HARARE (Reuters) - Zimbabwe is yet to reach a deal with the World Bank and other foreign lenders over clearing arrears and implementing reforms, the International Monetary Fund said, warning that reliance on raising money domestically could further fan inflation.
President Robert Mugabe’s government has not received foreign funding since it started defaulting on its external debt in 1999 and is relying on domestic borrowing and taxes to fund its national budget.
The IMF said in a statement on Friday after a meeting of its executive board this week that although Harare cleared its arrears with the fund last year, talks with the World Bank and other multilateral lenders faced delays.
“It (Zimbabwe) is yet to reach agreement with the World Bank and other multilateral institutions on the settlement of arrears, and undertake reforms that would facilitate resolution of arrears with bilateral creditors,” the IMF said.
The IMF also said Zimbabwe should not seek to clear its $1.75 billion foreign arrears through agreements that would worsen its debt situation. Zimbabwe’s foreign debt stands at more than $7 billion, more than half of its GDP.
The suggested reforms include slashing public sector wages, now at more than 90 percent of the national budget, reducing farm subsidies, improving transparency in the mining sector and reaching an agreement on the compensation of white farmers.
On April 27, Zimbabwean Finance Minister Patrick Chinamasa said the southern African nation had met all conditions to clear arrears to the World Bank and African Development Bank, paving the way for possible future funding from the IMF.
But the IMF warned that Zimbabwe’s borrowings from its central bank and domestic banks to plug its budget deficit was unsustainable, left the economy fragile, and had “significant potential for generating inflationary pressures”.
The IMF said in Friday’s report that the government’s domestic borrowing would fuel consumer prices, with annual inflation expected to rise to 7 percent by December from 0.75 percent in May, before entering double digits by end of 2018.
The World Bank has forecast a 3.2 percent annual inflation rate in Zimbabwe at the end of this year, before accelerating sharply to 9.6 percent at the end of 2018.
Although the IMF projected GDP of 2.8 percent this year, it said growth would slow to 0.98 percent in 2018.
The government’s domestic borrowing stands at more than $4 billion and is seen growing.
“Should the authorities prove unable to restrain fiscal spending, or additional exogenous shocks arise, the status quo could prove very fragile,” the IMF said.
Shortages of foreign currency have forced banks to limit daily withdrawals since last year, while importers, including mining companies, have struggled to pay for their goods abroad.
Editing by Alexander Smith and Louise Ireland