HomeBusiness DigestGovt’s new debt policy: Will this one do the trick?

Derailing constitution-making a key Zanu PF strategy

For one reason or another, Africans are among the most impoverished people in the world, with the continent battered by drought, civil wars, famine and disease. Also, despite the rich resources that are embedded in the continent, the bulk of African countries have huge external debts owed to multilateral institutions such as the World Bank and IMF. In 1996, these two institutions launched what they called the ‘Heavily Indebted Poor Countries (HIPC)’ initiative whose purpose was to ensure that poor countries are not burdened by debts they cannot manage. There are about 34 countries in sub Saharan-Africa that have been identified as qualifying for the initiative due to their high debt overhang. Zimbabwe is one such African country.

Our external debt currently stands at US$9,1billion, which translates into about 90% of estimated GDP for 2011. Clearly, Zimbabwe should qualify for the HIPC initiative which can offer full debt relief upon satisfaction of all conditions. Government, however, argues that the country can generate enough revenue from its own resources and therefore cannot be called poor.

 

Be that as it may, for a country in recovery mode like ours, there is need for intensive Foreign Direct Investment  to enable the exploitation of the country’s resources to be more widely undertaken. Cheaper funding from the multilateral institutions is required but  cannot however be accessed with such a huge debt overhang.

Without going the HIPC initiative route, the Ministry of Finance came up with a ‘Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy (ZAADDS). Seemingly, this is a more palatable strategy to members of government as it does not involve declaring the country ‘poor’.

 

The main thrust of the strategy is to re-engage the international financial institutions  and also re-initiate the local economic programme. On the local front, it is necessary that government establishes a good track record of implementing economic policies, a sustainable public sector wage bill and securing strong support from development partners

Of most importance is re-engagement with the International Financial Institutions (IFIs). These include the IMF, World Bank, African Development Bank (AfDB), European Investment Bank and both the Paris and the non-Paris Club creditors. However, before Zimbabwe can be re-engaged by these IFIs it should clear all its arrears first. Government acknowledged that it does not have the capacity to pay off the IMF, with which it has outstanding arrears amounting to US$140million.  The country will therefore require a concessional bridging loan or a grant to settle the arrears.

 

Likewise with the World Bank, the country will require assistance from development partners to clear arrears. The country owes US$807 million to the World Bank. Further, the government is considering approaching the AfDB, which it owes US$510million in arrears, to finance this indebtedness under the Fragile State Facility (FSF).  This facility requires Zimbabwe to clear up to a third of its arrears while the rest will be provided through the FSF. Zimbabwe also qualifies for arrears clearance support from the AfDB and hence is also considering further dialogue. The clearance of arrears is also a requisite by the other creditor international institutions, before any funding can be extended.      

    
We applaud government for taking a big step to deal with the issue of debt payment. Usually non-payment of debt or a lack of effort to try to do so, even in the most difficult circumstances, is viewed as a sign of intransigence.  Efforts to try and clear arrears will go a long way towards unlocking funding avenues that have been closed.

 

Most of these institutions, however, require stable and sound economic policies to be put in place before they agree to some sort of debt clearance programme.  This will at least assure them that there is a good chance that arrears can be cleared. Although it is debatable, government is confident that it has passed this milestone through implementation of policies such as the Short Term Economic Recovery Programme (Sterp) I and Sterp II and the Medium Term Plan (MTP).

 

What matters, however, is whether these policies will convince creditors or not. One reason why they might not is the differences between what is on paper and what is on the ground. Reforms such as privatisation of state enterprises, as mentioned in the MTP, remain mere writings with no single case to point to since it was announced.

Another issue is the strategy plans to use concessional borrowing to settle debt arrears. Firstly, the success of the plan is already dependent on some third party. Failure to access these concessional bridging loans or grants to repay arrears will therefore mean that this policy will turn out to be like the others; writings on paper with no tangible results.

 

Furthermore, the whole concept of borrowing to repay another debt seems unhealthy. There is no clear way on how it makes the country better off when it is being plunged into debt to settle another outstanding position. Also, there is no guarantee that the development partners will provide the requisite funding. If they do, it does not automatically mean the country will qualify for funding from the international financial institutions.

 

It is merely a head-start. Should Zimbabwe fail to satisfy the other qualitative conditions, it might just be a country with no arrears and  no funding either. Hence the country really needs to work on its own economics.

What   Zimbabwe needs is a significant inflow of FDI. There exists vast opportunities that many investors would want to exploit but they cannot risk putting their money where they may be bound to lose it. Between 2000 and 2009 FDI averaged a mere 1.1% of GDP against 18% and 20% achieved in the 1980s and the 1990s.

 

Investor friendly policies should therefore be put in place to necessitate this capital inflow. In addition, accountability of the revenue we generate from resources such as diamonds, gold and platinum should be enhanced to avoid leakages and curtail corruption. This will improve revenue streams to treasury coffers and only then can the country start repaying its arrears from its own funds.

It would not be too far from reason to conclude that applying for HIPC would have been a more realistic bet than ZAADDS. HIPC initially provides partial debt relief and if the country successfully completes the process, it can be eligible for total debt relief. This avoids factors such as concessional borrowing and ensures the country focuses on working on its own economic issues. For one reason or the other, the government is against this and therefore the ZAADDS is the chosen route.

 

There is need to work on our economic policies to ensure they meet with the required standards. Some policies have caused a lot of noise among the international community, and if we need to engage the very same people, then a review of those policies might be necessary. A follow up of previous blueprints such as STERP and MTP would also be called for to ensure these policies do not just amount to a lot of paper, but can also be expected to bear fruit.

It is the hope of many that the ministry will be able to pull this one off, although it seems a daunting task. Only when we have reduced our external debt, can we start talking of significant economic growth going forward.

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