eBusiness Weekly
Kudzanai Sharara
Fiscal and monetary reforms Government is undertaking in order to revive the economy are taking place in the worst possible circumstances, resulting in an unsatisfactory outcome from what was expected, IMF representative to Zimbabwe Patrick Imam has said.
Zimbabwe is facing a myriad of economic headwinds including limited electricity and fuel supply, low Foreign Direct Investment (FDI), high inflation, a weakening local currency, and a widening production gap among others.
These challenges have made efforts to revive the economy extremely difficult, according to the IMF.
“Let’s first discuss context. The authorities are going through an extremely tough adjustment, with little outside financial support. This is compounded by the worst drought in decades. So the reforms are taking place in the worst possible circumstances,” said Imam.
While the effect of drought has manifested in people being food insecure, failure to get external financial support has made it difficult for authorities to pursue a tight monetary policy, to reduce the very high inflation levels, and fiscal policies to address the macroeconomic imbalances to help build confidence in the local currency.
In an interview with Business Weekly, Imam noted the undertakings that Government had made on the subsidy front as well as the introduction of the Zimbabwe dollar and the creation of the interbank market, which he said had helped reduce the distortions that afflicted the economy and provided much needed oxygen.
In fact, he said Government has been quite decisive in many of the reforms it undertook describing the fiscal adjustment observed over the past 18 months as “one of the deepest on the African continent over the past decade”.
“Look at the elimination of fuel subsidies last year, the electricity price hike or even the introduction of a new currency. All these are major reforms, with huge implications, and yet the Government had the guts to pursue these policies in a decisive manner,” Imam said.
He, however, said quasi-fiscal operations by the Reserve Bank of Zimbabwe, with reserve money nearly doubling in the space of three months between June and September had resulted in the Staff Monitored Programme going off track.
He said end-September and end-December 2019 performance criteria were missed under the Staff Monitored Programme.
“This is what fuelled a rapid depreciation of the new currency and then led to very high inflation.
“Overall therefore, reforms have been enacted, but they have been uneven, and more needs to be done to ensure the reforms stabilise the economy,” he said.
Imam added that the main problem Zimbabwe is facing is that reform implementation has been uneven as there have been some policy inconsistencies that may have undermined some of the benefits emanating from the reforms.
He said although there are solid reasons for why the Government introduced the local currency, which can be justified on theoretical and economic grounds, the decision had not been backed up with consistent policy-measures most importantly encouraging the demand for the new domestic currency.
Last year Government introduced the Zimbabwe dollar as the sole legal tender through Statutory Instrument 142 of 2019, but the local currency has lost much of its value on both the foreign exchange interbank market and the parallel market.
“We have seen in several instances that measures were taken that have led to exemptions of payments in foreign currency, including allowing some taxes to be paid in USD. While these decisions may be understandable and justifiable looked at on their own, they undermine the big picture goal which is to have a stable, well traded domestic currency,” Imam said.
The global lender’s local representative also blamed the printing press for the continued depreciation of the local currency.
“And if you significantly hike money supply to finance quasi-fiscal activities, it is not surprising that the currency depreciates as we have seen over the past 12 months.
“These inconsistent policies have not yet been addressed. A year after the introduction of the Zimbabwe dollar, the process is still not complete,” he said.
Imam said one of the main reasons why inflation was spiralling is the depreciating currency, a direct consequence of the significant expansion of money supply that was observed last year. By end of December 2019 broad money supply had grown by 245 percent to $34,5 billion from $10 billion in 2018.
To curb this, Imam said, is for the RBZ to move ahead with Reserve Money Targeting, which will be key in containing money supply growth and ultimately inflation.
“By targeting a moderate increase in reserve money in 2020, the RBZ would help anchor movements in broad money growth, exchange rate and inflation, given their correlation with reserve money growth. This is the best way to stabilise price increases, and to help the population at large,” he said.
He said the authorities must translate their commitment in the Monetary Policy Statement into concrete actions, in particular, to ensure exchange rate stability, by implementing reserve money targeting.
“It is imperative that the printing press stops, and that there be a better co-ordination between monetary and fiscal policies to help stabilise the currency and avoid a repeat of what happened a decade ago.”
