THE International Monetary Fund (IMF) has projected that the Zimbabwean economy will this year grow by a modest 2.2 per cent, significantly lower than last year's four per cent.

The Fund painted a gloomy picture of developments this year, stressing that the country's forecast was unclear.

"The outlook for 2010 is highly uncertain. Large budgetary wage increases crowding out growth-oriented expenditures, a significant slowdown in private capital inflows because of increased uncertainties about the indigenisation process, and strong credit growth have intensified external and banking system vulnerabilities," the Fund stated in its annual review of the country that was published on Tuesday. "In the absence of timely corrective policy measures, economic growth would slow down significantly in 2010 and risks in the banking system would continue to rise."

The IMF stated that Zimbabwe was in debt distress and sound policies and good governance would therefore be critical to pave the way for eventual debt relief and access to donor financing.

It stated that the country's external debt continued to grow mainly as a consequence of new payment arrears and interest and penalty charges on existing payment arrears.

New private sector short-term borrowing had also added to the external debt estimated at US $7.1 billion 162 per cent of GDP by end-2009.

"The external position remains precarious. Volatile short-term capital inflows and external payment arrears financed the current account deficit that is estimated to have widened to 30 per cent of Gross Domestic Product (GDP) in 2009, from 24 per cent in 2008. Significant capacity constraints, in part related to a weak business climate, depressed export earnings in 2009, while rapidly increasing domestic credit and capital inflows, as well as higher humanitarian aid, financed increased import demand," the report stated.

Despite all this, the IMF welcomed improvements in inflation, the humanitarian situation and the adherence of the government to cash-budgeting as well as improvements in the GDP, which was recorded at four per cent last year following years of depression.

The Fund stated that the multi-currency regime following the abandonment of the Zimbabwe dollar had helped promote financial stability.

"Deposits with banks tripled between end-March and end-December 2009, and banks' loan portfolios grew six-fold. Strong credit growth supported the nascent economic recovery, but it also contributed to a widening current account deficit and rising vulnerabilities in the banking system," the IMF stated. "Directors considered that the multi-currency system would serve Zimbabwe well in the coming years.
They agreed that the Zimbabwe dollar can be reintroduced as sole legal tender only after a track record of sound policies is established and a central bank governance framework with a focus on price stability is adopted."