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Zimbabwe: Staff-Monitored Program: Letter of Intent and Technical
Memorandum of Understanding


July 1, 2014


The following item is a Letter of Intent and a Memorandum of Economic and
Technical Memorandum of Understanding of Zimbabwe. The document, which
is the property of Zimbabwe, is being made available on the IMF website by
agreement with the member as a service to users of the IMF website. This
memorandum describes the policies that is implementing in the framework of a
staff monitored program. A member's staff-monitored program is an informal
and flexible instrument for dialogue between the IMF staff and a member on its
economic policies. A staff-monitored program is not supported by the use of the
Fund's financial resources; nor is it subject to the endorsement of the Executive
Board of the IMF.








LETTER OF INTENT

July 1, 2014



Ms. Christine Lagarde
Managing Director
International Monetary Fund
Washington, DC 20431

Dear Ms. Lagarde:

1. We would like to take this opportunity to inform you of our progress in implementing
Zimbabwes Staff-Monitored Programme (SMP) that was approved by the Funds Management in
June 2013. You will recall that this is Zimbabwes first program engagement with IMF staff in more
than a decade. The SMP focuses on putting our public finances on a sustainable course (while
protecting infrastructure investment and priority social spending), strengthening public financial
management, enhancing diamond revenue transparency, and reducing financial sector
vulnerabilities, including by restructuring the balance sheet of the Reserve Bank of Zimbabwe (RBZ).
To this end, the programme is based on ambitious quantitative targets and structural reform
measures.

2. You will also recall that the first review under the SMP could not be completed last year.
Consequently, in December 2013 the Government of Zimbabwe requested, and you approved, a six-
month extension of the SMP until June 2014, as well as modified quantitative targets for end-
December 2013. The additional six months allow us time to strengthen our policies and deliver on
outstanding commitments under the program.

3. Following a constitutional referendum in March 2013, the July 2013 harmonised elections
delivered a victory for President R.G. Mugabe and ZANU-PF, which secured a more than two-thirds
majority in the National Assembly. Our new Cabinet, which was appointed in September 2013, is a
more cohesive body than its predecessor. We are confident that this cohesiveness will translate into
strengthened policy formulation and implementation. This will enhance our ability to vigorously
pursue our reform agenda.
ZIMBABWE

2

4. The governments new economic blueprint for the next five years, the Zimbabwe Agenda for
Sustainable Socio-Economic Transformation (ZIM ASSET) October 2013 to December 2018, aims to
achieve sustainable development and social equity, propelled by the judicious exploitation of the
countrys abundant human and natural resources. As part of ZIM ASSET, we also intend to accelerate
our re-engagement on debt resolution with the international financial institutions (IFIs) and with
other creditors. Zimbabwe urgently requires a substantial amount of inflows of fresh capital to help
jump-start the recovery of the economy.

5. Against the background of uncertainty typical of an election year, GDP growth in 2013 is
estimated to have slowed down significantly to some 3 percent, from 10.6 percent in 2012. In
particular, we faced a disappointing maize harvest for the 2012/2013 agricultural season due to late,
unevenly distributed and erratic rains. This poor 2012/2013 harvest threatened food security for an
estimated 2.2 million of our people during the lean period from January to March 2014,
underscoring the need for us to come up with strategies for mitigating the effects of droughts and
to support agriculture going forward. The electoral process also induced a wait-and-see attitude
among many economic agents, further contributing to the economic slowdown.

6. A baseline projection for real GDP growth for 2014 is 3.1 percent, reflecting, among other
factors, continuing low business and investment confidence, scarce liquidity, and subdued
international prices for our major exports. However, the timely and full implementation of ZIM
ASSET could accelerate growth to an average of 6 percent over the medium term.

7. Inflation continues to be very low and has recently dipped into negative territory, recording
-0.3 percent year-on-year in April 2014, reflecting weak domestic demand, tight liquidity conditions
and the appreciation of the US dollar against the South African rand, the currency of our main
trading partner. We anticipate that inflation will average around 0.8 percent in 2014.

8. The SMP provided a useful anchor for the economy in an election year. However, the
constitution-making and electoral processes created spending pressures and, together with the
transition to a new government, slowed the pace of implementation of our structural reforms.
The elections caused a more general delay in a variety of processes, including the preparation of the
2014 Budget. That is why our performance on the end-June 2013 and the modified end-
December 2013 quantitative targets (Table 1) and the structural benchmarks for the first and second
reviews (Table 2) was not as strong as we would have liked.

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9. For the end-June 2013 test date, we met two of the six quantitative targets: the floor on
protected social spending and the floor on payments to the Poverty Reduction and Growth Trust
(PRGT). We nearly met the floor on the stock of usable international reserves. We missed the
continuous ceiling on new non-concessional external debt by a small margin, due to the signing of a
US$ 319 million loan with the Export-Import Bank of China in November 2013 to finance a critically
important power generation project. We missed the target for the primary fiscal balance on a cash
basis by about 1.3 percent of GDP, mostly due to spending overruns, some of which can be
attributed to our efforts to advance the clearance of old domestic arrears.

