The Managing Director of the International Monetary Fund has approved a Staff-Monitored Program (SMP) for Zimbabwe, covering the period April-December 2013. An SMP is an informal agreement between country authorities and Fund staff to monitor the implementation of the authorities' economic program. SMPs do not entail financial assistance or endorsement by the IMF Executive Board. This is Zimbabwe's first IMF agreement in more than a decade.
The SMP supports the Zimbabwean authorities' comprehensive adjustment and reform program and has been endorsed by Zimbabwe's Cabinet, a strong signal of their commitment. A successful implementation of the SMP would be an important stepping stone toward helping Zimbabwe re-engage with the international community.
The SMP focuses on putting public finances on a sustainable course, while protecting infrastructure investment and priority social spending, strengthening 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 program.
Zimbabwe has made considerable progress in stabilizing the economy since the end of hyperinflation in 2009. Since then, GDP has grown by an average of over 7 percent and inflation has remained in the low single digits, thanks largely to the multi-currency system. Government revenues have 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.
The economic recovery, however, has been accompanied by very large current account deficits in recent years, while international reserves remain 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.
The strong rebound seen after the end of hyperinflation seems to have run its course. GDP growth has moderated from over 10 percent in 2011 to an estimated 4½ percent in 2012, with marginally better growth projected for 2013, as mining output expands. Going forward, sustaining high growth will require determined efforts at economic reform. In this regard, the SMP already envisages important reforms in public financial management, financial sector regulation, and other areas.
Zimbabwe's external debt is high and largely in arrears, cutting off the country from access to most external financing sources. In particular, Zimbabwe remains unable to access IMF resources because of its continued arrears to the Fund. ? strong track record of maintaining macroeconomic stability and implementing reforms, together with a comprehensive arrears clearance strategy supported by development partners, will be essential for resolving Zimbabwe's large debt overhang.
IMF staff will remain engaged with the authorities to monitor progress in the implementation of their economic program, and will continue providing targeted technical assistance in order to support Zimbabwe's capacity-building efforts and its adjustment and reform program.
