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Kudzanai Sharara
Weakening confidence, policy uncertainty, a continuation of forex market distortions and a recent expansionary monetary stance, has increased pressure on the country’s exchange rate, the International Monetary Fund (IMF) has said.
Since the February currency reform, the exchange rate has depreciated from USD 1:1 ZWL to USD 1:15 ZWL (as of September 26), fostering high inflation. As a result, policy actions are urgently needed to tackle the root causes of economic instability and enable private-sector led growth, Gene Leon, who led an IMF mission that conducted the Article IV Consultation and review progress under the Zimbabwe’s Staff-Monitored Programme (SMP), said in a statement released yesterday.
The SMP review covered recent economic developments, the near and medium-term outlook, risks to the economy, developments in the financial sector, and the set of economic policies that are needed to restore stability and build the foundations for strong, sustainable, and balanced growth.
“The key challenge is to contain fiscal spending consistent with non-inflationary financing and tighten monetary policy to stabilise the exchange rate and start rebuilding confidence in the national currency.”
Zimbabwe has been implementing macro-economic policies and structural reforms aimed at fostering economic growth and stability, but economic outcomes are much worse than expected as adverse weather shocks (drought and Cyclone Idai) crippled agriculture, mining, and electricity generation.
Risks to budget execution are high as demands for further public sector wage increases, quasi-fiscal activities of the RBZ that will need to be absorbed by the central government, and pressure to finance agriculture could push the deficit back into an unsustainable stance.
As a result, policy actions are urgently needed to tackle the root causes of economic instability and enable private-sector led growth, said the global lender.
“There is also a need to strengthen forex market operations and improve transparency on monetary statistics.”
Leon said the IMF staff and the authorities have agreed to maintain a close and continuous dialogue in the coming weeks on economic policies to restore economic stability while accommodating spending to alleviate food insecurity and protect vulnerable groups.
“Our dialogue with the Zimbabwean authorities is anticipated to continue during the IMF and World Bank Annual Meetings, taking place October 14-20, 2019.”
Meanwhile, IMF representative to Zimbabwe, Patrick Imam said; “policy implementation under the SMP has been largely satisfactory, albeit with costly delays in implementing measures supporting the new domestic currency.”
In a presentation to NGOs recently, Imam said although the authorities are currently running a fiscal surplus, other economic outcomes had been worse than anticipated.
One of the main reason behind the worse than expected outcomes according to Imam, are weather shocks (drought and Cyclone Idai), which crippled agriculture, mining, and electricity generation. He also touched on efforts to stabilising the new currency, which while initially stable around 3.5:1, the currency slid to 13:1 a much more depreciated level than was anticipated at the time of the February reform.
This, Imam, said was due to delays in introducing monetary/FX market reforms and a lack of confidence in policy implementation.
He said what also worsened the situation was that the central bank has no reserves and coupled with its inability to access external financing leaves “little policy ammunition to defend the new currency in a context of very weak confidence”.
“Distortions caused by multiple exchange rates, and a refusal to move quickly to a market determined exchange rate, have exhausted all the country’s external buffers,” said Imam.
This initial hesitancy in moving to a market-determined exchange rate, fuelled inflation, he added.
Inflation reached 230 percent (y-o-y) in July, from 5 percent a year ago, reflecting the continued depreciation of the exchange rate.
Going forward, Imam said re-engagement with the international community and restoring debt sustainability are important priorities of the Zimbabwean authorities, which the IMF supports.
“These priorities require strong economic reforms that address existing imbalances, as outlined in the SMP.”
Bongani Ndlovu