THERE is no doubt that the decision to introduce bond notes had already been taken while the International Monetary Fund (IMF) was compiling its final Staff-Monitored Programme (SMP) report on Zimbabwe.
The Brett Chulu Column
The Reserve Bank of Zimbabwe (RBZ) disclosed on the very day the IMF released its third and final SMP report that it had secured a US$200 million loan facility from the African Export and Import Bank (Afreximbank) to back its bond notes export-incentive scheme. It’s plain — the RBZ had secured this facility while the IMF was still in the process of compiling its final SMP report.
The third and final review of the SMP concluded that Zimbabwe had met all its pre-set targets. This was a powerful statement coming as it were from the executive board of the IMF which had met on May 2 to discuss and vote the SMP report. The IMF is regarded as an international commissioner of oaths and as such a good word from the IMF is a major booster of credibility to a nation in the eyes of lenders and other investors. It signaled achieving a major milestone on the path to economic reform.
The elephant in the room: The Afreximbank facility and bond notes are not mentioned in the third and final SMP report even though the IMF staff, the Finance ministry and the RBZ had met between February 24 and March 11 for a review that informed the IMF’s May 4 report.
Under the SMP, Treasury was to make any new borrowings in the form of concessional debt, with the caveat that if non-concessional debt is to be contracted it should be strictly for projects that hold the promise to impact positively upon economic growth. In addition, such projects should demonstrate the potential to increase the capacity of Zimbabwe to repay its debts.
The framework for monitoring the implementation of the SMP is articulated in the Technical Memorandum of Understanding (TMU).
Point 12 of the TMU articulates the borrowing principle agreed on: “New non-concessional debt will be contracted or guaranteed only as financing for critical growth-enhancing projects that can improve the country’s capacity to repay. These projects would be consistent with the key sectors expected to drive economic growth under ZimAsset, including mining, agriculture, infrastructure, transport, tourism, information communication technology, small and medium enterprises and cooperatives, supported by investment in education and health facilities. Large projects (above US$100 million) will be assessed in consultation with a reputable and independent financial institution, such as the African Development Bank (AfDB), the Development Bank of Southern Africa (DBSA), or the World Bank, prior to the signing of the loan agreement and project documents.”
The way the RBZ has articulated the bond notes project as an export-incentive scheme architected to boost exports and stimulate local production fits the IMF’s criteria for securing non-concessional debt for US$100-million-plus projects. However, questions on whether the export-incentive scheme and its associated bond notes project are in line with the SMP spirit remain.
Point 11 of the TMU states that, “Debt is defined as concessional if, at the time of its contracting, the ratio between the present value (PV) and face value of debt is less than 65% (equivalent to a grant element of at least 35%). The PV of debt at the time of contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discounting rate to be used is 5%.”
Why are the Afreximbank facility and bond notes project not included in the May 4 IMF’s SMP report? The only US$200 million Afreximbank-related facility disclosed in the report is the Aftrades initiative meant to boost interbank liquidity (deficit banks borrow at 8%, surplus banks earn 5%). It is worth noting that Afreximbank is just an underwriter of this facility.
If the RBZ were already mulling introducing a major project before the release date of the SMP report, it would have been prudent to alert the IMF to such a major economic development with a view to having the project included in the future outlook section of the final SMP report.
Technical correctness aside, one would have thought that in the spirit of the SMP, the terms of the so-called Afreximbank countercyclical facility should have been disclosed in full. The reason is quite straightforward: the US$200 million facility breached the US$100 million ceiling set under the SMP. In keeping with SMP mother lode, our Treasury carried the legitimate burden to secure this facility in consultation with any of the members of the troika of independent financial advisors recommended and deemed reputable by the IMF, namely, AfDB, DBSA and the World Bank. The IMF’s TMU requires that any one of the three should have been consulted before signing both the Afreximbank US$200 million loan agreement and the bond notes project documents. There was no reason and still none standing in the way of our Treasury to announce publicly that they secured the Afreximbank facility after consulting the IMF-recommended independent financial advisor(s) and come clean on whether the IMF was made aware of the terms of the facility. Why is Treasury not disclosing to the reputable financial advisor(s) recommended by the IMF who analysed and gave the say-so to both the Afreximbank facility and the bond notes scheme? Disclosure would increase the credibility of these two related initiatives.
It would not hurt anyone if Treasury were to make a public statement confirming the status of the facility as per the IMF’s SMP quantitative targets, stating whether it is concessional or non-concessional. Such an unforced announcement would be a sign of maturity likely to build more confidence in the country by international financial institutions and other lenders.
The terms of this debt are important in that they enable us to calculate the present value of the facility so that we are able to determine if the facility is concessional or not.
Disclosing the terms of the facility (interest, repayment schedule, tenure) should not suddenly become a sore point — Treasury has been disclosing to the IMF under the SMP both new concessional and non-concessional debt contracted during the life of the SMP. The announcement by the IMF that Zimbabwe had met all its SMP targets and the announcement on the same day by the RBZ that Zimbabwe was implementing a drastic economic panacea, do not reconcile easily. Was the IMF informed of the underlying and seemingly sudden economic challenges prior to the ratification of the third SMP report? If so, why didn’t the IMF make a qualification to its report?
Admittedly, not disclosing the Afreximbank facility and the bond notes project would not constitute an ethical breach because the final SMP report covered 2015. However, this omission whether intended or unintended, is a strategic blunder that flies in the face of the spirit of the SMP. The end of the SMP did not suspend its aspirations and benchmarks, more so the concessional funding principle.
The bride is expected to be honest about things that transpire between engagement and the actual nuptials.
Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer-reviewed academic journal.