via Will the IMF concede to Zim’s plea? | The Financial Gazette by Dumisani Ndlela 14 Nov 2013
LAST week, Finance Minister Patrick Chinamasa (pictured) made a plea to the International Monetary Fund (IMF) to be “open-minded with the unique situation that Zimbabwe finds itself (in)”.The unique situation is that the country is desperate for cash and wants a rescue package from the Bretton Woods institution.
Yet Zimbabwe has outstanding arrears to the IMF and its sister institution, the World Bank, as well as other creditors. These arrears, the IMF has insisted, should be cleared first to enable Zimbabwe to exercise its borrowing rights with the IMF.
Analysts contend Zimbabwe’s indebtedness, as well as its relationship with key voting members of the IMF, will make it impossible for the IMF to resume funding for the country.
“I don’t see that happening,” said economist, Witness Chinyama, adding: “It’s still too early to think about IMF lending to Zimbabwe.”
Chinamasa wants the IMF to be compassionate.
“(The IMF) should have some flexibility,” Chinamasa said. “Of course we are saying we would abide by the staff monitoring programme (SMP) but would wish for injection of new money (into our economy).”
“Our plea is meaningless,” an economist who was previously involved with government work said, declining to be named. “The process for lending will be very arduous, even if we cleared our arrears today,” he said.
An SMP is an informal agreement between country authorities and IMF staff. SMPs do not entail financial assistance or endorsement by the IMF executive board.
The IMF managing director, Christine Lagarde, approved an SMP for Zimbabwe in June covering the period from April to December 2013.
The SMP encourages Zimbabwe to put its public finances on a sustainable course and to protect infrastructure investment and priority social spending. It calls for the strengthening of public financial management, increasing diamond revenue transparency, reducing financial sector vulnerabilities, and restructuring the central bank.
“In particular, fiscal consolidation efforts aim to move the primary budget balance from a deficit in 2012 to a small surplus in 2013, helping start what should be a gradual rebuilding of fiscal buffers and international reserves. A decline in commodity export prices, financial sector stress, and uncertainties related to the election year, however, pose some of the risks to the programme,” said the IMF.
The SMP was put in place prior to the July 31, 2013 elections when Zimbabwe had an inclusive government. After a landslide victory at the polls, President Robert Mugabe’s ZANU-PF party went on to form the current government, with Chinamasa replacing former finance minister Tendai Biti, the secretary-general of the MDC party led by former prime minister in the inclusive government, Morgan Tsvangirai.
Under the inclusive government, Zimbabwe made considerable progress in stabilising the economy since the end of hyperinflation in 2009. Gross domestic product (GDP) grew by an average of over seven percent and inflation has remained in the low single digit.
This has been largely due to the multi-currency system adopted in 2009.
Government revenues more than doubled from 16 percent of GDP in 2009 to an estimated 36 percent of GDP in 2012, allowing the restoration of basic public services.
But the IMF has noted that the economic recovery had been accompanied by very large current account deficits, while international reserves remained very low, at around one week of imports.
“In 2011 and 2012, sizeable public sector salary increases crowded out spending in key areas. Those increases, combined with significantly lower-than-expected diamond revenue in 2012, resulted in fiscal stress, including the accumulation of domestic payments arrears, which necessitated significant adjustment in the second half of 2012. In addition, rapid credit growth combined with slow implementation of financial sector reforms, has exacerbated financial sector vulnerabilities,” it noted.
The IMF warned that the strong rebound seen after the end of hyperinflation appeared to have run its course.
It would appear Chinamasa’s major hurdle is that he took over when that “strong rebound” had “run its course”.
GDP growth has moderated from over 10 percent in 2011 to an estimated 4,5 percent in 2012.
Although marginally better growth had been projected for 2013 with an expansion in mining output, reports suggest the economy could in fact plummet into a crisis.
Chinamasa’s predecessor, Biti, failed to present a budget review prior to the July 31 elections, a situation analysts said highlighted a financial crisis within government.
