Zimbabwe Faces Deep Macroeconomic Imbalances – IMF

Christine Lagarde, Head of the IMF (File Photo).

The Managing Director of the IMF approved on May 15, 2019, a Staff-Monitored Program (SMP) for Zimbabwe, covering the period of May 15, 2019 to March 15, 2020.

Zimbabwe faces deep macroeconomic imbalances. After moving to full dollarization in late 2008 to break a period of hyperinflation, fiscal deficits increased substantially during 2016– 18, financed by the issuance of quasi-currency instruments nominally at par to the US dollar and the continued accumulation of external arrears. The fragile equilibrium was maintained through exchange controls and other restrictions on access to foreign exchange, providing a deep distortion for economic activity.

The new government that assumed office following the July 2018 elections is committed to addressing the macroeconomic imbalances, removing structural distortions to facilitate a resumption in growth, and to re-engaging with the international community including by clearing its external arrears. The authorities have elaborated a comprehensive structural reform program—the Transitional Stabilization Program—to address structural rigidities in the economy while also taking key steps to address the macroeconomic imbalances by halting the issuance of quasi-currency instruments to finance the deficit (since September 2018) and introducing a new domestic currency in February 2019.

The SMP is designed to support the authorities’ reform agenda. The SMP will be monitored on a quarterly basis, and is intended to assist the authorities in building a track record of implementation of a coherent set of economic and social policies that can facilitate a return to macroeconomic stability and assist in re-engagement with the international community.

Economic policies under the SMP emphasize the restoration of macroeconomic and financial sector stability through: implementing a large fiscal adjustment, the elimination of central bank financing of the fiscal deficit, and adoption of reforms to allow the effective functioning of market-based foreign exchange and debt markets. Structural reforms include steps to reform and privatize state owned enterprises, enhance governance including in procurement and revenue administration, and to improve the business environment. The SMP also includes important safeguards to protect the country’s most vulnerable people. Risks to the SMP are high, including due to the materialization of two external shocks—the El Niño related drought impacting both agricultural production and electricity supply as well.