BY BUSINESS REPORTER
The International Monetary Fund (IMF) has warned that Zimbabwe’s economy is likely to take a battering from the coronavirus outbreak that has paralysed the world as it would make it harder to balance macroeconomic stability.
Prior to the spread of the coronavirus or Covid-19 that was first detected in China’s Hubei province late last year, the IMF had already slashed its 2020 economic growth projection for Zimbabwe from 2.7% to 0.8%, citing poor performance of the agriculture sector and government’s “policy missteps”.
Zimbabwe had, as of Friday, recorded nine cases of people that tested positive for the coronavirus with one fatality.
The country is under a 21-day lockdown to try and control the spread of the disease with far-reaching disruptions of local businesses.
In a statement following the conclusion of its Article IV consultations done in February, the IMF said although its engagements with Zimbabwe were done before Covid-19 became a pandemic, it was now apparent that the outbreak would adversely impact the economic outlook.
“Covid-19 will make it even harder to balance the policies needed to restore macroeconomic stability with those to address urgent social needs,” the IMF said.
“Zimbabwe is experiencing an economic and humanitarian crisis.
“Macroeconomic stability remains a challenge: the economy contracted sharply in 2019, amplified by climate shocks that have crippled agriculture and electricity generation; the newly introduced Zimbabwe dollar has lost most of its value; inflation is very high; and international reserves are very low.”
After the 2018 elections, President Emmerson Mnangagwa’s government adopted a reform agenda focused on macroeconomic stabilisation.
In May last year it adopted the IMF’s staff-monitored programme, but the Bretton Woods institution in February this year declared that it had gone off-track because of mixed policy implementation.
Reforms included fiscal consolidation that saw the re-introduction of the Zimbabwe dollar last year, the creation of an interbank foreign currency market, and restructuring of the financing of command agriculture.
The IMF, however, said lack of implementation of reforms and missteps in foreign currency and monetary reforms had led to failure to restore confidence in the Zimbabwe dollar.
Delays in re-engagement with the international community and Zimbabwe’s failure to define modalities and financing to clear arrears to the World Bank and other multilateral institutions, was another impediment to the country’s economic revival, the IMF warned.
“This continues to constrain Zimbabwe’s access to external official support,” the statement added.
“As a result, the authorities face a difficult balance of pursuing tight monetary policy to reduce very high inflation, and prudent fiscal policy to address the macroeconomic imbalances and build confidence in the currency, while averting a crisis.
“While the 2020 budget includes a significant increase in social spending, it is likely insufficient to meet the pressing social needs.”
Zimbabwe was urged to ensure economic and social stability through the adoption of coordinated fiscal, monetary and foreign exchange policies, “alongside with efforts to address food insecurity and serious governance challenges.
“(The IMF directors) emphasised the importance of re-engagement with the international community to support efforts to achieve economic sustainability and address the humanitarian crisis,” the statement added.
“Notwithstanding efforts in 2019 to tighten the fiscal stance and contain quasi-fiscal operations by the central bank, directors noted that pervasive deficits remain and could be exacerbated by the need to respond to the humanitarian crisis.”
The government was also urged to cut on non-essential spending, implement decisive reforms to agricultural support programmes and allow for social spending reforms.
The IMF directors underscored the importance of public financial management and enhanced domestic revenue mobilisation efforts.
“They stressed that eliminating deficit monetisation would not only be crucial for fiscal sustainability, but it would also serve as a precondition for the stabilisation of hyperinflation and the preservation of the external value of the currency,” the IMF added.
“The directors noted that Zimbabwe remains in debt distress, with large external arrears to official creditors, and encouraged the authorities to give impetus to re-engagement efforts and debt relief to a public-private partnership with commercial banks.”
Issues were also raised around the credibility of the newly introduced Zimbabwe dollar and authorities were urged to press forward with the establishment of a functional foreign exchange market and to remove distortions that could lead to rent-seeking behaviour in the economy.
Introduced mid last year, the Zimbabwe dollar rapidly lost value against major currencies amid concerns that businesses linked to the state were manipulating the currency by trading on the thriving parallel market.
Last year, the Reserve Bank of Zimbabwe froze accounts of several firms that were suspected of dealing in foreign currency but lifted the sanctions under a cloud.
The IMF said given the low reserves and hyperinflation, limited credibility, and a lack of access to traditional forms of external financing, a monetary targeting regime was appropriate to conduct monetary policy.
“Enhancing central bank independence and transparency, including by timely publication of monetary statistics, would be important,” it added.
The government was also implored to address governance and corruption challenges, entrenched vested interests, and enforcement of the rule of law to improve the business climate and support private sector-led inclusive growth.
Mnangagwa took over from longtime ruler Robert Mugabe following a military coup in 2017 promising a quick turnaround, but so far his government has struggled to set the pace for economic revival.
The economy is saddled with hyperinflation and widespread shortages of fuel and electricity.