Zimbabwe’s fragile economic situation characterized by a growth slowdown, a large external deficit and low international reserves has put the economic rebound the country experienced since the end of hyperinflation in 2009 to an end, said the International Monetary Fund executives on Monday based on its latest review of the country.

The IMF executives finished their review and consultation with Zimbabwe in mid-June.

With risks on the downside, the IMF executives emphasized that in order for the country to achieve sustainable and inclusive growth, it will require determined and comprehensive reforms. The IMF highlighted the need for Zimbabwe to restore fiscal and external sustainability and to reduce financial vulnerabilities.

Having said that, the IMF executives said they were encouraged by the country’s leaders’ renewed commitment to continue implementing the policies and reforms agreed to with IMF under the staff-monitored program, which has provided a useful anchor for policies during the past year, regardless of policy delays.

Zimbabwe held its first general elections in July 2013 under the new constitution approved by the March 2013 referendum and ended the then-four-year coalition government.

After averaging 10 percent from 2009 to 2012, Zimbabwe’s economic growth fell to an estimated 3.3 percent in 2013 due to uncertainty during the election year, tight liquidity conditions, weak export demands, competitiveness pressures and adverse environmental impact.

Inflation then continued its downward spiral to minus 0.3 percent in April 2014 from 2.9 percent at end of 2012, mainly reflecting the appreciation of the U.S. dollar against the South African rand and weak domestic demand. The country’s current deficit has widened in 2013 to 28.7 percent of GDP as the trade deficit deteriorated, reflecting lower mineral exports.

To rebound the economy, IMF executives encouraged the government to fully implement its revised fiscal plan for 2014 and be ready to take additional actions if needed, while at the same time protecting priority infrastructure and social spending and to stay engaged with the international financial institutions.

They also highlighted the need to mobilize revenue, including from the diamond sector.
To achieve sustainable development and social equity, the IMF executives said the government has launched a new five-year development plan, the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIM ASSET).

However, the IMF executives stressed the importance of rebalancing the expenditure mix away from employment costs in order to free up resources for development. Strengthening public financial management is also crucial to prevent accumulation of new arrears, they said.

The IMF executives are concerned that the main financing resource in Zimbabwe’s capital account was private loans. They underscored the need to improve debt management and supported the strategy to seek mainly grants and highly concessional resources while limiting non-concessional financing to critical development projects with high economic returns.

The executives also noted in their review that strong macroeconomic policies and a comprehensive arrears clearance framework supported by development partners are essential to addressing Zimbabwe’s debt problems.

They urged the government to engage in coordinated discussions with the World Bank and other international financial institutions (IFIs) and calls on them to respect the preferred creditor status of IFIs, avoid selective debt service and increase payments to the Fund’s Poverty Reduction and Growth Trust as capacity to repay improves.

IMF executives said taking a proactive approach, such as restructuring and recapitalizing the Reserve Bank of Zimbabwe, will help mitigate financial vulnerabilities and ensure an orderly resolution of insolvent non-systemic banks.

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