in the economy. The repetition on the same issues points to lack of appetite for reform from the government. The repeated aspects include:

Foreign exchange reforms
As with the last 2 press releases, the IMF recommended further monetary tightening, given the persistently high inflation in Zimbabwe. Annual inflation for March 2022 increased to 73% from 61% at the beginning of the year.  The Bretton Woods institution emphasized the need to increase the operational independence of the central bank, ending quasi-fiscal operations and moving towards exchange rate flexibility by allowing a more transparent and market-driven price process. IMF once again called the central bank to remove exchange control restrictions and allow free movement of dividends and capital.

Zimbabwe faces chronic foreign currency shortages on the formal market due to central bank manipulation of the exchange rate. The manipulation means that independent holders of foreign currency especially exporters and households shun the auction platform. The central bank even goes beyond its mandate to source external lines of credit for reallocation on the auction platform. The apex bank is reluctant to institute a managed floating exchange rate as it fears that inflation will spiral out of control because of its quasi-fiscal operations. Recently, US$3.3 billion in central bank legacy debt was parceled to the taxpayers, 6 years after US$1.4 billion in RBZ debt was assumed by the taxpayer as well. Treasury has also been diverting foreign currency revenues (from taxation) to the auction, thus subsiding imports. The government has no intention to reform and give autonomy to the central bank on monetary policy as it relies on money printing to found out of budget programs which are often carried as quasi fiscal operations by the bank. Similarly, the hostile business environment means that local of foreign investors are constantly looking for ways to move capital out of the country to safe havens. This means free movement of capital would open flood gates of foreign currency externalization.

However, a dysfunctional auction rate is creating price instability and rent seeking behaviour in the local market. Pegging the exchange rate has also given a lifeline to the parallel market system which is now being used by businesses to price goods and services. The bank has demonstrated no appetite to reform the auction system. The current foreign currency allocation system is not an auction as it does not follow the basic tenets of a Dutch auction market. The amounts to be auctioned are not communicated before the auction, settlement is not done withing 2 days, winning bids are not settled in full, and settlement of bids does not follow any order as certain bidders jump the queue over others.

Privatization of state entities
The IMF implored on the government to accelerate reforms for state entities through privatization and governance reforms. Key entities earmarked for privatization include National Railways of Zimbabwe (NRZ), Air Zimbabwe, NetOne, Telecel, ZimPost and the People's Own Savings Bank (POSB Bank) Zimbabwe United Passenger Company (ZUPCO), Cold Storage Commission (CSC) and Willowvale Motor Industry. Almost all of the firms above are technically insolvent. However, the government's privatization plans fell off the rails due to lack of investor appetite, political interference, economic instability, and the failure by government to address longstanding investor concerns. Most investors still regard Zimbabwe as a risky and hostile investment destination with most pessimistic about the country's ability to uphold investor property rights and respect the rule of law. The unilateral suspension of the country's stock exchange market and unprocedural delisting of multinational companies Old Mutual, PPC and SeedCo in June 2020 all but confirmed the investor fears.

Additionally, the country's foreign exchange market and inconsistent monetary policies have been a pain to most local and foreign businesses. Several foreign investors have significantly reduced their portfolios locally while others have divested totally. Multinational corporations operating in the country have found it difficult to repatriate dividends to their foreign shareholders or settle foreign obligations in the last 3 years. To attract investment in state entities, investors need guarantees that they will be able to repatriate their dividends through formal banking channels and exit the market (if necessary) without regulatory bottlenecks.

Debt Management
IMF noted that Zimbabwe is in debt distress. Harare has made a commitment to re-engage with external creditors, including by resuming token payments and preparing a debt resolution strategy. Further, IMF encouraged further efforts to enhance debt management and transparency. As of November 2021, Zimbabwe's external debt stood at US$10.5 billion before the US$3.5 billion Global Compensation Deed which seeks to compensate former commercial farmers and the US$3.3 billion Reserve Bank external debt are added. Treasury is now required put forward a debt repayment plan to external creditors and actually make token payments from the foreign currency revenues. In 2021, treasury received more than US$1.5 billion in foreign currency taxes.

Fiscal reforms
IMF has also repeated calls for enhanced government revenue mobilization through broadening the tax base and improving tax administration and compliance. On the spending side, the institution encouraged enhanced fiscal controls that are critical to limit fiscal risks. The government was also encouraged to use the SDR allocation prudently and transparently. Despite notable progress on fiscal consolidation and tightening of money supply, IMF has repeated its stance that Zimbabwe needs broader reforms to achieve macroeconomic stability. The central bank's foreign exchange regulations remain the biggest drain on the Zimbabwean economy.

The increase in extreme poverty and longstanding structural constraints have also been mentioned by the IMF.

IMF reports have repeated calls on the need for inclusive growth and sincerity in reengaging the international community. Other areas of concern include the need for coordination between fiscal, foreign-exchange and monetary policies to guarantee market stability. Structural reforms aimed at improving the business climate (streamlining taxation, exchange control and trade policies) and curbing corruption through prosecuting high-profile cases remain key to Zimbabwe's path to stability. In February 2020, IMF warned that Zimbabwe's reform agenda was off track and the government needed to urgently address governance and corruption challenges, entrenched vested interests, and improve enforcement of the rule of law to improve the business climate and support private sector led inclusive growth. It is evident that the government knows what needs to be done and what is lacking is the appetite and political will to reform.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.