Debt-ridden Zim runs out of time

TIME is running out for the debt-ridden government to settle its US$1,8 billion arrears to preferred international financiers — World Bank, International Monetary Fund (IMF) and the African Development Bank (AfDB) — in order to access AfDB bridge financing for distressed countries like Somalia, Sudan and Zimbabwe.

Bernard Mpofu

The country’s debt overhang at US$10,8 billion continues to be a major impediment to its re-engagement with the international community and limits access to concessional funding.

According to an AfDB internal memo titled Zimbabwe Processing of Debt Arrears Clearance Information Note for July 2016: The African Development Fund-13 Report, the regional bank’s deputies agreed to ring-fence Transition Support Facility Pillar II resources for arrears clearance of Somalia, Sudan and Zimbabwe on a first come, first served basis.

This means should Zimbabwe, which has already missed its June 2016 deadline fail to meet its commitments, fail to repay arrears the window could be closed.

The AfDB said while government has shown commitment to implementing reforms, Zimbabwe has up to October this year to demonstrate how it wants to tackle its arrears before the facility is closed in December.

“For the AfDB, delivering Zimbabwe’s debt arrears clearance will be done in close co-ordination with the IMF and the World Bank. It will require the production of three key documents, namely a Country Strategy Paper, a Fragility Assessment and a Board Paper for the debt arrears clearance. These three documents will be submitted together for board consideration in October 2016,” the memo says.

“The total resources for Pillar II amount to UA (Unit of Account) 392,29. By end September 2016, the total arrears for Zimbabwe with the AfDB are projected at UA448,16 million. If the bank uses all of Pillar II resources for clearing the ADB debt arrears of Zimbabwe, a gap of UA41,78 million for AfDB and UA14,10 million for ADF (African Development Fund) will remain. However, the final amount for debt arrears clearance will depend on the timing, financing plan and cut-off date as well as board approval.”

Treasury expects to secure US$819 million bridge finance from the African Export-Import Bank (Afreximbank) to repay arrears to the AfDB (US$585 million); African Development Fund of the AfDB (US$16 million) and US$218 million to International Development Association (IDA). The IDA is a World Bank fund for poor countries.

“Progress on Somalia debt arrears clearance is slow due mainly to unavailability of debt data and limited capacity on the ground. Sudan has met the technical requirements necessary for debt arrears clearance process to start, but lack of a champion, current instability in South Sudan, as well as the challenging political situation and human rights record of Sudan have stalled the process,” reads the memo.

“Out of the three countries, Zimbabwe is currently the only one that is technically ready and can access resources under Pillar II for debt arrears clearance. Few challenges remain in the implementation of reforms needed to consolidate the progress made on fiscal management, business environment and human rights.

“The debt arrears clearance is, therefore, carried out in the context of a broader roadmap developed by the Government, with the assistance of the AfDB, IMF and World Bank. The process for Zimbabwe’s debt arrears clearance with AfDB is being closely coordinated with the IMF and the World Bank, with a tentative date for Boards’ consideration on 26 October 2016.”

In October last year the virtually broke government approved an ambitious external arrears clearance strategy to pay off US$1,8 billion overdue to multilateral creditors by June 2016 in a bid to break its debt vicious cycle and secure at least US$2 billion in new funding to rescue a crumbling economy ravaged by recession, a liquidity crunch and deflation, among a plethora of other chronic problems.

To get new funding from the AfDB, Zimbabwe – classified as one of the vulnerable economies on the continent together with Sudan and Somalia— needs to clear its arrears first before the end of 2016 when the funds are still available.

Zimbabwe will also need US$896 million to repay arrears to a World Bank associate, the International Bank for Reconstruction and Development (IBRD). The money to repay IBRD arrears will be secured from “bilateral loan facilities from friendly countries in central and north Africa”, according to an executive representing a key multilateral creditor.

“The Government of Zimbabwe has made significant efforts in taking forward the debt arrears clearance process, particularly by undertaking key policy reforms to address governance issues in both the financial and non-financial sectors, particularly in the context of two IMF Staff Monitored Programmes (SMPs). However, a few reform challenges remain. Development partners have committed to assist the Government in deepening reforms and the reengagement process, for which the Bank Group was requested to facilitate,” the memo says.

The economic situation, according to the regional bank, is exacerbated by political uncertainty and lack of clarity over the indigenisation policy, property rights, lack of coherence and consistency in policy pronouncements, and the pending disputes arising from the land reform programme.

“Settling the arrears and addressing the overall debt situation are therefore critical for Zimbabwe to mobilise more resources. They could also provide an opportunity for the country to fully return to and be part of the global community. Since Zimbabwe is not HIPC eligible, the arrears and debt issues could happen in the context of a roadmap developed by the government of Zimbabwe with the assistance of the major international financial institutions among these, the AfDB, IMF and World Bank,” the memo says.

“This will also to provide a stamp of confidence and provide positive signals to potential foreign private investors. The Bank Group is already leading the work on debt arrears clearance, and has supported the membership of Zimbabwe to organisations such as the African Trade Insurance that help in reducing risk levels borne by investors in settings dominated by a negative risk perception, mostly driven by political risk aspects.”

Experts say Zimbabwe continues to experience a decline in economic growth which is projected at 1,6% in 2016. This is the result of several factors, including lower commodity prices, the El Nino-induced drought, and the appreciation of the US dollar, which is the dominant currency in the country’s multi-currency arrangement.

They also say the appreciation of the US dollar has particularly reduced the competitiveness of the economy. The decline has led to rising youth unemployment, company closures and a crippling liquidity crunch mainly due to lack of confidence in the economy.

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