IMF warns Zimbabwe against excessive spending

The International Monetary Fund (IMF) has warned Zimbabwe against excessive spending as this may worsen cash shortages and ultimately fuel inflation.

The IMF said this in a statement released Monday after a two-week mission to the southern African country from May 2-13.

"Spending pressures stem from high employment costs, government transfers to support specific economic sectors, and elevated discretionary expenditure. Action on these three fronts, while safeguarding social outlays, is therefore crucial," IMF team leader Ana Lucia Coronel said.

She said a severe drought in the 2015/2016 agricultural season and slow reform momentum had led to high expenditure levels by the Zimbabwe government since late 2015.

This was happening against the background of subdued state revenue and foreign inflows, forcing the government to finance the large fiscal imbalances through domestic borrowing.

The IMF said the expansionary fiscal stance and curtailed net capital flows had resulted in cash shortages, hampering economic activities.

Zimbabwe is facing severe bank note shortages since January 2016 and bond notes introduced in November 2016 have not helped to address the cash shortages.

The country also moved out of deflation in March, after having been stuck in negative inflation since 2013.

Annual inflation for the month of April stood at 0.48 percent, with the Reserve Bank of Zimbabwe forecasting inflation to close the year at between one and two percent.

The country suffered from hyperinflation during a decade of economic crisis which ended in 2009 when the country abandoned the worthless Zimbabwe dollar and adopted multiple currencies.

The IMF said Zimbabwe's economy was facing difficulties which require government to take action to unleash the potential of the private sector and ensure that growth benefits the most vulnerable segments of the population.

"Building on the progress already achieved, the government is encouraged to demonstrate that Zimbabwe is open for business. This will include enhancing efforts to tackle corruption, encouraging private sector investment, allowing the market to determine prices, promoting labor flexibility, and creating a stable legal and regulatory framework to reduce policy uncertainty," Coronel said.

The IMF added that restoration of confidence is essential for Zimbabwe to attract necessary dollar inflows to the economy.

The recovery in agriculture and mining would drive growth this year but maintaining the growth momentum would require action to expedite the authorities' plans to reduce the fiscal deficit to a sustainable level, the IMF said.

Zimbabwe is expecting higher economic growth of 3.7 percent in 2017 from an initial projection of 1.7 percent following a better agriculture season. Endit