HARARE, Sept. 26 (Xinhua) -- The International Monetary Fund (IMF) has said Zimbabwe needs to urgently implement policy measures to stabilize the exchange rate and shore up confidence in the recently introduced local currency.
In a statement released Thursday at the conclusion of its mission to Zimbabwe undertaken from Sept 5-19, the IMF said the continued weakening of the Zimbabwe dollar against the U.S. dollar due to exchange rate distortions was fueling economic instability in the southern African nation.
The IMF said the situation had also been exacerbated by severe weather shocks this season, marked by a drought and cyclone, and which had left more than half of the country's population in need of food aid.
It noted that weakening confidence, policy uncertainty, continuation of foreign exchange market distortions and a recent expansionary monetary stance had increased pressure on the exchange rate.
Since February when the inter-bank foreign exchange market was introduced, the exchange rate has depreciated from 1:1 parity with the U.S. dollar to 16.5 Zimbabwe dollars to the greenback as of Sept. 23, thereby fueling high inflation, which reached almost 300 percent year-over-year in August, the IMF said.
"Policy actions are urgently needed to tackle the root causes of economic instability and enable private-sector led growth," the IMF said. "The key challenge is to contain fiscal spending consistent with non-inflationary financing and tighten monetary policy to stabilize the exchange rate and start rebuilding confidence in the national currency."
In June, Zimbabwe discarded use of the U.S. dollar that had been in place since 2009, and re-introduced the local currency.
The IMF observed that risks to budget execution were high as demands for further public sector wage increases, quasi-fiscal activities of the central bank that will need to be absorbed by the central government, and pressure to finance agriculture could push the deficit back into an unsustainable stance.
"There is also a need to strengthen foreign exchange market operations and improve transparency on monetary statistics. These adjustment challenges are magnified by slow progress on international re-engagement. Efforts will need to be intensified on both economic and political fronts to drive Zimbabwe forward," the IMF said.
