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In a statement at the end of a two-week IMF mission to Zimbabwe, the head of the IMF office in Harare, Domenico Fanizza, said the IMF and Zimbabwe had also agreed to slash a wage bill gobbling up about 80% of the government budget and review a policy of forcing foreign-owned firms to sell majority stakes to locals.
"The mission welcomes Zimbabwe's decision to start working with the international financial institutions and the IMF to prepare a plan for clearing the outstanding arrears as a step toward resolving the country's debt challenge," Fanizza said.
The technical Staff Monitoring Programme helping the government deal with its pressing economic problems, including balancing the government budget and establishing stability in the financial sector as well as servicing its debt, would be extended for another 15 months to December 2015, the fund said.
"It is encouraging that the authorities have come to the conclusion that Zimbabwe cannot address these challenges without the support of international financial community," the IMF said.
"Balancing the primary fiscal budget will send a strong signal that Zimbabwe's government intends to live within its means, while addressing the country's debt challenge by stepping up re-engagement with all creditors will be essential," it said.
Harare has struggled and failed to service its $10bn in foreign debts in any meaningful way over the last 15 years due to a severe economic crisis many blame on policies pursued by long-ruling President Robert Mugabe's Zanu-PF party.
Cash crunch and lack of foreign support
Fanizza said although Mugabe's government had "redoubled" efforts to rebalance an unstable macroeconomic environment, economic growth had slowed down on a cash crunch and lack of foreign balance of payments support.
"This and the appreciation of the South African rand, the major currency of Zimbabwe's (main) trading partner, has caused a liquidity crunch that has weakened economic activity," it said.
"The external position remains precarious with low levels of international reserves, a large current account deficit, and external arrears," it added.
The IMF said the technical programme would also cover "clarifying the indigenisation and economic empowerment laws" to help Zimbabwe boost mutually beneficial domestic and foreign investment, allay fears over property rights "and reassure markets of the government's open invitation to invest in Zimbabwe".
Zimbabwe Finance Minister Patrick Chinamasa told a press briefing on Monday that Harare was committed to reforms to put the economy back on track.
"We are equal to the task, we are going ringfence budget allocation towards social spending," he said.
The government would also have to reduce its public sector wage bill taking up 76% of the budget, which Chinamasa described last week as embarrassing, he added.
"We are going to work hard to reduce the level of the wage bill. I have begun engaging my colleagues informally," he said.
Chinamasa did not elaborate but has but he has previously ruled out the government would reduce its 235 000 workforce.
