Zimbabwe deals with IMF (fwd)

[Robert Weissman <rob@essential.org>]

Wednesday July 28 1999
 Financial Times

ZIMBABWE: Tough challenge to revive economy
With elections looming, complying with terms for a $200m IMF standby loan
may be difficult for Harare, reports Tony Hawkins

When the International Monetary Fund's executive board meets next week it is
almost certain to confirm a $200m one-year standby loan for Zimbabwe's
embattled economy. But complying with the terms will present as tough a
challenge to Robert Mugabe, Zimbabwe president, as any he has faced since
coming to power nearly 20 years ago.

Imposing spending cuts and resisting demands for wage increases would be
demanding at the best of times. But with elections coming up next year, it
will be doubly difficult for what is already an unpopular government.

Although the resumption of an IMF agreement was signalled last week - a
similar programme launched last year lapsed with just one tranche being
disbursed - events over the past few days may concern the board.

A Supreme Court ruling last week allowing three detained US missionaries
charged with the illegal possession of arms to collaborate in their defence
was promptly overruled by presidential order.

Meanwhile, the credibility of the government's land redistribution programme
was undermined when an independent local newspaper published names of 149
people shortlisted for the allocation of farms. At least a third are senior
professionals - 19 doctors, three government ministers, the president's
press secretary, two senior army officers and a bevy of top officials.

But human rights and transparency issues aside, the fund package is certain
to set strict budgetary targets, which the government will find the greatest
difficulty in meeting.

Zimbabwe has an estimated 9,000 troops fighting in the Democratic Republic
of Congo in support of Laurent Kabila, the president. There are no figures
of the cost of the war, and scant information about how it is being funded.
Most observers doubt the claim that Harare's Southern African Development
Community allies are picking up the tab.

Clearly, there may be some burden-sharing, but defence spending is thought
to be ahead of the Z$5.4bn (US$142.2m) budget, which is 2.7 per cent of
gross domestic product.

The 1999 budget allocated Z$10.1bn for debt-service, but with the treasury
bill issue standing at more than Z$42bn at rates of about 45 per cent - and
rising - there is a massive shortfall of about 5 per cent of GDP.
State-owned companies made losses of more than Z$11bn last year - not a cent
of which was provided for in the budget.

The IMF will also expect the government to hold the line on public service
wages in the face of demands for a 35 per cent increase in January. But with
elections scheduled for the first half of 2000, Mr Mugabe's administration
will be reluctant to impose further pain on the electorate. The budget
deficit is likely therefore to exceed 10 per cent of GDP rather than the 6
per cent target.

Government officials hope that once the IMF facility is in place, the World
Bank will provide a structural adjustment credit enabling Zimbabwe to retire
some of its short-term debt, thereby cutting the deficit.

If the budget poses problems, monetary policy is little better. Money supply
grew 51 per cent in the year to May - broadly in line with inflation, which
averaged 51 per cent in the first half of 1999.

This week, the authorities moved belatedly to tighten their monetary stance,
by raising the bank rate and curbing credit creation. At the same time,
Leonard Tsumba, the governor of the Reserve Bank of Zimbabwe, warned the
banks against further increases in prime lending rates, which are at 45 per
cent. The highest post-tax return available to savers - 36 per cent on
treasury bills - is almost 20 per cent below inflation, which even the
central bank admits will rise to more than 60 percent before peaking.

Exchange rate policy is a third key area. Since mid-January the Zimbabwe
dollar has been "managed" by the banks with the central bank insisting that
even now the currency is still 30 per cent undervalued. The justification
for this claim is obscure, given falling exports and deteriorating terms of
trade.

Normally, an IMF package would require that the exchange rate be left to
find its own level. If this does happen, bankers expect the Zimbabwe dollar
to slide from its current level of Z$38 to the US dollar to about Z$45 by
year-end.

Donor support, unless underpinned by rigorous monetary and fiscal restraint
and a more realistic exchange rate strategy is unlikely to rescue the
economy. Accelerated privatisation and the phasing out of the direct
controls, formal and informal, imposed during the past two years, will be
needed to rebuild investor confidence at home and abroad.

Yet public statements by leading politicians, and especially Mr Mugabe,
demonstrate little enthusiasm for such root-and-branch economic reform.

It would be ironic if the IMF, whom he regularly castigates, should be the
catalyst for his political revival.