Zimbabwe’s total debt including domestic and external arrears is US$5,7 billion, of which US$5,2 billion is external and US$413 million domestic liabilities. The external debt of US$5,2 billion includes total arrears of US$3,6 billion.
Zimbabwe currently needs up to US$10 billion for economic recovery. It is officially estimated the country needs US$45 billion for the next 10 years to recover to 1997 gross domestic product (GDP) levels.
However, the politicians are divided along political lines on the way forward. Indications suggest a massive chasm in the political hierarchy over Finance minister Tendai Biti’s recommendations to apply for the Highly Indebted Poor Country (HIPC) status.
Some Zanu PF ministers are reportedly determined to oppose the move, on grounds that doing so would “open the floodgates to foreign interference”, not just in Zimbabwe’s economic affairs, but also in its politics. They contend that an HIPC initiative would “be used by Western countries as an instrument of regime change”.
Biti strongly contends that HIPC status is the best option for Zimbabwe, stating that the options do not accord Zimbabwe a “holistic and viable approach to its debt and arrears problems” significantly diminishing the extensive current restraints upon economic growth and poverty reduction.
But what are the advantages and disadvantages of Zimbabwe falling under HIPC?
Institute of Chartered Accountants chief executive, Sonny Mabheju told businessdigest that the HIPC programme required a number of conditions to be fulfilled, largely similar to those attached to International Monetary Fund (IMF) and World Bank loans, which require “structural adjustments and at times including privatisation of public entities like water and electricity”.
“The country must (also) maintain macroeconomic stability and has to implement satisfactory poverty reduction strategies for at least one year,” Mabheju said.
He said the process of complete debt relief is long and at times painful to the indebted country.
Between 1996 and 1999 a number of modifications have been made to the HIPC process but they have remained largely not easy for the poor countries.
“Smaller multilateral institutions, non-Paris Club bilateral creditors and commercial creditors who together account for about 25% of total HIPC initiative amounts have honoured a small percentage of their expected relief so far. Some commercial creditors have gone to the extent of seeking litigation against HIPC initiatives,” he said.
For a country to qualify for the HIPC process, it has to among other eligibility criteria:
lEstablish a track record of reform and sound policy implementation under the auspices of an IMF- and International Development Association-supported programme.
lDevelop a Poverty Reduction Strategy Paper through a broad-based participatory and consultative process;
lFace an unsustainable debt burden, beyond traditionally available debt-relief mechanisms — the debt sustainability analysis confirms that Zimbabwe’s debt is unsustainable until 2029 and;
lHave a per capita income of less than US$1 095 (Zimbabwe’s per capita income was US$340 in 2008.
Mabheju said commercial creditors have in some cases resorted to selling debt due to them to “vulture” funds.
Vulture funds are companies which buy the debt of poor nations cheaply when it is about to be written off and then sue the debtor country for the full amount of the debt plus interest which may be several times the amount they paid for the debt.
He said the normal commercial investment vulture funds can be used for normal business speculation where a distressed asset is bought cheaply during times of economic distress and sold later at a profit when the economic environment improves.
In 1996 a vulture fund paid US$11 million for some Peruvian debt and then sued the country for US$58 million. The same fund sued Congo Brazzaville for US$400 million for a debt the fund bought for US$10 million.
Zambia bought some agricultural equipment from Romania for US$30 million and failed to repay the loan. Romania was prepared to write off the debt after some negotiations. A vulture fund came in and bought the debt for US$3,5 million and sued Zambia for over US$50 million.
“HIPC initiatives do not seem to protect poor debtor countries against commercial creditors, smaller lender institutions and non-Paris Club creditors,” he said
Mabheju said it was important if a country considered going the HIPC route to getting debt relief to analyse the composition of its creditors.
“If it has creditors not bound by the HIPC initiatives, it has to proceed cautiously to avoid the possibility of vulture funds coming in to cause more damage than the original debt.
Vulture funds are generally viewed as immoral and there are calls to make them illegal wherever they exist. It is however up to each potential victim country to be proactive and avoid being preyed upon,” said Mabheju.
It is however up to each potential victim country to be proactive and avoid being preyed upon,” said Mabheju.
According to a document prepared by Biti, experience of 35 countries for which packages have already been approved, debt service paid on average has declined by about 2,5% of GDP between 1999 and 2007. Their debt burden is expected to be reduced by about 90% after the full delivery of debt relief.
Some of the disadvantages of HIPC status are that it does not bring additional funding for the development needs of poor countries. This means that poor countries may have to continue contracting new debt to meet developmental needs. HIPC status also takes time to reach its completion point. Originally the time lag between the decision and completion points was three years.
Economist David Mupamhadzi told businessdigest this week that the issue of the country’s external debt was central to the sustained recovery of the economy. He said the government of Zimbabwe should come up with a clear arrears clearance strategy since this was “one of the first steps towards the reengagement with the international community”.
“The HIPC route is one option which the government could adopt, and this approach will be widely supported by the international finance institutions. Taking this option will enable the government to make huge debt service savings, and this will provide the government with an opportunity to redirect resources to other critical areas of the economy.
“For example in January 2010, the Republic of Congo, reached the completion stage of the HIPC initiative, and they generated a total debt service savings of US$1,9 billion.
“Furthermore once a country adopts a credible debt clearance strategy, this will also improve the country’s risk profile to both domestic and international investors,” Mupamhadzi said.
Economist Eric Bloch said officials in Zanu PF’s intention to block the HIPC route demonstrates yet again their “extreme paranoia and, even more so, their intractable determination to remain in power, irrespective of the negative consequences upon the country and its populace of not pursuing the only practical way of dealing with the country’s crippling burden of debt”.
“They are once again proving that they are readily willing to sacrifice the best interests of the nation to protect their own desires and wishes,” he said.
Bloch said those opposing the HIPC option do not even suggest any practical alternative path to be followed to “deal with the gargantuan debt arrears that they caused Zimbabwe to accumulate”.
“And undoubtedly they have decided consciously or unconsciously that as the economic recovery is hindered by the country’s ongoing debt-servicing default, they will attribute all culpability to the international community.
“They will deliberately contend that the tardiness of economic recovery is partially attributable
to the continuing huge debt arrears, and will strive to deflect any suggestions of their being even remotely responsible for continuing national poverty and suffering,” Bloch said.
Economist Brains Muchemwa told businessdigest on Monday that being considered under the HIPC eliminates the incidences of delusional fiscal populism and its associated ills.
“The associated improved in-flows of offshore capital will erode the existing high country risk being priced into cost of capital, whilst the reprieve on the fiscus will be a huge stimulus on capital expenditure to address the high unemployment and fragile consumer spending,” Muchemwa said.
Bloch said the world’s major creditor nations which constitute the Paris Club have aided various heavily indebted nations by restructuring and rescheduling debt.
However, with the magnitude of the political differences that continue to characterise those in authority in Zimbabwe, there is no certainty that the Paris Club would agree to a programme of Zimbabwean debt-rescheduling, especially so as the international community remains uneasy at the pronounced disregard for law and order, and for human and property rights in Zimbabwe.
There are also the continuing defaults in honouring Bilateral Investment Promotion and Protection Agreements (Bippas). Analysts said the Paris Club negotiations would, in all probability, be extended, whereas Zimbabwe urgently requires resolution of its debt crises.
By Paul Nyakazeya