ZIMBABWE, faced with its most serious economic crisis since the 2008 meltdown and hyperinflation, has been trying since 2015 to re-engage the international community by clearing its US$1,8 billion arrears to International Financial Institutions to access US$2 billion in new funding.
Editor’s Memo,Dumisani Muleya
However, the process seems to be facing headwinds. With President Robert Mugabe’s succession battle intensifying and general elections coming next year, it might well be dead in the water — at least for now.
Late last year, Zimbabwe cleared its arrears to the International Monetary Fund (IMF) and its executive board removed the remedial measures applied on Harare resulting from the overdue obligations.
However, the expected bilateral loan to clear arrears to the World Bank’s US$1,2 billion arrears and repay the African Development Bank (AfDB)’s US$600 million did not materialise. This has led to the authorities hunting for an alternative package from commercial lenders. But inadequate progress on reforms is undermining the prospects for new external financing, while insufficient assurances of new financing are weakening the incentives for reform.
In the absence of debt relief, Zimbabwe, which owes creditors about US$11,2 billion, is in serious debt distress. The 2015 Lima process, that received support from creditors and development partners, envisaged clearing US$110 million arrears to the IMF using the SDR holdings, to the International Bank for Reconstruction and Development with a bridge loan from a bilateral creditor, to the International Development Association (IDA) drawing on a turnaround facility, and AfDB with its Pillar II Trust Fund set up for countries’ arrears clearance.
After the bilateral loan to clear the World Bank arrears and the IDA turnaround facility failed to come, Zimbabwe proposed a sequential approach. It fully settled overdue obligations to the IMF in October last year. This allowed the IMF’s executive board to lift the declaration of non-cooperation, ineligibility to access funding, and restriction on technical assistance, in November last year.
Access to IMF resources, however, requires that Zimbabwe comply with other applicable IMF policies, including having a credible plan to: (i) resolve arrears with official creditors, and engage with external private creditors (if any); and (ii) implement strong fiscal adjustment and structural reforms to restore fiscal and debt sustainability and foster private sector development.
Zimbabwean authorities view market resources, an option with costlier financial terms, as the only alternative to clear World Bank arrears in the absence of official support. They are willing to collateralise gold proceeds to settle these obligations.
There are concerns, though, over the sustainability of relying on market resources to repay the World Bank obligations, which are currently not being serviced.
Additionally, mortgaging gold proceeds could complicate future debt relief. The key question is the timing and quantity of new financing that the arrears clearance could unlock. Assessing this matter has proved challenging amid lack of political will to reform and uncertainties over the strength of policies to restore sustainability and the appetite for support at the Paris Club. All the while, the economy continues to reel from stagnation and low productivity exacerbated by low commodity prices, weak regional currencies and a domestic currency crisis, in the context of a deteriorating situation, hostile business climate and policy inconsistencies.
The current political quagmire, dominated by 93-year-old Mugabe’s messy succession power struggle, is not helping matters.
The gravity of the economic situation has forced the Zimbabwean government into the process of re-engagement with the West, which is primarily aimed at ending international isolation, attracting new investment and getting funding to trigger economic recovery.
However, there has been between little and no progress in terms of critical reforms and a required new economic plan. With the situation increasingly unstable and uncertain amid ruling party factionalism, succession disputes and occasional scares about Mugabe’s health, as well as the upcoming elections, it appears the re-engagement process has stalled and might well be dead unless something happens soon, which is unlikely.