10. Although the continuous zero ceiling on new domestic arrears was missed, we believe that
we made significant progress on this issue than envisioned under the SMP. In fact, although we
accumulated some new domestic arrears in 2013, we also prioritized the clearance of pre-2013
arrears, and on balance, the overall stock of arrears declined by US$ 54 million (about 0.4 percent of
GDP) in 2013, which compares favourably with the reduction of US$ 23 million envisaged under the
original programme.

11. For the end-December 2013 test date, we met three of the six revised quantitative targets:
the floor on usable international reserves, the floor on payments to the PRGT, and the continuous
ceiling on new non-concessional borrowing. We missed the modified target for the cumulative
primary fiscal balance on a cash basis by about 1.7 percent of GDP, mostly due to substantial
weakness in tax revenues in the last two months of 2013. Owing mostly to the weakness in revenue
in Q4, we missed the floor on protected social spending by about 0.3 percent of GDP and our stock
of domestic arrears overshot its ceiling by about 0.3 percent of GDP.

12. We made progress on the structural reform front by attaining three of the five structural
benchmarks for the first review and one of the five structural benchmarks for the second review.
In particular:

we submitted the new Income Tax Bill to Parliament in May 2013;
the time-bound action plan by the Civil Service Commission (formerly the Public Service
Commission) on measures to modernize human resource and payroll systems was submitted to the
Ministry of Finance and Economic Development (MoFED) in December 2013;
the new framework for contingency planning and systemic risk management was submitted
to and approved by the RBZ Board in October 2013;
finally, the RBZ Debt Assumption Bill (formerly the RBZ Debt Relief Bill) was approved by
Cabinet in November 2013 and submitted to Parliament on April 10, 2014.
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13. The report on the stock of verified pre-2013 domestic arrears was completed. Although it
was not published on MoFEDs website, the total stock of arrears and the strategy to clear them
were made public in the 2014 National Budget Statement submitted to Parliament last December.

14. Given the complexities of drafting a new Mines and Minerals Act, after some consideration
the new government decided to accomplish its objectives through amendments to the Act. A series
of workshops were held between March and May to discuss the amendments, involving the Ministry
of Mines and Mining Development (MoMMD), MoFED, the Zimbabwe Revenue Authority (ZIMRA),
the Attorney Generals Office, the RBZ and the mining companies.

15. The Principles of the Mining legislation amendments (structural benchmark for the third
review) have been approved by Cabinet on 1
st
July, 2014. Given the importance of these proposed
amendments, they are receiving priority from the Ministry of Mines and Mining Development
(MoMMD). This will push back the completion of the work on the amendments to the Precious
Stones Trade Act into the second half of 2014.

16. The Statutory Instrument establishing a formula for calculating dividends from entities in
which the government is a shareholder was not issued, owing to the absence of enabling legislation.
However, we undertook other policy measures to attain the objective of mobilizing diamond
revenue.

17. The Finance Act gazetted in April 2014 gave legal effect to the tax measures pronounced in
the 2014 Budget Statement, including the withholding by the Mineral Marketing Corporation of
Zimbabwe (MMCZ) and the Zimbabwe Mining Corporation (ZMDC) of a special dividend equal to
15 percent of the gross proceeds of diamond sales and collecting depletion fees for direct payment
to the Treasury. The enforcement of this special dividend has been held in abeyance pending the
completion of the review of the mining fiscal regime.

18. More fundamentally, with technical support from the World Bank, we are in the process of
reviewing the fiscal regime for the mining sector to ensure that Zimbabwe maximizes its benefits
from its mineral resources, while at the same time encouraging investment in the sector. As part of
our consultative process, a workshop will be held on 30
th
June 2014 with key stakeholders. In
addition, in order to increase diamond revenue transparency, the 2012 audited financial accounts of
the ZMDC were posted on the website of the MoMMDs in May 2014.

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19. Furthermore, we have constituted a joint task force composed of technical staff from
MoFED, MoMMD, and the Zimbabwe Revenue Authority to forecast and monitor diamond-related
revenue flows covering taxes, royalties, dividends, depletion fees and management fees. Finally, in
December 2013 we dissolved the management boards of the three state-owned enterprises
involved in the diamond sector: ZMDC, MMCZ, and Marange Resources, because of their failure to
exercise proper oversight over the management of these public enterprises. More critically, we are
undertaking a review of the structure of the diamond sector, with a view to streamlining the number
of companies operating in the sector.

20. Going forward, it is our intention that all diamond sales must take place in a competitive
environment at international trading centres. In fact, our first two diamond tenders, undertaken as
test runs, took place in Antwerp in December 2013 and February 2014. In view of their positive
outcome, we held another successful auction in Dubai in late March 2014, and additional auctions
are planned in the coming months.

