Govt’s debt strategy could come unstuck

Although Biti must be commended for  attempting to tackle the huge debt overhang now estimated at over US$9,1 billion and which has become an albatross around the economy’s neck, clearing this staggering sum could prove to be a mountain to climb.

Tackling the country’s debt crisis is critical as this is causing so many problems, including suspension of crucial projects in agriculture, infrastructure development and social sectors following the suspension of balance-of-payments support by the International Financial Institutions (IFIs).

Key elements of the debt clearance plan unveiled by Biti on March 16 consist of:

Establishment of the Zimbabwe Aid and Debt Management Office (ZADMO) whose mandate would be to undertake the validation and reconciliation of the country’s external debt data-base;

Actively re-engage creditors and the international community for the removal of sanctions;

Renegotiation of the terms set for arrears clearance;

New funding on the one hand and debt relief from current creditors on the other and

Leveraging the country’s natural resources in pursuit of debt relief and development. 

The country’s external debt issue has been under discussion since 2009. As a build-up to the adopted current proposal, various scenarios to expunge the debt were explored.

In the initial strategy document issued by Biti in 2009, four options were considered: Using internal revenue inflows, a resource-based debt restructuring model, the traditional Paris Club debt rescheduling approach and the Highly Indebted Poor Country (HIPC) initiative. 

Under the first option, government wanted, in the normal course of business, to set aside resources that would be used for debt servicing. However, government simply had “no fiscal space”’ to clear its external obligations on its own, as Biti often admitted.

The second option was premised on the understanding that Zimbabwe has abundant mineral resources such as platinum, gold and diamonds which could be used for restructuring of the debt. Biti’s current debt-clearing strategy is based on this model. A major advantage of this approach is that once a country clears its debts via this route, it becomes free from conditionalities that are normally set by the Bretton Woods Institutions and other IFIs.

The disadvantages of this model, however, include that it is difficult to agree on valuations and that the country could end up mortgaging resources.  Another sticky point is the current poor investment climate which makes it difficult to attract capital and to leverage those resources.

The third option the government considered was to pursue traditional debt-rescheduling with bilateral lenders such as the Paris Club. The difficulty with this option is that the country needs to be under an IMF Programme to be considered.

There was also the fourth option of Zimbabwe going the HIPC route. This option was however ruled out due to major differences between Zanu PF and MDC cabinet ministers. It was also difficult for the country to meet some of the tough preconditions of the HIPC initiative which include the full restoration of the country’s voting rights in the IMF and the clearance of arrears with the IMF, World Bank and African Development Bank.

After failing to adopt the HIPC initiative and other models, Biti was forced to pursue a resource-based debt restructuring strategy as proposed in ZAADDS, targeting to leverage unencumbered mineral resources to raise funding. The plan therefore essentially hinges on substantially “leveraging the country’s natural resources” to unlock funding and opportunities for development.

However, it does not state how this will be achieved given the current accelerated onslaught on foreign-owned mining firms, which ZAADDS seems not to address.

Whilst Angola successfully used this strategy, in 2007, of paying off its US$2,3 billion debt to the Paris Club lenders within one-and-half years without assistance, this was on the back of abundant oil which is easier to securitise than minerals. The resource-based model is also difficult because valuation of the mineral resources is complicated.

 

It takes time and financial resources, a luxury Zimbabwe can ill-afford. But the real problem is that agreeing on valuations with financiers could prove very difficult.

 

The failed negotiations between Zimbabwe Mining  Development Corporation  and China’s Norinco, where the parties could not agree on a US$3 billion offer for the Selous platinum reserves, is a case in point. Government felt the reserves were worth between US$24 billion and US$40 billion but the Chinese disputed this.

Another example of the problem of valuation of minerals is the contentious Essar-Ziscosteel deal where there is a problem with valuing of iron ore reserves. This has ultimately jeopardised the consummation of the deal. Meetings are still being held to resolve the issue.  More critically, finding takers for securities backed by natural resources is extremely challenging in an environment where property rights are flagrantly violated, given the ongoing expropriation of mining assets.

How does government plan to attract new investment in the mining sector when it is targeting existing investments for acquisition? 
Even if this hurdle was to be overcome, the Finance minstry also admits that the process of verifying and quantifying the country’s mineral wealth requires a considerable amount of human, financial and technical resources. Besides, successful exploitation of resources requires government to launch an “intensive investment drive in the mining sector”.

Others say the ZAADDS’ timeframe of 18-24 months that has been set to achieve its key deliverables is unrealistic.  Whilst the ministry has done well in building the basic institutional framework to reconcile and validate the debt position with creditors and other stakeholders before the end of 2012, analysts say the proposed supporting actions cannot be achieved within this timeframe.

For instance, given government’s bankruptcy, there will be no resources to complete a full geological mineral survey to ascertain the quantities and values of the minerals.

More worryingly, the plan hinges on re-engagement with the international community to normalise relations and the removal of sanctions.

Private capital and bilateral aid flows have been negatively influenced by these measures, among other issues, and it is not surprising that foreign direct investment, aid and other capital flows to Zimbabwe remain the lowest in the region.

The fourth challenge in Biti’s programme lies in the country’s poor debt service record since the year 2000. Any new debt relief mechanism will depend on the country clearing its arrears with the various IFIs, currently estimated at more than US$4,7 billion. Given the country’s budgetary constraints, this strongly suggests that the government can only look externally for resources to clear its arrears. There is a generally agreed view that creating new borrowings to pay existing debts will not solve the country’s debt problem in the long-term.

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