The debt-ridden and broke Zimbabwe government has secured a US$1 billion bailout to pay off their World Bank’s arrears, piling more pressure on the sinking ship due to a huge debt albatross and deindustrialisation stemming from a myriad of macro-economic challenges militating against productivity.
By Taurai Mangudhla
Analysts say government should instead be funding productivity to grow the national cake and leave room for repaying the legacy loans and arrears.
Different players around the world agreed to bail out Zimbabwe with US$1,1 billion to pay off the World Bank’s arrears and possibly unlock new funding amounting to about US$2 billion as part of government’s international re-engagement process agreed to in October 2015 in Lima, Peru, between Harare and three international financial institutions (IFIs) — the International Monetary Fund (IMF), World Bank and the African Development Bank (AfDB).
The Lima Plan is designed to clear Zimbabwe’s arrears to IFIs and secure US$2 billion in new funding. Zimbabwe owed the IMF, World Bank and AfDB US$1,8 billion in arrears, making the country ineligible for cheap funding. While the need for clearing all arrears and debt remains paramount for any economy to become a good destination of fresh funding either from the private sector or IFIs, Zimbabwe’s strategy has sparked mixed feelings.
Analysts say government should be committed to reforms and change the country’s investment climate. They say government jumped the gun by not seeking parliament’s consent prior to the funding arrangements.
Economist Tapiwa Mashakada said government jumped the gun by accepting a loan of that magnitude without parliamentary consent.
“In the first place all external loans must be ratified by parliament. Right now parliament is not privy to the Term Sheet of the Malaysian loan. Assuming that the loan has been secured and the government proceeds to repay debt, that would be the most stupid thing to do,” Mashakada said, adding: “That money should be committed to production and exports in order to create new capacity for the economy to service its debts.”
Mashakada said Zimbabwe needs structural reforms to improve its business climate and come off as a safe investment destination in order to come out of this quagmire.
“In any case, there is no guarantee that the repayment will unlock new funding which is dependent on so many factors including but not limited to good public financial management, deficit reduction, parastatal reform, tax performance and democratisation. Why would that Malaysian loan not be used to stimulate the economy and arrest the liquidity crisis?” Mashakada said.
Zimbabwe slipped to position 166 out of 190 on the the World Bank Doing Business Report compared to position 155 the previous year due to administrative delays in starting a business, tax payments and erratic supply of utilities.
According to the doing business report, Zimbabwe performed poorly on the starting a business index (183 out of 190) reflecting why the country’s foreign direct inflows have been declining in recent years. It also fared poorly on getting electricity (165); enforcing contracts (165) and paying taxes. The country also has a poor record in protecting minority investors.
Critics believe the lack of political will is slowing down reforms in the economy, badly in need of capital to stimulate growth.
Zimbabwe is currently saddled with a debt overhang of US$10,8 billion accrued from both public and private sector borrowing. The country has been sinking deeper into a quagmire since 2013.
Its debt arrears amount to US$5,6 billion split between multilateral creditors (US$2,2 billion), the Paris Club, an informal grouping of creditor nations (US$2,7 billion), and non-Paris Club creditors (US$700 million). It owes the Paris Club about US$6 billion. Arrears contribute about US$1 billion. The amount overdue to non-Paris Club creditors is US$476 million.
Economist Prosper Chitambara said the decision to borrow in order to pay arrears adds to the country’s already unsustainable debt albatross.
“We are not yet privy to the terms of the funding so it becomes difficult to comment really authoritatively whether it is viable and if not to what extent, but if you are borrowing to pay debt it doesn’t address the indebtedness,” Chitambara said.
In an update on the re-engagement programme last month, Finance minister Patrick Chinamasa said the terms and conditions of the facilities that the Reserve Bank of Zimbabwe have put in place to repay the debt arrears to the World Bank and AfDB have been scrutinised and adjudged by the affected IFIs and found to be reflective of current market conditions with financing terms similar to market transactions recently concluded by several sub-Saharan African countries during 2016 and 2017.
He however did not share the terms.
“It is on this basis that Zimbabwe can now proceed to repay its debt arrears. Clearance of debt arrears is expected to attract in the short to medium and long term foreign and domestic investment, given perceptions of lower country risk, and would be expected to open the door to foreign finance inflows and possible debt treatment by the Paris Club and non-Paris Club Bilateral Creditors through an IMF financing programme,” Chinamasa said in the statement.
“Building on the above positive developments, government is dedicated to clearing the debt arrears to the World Bank and the AfDB on a simultaneity basis after completion of the exercise which it is undertaking to evaluate the future flows from IFIs and other co-operating partners and financial institutions.
“This sequencing process is essential for debt sustainability by ensuring that there is no significant lapse of time between the settlement of the remaining debt arrears to the IFIs and the unlocking of future flows of capital that is necessary for sustained socioeconomic transformation and eradication of poverty in Zimbabwe.”