21. Turning to 2014, our proposed quantitative targets are presented in Table 1, while our
structural reform agenda is presented in Table 3. The 2014 Budget was submitted to Parliament in
December 2013 and approved in January 2014. It targeted a zero overall balance on a cash basis
and was anchored on a revenue envelope of US$ 4.12 billion (30.6 percent of GDP). To enhance
revenue, the government maintained the measures on excise duty introduced in early 2013 to help
fund the constitutional referendum and harmonised elections. These measures had originally been
slated to expire at end-2013. In addition, other tax policy measures were introduced, such as the
removal of the deductibility of royalties for profit tax calculations by mining houses, and a new
excise on ethanol.

22. The 2014 Budget provided for an 8 percent increase to the overall wage bill. Following the
conclusion of negotiations in the National Joint Negotiating Council in January 2014, the overall
wage bill is now projected to increase by 14 percent this year. The larger increase resulted from the
need to make good on the Governments election commitments. We have already identified cuts in
non-wage non-interest spending, relative to the 2014 National Budget Statement, in order to
completely offset these wage increases.

23. The wage increase significantly exceeds projected inflation for 2014. However, we remain
committed to our objective of keeping the overall wage bill on a downward trend relative to
Government revenues and expenditures in the medium term, while preserving the real value of
salaries of the civil service. Like we did in 2013, we commit to granting only one salary adjustment in
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2014. In addition, we will maintain the hiring freeze in Government which started in July 2012, while
allowing some limited flexibility in filling critical vacancies that cannot be filled through internal
mobility.

24. Given the downward revision to the economic outlook for 2014, there are significant risks to
the revenue side of the budget. In addition, our financing space is quite constrained, as we are
facing large maturities on domestic T-bills and loans in 2014. To address these challenges, the
Minister of Finance and Economic Development presented a package of additional revenue and
expenditure measures to Cabinet in early-June 2014. The package amounts to about
US$ 933 million (6.9 percent of GDP) and places a heavier weight on revenue measures, including
US$ 554 million (4.1 percent of GDP) from selective increases in customs duties, targeted tax
compliance operations, non-tax revenues mobilized largely by redirecting surplus resources in
several extra-budgetary funds, and from measures to address custom revenue leakages.

25. Capital and recurrent expenditure reduction measures will amount to US$ 379 million
(2.8 percent of GDP). It is important to note that we have ring-fenced high-value and high-impact
social spending. As a result, we are currently targeting for total revenue of US$ 4,014 million
(29.8 percent of GDP), total cash expenditure of US$ 4,092 million (30.4 percent of GDP), and an
overall cash deficit of US$ 78 million (0.6 percent of GDP) in 2014. The Government remains
committed to taking the necessary measures to achieve the primary balance target, including
through mobilization of diamond revenue, which we will discuss with stakeholders in the mid-June
2014 workshop discussed above. In line with our fiscal projections for 2014, we shall begin to make
efforts to rebuild our international reserves in the second half of the year. During the coming
months we will endeavour to mobilize additional financing so we can reverse some of the cuts in our
capital spending.

26. We plan to extinguish the remaining stock of pre-2013 domestic payments arrears
amounting to US$ 23 million by end-2014. However, given the very tight resource constraints in the
2014 Budget, it would be very difficult for us to continue reducing the total stock of arrears of
domestic payment in 2014. We plan to eliminate the total stock of end-2014 domestic arrears by
end-2016.

27. In addition, a number of governance issues have emerged within the countrys public
entities, including state-owned enterprises and local authorities. As a first step, we have as an
interim measure, capped compensation for the senior managers of such public entities.
Furthermore, we will seek to amend the Public Finance Management Act to strengthen oversight by
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the Ministry of Finance and Economic Development of public enterprises and local authorities. In
particular, the amendments will require all public entities to submit their corporate and financial
plans to the Minister of Finance and Economic Development before the beginning of the new fiscal
year. The Minister of Finance and Economic Development will be given powers to direct boards to
amend the corporate and financial plans if necessary. The amendments will direct public entities to
submit quarterly financial statements and performance reports not later than thirty days after the
end of the respective quarter. In addition, we have started reviewing the Procurement Act, with the
objective of tightening our public procurement framework and making it more transparent.

28. Finally, we have embarked on the reforms of our labour laws in 2014, in order to make our
labour market more flexible, investment- and growth-friendly. To this extent, a Cabinet committee
chaired by the Minister of Public Service, Labour and Social Welfare has been constituted to
coordinate the review of our labour laws. A working party of senior government officials has also
been set up to support the Cabinet committee. Existing regulations make it difficult for business to
respond to the current environment, affecting profitability and discouraging hiring.

29. The financial sector continues to face vulnerabilities stemming from depressed economic
activity, weak corporate governance, low capitalization, and poor asset quality in a number of banks.
Following rapid credit growth in previous years, the ratio of non-performing loans (NPLs) to total
advances reached 16.6 percent on average at end-March 2014. The high level of NPLs and the
economic slowdown contributed to the deterioration in bank profitability in 2013. Industry averages,
however, mask wide variations among banks, with the larger banks remaining solid and profitable,
while several non-systemic banks are facing deep distress. Liquidity remains tight, as 11 out of 22
banks operated below the prudential liquidity requirement in December 2013. The high demand for
cash and the resultant liquidity crunch in December 2013, strained some of the smaller banks.
This, along with the absence of a lender of last resort, exacerbates financial sector vulnerabilities.

