Delay setting up sovereign fund: IMF

via Delay setting up sovereign fund: IMF | The Herald June 26, 2014

The International Monetary Fund is recommending that Government delays the introduction of the Sovereign Wealth Fund saying it will add more fiscal stress to already strained accounts as the institution warned that fiscal under-performance remains the highest risk facing the economy.
In the full Article IV Concluding Statement seen by this paper, the IMF directors recommended delaying the introduction of the Sovereign Wealth Fund.
“Although such a mechanism might be helpful over the medium term, the present situation of fiscal stress requires that the Government avoid imposing on itself new administrative and managerial challenges. The mission encourages the authorities to re-examine the fiscal regime for extractive industries before launching any SWF.”

The IMF also said Government risks compromising its ability to achieve the main objectives set out under its economic blueprint — Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim Asset) — if employment costs continue to chew up treasury revenue.

The IMF says if the Government continues on the path of the last few years, in which for every extra $1 collected in taxes it spends an additional $1,27 in employment costs, it will compromise its ability to achieve its main objectives, including under Zim Asset.

According to the IMF, fiscal under-performance remains high risk if nominal wages are to exceed the budgeted 9 percent in 2014. “This would increase the fiscal pressure, further undermine service delivery, further crowd-out critical social and capital spending, and jeopardise restoring fiscal sustainability,” said the report.

It might also lead to new accumulation of domestic arrears. In the four months to April, total expenditure including retained grants was at $1,12 billion with employment costs chewing up $671,07 million. Month on month April employment costs were at $225,32 million, a growth of 39 percent against the March cost of $162,03 million.

This follows an increase in civil servants’ salaries in April, which were backdated to January. The increase though welcomed by employees, led to an increase in Government debt as loans of $40 million were taken during April.

The IMF said that going forward, nominal wage increases should be in line with inflation, and the hiring freeze should be maintained, except in critical areas and only if these vacancies cannot be filled through internal mobility.

The IMF directors recommended the improvement of fiscal management by following through on PFM reforms, including payroll management reforms, and welcomed the intention to strengthen financial monitoring and oversight of state-owned enterprises (SOEs) and local authorities.

The other high risk was the instability in the financial sector. This also includes liquidity constraints and further deterioration of asset quality.
The financial sector remains saddled with under-capitalised banks and high non-performing loans (NPLs) (15,9 percent at end-December), exacerbating the tight liquidity conditions.

“Further deterioration in asset quality, and bank capitalisation would lead to further loss of confidence in the banking system, aggravation of already tight liquidity conditions, and possible bank runs,” said the IMF.

In view of the dangers, the IMF stressed the need strong, proactive banking supervision, and intensified monitoring of troubled banks, with a particular focus on provisioning practices and risk management.