CONTENTS | ANB-BIA HOMEPAGE | WEEKLY NEWS
by Tonderayi Mukeredzi, Zimbabwe, August 1999
THEME = ECONOMY
After almost a year of bickering, the International Monetary Fund (IMF) and the Zimbabwean government buried the hatchet on the 2 August, when the IMF finally approved a total of US $193 million stand-by credit facility for Zimbabwe, thus lifting the troubled southern African nation from the brink of an economic collapse
The credit facility is designed to support the nation's economic programme over the next 14 months. Zimbabwe, and the IMF locked horns over the failure by the Zimbabwean government, to meet conditions set by the Bretton Woods Institutions for the release of the crucial balance of payment support. The IMF froze aid to Zimbabwe in August last year, over concerns on a range of government policies, and the country's involvement in the Congo RDC conflict. Press reports indicate that Zimbabwe is spending an enormous amount of money (Editor's note: 'Jeune Afrique' mentions $ 27 million, each month) on the conflict in Congo, where an estimated 11,000 Zimbabwean troops are helping President Kabila oust Ugandan and Rwandan-backed Tutsi rebels.
Of the total; about US $24 million was immediately made available, whilst a further US $9.7 million was due for release on 16 August. The IMF said subsequent disbursements would be made available on a quarterly basis, on condition that Zimbabwe meets performance targets and completes program reviews.
The balance of payment support is set to restore macro-economic stability and investor confidence, which had fallen to record lows during the past 18 months. On 1 June last year, the IMF approved a stand-by credit for Zimbabwe, and authorised drawing of US $175 million over a 13-month period. But only US $65 million was disbursed.
The release of the funds by the IMF, is believed by economic analysts here, to unlock further bilateral support from other donor institutions such as the World Bank and others that offer concessional loans.
IMF deputy director, Shigemitsu, said at the conclusion of an executive board meeting dealing with the Zimbabwean program: "IMF Directors emphasized the importance of macro-economic stabilisation and economic reforms. They underscored that the immediate challenge is to stabilise the exchange rate and bring inflation under control through a further tightening of financial policies. Directors also stressed that the restoration of market confidence was central to this effort, and thus steps being taken by the incumbent program, towards the removal of price controls, trade and exchange restrictions were welcomed".
Zimbabwe is probably experiencing its worst macro-economic stability since independence, with runaway inflation breaching the 53% mark in June this year. Year-on-year inflation increased from 52.2% to 53% in June, setting a new record. In 1998, inflation ended the year at 46.6%, and eased marginally to 44% in January this year, before shooting to a record high in June. This unusual development was underpinned by the 200% collapse of the exchange rate since November 1997. The fall of the dollar on 14 November 1997 has become known as "Black Friday".
Experts now forecast inflation to peak above the current rate of 63.5% during the last quarter of this year. Analysts say that the headline rate is likely to continue to move upwards to above 60% due to technical factors, such as new wage awards, the gradual adjustment of some basic commodity and energy prices. Interest rates are pegged at more than 50%.
According to Shigemitsu, IMF directors underscored the need for sustained fiscal consolidation, and emphasised that the realisation of the authorities fiscal consolidation objective, hinges on early and continued efforts to strengthen revenue collection, cut public expenditure and reorient spending towards more productive uses.
It is in this light, that efforts underway to establish a National Revenue Authority and to introduce a Value-Added Tax system, were welcome. The IMF recommended containing the size of the wage bill, limiting support to public enterprises and reducing military spending, as essential ingredients to help refocus budgetary outlays toward key infrastructure items of health, education, and social safety nets.
Zimbabwe's performance during the previous 13 months stand-by credit was mixed. The country managed to cut its budget deficit by more than one-half in 1998. However, Zimbabwe's balance of payments situation was worsened by increased levels of inflation, in response to a difficult environment, deterioration in the financial position of the parastatal sector, and a series of policy decisions, that undermined market confidence. Uncertainties over the government's land reform program and issues relating to price controls and tariff regimes, prevented completion of the first review under the previous arrangement.
The IMF-backed 1999 government programme seeks to dampen inflationary pressures, restore a viable external position, and provide a platform for economic growth. Efforts on stabilisation, centre on continued financial restraint, including steps to bring monetary growth and price adjustments in the parastatal sector under control, especially in the oil and electricity sectors. The IMF says these efforts can only be reinforced by a package of measures designed to restore market confidence, including implementation of a land reform strategy agreed with stakeholders and donors, public disclosure of military expenditures and the strengthened supervision in the financial sector. Other measures would involve the removal of maize-meal price controls, a roll to lack of emergency trade and a capital controls, and expedition of the government's divestiture program.
The Zimbabwean authorities have in recent months implemented a number of steps aimed at putting the economy on a more solid footing. The measures include a 15% increase in electricity tariffs, and the increase in retail gasoline and diesel prices by 27%, and 32% respectively. The controlled price of maize-meal was raised by 20% and a further 20% increase was effected in July.
Growth in real GDP is forecast to grow by 1.2% in 1999, reflecting a significant fall from previous expectations because of lower output in the mining and manufacturing sectors. Inflation target for the end of 1999 is set at 30%, which is to be achieved by containing money supply growth. The exchange rate will be allowed to respond freely to market forces, in order to meet international reserve targets. Zimbabwe is also expected to maintain a tight fiscal stance, to support the fight against inflation, although higher than previously envisaged interest rates have required an upward revision in the target for the overall fiscal deficits.
Excluding grants, Zimbabwe's fiscal deficit is projected to reach levels of around 5.3% of GPD in 1999, which translates to a primary budget surplus around 3.2% of GPD.
Latest figures released by the Ministry of Finance on the 1999 budget performance, indicate that Zimbabwe had a total expenditure of Z$14.8 billion, (Editor's note: In September 1999, the rate of exchange was Z$38 = US$1) exceeding the target by Z$1 billion. The target deficit for the first quarter of the year was Z$3.8 billion against a target of Z$3.2 billion. The deficit was financed mainly through Treasury Bills.
The Zimbabwe National Chamber of Commerce (ZNCC) has condemned the recent move by the Reserve Bank of Zimbabwe to further tighten monetary policy by increasing interest rates. Last year, the Reserve Bank used the high interest rate instrument to try and control the slide of the dollar against major currencies. This failed to work, and then the dollar only stabilised as a result of an agreement banks had, that the currency should be allowed to fall further.
"The policy of increasing interest rates will, therefore, not achieve the intended results, unless there is drastic reduction in government expenditure. We, therefore, do not see how the government will stop utilising its overdraft facility at a time when the deficit continues to increase and when nearly all ministries are rushing to Treasury for supplementary payments", said the ZNCC. The ZNCC has urged that the central bank be given legal powers to set inflation and money supply targets. Without the central bank having powers to limit domestic borrowing, it will be difficult to control money supply growth. The ZNCC is a non-political association of business people from commerce, finance, banking, transport, and manufacturing sectors.
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