30. Against this challenging background, the Government of Zimbabwe reaffirms its
commitment to take measures to reduce financial sector vulnerabilities. In recognition of the
importance of a strong central bank to financial stability, the RBZ Debt Assumption Bill was
submitted to Parliament in April 2014. It provides for the restructuring of the RBZ balance sheet by
transferring its non-core domestic and foreign liabilities totalling US$1.35 billion to the central
government. In this regard, the MoFED issued in late-March and in April 2014, securities to repay
US$ 146 million of the validated RBZs liabilities. In implementing the debt assumption process, the
Government of Zimbabwe is guided by a strategy to minimise potential fiscal risks and to avoid the
concentration of maturities.
ZIMBABWE

8

31. We have taken the decision to move the Treasurys exchequer account from the Commercial
Bank of Zimbabwe (CBZ), to the RBZ, with the process to commence in tandem with the policy
measures discussed in paragraphs 30 above and 33 below. When the transfer process starts, we will
proceed on the basis of allowing the balance in the account at CBZ to gradually decline, while we
begin to direct tax revenue flows to the new exchequer account at RBZ. The transition arrangements
will remain in effect while we complete the link between the RBZs systems and the Public Finance
Management Information System (PFMIS) at the MoFED. As we approach the end of the transition
period, we will endeavor to minimize side effects on banking system liquidity and on the CBZs own
liquidity management. With this reform in mind, RBZ staff have for some time now been
incorporated into the MoFEDs cash-flow forecasting and management team. In this regard, we will
be calling on IMFs technical assistance to strengthen the governments treasury management
function.

32. Strengthening the financial regulatory and supervisory framework remains a priority for the
new government. We, however, thought it necessary to review the initial work on the Banking Act
amendments that was carried out under the previous government. Following a workshop held in
early-May 2014 where we consulted with the banking sector, the principles for the amendments to
the Banking Act were approved by Cabinet on 10 June 2014 (structural benchmark for the third
review), and we will submit those to Parliament in July/August 2014. Once enacted, these
amendments will improve corporate governance in the banking sector, strengthen the Troubled
Bank Resolution Framework, enhance consumer protection, improve regulatory coordination, and
facilitate the accreditation of a Credit Reference Bureau.

33. To help alleviate recurrent liquidity shortages, in February 2014 the Government of
Zimbabwe signed a Memorandum of Understanding with the African Export-Import Bank
(Afreximbank) to introduce a $100 million interbank liquidity facility. Under this facility, participating
banks in temporary need of liquidity will be able to pledge as collateral eligible assets in their
portfolios. Banks providing the liquidity will be protected by accepting as collateral securities issued
by Afreximbank, which enjoys a BBB rating. While Government stands ready to support this
mechanism, its possible exposure is strictly limited by the design of the facility.

34. We will continue to implement our policy to raise the minimum capital requirements for
banking institutions. Against the background of attendant challenges in the macroeconomic
environment, we will maintain the current minimum capital requirement levels as at
31 December 2012. We will monitor and evaluate progress made banks towards attainment of the
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capital milestones outlined in their recapitalization plans. We will intensify the monitoring of weaker
banks, with a particular focus on loan provisioning practices and risk management. Banks are
required to review the levels of insider loans, ensure adequate provisioning, and report monthly to
the RBZ. Finally, we will prioritize financial stability in designing and implementing any
indigenization and empowerment policies for the financial sector.

35. As spelt out in ZIM ASSET, we are determined to accelerate our re-engagement with all of
our creditors. We have started making quarterly payments to the African Development Bank (AfDB)
and the World Bank, and organized an initial meeting between our Debt Management Office and all
three major IFIs in late 2013 to launch discussions on appropriate payments going forward. We aim
to continue this discussion in the period ahead with the objective of settling on a solution that can
be satisfactory to all parties. While we continue these discussions, we will maintain payments to the
IFIs at least at their current levels. As our capacity to pay improves over time, we will increase these
payments.

36. In addition, we will refrain from making any draw-downs of our SDR holdings in 2014, as
these constitute the core of our international reserves. We will avoid selective debt servicing, as this
would complicate reaching an agreement with creditors on a debt resolution strategy. However, we
will continue to make repayments to creditors that are providing us with positive net new financing.

37. In 2013 the Government of Zimbabwe contracted two new external loans with Export-Import
Bank of China (US$ 319.5 million for power generation) and India (US$ 28.6 million for power and
water infrastructure). The financial terms of these loans fall below the 35 percent concessionality
requirement under the SMP. It is important to note that we could not afford to further postpone the
contracting of these loans, as these will fund improvements in power generation and water
infrastructure, which are essential for economic development and poverty reduction.

