ZIMBABWE’S desperate quest to break free of an unsustainable debt trap was mapped out at the October 8 creditors meeting in Lima, Peru, when the country presented a debt clearance plan to avert an economic implosion.
Bernard Mpofu/Elias Mambo
The country has a debt overhang of US$10,8 billion accrued from both public and private sector. The public debt amounts to US$5,6 billion, split between multilateral financial institutions (US$2,2 billion), the Paris Club (US$2,7 billion) and US$700 million to the non-Paris Club.
The road to Lima, which started nearly six months ago, was kept under wraps as government bureaucrats worked behind the scenes trying to seek full re-engagement with bilateral and multilateral creditors.
This week the Zimbabwe Independent looks at how the country intends to navigate out of the crossroads.
As a first step to tackling the huge debt, government constituted an external debt clearance committee comprised of representatives from the ministry of Finance and Economic Development, the Reserve Bank of Zimbabwe (RBZ), the World Bank and the International Monetary Fund (IMF).
The committee, chaired by central bank chief John Mangudya, was tasked with resolving Zimbabwe’s external debt arrears in order to improve the country’s standing with its creditors and unlock new development concessionary finance in the economy.
The journey to Lima saw RBZ boss Mangudya becoming the country’s top diplomat, visiting European capitals to seek support from his counterparts ahead of make-or-break meeting in South America.
The country’s external debt strategy implies clearing external debt arrears to International Financial Institutions (IFIs) to the tune of US$1,8 billion. Under this repayment plan, the three IFIs — World Bank, IMF and AfDB — would be repaid simultaneously because they are considered creditors which should be treated equally.
Before this meeting Zimbabwe had received thumbs up upon completion of the IMF Staff Monitored Programme (SMP). The SMP, an informal arrangement between Harare and the Bretton Woods institution, was first agreed to in 2013 when government agreed to austerity measures and other governance reforms.
After raising the toast following a successful campaign, Mangudya said the resolution of the country’s arrears would improve the country’s risk and ultimately lower interest rates on the domestic economy.
“Government’s bold vision of resolving the external arrears is to improve the country risk premium and at the same time unlocking new long-term financial resources that desperately are required to enhance productivity,” he said.
“The economy requires resources for enhancing capital formation… clearing of arrears is good for Zimbabwe and good for creditors and would-be creditors. It is a financial friendship strategy. It improves Zimbabwe’s negotiating power. Zimbabwe is on the move.”
Notwithstanding sharp differences over the debt strategy within government, Finance minister and Mangudya committed to a raft of reforms as preconditions to resolving the external debt arrears.
Zimbabwe is operating with limited fiscal space as government spending continues to crowd out capital projects.