Zimbabwe to eliminate central bank financing of fiscal deficit through IMF programme
HARARE – Christine Lagarde, the managing director of the International Monetary Fund (IMF) has approved a Staff Monitored Program for Zimbabwe covering the period May 15 2019 to March 15 2020 and which seeks to enhance financial sector stability through the elimination of central bank financing of the fiscal deficit and underpin well-functioning and effective market-based foreign exchange and debt markets.
Zimbabwe has been gripped by confidence erosion in its financial and fiscal systems as the central bank dabbled in quasi-fiscal activities, some of which have been blamed for the country’s fiscal imbalances. This issuance of treasury bills and subsidies have resulted in excess money supply in the economy, resulting in a debt overhang that has crippled the country’s ability to access and secure further financing.
“Zimbabwe faces deep macroeconomic imbalances. After moving to full dollarisation 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 IMF said on Friday.
“The fragile equilibrium was maintained through exchange controls and other restrictions on access to foreign exchange, providing a deep distortion for economic activity.”
Following the exit of former leader, Robert Mugabe after a coup in November 2017, Emerson Mnangagwa has assumed office after elections held in 2018.
The IMF says the new administration in Harare “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” and other obligations.
Zimbabwe’s Finance Minister has outlined a Transitional Stabilization Program aimed at addressing structural rigidities in the economy while also taking key steps to address the macroeconomic imbalances. These measures include halting the issuance of quasi-currency instruments to finance the deficit and introducing a new domestic currency in February 2019 which has however been losing ground in terms of value.
The IMF’s SMP is hence “designed to support the authorities’ reform agenda” and will be “monitored on a quarterly basis” with the intention “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”. Zimbabwe is also desperate to re-engage with the international community and international financiers.
According to the IMF, economic policies under the SMP will 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.”
However, risks to the staff monitored economic program “are high,” notes the Bretton Woods institution, noting that the risks include “the materialization of two external shocks—the El Niño related drought impacting both agricultural production and electricity supply as well as the extensive damage caused by Cyclone Idai” earlier this year.
“The impact of these two shocks complicate an already difficult near-term economic outlook as the economy adjusts to the new policy regime. To mitigate the potential risks from capacity constraints, the IMF will support the authorities’ efforts in all policy areas covered by the SMP through tailored technical assistance.”
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