38. As indicated in our 2014 National Budget Statement, we will seek to avoid borrowing on
non-concessional terms going forward. However, only if grants and concessional loans are not
available, will we contract or guarantee non-concessional borrowing only subject to the limits
proposed in Table 1, and only for critical infrastructure projects. Moreover, before signing any non-
concessional loan agreement, we will seek project viability assessments from the AfDB, the
Development Bank of South Africa, or the World Bank to ensure that the identified projects have
high economic and social impact. We will also consult with Fund staff and provide them with all
related documents regarding non-government guaranteed and non-concessional external
borrowing by state-owned enterprises. We will inform the Fund staff when considering new
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instruments to leverage our natural resources and/or major projects under the public-private
partnerships model.

39. In order to strengthen public debt management, Cabinet approved the principles of a Public
Debt Management Bill on June 18, 2014 (structural benchmark for the third review).

40. The Government of Zimbabwe believes that the policies outlined above will achieve the
objectives of the programme, but stands ready to take further measures that might become
necessary for this purpose, in consultation with the IMF staff. The Government will continue to
provide IMF staff with the information required to accurately monitor the programme. Furthermore,
the Government of Zimbabwe will consult with the IMF staff in advance of any revisions to the
policies contained in the MEFP, in accordance with the IMFs policies on such consultations, at the
initiative of the Government or the IMF staff.

41. The Government of Zimbabwe authorizes the IMF to publish this letter, the attached TMU,
and the related staff report. We authorize the IMF to arrange for these documents to be posted on
its website following the conclusion of the review and subject to the removal of market-sensitive
information.

Sincerely yours,


/s/ /s/
Patrick A. Chinamasa John Mangudya
Minister of Finance & Economic Development Governor
Government of Zimbabwe Reserve Bank of Zimbabwe


Table 1. Zimbabwe: Quantitative Targets
(In millions of U.S. dollars, unless otherwise indicated)
2014
1
March March June
2
Sept. Dec.
Act. Prog. Act. Status Prog. Act. Prog. Act. Status Est. Proposed
1. Floor on primary budget balance of the central government
3,4,5,6,7
-26 18 80 -47 -262 52 -43 5 -35
Adjusted floor 169 -3 Not met 170 -25 -53 Not met
2. Continuous ceiling on new domestic payment arrears
8
n.a. 0 n.a. Not met 0 n.a.
3. Floor on protected social spending 18 51 58 Met 93 98 144 100 Not met 5 25 70 107
4. Floor on stock of usable international reserves 143 149 143 Not met 169 175 143 143 Met 143 143 158 173
5. Floor on payments to the PRGT 0.45 0.90 1.05 Met 1.35 1.50 1.80 1.80 Met 0.60 0.90 1.35 1.80
6. Continuous ceiling on the stock of new non-concessional external 0 330 29 Not Met
9
330 29 350 348 Met 0 400 400 400
debt contracted or guaranteed by the general government with
original maturity of one year or more
7. Ceiling on total stock of arrears to domestic service providers, 171 75 117 158 Not met 200 301 301 267
agricultural input suppliers, and on capital certificates
Memorandum Items:
Broad Money (stock) 3,646 4,043 3,689 4,226 3,757 3,828 3,888 4,014 3,900 3,918 4,011
Reserve Money (stock) 227 232 337 243 276 283 272 274 276 278 280
Disbursements on medical equipment and supplies loan 0 90 30 90 30 72 72 0 0 18 18
Unbudgeted costs related to the referendum and elections 18 148 47 148 153 153 153
Unbudgeted revenues from telecom licence fees 0 50 40 50 85 91 85
Indicative
Sept. Dec.
2
2013
1
June
2
2014
1, 10
1
Value of cumulative flows for the calendar year, unless otherwise indicated.
2
Program performance will be monitored based on the quantitative targets for June and December 2013 and for June 2014.
3
To be adjusted downwards in any quarter and subsequent quarters by the full amount of any new borrowing disbursed and utilized by central government for priority infrastructure projects.
10
Indicative targets are part of the authorities' reform agenda .
4
To be adjusted downwards in any quarter and subsequent quarters by the full amount of any domestic debt issuance by central government ring-fenced for clearance of domestic payment arrears.
5
To be adjusted upwards (downwards) in Q2 and Q3 of 2013 by the full amount of any shortfall (excess) in unbudgeted costs related to the constitutional referendum and national elections and incurred by central government, relative to programme assumptions.
6
To be adjusted downwards (upwards) in any quarter and subsequent quarters in 2013 by the full amount of any shortfall (excess) in unbudgeted revenues from telecom licence fees received by central government, relative to programme assumptions.
7
To be adjusted downwards in Q1 of 2013 by the value of the medical equipment and supplies project loan if the loan were disbursed in that quarter. To be adjusted upwards in Q2 and Q3 of 2013 by the shortfall in the cumulative disbursement on the loan
effected through these quarters, relative to programme assumptions. To be adjusted downwards (upwards) in Q4 of 2013 and all 4 quarters of 2014 by the full amount of any excess (shortfall) in the cumulative disbursement on the loan for the calendar year
effected through each date, relative to programme assumptions.
9
A US$ 319 million non-concessional loan was signed with the Export-Import Bank of China in November, thus breaching the continuous US$ 330 million ceiling.
8
For the second and third SMP reviews, the continuous ceiling on new domestic payment arrears is replaced with a ceiling on the total stock of arrears to domestic service providers, agricultural input suppliers, and on capital certificates.
1
1
Z
I
M
B
A
B
W
E
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Table 2. Zimbabwe: Status of Structural Benchmarks for 1
st
and 2
nd
SMP Reviews
Benchmarks Macroeconomic
Rationale
Review Status
Tax Policy
1. Submit to Parliament the new Income Tax Bill. Enhance tax
administration
1
st
Met.
2. Issue a Statutory Instrument establishing a clear formula
for the calculation and remittance of dividends from
entities in which the Government holds shares.
Increase transparency
and accountability
1
st
Not met.
3. Submit to Cabinet amendments to the Precious Stones
Trade Act to incorporate the principles of the Diamond
Policy.
Increase transparency
and accountability
2
nd
Not met.
4. Submit to Parliament amendments to the Precious
Stones Trade Act.
Increase transparency
and accountability
2
nd
Not met.
5. Submit to Parliament a new Mines and Minerals Act. 2
nd
Not met.
Public Financial Management
6. PSC to submit to MoFED a time-bound action plan on
measures to modernize the human resources and payroll
systems.
Enhance public
expenditure and
financial management
1
st
Met.
7. Publish a report on the stock of verified arrears and a
strategy to clear validated arrears by December 2013 on
MoFEDs website.
Enhance public
expenditure and
financial management
1
st
Not met.
Financial Sector
8. Submit to the RBZ Board a framework for contingency
planning and systemic crisis management.
Reduce financial sector
vulnerabilities
1
st
Met.
9. Submit amendments to the Banking Act to Parliament
aimed at strengthening the Troubled Bank Resolution
Framework.
Strengthen legal and
regulatory framework
and reduce systemic
liquidity risks
2
nd
Not met.
10. Submit the RBZ Debt Relief Bill to Parliament to
complete the restructuring of the RBZ balance sheet.
Reduce financial sector
vulnerabilities
2
nd
Met

