IMF speaks on Zim economic developments

22 Aug, 2019 - 11:08 0 Views
IMF speaks on Zim economic developments

The Chronicle

Harare Bureau

International Monetary Fund Zimbabwe representative Patrick Imam had an in-depth interview with The Herald Business to air the international lenders views on economic developments in the country as well as future prospects. Below is the full interview:

HB: How has the relationship between the Zimbabwean authorities and the IMF evolved since last year’s election? What are the next steps?

P Imam: The relationship between us is very good. We hold regular meetings and discussions. In fact, as you know, since May, the Government of Zimbabwe started implementing the Staff Monitored Program which runs through March 2020. The SMP is anchored on the Transitional Stabilization Plan which foresees that the authorities seek to address deep macroeconomic imbalances and remove distortions. This entails a substantial fiscal adjustment and financial and monetary sector stabilization. The SMP is also intended to assist in resolving the longstanding arrears to external creditors and facilitate Zimbabwe’s re-engagement with the international community. On the next steps, the first review of the SMP is scheduled for September, and this will be combined with the annual Article IV consultations.

HB: Since the Presidential and parliamentary election of July 2018, how many missions did the Fund send, and what was the purpose of these missions?

P Imam: There are two types of missions. Those directly related to the SMP, of which we had numerous missions. These missions entail continuous policy discussions with the authorities on how to stabilize the economy. In addition, we have what we call technical assistance missions. These types of missions are aimed at strengthening the capacities of key economic institutions. Technical assistance missions have been held on various topics, such as on debt management, public financial management, revenue administration and government financial statistics. We have also send missions on topics ranging from implementing monetary policy operations to improving the financial oversight and bank supervision.

HB: How does the IMF assess the economic environment since the arrival of the new government?

P Imam: Look, the country is obviously in a difficult position and we expect a contraction in 2019. Part of it is driven by an exogenous shock which is beyond the government’s control. Think for instance about Cyclone Idai and the drought. These natural disasters will lead to a contraction in the agricultural sector for instance, and also impact electricity generation. Erratic electricity supply is also expected to continue to have a distressing impact on producers and consumers across sectors. Some critics claim that the government should have better prepared for the impact of the drought, but hindsight is always 20/20. In addition, there was, and this was anticipated, the contraction arising from the belt-tightening induced adjustment. The fiscal adjustment was always going to take purchasing power out of the economy. On the currency front, some hesitations may have created a temporary lack of confidence in the market, which didn’t encourage the private sector to invest. But over the past month, we have achieved some stability on that front as well.

HB: What is the impact of the drought on the economy?

P Imam: The drought has a direct impact on the agricultural sector, and an indirect impact on the whole economy, as the low rainfall has curtailed hydroelectricity generation on which the economy is so dependent. The drought has crippled agriculture, with maize production for instance cut by about a half. The resulting huge grain import bill will also impact the already fragile balance of payment situation. Tobacco has also underperformed, both because of the decline in production volume and because of lower international prices, and this will affect Zimbabwe’s exports, which are dependent on the crop. At the moment, various analysts estimate that the agriculture sector could contract by at least 15 percent. But the fact that power is rationed nationwide, with outages reaching 18 hours a day or more has a much wider effect on the economy. This impacts production across all sectors, from agriculture that cannot be irrigated, to mining and manufacturing that cannot take place, resulting in huge losses to firms.

The other costs are obviously the inconvenience to the service sector. Think of a hotel that needs to run an expensive generator. And we should not forget the huge impact this has on the consumer, including the psychological impact. The Government, supported by the international community, seeks to mitigate the impact of the drought, on the most vulnerable households through several measures, including a minimum floor on social spending that ensures that several key social programs continue to have adequate financing. In addition, the international community is also mobilizing, with the UN, the EU, the UK and the US providing humanitarian and food support to the affected areas. The recent appeal by the World Food Program will hopefully help contain further the impact of the most vulnerable.

