IMF warns Zim

SAMANTHA MADE

The International Monetary Fund (IMF), a Bretton Woods institution, has cautioned that Zimbabwe’s fragile public finances and unsustainable debt levels threaten to tip the economy into a deeper crisis unless sweeping fiscal and structural reforms are urgently implemented.

In its latest Article IV Consultation report, the IMF called on Harare to embark on decisive  fiscal consolidation and pursue  a comprehensive debt restructuring plan  to restore  macroeconomic stability, rebuild market  confidence and unlock new  lines of concessional  financing.

 The Fund warned that “Current policies are insufficient to restore debt sustainability.”

IMF said Zimbabwe’s fragile public finances, coupled with limited access to concessional funding, continue to weigh heavily on the economy.

“Debt sustainability will require a balanced mix of fiscal consolidation, strengthened public debt management, growth-promoting structural reforms, and external arrears resolution, which will pave the way for new financing from multilateral and bilateral official creditors,” the IMF stated.

The IMF recommended that Harare close its fiscal gap through a blend of revenue-enhancing and expenditure-rationalisation measures. It urged the authorities to rationalise tax incentives, curb tax avoidance, and address weaknesses in tax administration.

“On the revenue side, priorities include rationalizing tax incentives and addressing tax avoidance and tax administration weaknesses for medium-term gains,” the Fund said. “Most untapped potential is in corporate income tax, where rationalizing generous tax incentives would help narrow the tax gap—estimated at about 3½ percent of GDP.”

The report also cited the need to strengthen mining sector taxation, particularly by tackling profit-shifting practices that erode the revenue base. Improved mining taxes, it said, could generate an additional ½ to ¾ percent of GDP.

Furthermore, the IMF pointed to inefficiencies in the Tax and Revenue Administration System (TaRMS), including an unreliable taxpayer database, as key obstacles to realising the full revenue potential. If addressed, these reforms could “gradually boost the revenue ratio by an estimated 1 percent of GDP in the medium term.”

To plug the fiscal gap in 2025, the IMF called for significant expenditure rationalisation while protecting essential services and development projects.

“To close the financing gap, the updated expenditure plans would require significant cuts in spending on goods and services, transfers, and capital this year, equivalent to about 1¼ percent of GDP, which should be selected in a way that minimises disruption to essential services and projects,” the report stated.

The Fund noted that these adjustments would create fiscal room to increase priority spending once stability is restored.

Economist Misheck Chikodzo told Business Times that the IMF’s message underscores a painful but necessary truth: Zimbabwe can no longer defer tough fiscal choices.

“The government has been relying heavily on short-term fixes, but the IMF is clear,  without structural fiscal consolidation and a credible debt restructuring plan, Zimbabwe’s economy will remain stuck in low growth and high inflation,” Chikodzo said.

“What’s needed is a shift from survival policies to sustainability policies.”

He added that rationalising tax incentives in the mining and manufacturing sectors would not only broaden the tax base but also “signal to the market that Zimbabwe is serious about transparency and reform.”

Another economist Nyasha Moyo echoed similar sentiments, warning that Zimbabwe’s fiscal trajectory is unsustainable without decisive intervention.

“The real risk is policy fatigue. The IMF report is a mirror reflecting our weaknesses,  from fiscal indiscipline to weak debt management,” Moyo said. “Unless the authorities commit to genuine reforms, including fiscal restraint and monetary coherence, investor confidence will not return, and the debt trap will deepen.”

Moyo also noted that meaningful re-engagement with creditors such as the World Bank and AfDB would depend on visible progress in governance and transparency

Zimbabwe’s total public and publicly guaranteed debt stood at US$21.5 bn as of December 2024—equivalent to 47.1% of GDP—leaving the country effectively locked out of international capital markets. Of this amount, US$13.2 bn is external debt and US$8.3 bn domestic.

More than 70% of external arrears stem from accumulated interest, deepening debt distress and leaving Harare unable to access new concessional finance for over two decades.

Zimbabwe owes US$1.48bn to the World Bank, US$671m to the African Development Bank (AfDB), US$372m to the European Investment Bank, US$3.55bn to Paris Club creditors, and US$2.22bn to non-Paris Club lenders.

Although Zimbabwe cleared its arrears with the IMF in 2016, it remains in default with the World Bank and AfDB, blocking access to new funding.

The IMF urged the authorities to re-engage international creditors to develop a comprehensive debt resolution strategy, warning that delays will prolong financial isolation.

“Restoring debt sustainability requires concerted action on arrears clearance, improved debt transparency, and credible commitments to governance and policy reform,” the Fund said.

The IMF further emphasised the need for a transparent and market-based foreign exchange system alongside a coherent monetary policy framework to stabilise the ZiG, the new local currency.

“A credible monetary and FX policy framework is essential to establish the ZiG as a stable and more widely used national currency,” the report noted. “In the long run, staff recommend a more flexible FX regime and inflation targeting. But given the high degree of dollarization, initial efforts should focus on stabilising the ZiG nominal exchange rate against a suitable basket of currencies.”

The IMF urged the Reserve Bank of Zimbabwe (RBZ) to phase out direct monetary instruments and allow market forces to determine interest rates.

“The RBZ should reduce the role of direct monetary instruments by phasing out NNCDs and replacing them with indirect and tradable securities carrying a market-based interest rate,” the Fund advised.

To strengthen confidence in the local currency, the IMF called for fiscal and monetary discipline complemented by measures to enhance ZiG usage in the economy.

“Further steps are needed to increase usage of the ZiG. Fiscal discipline and enhancements to the current monetary and FX frameworks would help improve confidence in the ZiG,” the report read. “These should be complemented by measures to enhance the demand for ZiG—most notably, by increasing the share of Treasury’s operations in ZiG and, once fiscal conditions allow, removing the intermediated money transfer tax (IMTT) on electronic bank transfers.”

The IMF also urged greater clarity on the government’s mono-currency transition plan, saying uncertainty around its operational scope could undermine confidence.

“The authorities should provide more clarity on the operational implications of the mono-currency transitional plan, including clarifying if the use of a mono-currency will be limited to domestic transactions,” it stated.

Despite highlighting significant vulnerabilities, the IMF acknowledged recent progress, including tighter monetary policy and the halting of quasi-fiscal operations by the RBZ. These moves, it said, have helped reduce inflation and stabilise the economy.

The Fund also welcomed signs of a modest growth recovery, driven by favourable terms of trade and fading climate shocks, but warned that without deep reforms, these gains would remain fragile.

Zimbabwe’s last major arrears clearance attempt—the 2015 Lima Strategy—collapsed amid concerns over policy credibility. More recently, AfDB President Dr. Akinwumi Adesina proposed a US$2.6 billion bridge financing facility to unlock re-engagement, but progress has stalled.

As Finance Minister Professor Mthuli Ncube turns to resource-backed repayment mechanisms, the IMF’s latest assessment signals growing impatience among lenders over policy inertia.