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Table 3. Zimbabwe: Proposed Structural Benchmarks for 3
rd
SMP Review
Benchmarks Review Macroeconomic
Rationale
Tax Policy
1. Submit to Cabinet amendments to the Mines and Minerals
Act.
3
rd
Increase transparency
and accountability.
Public Financial Management
2. Cabinet approval of the principles for a Public Debt
Management Bill.
3
rd
Enhance public debt
management.
Financial Sector
3. Cabinet approval of the principles for the amendments to
the Banking Act.
3
rd
Reduce financial sector
vulnerability.

ZIMBABWE

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TECHNICAL MEMORANDUM OF UNDERSTANDING
INTRODUCTION
1. This memorandum sets forth the understandings between the Government of Zimbabwe
and the IMF staff regarding the definitions of the quantitative targets, the structural benchmarks, the
applicable adjusters, and the respective reporting requirements for the Staff-Monitored Programme
(SMP). The quantitative targets and structural benchmarks are reported in Tables 1 and 3 of the
Governments Letter of Intent (LOI).
DEFINITIONS
2. Central government represents a single institutional unit consolidating all the accounts
whose total revenues and expenditures are authorized through the Blue Book (including line
ministries, the Parliament of Zimbabwe, the Auditor Generals Office, and Vote of Credit). The
definition excludes public entities with autonomous legal personae whose own budgets are not
included in the central government budget.
3. The general government comprises the central government, the Reserve Bank of
Zimbabwe (RBZ), extra-budgetary funds, social security, and local governments.
4. The public sector comprises the general government and all state-owned enterprises.
5. Non-interest expenditures are measured on a cash basis. Non-interest expenditures
include current expenditures (wages and salaries, pensions, goods and services, grants and
transfers), capital expenditures, and net lending. Net lending comprises loans granted by the central
government, except in the case of on-lending of externally borrowed funds, which is included as a
negative domestic financing item (below the line). All expenditures and net lending financed with
loans to be serviced by the central government fall within the programmes definition of
expenditures and net lending, even if the cash did not transit through the treasury. Non-interest
expenditures will be measured from the budget execution data.
6. Broad money is defined as total banking sector deposits, net of interbank deposits and
excluding government deposits in the banking sector.
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7. Reserve money comprises bank and non-bank deposits with the Reserve Bank of
Zimbabwe, including bankers current accounts.
QUANTITATIVE TARGETS
A. Floor on the Primary Budget Balance of the Central Government
8. The primary budget balance of the central government is measured on a cash basis and
is defined as revenues and grants minus non-interest expenditures. The central government primary
balance will be measured from above the line using budget execution data.
B. Ceiling on the Total Stock of Arrears to Domestic Service Providers,
Agricultural Input Suppliers, and on Capital Certificates
9. Domestic arrears are defined as overdue domestic payment obligations of the central
government, whether verified or not, to domestic service providers, agricultural input suppliers, and
on capital certificates. Arrears will be monitored using the monthly fiscal data reporting. Domestic
service providers are defined to comprise the Central Mechanical Equipment Department (CMED),
NetOne, TelOne, ZESA (power company), ZINWA (water authority), and the local authorities.
C. Floor on Protected Social Spending
10. Protected social spending is measured on a cash basis and comprises central government
spending in the following areas:
education (recurrent spending on teaching and learning materials, on student stipend support
from the National Education and Training Fund; and capital spending on upgrading of schools
and other facilities);
health (recurrent spending on government hospitals and health centres, on grant-aided
institutions such as Parirenyatwa Hospital, mission hospitals, and local authorities, on maternal
and child health, on results-based financing, on preventive health programmes, on procurement
of ARVs and TB drugs; and capital spending on revitalization of health institutions, on medical
equipment, and on procurement of ambulances and service vehicles);
social protection (recurrent spending on the Basic Education Assistance Module (BEAM), on the
harmonized cash transfer, on health assistance, on rehabilitation of disabled persons, on
