On May 2, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Zimbabwe.

Zimbabwe’s economic difficulties have deepened. Drought, erratic rains, and increasing temperatures, have reduced agricultural output and disrupted hydropower production and water supplies. Economic activity is severely constrained by tight liquidity conditions resulting from limited external inflows and lower commodity prices. Inflation remains in negative territory, because of the appreciating U.S. dollar—the country’s main currency—and lower commodity prices. Zimbabwe remains in debt distress and the level of international reserves is low. Despite the adverse environment, the authorities have reduced the fiscal deficit in both 2014 and 2015. They have started to rationalize public expenditures by implementing recommendations from the 2015 civil service audit. They are also amending the Public Financial Management and Procurement Acts. The Reserve Bank of Zimbabwe has taken measures to restore confidence in the financial sector. All banks in operations now have capital buffers above the minimum requirements.

Unless the country takes bold reforms, the economic difficulties will continue in medium-term. Given the outlook for the global economy, growth is projected to remain below levels needed to ensure sustainable development and poverty reduction. The current account deficit is expected to narrow, but remain high over the medium term, financed mainly by loans to the private sector.

The authorities have met their commitments under the Staff Monitored Program (SMP) that ended at end-December 2015, despite economic and financial difficulties. The program focused on implementing a limited number of key reforms to show that the country has the capacity to implement the kind of reforms that would be required for a Fund-supported program. The SMP has been a useful anchor in a difficult macroeconomic and political environment.2

The authorities are pursuing a gradual, step-by-step approach to reengaging with the international community. Clearing arrears to the International Financial Institutions (IFIs) is seen as a first step in this process. The authorities presented a strategy to clear their external arrears to the IFIs and reforms plans going forward to creditors and development partners in October 2015. The strategy and reform plans received broad support and, once implemented, should provide positive signals to investors and creditors, and help unlock external flows to finance the authorities’ development plans and private sector-led growth.

Going forward, the authorities intend to: (a) reduce the size of the wage bill to re-orient spending towards priority capital and social outlays; (b) improve debt management, develop a comprehensive public financial management strategy, and strengthen VAT policy and key processes in revenue administration; and (c) improve the business environment, including by a transparent and consistent application of their indigenization policy and a new comprehensive land reform program. The latter would include a framework for land compensation.

Risks to the already difficult outlook stem mainly from prolonged adverse weather conditions, and weak commodity prices and policy implementation in a difficult political environment. Timely implementation of measures to curb the wage bill and continued progress in State-Owned Enterprise (SOE) reforms would be needed to lower employments costs.

Executive Board Assessment3

Directors commended the Zimbabwean authorities for the successful implementation of the economic policies under the staff-monitored program despite difficult domestic and external circumstances. Directors noted that adverse weather conditions and lower commodity prices have taken a heavy toll on economic activity and social well-being. They underscored the importance of maintaining fiscal prudence and pressing ahead with ambitious structural reforms to address impediments to investment, foster private sector-led growth, and reduce poverty, making the best use of the Fund’s targeted technical assistance. Further progress on these fronts, as well as on clearance of external arrears, will pave the way for full re-engagement with the international community, allowing Zimbabwe to regain access to external financing, particularly from the Fund, in support of its development agenda.

Directors agreed that a step-up to a comprehensive and deep economic policy adjustment agenda will be critical to address Zimbabwe’s daunting economic challenges. In this context, they concurred that achieving a sustainable fiscal position requires a significant reduction in the wage bill, while rebalancing the budget toward much-needed infrastructure investment and social outlays to stimulate growth. Noting the relatively high tax-to-GDP ratio, Directors considered it appropriate to focus efforts on base-broadening, increasing non-tax revenue from mineral resources, improving the efficiency of VAT collections, and enhancing tax administration. Further steps are needed to accelerate the reform of state-owned enterprises, strengthen public financial management, and enhance transparency in the mining sector.

Directors welcomed progress in enhancing the resilience of the financial system and reducing nonperforming loans. They encouraged the authorities to continue to strengthen bank supervision and risk management, facilitate financial deepening, and promote financial inclusion.

Directors stressed the importance of stepping up structural reforms to raise potential growth and living standards, and to secure support from Zimbabwe’s development partners. They highlighted the need to implement the indigenization policy in a business-friendly and transparent manner, and to resolve outstanding land issues swiftly. Other priorities include improving the investment climate, tackling corruption, and promoting economic diversification.

Directors acknowledged the difficult and unique debt situation of Zimbabwe. Noting that Zimbabwe continues to be in debt distress, they called on the authorities to pursue a strong debt management strategy, including by limiting non-concessional borrowing to critical growth-enhancing and poverty-reducing projects that would ultimately improve the country’s repayment capacity.

Directors welcomed the comprehensive strategy for normalization of relations with international financial institutions (IFIs). In this context, they urged the authorities to clear all arrears to the Poverty Reduction and Growth Trust (PRGT) and other IFIs. Once arrears to the PRGT are cleared, Directors looked forward to the next stage whereby remedial measures against Zimbabwe can be removed, including the reinstatement of Zimbabwe to the list of PRGT-eligible countries.