The International Monetary Fund (IMF) has warned Zimbabwe about excessive spending as this may lead to cash shortages and inflation.
The IMF said this in a report following a two-week mission to the country from May 2 to May 13.
The team leader, Ana Coronel said: “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.”
Coronel also said that severe drought during the 2015 and 2016 agricultural season and slow reform momentum had led to high expenditure levels by the Zimbabwe government since late 2015.
This was happening against the background of subdued state revenue and foreign inflows, forcing the government to finance the large fiscal imbalances through domestic borrowing.
The report read: The expansionary fiscal stance and curtailed net capital flows had resulted in cash shortages, hampering economic activities.
Zimbabwe is facing severe banknote shortages since January 2016 and bond notes introduced in November 2016 have not helped to address the cash shortages.
The country also moved out of deflation in March, after having been stuck in negative inflation since 2013.
Annual inflation for the month of April stood at 0.48 per cent, with the Reserve Bank of Zimbabwe forecasting inflation to close the year at between one and two per cent.
The country suffered from hyperinflation during a decade of an economic crisis which ended in 2009 when the country abandoned the worthless Zimbabwe dollar and adopted multiple currencies.
The IMF said Zimbabwe’s economy was facing difficulties which needed the government to take 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,” Coronel said.
Zimbabwe is expecting higher economic growth of 3.7 per cent in 2017 from an initial projection of 1.7 per cent following a better agriculture season.