government social protection institutions; and capital spending on refurbishment of
rehabilitation centres);
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water and sanitation (capital spending on water and sewer infrastructure for local authorities,
on water supply infrastructure for small towns and growth points, and on water and sanitation
for rural areas);
agriculture (recurrent spending on animal diseases and risk management, and capital spending
on irrigation rehabilitation and development and on input support for disadvantaged
households); and
other (capital spending on construction and rehabilitation of rural roads).
D. Floor on the Stock of Usable International Reserves
11. Usable international reserves are defined as the sum of (i) Zimbabwes SDR holdings; and
(ii) the higher of zero and the difference between gross international reserves as reported by the
Government of Zimbabwe (adjusted for encumbered deposits and securities and excluding SDR
holdings) and the amounts in commercial banks current and Real Time Gross Settlement (RTGS)
accounts. Gross international reserves, excluding Zimbabwes SDR holdings, include refined gold,
balances with foreign banks, foreign treasury bills, securities and investments, foreign currency held
by the Reserve Bank of Zimbabwe, and Zimbabwes reserve position in the Fund. SDRs allocated
under the Fourth Amendment of the IMF's Articles of agreement and placed in escrow account at
the IMF (SDR 66.4 million) are excluded from the definitions in this paragraph. For the purpose of
the programme, SDR-denominated accounts will be valued at the programme exchange rate of
US$ 1.54 per SDR.
E. Ceiling on the Amount of New Non-concessional External Debt
Contracted or Guaranteed by the General Government with Original
Maturity of One Year or More
12. Contracting or guaranteeing of new external debt by the general government applies
to debt to non-residents with original maturity of one year or more. For the purposes of the
programme, the definition of debt is set forth in point No. 9 of the "Guidelines on Performance
Criteria with Respect to External Debt" (see Decision No. 6230-(79/140) as revised on August 31,
2009 (Decision No. 14416-(09/91)), attached in Annex I). This quantitative target will be assessed on
a continuous basis.
13. Debt is defined as concessional if, at the time of its contracting, the ratio between the
present value (PV) and the face value of debt is less than 65 percent (equivalent to a grant element
of at least 35 percent). The PV of debt at the time of its contracting is calculated by discounting the
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future stream of payments of debt service due on this debt. The discount rate used for this purpose
is 5 percent.
14. New non-concessional debt will be contracted or guaranteed only as financing for priority
infrastructure projects that have been assessed in consultation with a reputable and independent
financial institution, such as the African Development Bank, the Development Bank of Southern
Africa, or the World Bank, prior to the signing of the loan agreement and project documents.
F. Adjusters
15. The quantitative target on the primary budget balance of the central government
specified under the programme is subject to the following adjusters:
The floor on the cumulative primary budget balance in any quarter and subsequent quarters will
be adjusted downwards by the full amount of any new borrowing disbursed and utilized by
central government for priority infrastructure projects.
The floor on the cumulative primary budget balance in any quarter and subsequent quarters will
be adjusted downwards by the full amount of any domestic debt issued by central government
ring-fenced for clearance of domestic payment arrears.
The floor on the cumulative primary budget balance in Q4 of 2013 and all 4 quarters of 2014 will
be adjusted downwards (upwards) by the full amount of any excess (shortfall) in the cumulative
disbursement for the calendar year on the Medical Equipment and Supplies Project loan effected
through each date, relative to programme assumptions. The disbursement dates for the purpose
of this adjuster are the same as the disbursement dates officially communicated by the Lender
to the Borrower, as explained in the loan contract.
DATA REPORTING
16. To facilitate the monitoring of programme implementation, the Government of Zimbabwe
will prepare and forward to the Fund staff electronically information in accordance with the agreed
reporting framework contained in Table 1.
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Table 1. Zimbabwe: Data Reporting for Programme Monitoring

