IMF: Outlook "Bleak" for Zimbabwe Without Policy Changes
The IMF tersely notes that Harare has not met the policy commitments it made in late 2004, and warns that without a decisive shift in p
Though the International Monetary Fund gave Zimbabwe a reprieve from expulsion in September, it is now warning of serious economic trouble ahead if Harare does not take urgent measures including budget-cutting and currency liberalization. The IMF on Tuesday reported on its so-called Article IV consultations with the government, citing a “bleak” outlook unless Harare takes decisive action. The report’s release coincided with the payment by Harare of another $15 million on its debt arrears to the Fund, bringing its payments in recent weeks to $135 million and leaving another $160 million balance of past-due debt payments to clear. Economic and social conditions improved a bit in 2004 but have “deteriorated sharply” in 2005, said the Fund. The economy is likely to contract 7% this year after shrinking by an estimated 4% in 2004, mainly due to severe problems in agriculture. The government’s Operation Restore Order conducted in May-July also weighed on the economy as authorities shut down the informal sector as well as demolishing the homes of thousands of families deemed to be in violation of local building laws. After-effects of the operation could drive up public spending in future, the IMF said. Inflation was down from its 2004 high of 623%, noted the IMF assessment team which concluded its Article IV visit in late June. But the cost of living was accelerating again from its early-2005 low rate of 130% and could hit 320% by the end of this year. Consumer prices in Zimbabwe were last seen rising at a 265% annual rate. The IMF recommended that the government cut spending to bring the fiscal deficit down to 5% of gross domestic product – the report warned that it was headed for 14% of GDP this year. It said Harare should liberalize foreign exchange regulations to bring official and parallel rates closer, requiring an “immediate substantial depreciation.” The IMF also advised Harare to tighten monetary policy, in particular by reducing the central bank’s outsized role in directly funding government operations. One of the few pieces of good news in the report was that the financial system seems adequately supervised and looks “resilient to significant shocks.” Harare officials differed with the IMF perspective on the economic outlook, foreseeing economic growth of 2% this year based on strong performances from tobacco, wheat and mining. The government’s prescriptions for the economy were limited adjustments to spending, limited flexibility on the exchange rate, some reduction in the rate of growth of the money supply, and continued state subsidies to producers and borrowers to offset the drought of investment capital coming from abroad. The IMF’s overall conclusion: “Zimbabwe faces immense challenges in arresting the ongoing economic and social decline and turning the economy around to achieve sustained growth, external viability, and low inflation. Without a bold change in policy direction, the economic outlook is bleak, with likely prospects of continued triple-digit inflation and further output declines, with particularly detrimental effects on the poorest segments of the population. Food security is an urgent concern.”