Latest detailed information obtained this week by the Zimbabwe Independent from international financial institutions (IFIs) shows the Harare government — which presented its strategy to multilateral and bilateral creditors in Lima, Peru, on October 8 before over 100 top global financial executives — wants to break its debt trap and secure new funding from various sources to rescue the imploding economy.
Currently saddled with a debt overhang of US$10,8 billion accrued from both public and private sector borrowing, Zimbabwe’s failing economy has plunged deeper into recession since 2013 owing to limited sources of long-term finance, paralysing the country’s key sectors.
The country’s debt arrears amount to US$5,6 billion split between multilateral creditors (US$2,2 billion), the Paris Club, an informal grouping of bilateral creditor nations (US$2,7 billion), and non-Paris Club creditors (US$700 million).
The country has arrears estimated at US$1,8 billion with its three preferred creditors, International Monetary Fund (IMF), World Bank (WB) and African Development Bank (AfDB). Unlike the private sector, which has an external debt of over US$4 billion, and is paying arrears, the public sector has been in unserviced debt for nearly two decades making Zimbabwe ineligible for concessionary funding.
Under the country’s repayment strategy — also approved by the ruling Zanu PF politburo last week — Zimbabwe will secure US$819 million bridge finance from the African Export-Import Bank (Afreximbank) to repay arrears to the AfDB (US$585 million); African Development Fund of the AfDB (US$16 million) and US$218 million to International Development Association (IDA). The IDA is a World Bank fund for poor countries.
To get new funding from the AfDB, Zimbabwe – classified as one of the vulnerable economies on the continent together with Sudan, Somalia and Eritrea — needs to clear its arrears first before the end of 2016 when the funds are still available.
Zimbabwe will also need US$896 million to repay arrears to a World Bank associate, the International Bank for Reconstruction and Development (IBRD). The money to repay IBRD arrears will be secured from “bilateral loan facilities from friendly countries in central and north Africa”, according to an executive representing a key multilateral creditor.
IBRD is a global development cooperative owned by its 188 member countries. As the largest development bank in the world and part of the World Bank Group, IBRD has two main goals: to end extreme poverty by 2030 and to promote shared prosperity in a sustainable manner.
Zimbabwe will also have to pay the IMF US$110 million. It will use its special drawing rights to clear the amount.
After paying off the US$1,8 billion to multilateral creditors, Zimbabwe will then approach the Paris Club seeking either debt forgiveness or cancellation of penalties accrued on arrears. It will also approach non-Paris Club creditors like China, Kuwait and others to work out a debt and arrears resolution plan.
Zimbabwe owes the Paris Club creditor nations about US$6 billion. Arrears contribute about US$1 billion. Arrears to non-Paris Club creditors like China amount to US$476 million.
“The IFIs would need to be repaid simultaneously because they are considered preferred creditors which should be treated equally,” the executive said.
“The strategy, which is a non-HIPC (Highly Indebted Poor Countries) route, was approved by all creditors in Lima. So it is now up to Zimbabwe to complete the third review of the SMP by February or March and ensure arrears clearance by June next year.
“It’s also dependent on the country producing a new economic plan showing how it is going to use the new money which will come in and the implementation of its own economic programmes and reforms that underpin the whole strategy.”
Since 2009, Zimbabwe resumed and has been paying the IMF token amounts. According to a written response to questions sent to IMF resident representative Christian Beddies in Harare, Zimbabwe has been making token payments to the IMF’s Poverty Reduction and Growth Trust (PRGT) amounting to SDR11 million (about US$15,6 million). Beddies said token payments during the IMF’s Staff Monitor Programme (SMP) — an informal agreement between country authorities and the Bretton Woods institution staff to monitor the implementation of agreed economic programmes and reforms — were US$150 000 a month.
The debt strategy, IFIs executives further said, was anchored on the SMP, Zimbabwe’s economic blueprint ZimAsset and President Robert Mugabe’s threadbare 10-point plan, which among other issues, deals with reforms on labour, ease of doing business, indigenisation, alignment of laws with new constitution, compensation for dispossessed white farmers, strengthening of the financial sector, revival of agriculture and re-engagement of the international community.
Asked for a comment, Reserve Bank governor John Mangudya, who presented Zimbabwe’s debt arrears clearance strategy in Lima, said this was the way forward as the country needed to resolve its arrears and unlock new long-term funding.
“The strategy of clearing arrears is good for Zimbabwe. it’s good for creditors and would-be creditors,” he said.
“It’s a friendship-building strategy. It improves Zimbabwe’s negotiating power. Zimbabwe is now on the move.”
However, IFIs executives say for Zimbabwe’s debt arrears clearance strategy to succeed, there is need for more structural reforms than currently contemplated by the government or even IMF which has been focusing on narrowly technical, short-run changes that fall far short of what is needed.
They say the current policy focus on foreign capital alone to rescue the economy is misplaced because fundamental reforms that extend beyond the norms of policy are critical.
In particular, IFIs executives say, Zimbabwe needs to pay far greater attention than in the past to institutional renewal and deep reforms. Improved policies are unlikely to be designed and implemented by weak institutions and even less likely to be efficient without institutional overhaul.