Zimbabwe’s Menacing Monitor Muddle

Zimbabwe’s stock market remained a frontier favorite through June climbing 40 percent on the MSCI index, despite President Mugabe’s orchestration of quick end-July elections leaving the opposition with a narrow campaign and vote preparation challenge window. According to outside observers voter rolls are replete with dated and false names and the Finance Minister is struggling to raise the $100 million funding to ensure bare logistics. The opposition headed by prime minister Tsvingarai under the post-2009 coalition enters with a “heavy heart” and claims to be at a structural disadvantage particular in rural areas which have long been a Mugabe party stronghold. The contest follows a constitutional referendum in March which was also subject to fraud allegations but passed overwhelmingly and will in theory better balance executive and legislative powers under a criminal amnesty for past officeholders. Foreign investors who have been relieved by compromises struck on the indigenization program believe that the event nonetheless will avoid the depth of previous bloodshed, and note that the IMF coincidently has agreed to a staff-monitored arrangement through end-2013 that could bolster the external position. With debt at 90 percent of GDP, half in arrears, the “distress” classification applies with $1.5 billion owed to the World Bank and African Development Bank. Reserves are only sufficient to pay for one week’s imports, with the current account hole at 25 percent of output despite rising diamond, gold and tobacco exports. The inability to procure fertilizer and equipment hurts the agricultural harvest, and an estimated 1.5 million citizens get food assistance from aid agencies. The economy will grow again around 4.5 percent this year with inflation under control with dollar and rand use, but public finances remain precarious with hundreds of millions of dollars in unmet supplier bills and lagging mine revenue although the budget is near primary balance. Banking sector cleanup is another large cost with recapitalization still needed in many institutions after 2012 shutdowns. The loan-deposit ratio is at 90 percent with NPLs in double-digits and half the industry below the prudential liquidity standard.

In a pre-election move the government has demanded lower borrowing rates and service fees which may further undermine stability, according to the Fund. Pilot Treasury bill issuance has resumed but the Chinese Export-Import Bank continues to be a major source for infrastructure projects. The temporary staff agreement features a commitment to diamond dividend transparency with less than 10 percent of the 2012 budgeted item realized. Although international bodies attempt to track compliance with human rights and commodity norms inspection and valuation responsibility will remain in domestic hands. To normalize relations with bilateral and multilateral creditors commercial credit cannot be more than 3 percent of GDP over the monitoring period as monthly $150,000 IMF reimbursement tackles the poisonous past.