Zim should tighten monetary policy to rein in inflation: IMF
THE International Monetary Fund (IMF) says Zimbabwe must further ensure monetary tightening to rein in resurging inflationary pressures, while also allowing more operational independence of the central bank, ending quasi-fiscal operations, and tackling currency as well as exchange rate issues.
This follows the conclusion of the IMF executive board Article IV consultations.
“Directors recommended further monetary tightening, given the persistently high inflation,” the IMF said yesterday.
“In this context, they emphasised the need to increase the operational independence of the central bank, discontinue its quasi-fiscal operations, and improve its coordination with the fiscal authorities. Concerted efforts are needed toward greater exchange rate flexibility by allowing a more transparent and market-driven price process. Directors called on the authorities to phase out exchange restrictions and multiple currency practices as soon as conditions permit.”
Zimbabwe’s annual consumer price inflation surged for the sixth straight month to 66.1% in February, from 60.6% in January. That was the highest inflation rate since last June, even though the central bank raised in October its main lending rate to 60% in an attempt to tame that increase and to stabilise the free-falling Zimbabwe dollar now trading at up to US$1: ZW$250.
Part of the renewed inflationary pressures are due to fuel prices hikes triggered by Russia’s invasion of Ukraine. The war, which has an impact on the world economy, has sent the volatile global oil markets into turmoil, with oil prices surging well above US$100 per barrel amid fears it will scale US$200 per barrel by year-end.
The IMF says Zimbabwe experienced severe exogenous shocks (cyclone Idai, protracted drought, and the Covid-19 pandemic) during 2019-20, which along with policy failures in 2019, led to a deep recession and high inflation.
Real GDP contracted cumulatively by 11.7% during 2019-20 and annual inflation reached 837% by July 2020. It says authorities’ swift response to the pandemic, including through containment measures and economic and social support, helped contain its adverse impact.
Pandemic-related spending, equivalent to 2% of GDP, in 2020 was financed by reallocation within the budget. In 2021, such outlays represented about 1.6% of GDP, partially financed by the Special Drawing Rights allocation of about US$1 billion.
In addition, expenditures were increased to bolster food security and farm inputs to vulnerable households. The Reserve Bank of Zimbabwe introduced a medium-term bank accommodation lending facility and private sector lending facility, it says.
Real GDP rose by 6.3% in 2021, reflecting a bumper maize harvest, strong pickup in mining, and buoyant construction. A tighter policy stance since mid-2020 relative to 2019 has contributed to lowering inflation to 60.7% at end-2021.
Fiscal policy was tightened in 2020-21, reflecting increased revenues and lowered spending. The current account balance turned into a surplus during 2019-21, reflecting favourable metals’ prices, lower imports, and a surge in remittances. However, high double-digit inflation and wide parallel foreign exchange market premium have persisted.
Poverty has risen and about a third of the population is at risk of food insecurity. The output recovery that resumed in 2021 is expected to continue, albeit at a slower pace, with growth projected at about 3½% in 2022 and 3% over the medium term in line with Zimbabwe’s growth potential.
Authorities aim to limit the 2022 budget deficit at 1½% of GDP, and below 2% of GDP over the medium-term. At the same time, the current account surplus is expected to decline over the medium term, reflecting a pickup in imports and slowdown in remittances.
The effects from the Covid-19 pandemic and protracted drought have compounded existing structural constraints and would lead to scarring on the economic outlook.
“International reengagement has lagged as stakeholders seek political and economic reforms. The 2019 Staff-Monitored Programme experienced significant policy slippages and elapsed without a review,” IMF said.
“Since then, the authorities have made significant progress towards restoring macroeconomic stability, though the implementation of past IMF policy advice has been mixed. The authorities have developed a debt resolution strategy and started token payments to creditors in a bid to make progress on reengagement.”
IMF says despite Zimbabwe’s problems, it is not all gloom and doom.
“Executive directors welcomed the positive signs of economic recovery following two years of deep recession. Directors commended the authorities for their swift response to the Covid-19 pandemic and for stronger efforts to address macroeconomic imbalances, while prioritising social support,” it said.
However, Zimbabwe still needs to ensure reforms and international engagement.
“Noting that substantial challenges remain, including extreme poverty and longstanding structural constraints, they urged the authorities to implement the necessary reforms that would foster higher, more inclusive growth and pave the way for reengagement with the international community,” it says.
“Directors agreed that fiscal policy should aim to restore macroeconomic stability and create fiscal space for priority spending. They emphasised the need to enhance revenue mobilisation, including through broadening the tax base and improving tax administration and compliance. On the spending side, accelerating reforms of state-owned enterprises and enhancing fiscal controls will be critical to limit fiscal risks. Directors also encouraged the authorities to use the SDR allocation prudently and transparently.
“Directors noted that Zimbabwe remains in debt distress, with large external arrears to official creditors. They welcomed the authorities’ commitment to re-engage with external creditors, including by resuming token payments and preparing a debt resolution strategy. Directors encouraged further efforts to enhance debt management and transparency.”
The IMF highlighted the need for continued vigilance to ensure financial stability, including by addressing remaining banking sector weaknesses. They welcomed the removal of the country from the FATF grey list and progress on strengthening the AML/CFT framework, and encouraged further efforts to address the remaining deficiencies.
“Directors noted that addressing institutional weaknesses is instrumental in supporting growth and social development. They looked forward to further progress on implementing the 2020 National Anti-Corruption Strategy. Directors underscored the importance of prioritising structural reforms to improve the business climate and build resilience to climate change. Directors encouraged the authorities to advance reforms, noting that a new Staff Monitored Programme could help establish a track record of sound policies and provide further impetus to their re-engagement efforts.” —STAFF WRITER.