Statistics have indicated that almost all government departments and ministries, including the office of the former Prime Minister and that of the President, had overspent by a very large margin.
Chinamasa has failed to present the 2014 national budget in the traditional month of November. He has said he still needs to consult.
But government officials and economists say the issue is simply that government is broke. Chinamasa has said the budget will be presented in December, but insiders said this could be done in January.
“It’s impractical to do a budget with current inflows,” a source familiar with developments at Treasury said. “There is no cash and we are even battling to raise bonus money for civil servants.”
Yet there is a promise to raise civil servants salaries to levels beyond the poverty datum line. That would have the effect of quadrupling recurrent expenditure levels. How would this be funded?
Diamond revenues that had been expected to boost State coffers appear to have dried up. Reports suggest that the quality and quantity of alluvial diamonds mined at the controversial Chiadzwa diamond fields have been on a decline since 2012, and might have run out.
In 2009, the country’s political foes buried the hatchet and formed an inclusive government, putting an end to an unprecedented political crisis that had dogged the economy.
The country then ditched its defenceless currency, which had come under heavy attack from hyperinflationary pressure, triggering hourly erosion of value that created a nightmare for both individuals and corporate institutions.
After ditching the domestic currency, Zimbabwe needed huge foreign cash to bankroll its hard currency economy. International donors chose to stay away, unwilling principally to support President Robert Mugabe.
Upon dollarisation, the external position came under increasing pressure from a high import bill, as the rebound of exports did not match the steep rise in imports, leaving the country with current account deficits of around 30 percent of GDP.
The mounting current account deficit triggered largely by the high import bill has worsened the liquidity crunch in the economy and threatened the stability of the financial sector as well as the viability of local industries due to demand challenges created by lack of disposable incomes.Reports recently suggested an intensification of problems: A July 2013 National Social Security Authority Harare Regional Employer Closures and Registrations Report for the period July 2011 to July 2013 showed that 711 companies in Harare alone had closed.
This resulted in the loss of 8 336 jobs.
In his plea to the IMF and other international financiers, Chinamasa said creditors should fund the country’s productive sectors to enable Zimbabwe to earn cash and repay its debts.
At the moment, government is making payments of between US$150 000 and US$200 000 to clear its arrears, Chinamasa said, indicating that it would take “a million years” at this rate to repay Zimbabwe’s foreign debt.
But it is unlikely the IMF will relent and open its purse to Zimbabwe.
In its last statement issued in June, the IMF said Zimbabwe remained unable to access IMF resources because of its continued arrears to the Fund.
It demanded “a strong track record of maintaining macroeconomic stability and implementing reforms, together with a comprehensive arrears clearance strategy supported by development partners” in resolving Zimbabwe’s large debt overhang.
The IMF has repeatedly warned that Zimbabwe would remain mired in large financing gaps even if the country heightened efforts aimed at reviving the country’s battered economy.
The Bretton Woods institution snubbed concerted pleas for a financial rescue package by the inclusive government.
The country has been repeatedly bluntly informed that access to IMF lending facilities would require a sustained track record of sound policies and donor support for the clearance of arrears to official creditors.
Moreover, American and British members on the IMF board are proscribed from voting in favour of support to the country as long as sanctions against the country and its ruling elite are still in place.
The US first targeted Zimbabwe in 2001 after the controversial land reform programme that saw thousands of white-owned farms invaded and occupied.
The Zimbabwe Democracy and Economic Recovery Act directed that the US government should oppose the granting of any loan or financial assistance to Zimbabwe. President George Bush then expanded the sanctions by declaring a national emergency to deal with the Zimbabwean threat in 2003.
So, with the USA and Britain having representation on the IMF, and significant voting rights, Chinamasa might soon realise his plea to the IMF might be a case of barking at the wrong tree.
But is it possible for ZANU-PF and its leadership to seek dialogue with the USA and the European Union, particularly former colonial power Britain?