IMF warning must be taken seriously

The monetary and fiscal authorities who are currently collaborating round the clock, should find a long-term solution to the issues that are plunging the economy into crisis.

They also should  find a mechanism to stop the exchange rate from running away.

The warning issued by the Bretton Woods institution yesterday, the International Monetary Fund (IMF), must be taken seriously.

In order to support stable and equitable growth, the IMF cautioned Zimbabwe’s government to concentrate on enhancing economic governance, lowering the likelihood of corruption, and enhancing the business environment.

In addition, the IMF recommended that the government expedite changes to the foreign exchange market by eliminating current exchange limitations and distortions and promoting an official exchange rate that is more open to the market.

Wojciech Maliszewski, the head of the IMF staff team that was in Harare in the past two weeks issued the warning yesterday.

This occurs concurrently with the government’s recent exemption of 21 public bodies from oversight on the acquisition and disposition of assets.

“Structural reforms aimed at improving the business climate, strengthening economic governance and reducing  corruption vulnerability are key  for promoting sustained and inclusive growth and would bode well for supporting  Zimbabwe’s development objectives embodied in the country’s National Development Strategy (2021-2025). In this context, the  mission encourages the authorities to ensure that  the corporate governance arrangement, transparency and financial reporting  and accountability oversight of the recently established Mutapa Fund are in line with international  standards and good practices,” Maliszewski said.

He added: “We are (also) concerned by exchange-rate distortions as this affects future growth.

“The mission encourages the authorities to accelerate the foreign currency (FX) market reform by promoting a more transparent and market driven price discovery in the official exchange rate and by removing existing exchange restrictions and distortions. In particular the restriction on the 10% allowable trading margin for pricing domestic transactions should be eliminated.

“The FX market reform should be accompanied by establishing an effective framework for exchange rate and monetary policies.”

Maliszewski said that in order to implement such a framework, careful planning is required, and part of that planning entails addressing the underlying causes of the fiscal difficulties. Accordingly, the Reserve Bank of Zimbabwe (RBZ) Act should be amended, with a particular emphasis on restricting its legal authority to core functions.

“…local-currency instability intensified,” Maliszewski said, adding that the official exchange rate has depreciated by about 95% since the beginning of December 2023. The gap to the parallel market rate remains wide [above 30%]; and the Zimbabwe dollar inflation is still very high. “This instability weighs on sentiment, while exchange rate restrictions [prescribing retailers to use the official Zimbabwe dollar exchange rate with up to a 10% margin inflating US dollar prices] continue to be a burden on the formal sector.

“They promote informality, which erodes the tax base and undermines longer-term growth prospects. “Risks remain skewed to the downside, and the outlook will crucially depend on progress toward macroeconomic stabilisation and transformational structural reforms.”

Maliszewski added that resolving the debt overhang is necessary for sustainable development.

 

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