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US$5,7b Debt Splits Cabinet

CABINET is deeply divided over the debt and arrears clearance strategy proposal currently under government consideration, as Zimbabwe battles to extricate itself from a huge debt trap.

The division between Zanu PF and MDC ministers has left Finance minister Tendai Biti’s ambitious debt-relief proposal facing stiff resistance from his hostile colleagues who claim it is “ill-advised”, informed sources said this week.

Biti has produced a comprehensive document on debt and arrears clearance which is under government discussion.

The proposal has sparked a fierce row among cabinet ministers. The situation is fuelled by clashes in cabinet over the International Monetary Fund (IMF)’s US$500 million liquidity bailout for the country. Biti and Reserve Bank governor Gideon Gono as well as ministers are fighting over the control and utilisation of the money.

Sources said the political battle over Biti’s latest hotly contested proposal has deepened infighting within the shaky inclusive government.

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.

In his document, Biti proposes four debt and arrears clearance options — which entail using internal revenue inflows, resource-based debt restructuring, Paris Club debt-rescheduling, and the Heavily Indebted Poor Country Initiative (HIPC) — for consideration by cabinet. He however suggested that HIPC was a better alternative because the other options did not offer Zimbabwe a “holistic and viable approach to its debt and arrears problem”.

Biti is proposing that Zimbabwe should adopt HIPC because it has some advantages which could reduce the country’s debt burden by 90% after full delivery of debt relief. He says this is based on experiences of 35 countries for which packages have already been approved and debt servicing declined by 2,5% of GDP between 1999 and 2007.

Biti argues debt relief would reduce constraints on economic growth and poverty reduction imposed by the debt-servicing burden. He says before adopting HIPC, eligible countries were on average spending slightly more on debt than on health, education and other social services. Biti further says the huge debt overhang is increasing Zimbabwe’s credit risk profile while undermining investment and growth.

“Once the debt is forgiven, the sovereign risk profile is reduced and the country becomes creditworthy thereby attracting serious investors into the economy,” his proposal says.

Biti yesterday defended his suggestion and challenged those opposed to it to produce a viable alternative. “It’s a very simple issue. We have a debt of over US$5 billion largely caused by mismanagement, corruption and theft. Zimbabwe can’t pay this debt. It would be immoral to use our little resources to pay debts when our schools, hospitals and roads are in a bad state,” Biti said. “Those opposed to the debt relief strategy must come up with an alternative. I need a viable alternative solution, not their neo-fascist nationalism.”

However, Zanu PF ministers said they were determined to oppose the proposal. Their resistance is apparently informed by advice they have received from senior Reserve Bank officials who were uncomfortable with the issue. The central bank officials’ advice note has found purchase among Zanu PF ministers now mobilising to shoot down the proposal.

Zanu ministers interviewed this week said they were opposed to the plan because it would turn Zimbabwe into “a desperate basket case”. They said HIPC would worsen the current situation in the long term and should be blocked in cabinet.

“The problem is that HIPC would open the floodgates to foreign interference, not just in our economic affairs but also politics,” a senior Zanu PF minister said. “It’s likely to be used by Western countries as an instrument of regime change.”

Another minister said he was opposed to the initiative because it would “humiliate us beyond measure”.
The document by top central bank officials, circulated among ministers, says Zimbabwe could  ill-afford to declare itself a highly indebted poor country and publicly announce this because that would increase its “vulnerability” and credit profile risk.

Zanu PF ministers said the other problem was that HIPC
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depended on multilateral creditors (international financial institutions such as the IMF and World Bank), bilateral creditors (Paris Club) and commercial creditors (London Club) which are controlled by countries that have “imposed sanctions” on Zimbabwe.
“To the extent that predominantly the same countries who have imposed sanctions on Zimbabwe are the ones that have a say on whether or not the country would get help after the self-declaration of HIPC, there is no logic in expecting them to show mercy and debt forgiveness,” the advice note to stakeholders says.  
“To the contrary, the mere announcement by Zimbabwe that it deems itself as a HIPC country would most likely energise those countries to even intensify their sanctions in a bid to finally collapse the economy.”
Zanu PF ministers and monetary authorities claim “Zimbabwe is too rich to be poor”.  They argue the country has “abundant natural resources” and a “world-class” workforce to declare itself as a highly indebted poor country and go around the world carrying a “begging bowl”.
But Biti said their claims were “fiction”. “This is fiction, it’s a myth. The reality is we are a poor little struggling failed state,” Biti said. “Poverty is there, even in leading oil-producing countries in Africa such as Nigeria and Angola, it’s there in South Africa and China, which has been the fastest growing economy in the world for many years.”

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