Data Description
Reporting
Institution
Reporting
Frequency
Submission
Lag

Monetary and Financial Sector

NIR, NFA, monetary control programme RBZ Weekly 1 week
Broad money survey RBZ Monthly 2 months
RTGS transactions RBZ Monthly 1 month
Prudential liquid asset ratios RBZ Monthly 1 month
Cash flow of the RBZ RBZ Monthly 1 month
Balance sheets and income statements for
financial institutions
RBZ Quarterly 2 months
Financial soundness indicators (aggregate and by
bank)
RBZ Quarterly 2 months
Lending activity of banks (by sector) RBZ Quarterly 2 months
Commercial bank interest rates

RBZ

Monthly

1 month

External Sector
RBZ purchases and sales of foreign currency RBZ Monthly 1 month
Balance of payments (incl. revised outturn for
previous quarters)
RBZ/ZIMSTAT Quarterly 3 months
Import and export data, for aggregated sectors RBZ/ZIMSTAT Monthly 1 month
Net international reserves (incl. reserve
assets/liabilities by currency)
RBZ Monthly 1 week
Foreign exchange flow data (by type of flow) RBZ Monthly 1 month
Diamond production, exports, and prices RBZ Quarterly 1 month
RBZ Monthly Economic Review RBZ Monthly 6 weeks
Quarterly report on macroeconomic
developments
MoFED Quarterly 1 month
External debt stock, disbursements, amortization,
interest, other fees and charges, and repayment
(by creditor and currency); detailed terms and
conditions of all new contracted and government-
guaranteed external borrowing (concessional and
non-concessional); and committed undisbursed
balances (by creditor)
MoFED Monthly 1 month


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Table 1. Zimbabwe: Data Reporting for Programme Monitoring (concluded)

Data Description
Reporting
Institution
Reporting
Frequency
Submission
Lag

Fiscal Sector
Central government operations revenue, expenditure, and
financing
MoFED Monthly 1 month
Detailed data on the execution of the recurrent budget (by
economic and administrative classification and by line ministry)
MoFED Monthly 1 month
Total stock of arrears to domestic service providers, agricultural
input suppliers, and on capital certificates at end-month
MoFED Monthly 1 month
Stock of domestic debt, disbursements, amortization, interest,
and other fees and charges; face value, maturity, interest rate,
and payments schedule for new domestic loans and securities
MoFED Monthly 1 month
Employment data for each ministry MoFED Monthly 1 month
Detailed data on resource revenue (by type) MoFED Quarterly 1 month
Detailed data on the budget execution of protected social
spending (as defined in this document)
MoFED Quarterly 1 month
Details of disbursed external budget support and project grants
and loans
MoFED Quarterly 1 month

Real Sector
Consumer Price Index ZIMSTAT Monthly 1 month
Fuel price indices, including Petrol, Diesel, and Paraffin ZIMSTAT Monthly 2 months
Producer Price Index; Building Materials Price Index; Poverty
Datum Lines; and Civil Engineering Materials Index
ZIMSTAT Quarterly 6 weeks
Agricultural production data (volume/value of major products)
ZIMSTAT Semi-
annually
4 months
Mining production data (volume/value by minerals), excluding
production from sand and stone quarries
ZIMSTAT Quarterly 6 weeks
National Accounts (breakdowns of production and expenditure
side in real and nominal terms)
ZIMSTAT Annually 8 months
Quarterly Digest of Statistics ZIMSTAT Quarterly 6 weeks

Structural Benchmarks
Update on the status of implementation of the structural
benchmarks specified in Table 3 of the LOI
MoFED/RBZ Quarterly 3 weeks

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GUIDELINES ON EXTERNAL DEBT

Excerpt from Executive Board Decision No. 6230-(79/140) as revised on August 31, 2009 (Decision
No. 14416-(09/91)):

For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not
contingent, liability, created under a contractual arrangement through the provision of value in
the form of assets (including currency) or services, and which requires the obligor to make one
or more payments in the form of assets (including currency) or services, at some future point(s)
in time; these payments will discharge the principal and/or interest liabilities incurred under the
contract. Debts can take a number of forms, the primary ones being as follows:

(i) loans, i.e., advances of money to the obligor by the lender made on the basis of an
undertaking that the obligor will repay the funds in the future (including deposits, bonds,
debentures, commercial loans and buyers' credits) and temporary exchanges of assets that
are equivalent to fully collateralized loans under which the obligor is required to repay the
funds, and usually pay interest, by repurchasing the collateral from the buyer in the future
(such as repurchase agreements and official swap arrangements);

(ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments
until sometime after the date on which the goods are delivered or services are provided; and

(iii) leases, i.e., arrangements under which property is provided which the lessee has the
right to use for one or more specified period(s) of time that are usually shorter than the total
expected service life of the property, while the lesser retains the title to the property. For the
purpose of the guideline, the debt is the present value (at the inception of the lease) of all
lease payments expected to be made during the period of the agreement excluding those
payments that cover the operation, repair or maintenance of the property.

Under the definition of debt set out in this paragraph, arrears, penalties, and judicially awarded
damages arising from the failure to make payment under a contractual obligation that
constitutes debt are debt. Failure to make payment on an obligation that is not considered debt
under this definition (e.g., payment on delivery) will not give rise to debt.