Zimbabwe told to curb public spending and bring down debt

16 May 17

The International Monetary Fund has urged Zimbabwe to rein in its spending to bring its ballooning deficit back down to a sustainable level.

 

web_zimbabwebondnotes_shutterstock_616393664.jpg

Zimbabwean bond notes. Shutterstock 616393664

Zimbabwe launched a new currency, pegged to the US dollar and dubbed bond notes, last year amid chronic dollar shortages.

 

Zimbabwe’s finance minister, Patrick Chinamasa, said in December that the country’s 2016 budget deficit would widen to nearly eight times more than had been forecast a year earlier, reaching $1.18bn rather than the projected $150m.

The country’s economy has been battered by drought, falling commodity prices and the appreciation of the US dollar, leading to chronic cash shortages and declining growth and prompting the government to intervene to support certain sectors, namely agriculture.

With a quarter of the country’s population in need of food, Ana LucĂ­a Coronel, who led the IMF team in Zimbabwe, said such interventions were “understandable” but warned that too high government spending could exacerbate cash shortages, further burden the country with debt and “ultimately, fuel inflation”.

She also highlighted high employment costs – accounting for more than half of all government spending – as an area where action is “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,” she stated, adding that efforts to curtail other non-priority spending should be reinforced.

Meanwhile, interventions to support sectors like agriculture could be redesigned to maximise the benefits for production while minimising the risks to the public sector balance sheet, she said.

With high levels of perceived corruption and significant debt arrears (worth $1.7bn to the World Bank and African Development Bank alone), the country is also suffering from a crisis of confidence.

Coronel stressed that winning this back was essential for attracting the necessary dollar inflows into the economy. The US dollars Zimbabwe introduced after its own currency collapsed are in short supply, and a new version of the dollar, dubbed bond notes, introduced this year have done little to stave off the shortages.

“Refraining from central bank financing of the deficit and containing the issuance of debt and quasi-currency instruments is vital,” she noted.

She called for reforms to tackle corruption, encourage private sector investment, remove price controls, promote labour flexibility and create a stable and certain regulatory environment.

“The team recommends taking action to unleash the potential of the private sector and ensure that growth benefits the most vulnerable,” she continued.

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

In its previous health check of Zimbabwe’s economy, published in March 2016, the fund had also urged the country to aim for more prudent spending.

The country’s economic crisis has led to some of its biggest protests and strikes in decades, including one by civil servants who have not received their wages. 

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