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Zimbabwe: 2005 Article IV Consultation - Staff Report; Public Information Notice on the Executive Board Discussion and Statement of the Authorities of Zimbabwe
International Monetary Fund (IMF)
IMF Country Report No. 05/360
October 2005

http://www.imf.org/external/np/sec/pn/2005/pn05139.htm

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Executive Summary
After some improvement in 2004, Zimbabwe’s economic and social conditions have deteriorated sharply this year. Staff estimates a further contraction in real GDP of 4 percent in 2004. While inflation slowed from a peak of 623 percent in early 2004 to around 130 percent in early 2005, it has picked up again to 164 percent in June. With the official exchange rate overvalued and imports restricted, shortages of basic goods have become pervasive. The parallel market premium widened sharply to 100 percent by early July 2005. Social indicators have worsened and Zimbabwe is off-track in meeting all but two MDGs.

The authorities have not met the policy commitments made last December and, absent decisive policy action, the outlook appears bleak. Staff projects a further decline in real GDP of 7 percent in 2005, mainly due to difficulties in agriculture. The fiscal deficit would widen to 14 percent of GDP (from 4¾ percent of GDP in 2004) and contribute—together with the RBZ’s expanding quasi-fiscal activity—to a pick up in inflation to 320 percent by end-2005. Food security is an urgent concern. Non-food imports will be squeezed further, increasing vulnerability to a rise in world oil prices. "Operation Restore Order" could add to fiscal pressures and—by curtailing informal markets—could lower GDP and raise price pressure. Over the medium term, GDP would continue to contract given difficulties in agriculture and foreign exchange shortages. Inflation would remain in the 200-300 percent range reflecting substantial fiscal deficits and quasi-fiscal activities. Given limited external financing, the current account would be broadly stable and arrears would accumulate.

Staff pressed for a comprehensive policy package to achieve sustained growth, external viability, and low inflation. Macrostabilization, the immediate priority, could be achieved by: (i) strong fiscal adjustment to limit this year’s deficit to 5 percent of GDP to ensure a broadly neutral fiscal stance; (ii) liberalizing the exchange regime and unifying the exchange rate, with immediate substantial depreciation; (iii) tightening monetary policy to achieve the authorities’ end-year inflation target of 80 percent; and (iv) curtailing the RBZ’s quasi-fiscal activity. Staff noted that the financial system appeared to be adequately supervised and resilient to significant shocks. It would be critical to ensure that supervisors remain empowered to take timely action to address identified weak institutions.

Fundamental structural reform is essential over the medium term to ensure a stable and efficient financial system; increase the role of markets; place the fiscal accounts on a strong medium-term footing and reform public enterprises; improve agricultural productivity including through further land reform; and strengthen governance. Relations with the international community would need to be rebuilt and a strategy formulated to reduce arrears.

The authorities had a different view of prospects and policies. In their estimate, output would grow by 2 percent this year due to strong performance in tobacco, wheat and mining. Moreover, inflation was still much lower than early last year. They would attempt to stay within the budget deficit limit by taking offsetting measures for appropriated (discretionary) spending. Their room for maneuver on the exchange rate was limited, but sufficient flexibility would be maintained to ensure export viability. Broad money growth would be lowered to 80 percent by end-2005, in line with their inflation target. Producer and credit subsidies were needed, given the lack of foreign financing, and would be effective in lowering inflation through increases in productivity and output growth. Credit subsidies would be eliminated by end-2006.

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