The global lender said economic growth accelerated from 6 percent in 2009 to 9 percent last year. But it noted growth could decelerate to 5.5 percent this year.
Inefficient expenditure, challenges associated with the indigenisation programme and rising vulnerabilities in the financial sector were cited as potential impediments to growth.
The IMF announced this after its executive board concluded the 2011 Article IV Consultation with Zimbabwe on June 1 this year.
Finance Minister Tendai Biti has projected the economy will grow by 9.3 percent this year on the back of improved performance in agriculture and mining.
“Addressing these policy challenges in a timely manner could result in better growth outcome for 2011,” the IMF said.
“Key downside risks include possible political instability and a fall in (international) commodity prices.”
The IMF said Government should take advantage of a favourable global economic outlook and IMF technical support to strengthen its policy framework.
It has advised Government to return to cash budgeting and adopt strong expenditure measures, including reducing Government exposure to “ghost workers”.
The global lender suggested a reduction of the civil servants wage bill, fiscal support to State-owned enterprises and reform of public finance management.
After generating surplus in 2009 the Government had a deficit last year after support to State firms and employment costs gobbled up much of the revenue.
This was despite a revenue increased from 3 percent to 29 percent of Gross Domestic Product after improved tax administration enhanced cash collection.
The IMF said high metal prices, the resumption of diamond exports, capital inflows and the stronger South African rand eased balance of payments pressure last year, but the current account deficit was financed from short-term funds.
It also noted “Zimbabwe is in debt distress with a large and unsustainable external debt stock (118 percent of GDP last year), the bulk of which is in arrears”.
Zimbabwe’s nominal debt (excluding interest and default interest) stood at US$7 billion as of December last year, according to figures from the Ministry of Finance.
The IMF hailed Government strategy on debt clearance, but said it should refrain from further non-concessionary borrowing and seek low-cost funding.
While the financial sector had grown, the IMF said the sector’s vulnerability had increased despite the multi-currency “jumpstarting intermediation”.
“Priorities are the restructuring of the financially distressed Reserve Bank of Zimbabwe to which banks are exposed, and strengthening of prudential regulations and their enforcement to contain liquidity, solvency and credit risks,” it said.
To sustain and boost the current economic growth momentum, the IMF said there was need to improve the business climate, which is critical for competitiveness.
It added that this should entail aligning the indigenisation and empowerment objectives with respect for property rights, ensuring the rule of law, securing land tenure, transparency in diamonds and a free labour market.
The IMF said a Staff Monitored Programme would help establish a record of sound macro-economic policies and called for continued timely data reporting.
Clear progress on closing the fiscal financing gap for this year and addressing liquidity issues in the banking sector would be important to move to a Staff Monitored Programme, the IMF said.