HB: What is the IMF position on civil servant wage increases? There were recent reports that the IMF was opposed to these increases.

P Imam: Let me put the issue of the wage bill in its context before answering the question. The government wage bill increased significantly between 2010 and 2016, driven by higher compensation. The wage bill more than doubled from about 40 percent to nearly 90 percent of tax revenue over this period, primarily driven by significant pay increases above inflation. But unlike in other countries, the issue in Zimbabwe was not the public employment level, which was in line with peers, but rather the public sector wage premium, which was significantly above peers. Together with large agricultural subsidies and transfers to State-Owned Enterprises, the increase in the government wage bill was a major contributor to unsustainable fiscal deficits during 2015-2018, which caused the breakdown of the dollarised regime.

Recent reforms under the Transitional Stabilization Program are aimed at bringing the government wage bill back to sustainability. As employment numbers were not the issue, there were no major layoffs. The adjustment took place mainly on the compensation side. It is true that despite several nominal wage adjustments since January of last year, high inflation has eroded public sector compensation and the wage premium over the private sector. The result of the adjustment was that the public sector wage premium has been eliminated and may even be too low.

Contrary to what was reported in some media, the Fund is not advocating a freezing of salaries. Not at all. What we are saying is that going forward, civil servant wages will have to be adjusted upwards, as the government already announced in its supplementary budget. However, it’s important that the wage increases be financed in a sustainable way. And I really want to emphasize the word sustainability. In the past years, wage hikes were financed through printing money, which in the end was self-defeating as it eroded the purchasing power of the wage increase. It is therefore important that wage increases be aligned with growth in tax revenues to ensure it does not create an unsustainable burden on the budget. In fact, it is obvious that going forward, demographic pressures will require an expansion of public employment in health and education, and therefore even higher public employment growth and spending.

HB: An IMF mission has been announced for September. It will cover both the first review of the Staff Monitored Program as well as the Article IV? Can you tell us what we can expect from the 1st review of the SMP? And What is an Article IV?

P Imam: The first review of the SMP will entail an assessment of the authorities’ performance under the SMP for end-June. In total, under the one-year SMP, there will be four quarterly reviews. The first one will be in September, followed by the 2nd review in December and so on. Besides reviewing the end-June target, the macroeconomic forecasts for the rest of the year will also be updated and preliminary discussions on the 2020 budget will take place. Now on the Article IV consultation, this is an annual assessment that entail a comprehensive consultation with individual member countries. The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement. Every country goes through that consultation, from the US to China, from South Africa to Zambia. You should think of it as being an annual medical check-up. Whereas the SMP is focused on the very short-term, the Article IV is much broader both in terms of the topics it covers, in the time-line it looks at and in the interlocutors it meets.

During an Article IV consultation, an IMF team of economists from Washington visits a country to assess economic and financial developments and discusses the country’s economic and financial policies with government and central bank officials.

The mission also meets with parliamentarians and representatives of business, labour unions, and civil society. The idea is to discuss issues that are relevant for the coming 1-3 years. The team will report its findings to IMF management and then present them for discussion to the Executive Board, which represents all of the IMF’s member countries. A summary of the Board’s views will subsequently be transmitted to the country’s government. The Article IV recommendations are then often implemented by the authorities.

HB: Many Zimbabweans are expecting that IMF money will flow soon? Can you confirm that?

P Imam: The bar for a financial Fund programme is higher than for the SMP. It is necessary, but not enough to have in place a comprehensive and coherent macro-economic policy framework, including a strong program of fiscal adjustment and structural reforms to restore sustainability and foster private sector development.

The Minister of Finance has already mentioned it on several occasions. To benefit from a Fund financial programme, Zimbabwe also needs to clear its arrears to the AfDB, the World Bank, and EIB. In addition, under the Paris Club, Zimbabwe will need to achieve a commitment of debt treatment by bilateral creditors.

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