Zimbabwe: The IMF's Greece on the Zambezi

Those still reveling in Mugabe's departure, as well as armchair pessimists anticipating the "inevitable" cold shower when the IMF suits arrive, should both reflect.

Of all the dire economic legacies he left Zimbabwe, perhaps the worst—because it so complicates efforts to move forward—is the lack of its own currency. Despite note shortages and a bitcoin boom, the US$ is the unit of account, the primary means of settlement, and the store of value. The Zim $ hyperinflated into thin air in 2008, and so Zimbabwe now finds itself coupled to the Trump train.

That currency arrangement is the setting for alarming parallels with Greece. Because in that context, the IMF suits are set not bring a cold shower but analysis which is all over the map—loudly echoeing the lamentable quality of its post-2009 Greek work. That incoherence is a direct threat to Zimbabwe's nascent transition.

To elaborate, the IMF sees Zimbabwe's real exchange rate as 25-50 percent overvalued, reflected in, amongst other things, large current account deficits, forex controls, stagnation, unemployment, and emigration. But under "strong policies", spearheaded by austerity to cut the budget deficit by 10 percentage points of GDP in 5 years, it anticipates growth surging to 6 percent, saying: "Restoring external stability would require real exchange rate adjustment through fiscal consolidation and structural reforms aimed at improving the business environment." (See chart). Yet even more magically, with the CPI projected at 2 percent throughout, the IMF anticipates all this growth without any strengthening of price competitiveness, absent a major—Trump-related?—US$ collapse.

So here is the IMF at it again with expansionary fiscal consolidation. And if you are wondering what happened to all that Blanchard ballyhoo about multipliers, any IMF insider will tell you that what happens in Research stays in Research. So, as in Greece 2010, the IMF anticipates a Zimbabwean deflationary boom, and as noted, somehow without the deflation. And this is the IMF minus the Troika, or the Quadriga—including the IBRD, or, as I dub it, "the Squint"— including the ESM: this is the IMF solo.

And the record on this? By 2015, real Greek GDP was 25 percent short of the IMF 2010 projections for it, and debt was crushingly unsustainable. And while the IMF hummed-and-hawed about this unfolding saga for half a decade, Greece cratered.

The legion of IMF apologists who overlooked IMF non-apologies on Greece did not presume that IMF problems had been fixed—after all, the IMF Board described its GDP projections for Greece as "somewhat optimistic .. in hindsight" and Mme. Lagarde summarized IMF work on Greece as "a partial success"—but rather that the circumstances of Greece 2010 could not possibly recur. So, those apologists surmised, the whole sorry episode could be safely left in the rear view mirror and neither thought nor spoken of again. Sadly for them, Mugabe had other ideas and the unreformed and unapologetic IMF has been outed. If it is let loose, it will not bring cold water but a wrecking ball to Zimbabwe's fragile new settlement.

And it gets worse. The technical underpinnings of the IMF's assessments are also sorely lacking. Apparently, Zimbabwe is 25-50 percent overvalued. Well, just a year ago, the IMF declared Zimbabwe's competitiveness to be unmeasurable, although this pivotal issue was relegated to a single footnote in an annex, which intoned that: "Assessing Zimbabwe’s external stability and competitiveness is complicated by weak macroeconomic data, unrecorded exports and remittances given the high share of the informal sector." A year later—and tellingly cleared by the same internal reviewers— hey presto, its 25-50 percent out of whack, according to a toolkit dubbed "EBA-lite" which you will look in vain to find in any text book. And if 25-50 seems a tad on the wide side, it is. Nevertheless, no cross-check from standard metrics like a "Big Mac Index"—with sensible baskets of goods and wage rates. Like their "strong policy" macro projections, this critical numerical conclusion is sucked out of thin air.

And firmly in the IMF's zealous sights is Zimbabwe's government wage bill, high even by regional standards. There are plenty ghost workers, absentees, slouches, and party hacks there, just as in any old British rotten borough or Tammany Hall. But the IMF has to look through such labels. It does so on the tax side, correctly seeing that a "tax on employers" isn't necessarily that, thanks to incidence. But it is loath to do the same on the spending side. In poor countries, lacking an endownment of Bismarkian social administrators, the government wage bill serves as a pseudo and partial social safety net, working through extended families, a similar role played by the pension system in Greece. But, just as with Greek pensions, the IMF has no care for all that: moralizing about waste and regional comparators, it is all cut cut cut. With 3/4 of the population living below $6 per day, such slap dash by Gucci-suited IMF bureaucrats will not do.

And certainly not in Zimbabwe now. Because, of course, a sizeable part of that wage bill is for the army. Having just pulled off a remarkable non-coup—which de facto sets up the army as arbiter even if the new President doesn't sport army fatigues—this, as Zimbabwe tries to reassert the authority of elected civilians, is no time to set upon the army in a zeal of wage bill cutting in service of expansionary fiscal consolidation.

Last, with Zimbabwe set on this IMF-Greek path, one should not overlook the implications for the IMF's comforting assurances about financial stability.

Oh if Zimbabwe only had its own currency to help resolve all this! But even though, in contrast to Greece, there is no underlying political consensus in favor of permanence for the prevailing currency arrangements nor any negative spillovers elsewhere in the "currency union" from Zimexit, any such move now would be explosive, forex controls or no. It is not an option now.

That leaves massive early debt reduction as the only way out of the Mugabe legacy. Even with all the IMF's prognostication—lets call it—optimism, including flattering debt-carrying capacity with its inflation projections, they still classify Zimbabwe as "in debt distress" because although ratios of debt to GDP are not high by current industrial country standards, debt to revenue ratios are. So with Mugabe having recently cleared arrears to the IMF, Zimbabwe finds itself in the very early stages of a marathon slog towards distant HIPC debt relief.

But the precarious balance in Zimbabwe cannot wait for all that while draconian fiscal withdrawal sucks any remaining life out of the economy. If creditors will not make an early exception for an evidently macroeconomically exceptional case like this one, they, through the unreformed IMF and even with Mugabe finally gone, condemn it, like Greece, to further catastrophe.

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