Possibility opens for IMF programme

Zimbabwe came out with a reasonable grade from the latest Article IV Mission by the International Monetary Fund earlier this month, with the mission report wanting to see the administrative, fiscal and monetary reforms consolidated and extended, rather than new paths selected or complex U-turns.

For a start the mission checked the books and the calculations and found that economic growth last year was 5,3 percent, almost identical to the Government estimate at the time of the 2024 national budget statement when there was still some 2023 trade and statistics to bring to account.

There has been a mood in some quarters that the Ministry of Finance, Economic Development and Investment Promotion has been tempted into being overoptimistic, but the IMF certification of the results should shoot that down. The IMF is, after all, an organisation that eschews bad data and wishful thinking.

The mission, from the tone of its report, was mildly nonplussed by the growth, considering the exchange rate instability and inflation rates over last year, but agreed with the conclusion that the effective use of the US dollar in the core productive sectors helped immunise these critical chunks of the economy from the more negative trends.

Climbing into the economic reforms of last year, which had already been mentioned favourably in October by an IMF team under the same leader, so Mr. Wojciech Maliszewski is hardly a stranger to Zimbabwe and knows his way around the national accounts, the IMF gave its imprimatur to the moves made to strip the Reserve Bank of Zimbabwe of its main quasi-fiscal operations in the middle of last year.

The IMF also wants to see this consolidated, with anything left over from the non-core functions of a central bank removed, and the Reserve Bank Act amended to make sure that all temptation is removed and the Reserve Bank is limited to the core functions and all vaguely fiscal operations are permanently moved to where they belong, in the Finance Ministry.

Many would agree that the legal changes would be useful, and would consolidate the changes already made, which seem to just need tidying up in the view of the IMF.

A lot of Zimbabwe’s economic problems are the inherited attitudes generated during the Gideon Gono years by the Reserve Bank, admittedly under pressure from the then Government.

That saw the present Act coming into force giving the Reserve Bank far more independence.

Those bits obviously stay, but the point is made that the legislation probably does need a more precise listing of just what the Reserve Bank must do and what it is forbidden to do. Optional operations between the compulsory and forbidden need to be removed.

This is important. Elected Governments bear the responsibility, as well as the right, to manage the economy, set taxes using their Parliamentary majorities, select how those taxes will be spent and on which programmes.

Spending of a modest chunk of the tax revenue is set in stone through Constitutional requirements activated by other Acts of Parliament, the spending listed in the Constitutional and Statutory provisions in every budget, mainly debt servicing, the salaries of the President, legislators and judges, and State pension commitments.

But the vast bulk of Government spending is decided by the Government, with Parliamentary approval, and the taxes and borrowing requirements to fund both sections of the budget have to be approved, with the whole thing made public and nothing done in the dark of the Reserve Bank tower around the edges.

The overcosy relationship between the central bank and the Government dates from the UDI era, although in those days there was the personal relationship between the Governor and the Finance Ministry permanent secretary and their common background that explains Ian Smith’s long survival.

That continued working in the 1980s and most of the 1990s after independence, but came unstuck at the end of the second decade as deficit financing moved out of control and the Gono years where the Reserve Bank funded around half of Government operations.

This sort of history, and the memories, still have a major input into how people regard currency, and those psychological aspects are probably not fully taken into account by the IMF when it discusses foreign exchange rates and movements.

The IMF tends to assume everyone is logical and makes carefully considered decisions, but that is not so in the markets.

The IMF was worried about the 30 percent premium between the parallel (or black market) rate and the official exchange rate, even with the major switch to market forces via the banks in setting the official rate.

The problem is that premium will almost certainly exist regardless of any other factor. The parallel market is not some well-organised operation.

It is managed and driven by a moderately large group of dealers who all set their own rates, but without the interbank system that provides order within the official market.

Even the major effective devaluation of the Zimbabwe dollar this year driven by the banks as they use market forces to balance what they have to pay holders of foreign currency to meet demands by importers for foreign currency has done almost zero to change the premium.

The premium appears to be set by the dealers as a constant without underlying market-driven forces.

A premium is needed by the black or parallel market, otherwise everyone with more than a few dollars would use their bank for safety, despite the unwillingness of so many to allow records of their foreign currency transactions and their love of cash, even when this provides fuel for robbery.

So there are other factors but the experience of the last few weeks suggests that the problem is not the state of the market, but largely driven by that near-eternal tail chasing between the parallel and official markets and a belief that the parallel market reflects the real market, rather than dealers using the bank rates and adding 30 percent.

With due respect to the IMF, the Government has allowed major liberalisation of foreign exchange markets, the main control still in place being just what those buying currency from banks are allowed to use that currency for, a control on capital movements in effect.

Any assumption that the parallel premium makes any sense, except as a profit margin within what passes for a market, is probably wrong. The premium appears to be fixed, rather than the result of market forces.

The IMF did partially address the access by Zimbabwe to an IMF programme that would include IMF finance.

Acknowledging that Zimbabwe did pay off the IMF in 2026, using its SDR holding, and is a member in good standing, the IMF brought up the Zimbabwean external debt and the arrears.

The Government is aware of the problem hence the present determined effort to reach agreement with creditors over a restructuring, a process still in its early stages.

Generally speaking Zimbabwe should be able to negotiate a restricting, especially if the IMF certifies the accounts and the fiscal rectitude the Government has shown under the Second Republic.

But there are additional problems, in particular with US law that prevents easily the largest shareholder in the IMF and World Bank from approving any such measure, effectively until there is a change of Government.

The European Union, and now the British Government, seemed to have backed off from that extreme so a voting majority is possible, but obviously there are many details to be worked out. But the possibility ow exists.

Zimbabweans should note that conditions are likely to be tough in any deal, and an IMF programme will impose a range of standard conditions.

However, currency reform in most countries does need to involve the IMF and some backing by the IMF, in terms of access to cash, for the reforms.

That in fact was a prime reason why the IMF was set up in the first place almost 80 years ago, to prevent the sort of meltdowns that almost wrecked the global economy in the 1930s.

Conditions need to be negotiated, so the request by the Government for an IMF country programme, to build up the track record that has already been established to a sufficient degree to make the conditions “normal” needs to be encouraged.

Working with the IMF is a bit like a business working with its bank, the bank manager wants to see some commitment, and proven commitment, rather than just a signature on an agreement effectively just a promise.

Looking over the IMF reports in recent years, it appears the IMF has been agreeing that the Zimbabwe Government has the commitment and is implementing reforms, with the details now coming under discussion, rather than the concept, and the actual acceptance that a potential deal is possible.-ebusinessweekly