THE World Bank has warned Zimbabwe’s debt-ridden government against using vulture funds to clear the country’s arrears with multilateral financial institutions as Harare engages international lenders to access fresh capital.
The arrears clearance programme is part of government’s international re-engagement process agreed in October 2015 in Lima, Peru, between Harare and three preferred international financial institutions (IFIs) comprising 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.
According to the latest World Bank Economic Update on Zimbabwe report, while the Lima Plan could set the stage for accessing cheap long-term financing, a missing ingredient in the economy, relying on non-concessional funding could perpetuate the country’s debt trap.
“The authorities are committed to expediting the clearance of arrears to other multilateral creditors, including the African Development Bank (US$610 million), the World Bank (US$1,2 billion) and the European Investment Bank (US$212 million), the report reads. “However, resorting to non-concessional lending to clear arrears in a context of tight liquidity conditions and depleted international reserves could add pressures to an already tight budgetary situation if not accompanied by fiscal, monetary and investment reforms.”
In April, Finance minister Patrick Chinamasa announced that Zimbabwe had secured funding to clear the World Bank and AfDB arrears, raising hopes of fresh funding subject to a comprehensive economic recovery plan and a raft of political, economic, institutional and structural reforms. However, he did not disclose the source of the funding, but it is understood that Zimbabwe is on the brink of sealing a syndicated loan from a global commodities firm, regional trade bank and an offshore bank.
Zimbabwe owed the IMF, World Bank and AfDB US$1,8 billion in arrears, making the country ineligible for cheap funding. It has since cleared the IMF’s US$110 million arrears, but still owes the World Bank and AfDB.
“Zimbabwe’s long-term growth prospects are positive, but to restore fiscal and debt sustainability the government must adopt policies that reduce the country risk-premium,” the report reads. “A reduction in the country-risk premium would improve the government’s access to affordable capital, enabling it to complete much-needed infrastructure investments and revive its major industries.”
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.
A World Bank memo seen by the Zimbabwe Independent last year says the clearance of arrears would not only improve Zimbabwe’s access to concessional funding, but also ensure a win-win outcome.
Specifically, the IMF, whose US$110 million arrears were paid in October last year, will be able to offer balance-of-payments support, provided a credible and practical new economic programme — not the utopian and discredited ZimAsset — is in place. The World Bank will provide budgetary support and the AfDB infrastructural development funding, starting with agriculture and energy.
Zimbabwe will also further engage the European Investment Bank to agree on an arrears clearance plan. It will also engage the Paris Club and non-Paris Club or bilateral creditors on arrears.
Turning to reforms, the World Bank report institution says government should double its efforts in overhauling structures that make Zimbabwe less competitive on the global economy.
“The government will need to accelerate the implementation of structural reforms to restore fiscal sustainability while freeing resources for infrastructure investment and poverty-reduction programming,” the report reads.
“Accelerating growth and re-establishing sustainable fiscal dynamics will require integrating these efforts into a comprehensive reform programme, which includes refocussing public spending on priority capital investment projects and social programmes, improving the business environment through the transparent and consistent implementation of modern investment policies, addressing the country’s debt burden and governance challenges.”
Official figures show that the central government wage bill is equivalent to 90% of public revenue and 66% of public spending.
The public debt stock increased from US$9,4 billion in 2015, accounting for 58% of the gross domestic product to US$11,4 billion (70% of GDP).