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Why Lima Plan has stalled

ZIMBABWE’S debt and arrears clearance plan, which was first adopted in Lima, Peru, two years ago is facing serious headwinds.

By Bernard Mpofu

Problems blocking the deal stem from usurious interest rates, costly mortgaging of mineral resources, the absence of a sustainable economic recovery plan and lack of political will to implement a raft of reforms.

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya recently announced that the debt-ridden country had secured funding to settle World Bank arrears, but that was too early an announcement to pop the champagne bottle. Despite announcing that the country had secured funding to clear the US$1,4 billion arrears to the World Bank and US$600 million owed to the AfDB, the central bank chief said more has to be done to ensure that the country meets the pre-requisites of settling the arrears.

Before successfully clearing its arrears to the International Monetary Fund (IMF) recently, Zimbabwe owed three international financial institutions (IFIs), who enjoy preferred creditor status, US$1,8 billion.

Mangudya this week emphasised to the Zimbabwe Independent that while government was still committed to the Lima plan, many obstacles have to be overcome before creditors can accept money from Zimbabwe.

“Funding has been arranged and that payment would be done in synchrony with the implementation of the structural economic reforms that include enhancing investor trust and confidence, state-owned enterprises transformation, ease and cost of doing business and fiscal consolidation. This situation hasn’t changed,” Mangudya said yesterday.

Hope turned to despair for government when it missed its initial timelines with international financial institutions.
Outwardly, government put a straight face, boldly declaring that all was in order. That was not the case. In July the International Monetary Fund (IMF) team which had concluded Article IV consultations on Zimbabwe unequivocally said more work should be done.

“The re-engagement process is facing severe headwinds,” IMF said in a report on Zimbabwe.

“However, the expected bilateral loan to clear arrears to the World Bank Group did not materialise, and led the authorities to seek an alternative package from commercial lenders. The IMF added that inadequate progress on reforms is undermining the prospects for new financing”

Under the Lima plan, Zimbabwe committed to planned simultaneous repayment modalities to the IMF, World Bank and the African Development Bank. The 2015 Lima process, which received support from creditors and development partners, envisaged clearing arrears to the IMF using the SDR holdings, to the IBRD with a bridge loan from a bilateral creditor, to IDA drawing on a turnaround facility, and to the AfDB with the AfDB 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 materialize, Zimbabwe proposed a sequential approach. It fully settled overdue obligations to the IMF’s Povert Reduction and Growth Trust (PRGT),” the IMF said.

Now government views market resources or rather the mortgaging of mineral resources — an option with costlier financial terms — as the only alternative to clear World Bank arrears in the absence of official support. Government, which is the sole buyer of gold in the country, is willing to collateralise gold proceeds to settle these obligations, and pave the way for regularisation of arrears with other creditors.

But this, according to the IMF, could cost an arm and a leg.

“Additionally, collateralising 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 uncertainties over the strength of policies to restore sustainability and the appetite for support at the Paris Club,” the IMF said.

With elections coming up next year, government’s commitment to addressing reforms could wane in the coming months.

Zimbabwe will hold general elections in 2018, in which President Robert Mugabe is expected to face strong contest from a coalition of opposition political parties and internal electoral sabotage due to infighting.

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