The staff monitoring program arrangement which was agreed by Zimbabwe and the International Monetary Fund was approved by the managing director of the fund, Christine Lagarde. The deal agreed on the 15th of May will review the economy on a quarterly basis to March 2020. The deal is expected to help Zimbabwe contain the decline of its economy among other things. The IMF, however, highlighted that the strategy being pursued by the nation via the Transitional Stabilization Programme was very risky with little room to manoeuvre.
Two highlights of the agreement were the government agreeing to stop quantitative easing through the reserve bank. In simple terms, this is the printing of unearned money. Critics were very quick to ask if this also applies to electronic balances which have ballooned over recent years. The other highlight was that the government would stop borrowing from the Reserve Bank of Zimbabwe to Finance expenditure.
Finance minister Mthuli Ncube’s goals of cutting government expenditure and increasing tax revenue as stated in the TSP have only partly gone to plan. While the introduction of the Intermediated Money Transfer Tax has brought in considerable revenue for the government the much talked about austerity was dumped as the government budget and forecast deficit were all increased by 50%.
Without budget support from the IMF and as part of the agreement stipulates that the government shall desist from incurring further foreign debt, which they already did with the US$500 million facility agreed with the Afreximbank for the interbank foreign currency market, how will Zimbabwe finance this deficit?
Initial plans to cut the government budget deficit to about 4 per cent of gross domestic product in RTGS dollar terms this year, compared with more than 7 per cent in 2018, look academic now as Zimbabwe’s economy is already expected to contract this year because of the currency turmoil.
“Although the risks to a successful [staff-monitored programme] are considerable, staff supports the SMP as a strong step to restoring macroeconomic stability,” the IMF report said. The same report highlighted how Zimbabwe’s plan offered little room to operate. With the shocks of El Niño and cyclone Idai having hit an already troubled economy.
Aside from curtailing money supply growth and cutting government domestic borrowing through the reserve bank, both of which we did not require the IMF to know were problems or to stop engaging in, it is unclear how the proponents of this deal expect it to help a struggling RTGS dollar. The currency recently crossed the 5 mark in trades against the US dollar on the interbank market, representing halving of value in just 4 months on the block. Meanwhile, the parallel market values the RTGS at around 8 to the US dollar. The IMF’s tentative approach and the lack of financial support will ultimately be the telling factors in the success or failure of this programme.