IMF warns Zimbabwe that excessive government spending could worsen cash crisis

At the conclusion of the visit, Ms. Coronel issued the following statement:

“The economy is facing difficulties. A severe drought and slow reform momentum have led to high expenditure levels since late 2015, despite subdued revenues. With a difficult external environment limiting access to foreign inflows, the ensuing large fiscal imbalances are being financed by domestic borrowing. The expansionary fiscal stance and curtailed net capital flows have resulted in cash shortages, hampering economic activities.

“The recovery in agriculture and mining will drive growth this year. However, maintaining the growth momentum will require action to expedite the authorities’ plans to reduce the deficit to a sustainable level. Excessive government spending, if continued, could exacerbate the cash scarcity, further jeopardize the health of the external and financial sectors, and, ultimately, fuel inflation.

“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. Reducing the wage bill could involve reviewing allowances and benefits and evaluating the size of the civil service with a view to eliminating non-essential posts. Government interventions to support agriculture, while understandable, could be redesigned with the aim of maximizing the benefits on production while minimizing the risks to the public-sector balance sheet. Reinforcing the government’s efforts to curtail non-priority spending is also pressing.

“Restoration of confidence is essential for attracting the necessary dollar inflows to the economy. Refraining from central bank financing of the deficit and containing the issuance of debt and quasi-currency instruments is vital. Furthermore, the financial sector should restore its role of intermediating resources in the economy by channeling deposits to productive credit rather than financing fiscal operations.

“The team recommends taking 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. Moreover, there is room for enhancing domestic revenue mobilization, boosting transparency in the mining sector, and improving governance in public enterprises to strengthen the country’s fiscal position.

“The team stands ready to continue to work with the Zimbabwean authorities to address their policy challenges. The Executive Board of the IMF is expected to consider the staff report for Zimbabwe’s 2017 Article IV Consultations in early July. The team wishes to thank the authorities for their hospitality and constructive cooperation.”

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