The International Monetary Fund (IMF) has commended the inclusive government for putting in place strong economic policies in the last two years but said the macro-economic outlook remained uncertain going forward.
An IMF delegation led by chief of mission to Zimbabwe Vitaliy Kramarenko visited the country between March 16–30 to conduct Article IV consultations.
The mission met with Prime Minister Morgan Tsvangirai, Finance minister Tendai Biti, Minister of Youth Development, Indigenisation and Empowerment minister Saviour Kasukuwere, Economic Planning minister Tapiwa Mashakada and Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono among other senior government officials
In a statement, IMF said stronger policies, a favourable external environment and sizeable off-budget donor grants supported a nascent economic recovery and a notable improvement in the humanitarian situation during 2009-10.
The mission projected that real gross domestic product (GDP) grew by an estimated 6% in 2009 and 9% last year.
It however noted that economic growth started from a low base and was concentrated on primary commodity sectors in mining and agriculture, both of which are sensitive to exogenous shocks.
IMF said the country’s budget was heavily tilted toward increasing the government wage bill with insufficient resources being allocated to social programmes and high-priority infrastructure.
“As a result, growth benefits did not fully trickle down to many ordinary Zimbabweans outside the public sector and the growing segments of the formal private sector and poverty remains widespread,” said IMF.
“The macroeconomic outlook for 2011 remains highly uncertain. Against the background of a favourable external environment, short-term growth potential, particularly in mining, is strong.
“However, a sizeable fiscal financing gap projected for 2011, an inefficient composition of public expenditure, persistent financial sector vulnerabilities, and weaknesses in the business climate, including the recently announced fast-track indigenisation of the mining sector, weigh heavily on growth and poverty reduction prospects.
“If these policy challenges are addressed in a timely manner, the strong growth momentum could be sustained with a significant beneficial impact on living standards of ordinary Zimbabweans.
IMF projected the country would face a sizeable fiscal financing deficit this year despite historically-high commodity prices projected by the World Economic Outlook.
Significant wage bill overruns relative to the Budget and a large stock of outstanding domestic payments arrears accumulated by end-2010 were said to be the main sources of fiscal pressures.
The Bretton Woods institutions said the fiscal gap could be eliminated through the removal of ghost workers from the payroll, reinforced controls on employment levels, and a reduction in low-priority transfers to state-owned enterprises.
It noted that it would be critically important to protect non-wage social and infrastructure expenditure, which it said was essential for sustainable and inclusive growth.
“The multi-currency system continues to serve Zimbabwe well, and it should be strengthened by further progress in improving RBZ governance and measures aimed at reducing vulnerabilities in the financial system.
Further steps are needed to accelerate financial restructuring of the financially-distressed RBZ.
There is also an urgent need to strengthen prudential regulations and their enforcement to contain persistent financial sector vulnerabilities.
“Structural reforms need to be stepped up. Alignment of indigenisation and empowerment objectives with respect for private property rights and the need to attract domestic and foreign investment, more flexible labour market legislation, and improved governance, particularly in the diamond sector, would be essential to strengthen the business climate and boost economic growth,” IMF said.
“It would also be important to guard against wage increases in both in private and public sectors in excess of productivity growth to prevent an erosion of competitiveness of labour-intensive industries that are critical for employment generation and poverty reduction.”
“Zimbabwe remains in debt distress, which has been exacerbated by recent non-concessional borrowing of the government. A significant strengthening in policies and debt relief within a comprehensive arrears clearance framework supported by donors are essential for resolving Zimbabwe’s external payments arrears.”
IMF said access to lending resources would be subject to relevant policies, including a track record of sound economic policies and a comprehensive strategy for the clearance of arrears to official creditors agreed between the government coalition partners and official creditors.