Act now on reforms — IMF

via Act now on reforms — IMF – DailyNews Live 29 March 2016

HARARE – The International Monetary Fund (IMF) says Zimbabwe needs to act now if it is to reverse the deepening economic difficulties.

The institution’s head of mission to Zimbabwe Domenico Fanizza said the investment-hungry country needed not wait any longer, but act on its policies.

Our senior business reporter Ndakaziva Majaka speaks to Fanizza, who was recently in Zimbabwe for a final review of the Staff Monitored Programme (SMP), on the country’s economic prospects. Below are excerpts of the interview.

Q: Since you are in the country for the third and final review of the SMP as well as Article IV consultations, what has been your impression of economic reform progress in the country?

A: The Zimbabwean economy is in difficult conditions and the difficulties have worsened. I would say that the El Nino-induced drought, the low prices of raw materials (international price of course) and the appreciation of the dollar visa vie the South African Rand have hit the economy hard.

Gold is projected to be slow also in 2016 — 1,12 percent… or something like that… this will greatly affect Zimbabwe as it expects higher gold production which will be exported. And because of external shocks and structural problems of the Zimbabwean economy this is not good.

Q: What are some of these structural problems that Zimbabwe is facing?

A: Issues like the fact that the budget cannot deal with the shocks is a problem on its own together with the fact that the level of public and private investment is too low.

These are major problems that need to be addressed as soon as possible because the situation is dire. I may suggest that Zimbabwe cannot wait.

Reforms need to start and as part of that the re-engagement with the international community, the process needs to move forward because that is the only way in which development can be successful.

Strong reforms move towards transforming the economy together with normalising relations with the international financial institutions and also bilateral creditors and official creditors so the country can access financing to support its transformation process.

Q: In regards to the SMP, has Zimbabwe made any progress in meeting the scheme’s set benchmarks?

A: From the start allow me to say the SMP was a preliminary programme that did not want to address the underlying issues in the economy but wanted to build a track record that could be used to show that Zimbabwe was serious in its attempt to re-engage with the IMF.

So, it was a preparatory programme and just the initial step… so do not be surprised that during the time Zimbabwe has not solved the underlying issues.

The objective was showing that the country can live within its means and does not accumulate more debt and also show that the Zimbabwe can implement some key reforms that would be required in a real ambitious economic reform programme that could warrant financial support from the IMF.

And on that, Zimbabwe has succeeded in building this record. The country has made progress and building a strategy for the re-payment of its arrears was a key moment of that. The issue now is to move in implementing the Lima agreements and that should be done in a context of a more ambitious programme that the Fund could support.

Q: Judging from what you have deduced from the progress made under the SMP, do you think that Zimbabwe can now access funds from the IMF?

A: Well, one preliminary thing is for Zimbabwe to re-pay its arrears to the IMF and other institutions.

Then an ambitious reform programme must be developed with the authorities and discussed with the IMF. And yes, we will be walking in the direction. So, we can walk in that direction of preparing programmes that could be proposed by staff to the IMF executive board for approval.

Q: There is also the issue around Zimbabwe’s wage bill which presently consumes up to 83 percent of government revenue. Do you think that during the SMP government addressed the issue?

A: The answer is there is a lot more to be done, but government has started to tackle the issue with success.

For two years in a row, the actual wage bill has been lower than budgeted. And a number of measures have been taken to achieve savings; the issue is to place the sections in a medium term programme because you cannot reduce the wage bill overnight.

It will take time but action is needed as the wage bill eats too much into Zimbabwe’s scarce resources.

Q: With regard to the civil service wage bill reform, is there a specific time-frame that Zimbabwe and IMF have agreed as the deadline for the reduction of the wage bill?

A: That is up to government. We have discussed strategies, and provided input into the strategy but it is entirely up to government.

I understand that the objectives are ambitious but we will support them and provide any help we can. It is a difficult process that requires a lot of willpower.

Q: Apart from coming up with an ambitious reform programme, are there other conditions that Zimbabwe needs to meet to access credit from the IMF?

A: Of course on top is arrears repayment. This is the most important part.

Q: So, since the Finance minister says the country will have honoured its $1,8 billion arrears by May this year, do you think this will set in motion funding talks?

A: We hope so. I am always optimistic that Zimbabwe will, one day, access funding from the IMF.

Q: In his 2016 budget, minister Chinamasa projected a 2,7 percent economic growth anchored on agricultural and mineral drive. However, the country is expecting a drought and metal prices have been fluctuating, do you think this growth can still be achieved?

A: Clearly we have agreed on different numbers, now it is going to be 1,4 percent… In light of what has happened the drought and the low raw materials price and the appreciation of the dollar, we and the authorities have agreed to bring the projection down to 1,4 percent.

Q: Has the Finance minister agreed to this figure?

A: Yes, in the discussions we had, he has.

Q: Looking at the country’s political landscape — factionalism in the ruling party, expulsion of ministers and the formation of a new political party — do you think economic growth is achievable in the event of a change in government?

A: Let me say this very clearly, the re-engagement process with the IMF should be accepted by everybody.

I do not think there are too many alternatives.

This process should proceed no matter what happens in politics. And I hope so.

Q: The IMF has voiced that it does not see the logic behind a broke government forming a special purpose vehicle to assume Non-Performing Loans (NPLs) — the Zimbabwe Asset Management Company (Zamco) — can you shed more light on this?

A: While we think that financial sector reforms have progressed well in the country with the impression that Zamco is working well, we have also provided technical assistance in establishing the unit.

The process has been fully under the central bank control but our impression is that it does not work.

I think that having a strong financial system with banks that can actually extend loans to support economic activity is essential for growth.

So, you cannot afford to have a banking system weighted by huge NPLs. If you want the economy to start that it is necessary.

Q: The tax collecting agency, Zimbabwe Revenue Authority, has been looking at taxing the informal sector because an estimated $5 billion is moving in the sector. Do you think taxing the sector will boost the taxman’s dwindling revenues?

A: I think that Zimbabwe already collects relatively high level of taxes; these are already quite high which is good.

If anything towards efforts to broaden the tax base and possibly lower the taxes to encourage economic activity can be done, then it should.

Taxation of the informal sector is a huge problem and one should not rely on hopes to tax it. But lower tax rates and a friendly approach to the tax payer and less penalties could bring a win-win situation.

Q: There has been talk of the return of the Zimbabwean dollar. The central bank governor has said the country is not yet ready for the currency. As the IMF, what is your take on the issue?

A: With the history of Zimbabwe, I think that it cannot be envisaged in the short to medium period.

In order to introduce the local currency there are things that need to change.

The authorities must be substantially strengthened and confidence must also be build.