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US$1bn IMF windfall, what’s next?

By Respect Gwenzi

The IMF recently approved a general allocation of US$650 billion in Special Drawing Rights to members, of which Zimbabwe is one. These funds are meant to bolster global liquidity especially in the backdrop of the Covid-19-induced, global economic recession in 2020. The last time the Bank allocated funds to members was in 2009 following the global financial crisis of 2008.

At this point the IMF allocated a whopping US$250 billion in Special Drawing Rights to stimulate a rebound. These funds are typically allocated to member states in respect of their quota which in turn is largely derived from respective members’ GDP and economic openness.

Zimbabwe has been a member of the IMF since 1995 and initially had a quota equivalent to 0,17% of the total funds allocated. As at 2021 Zimbabwe’s quota has been reduced to about 0,15% which infers the eligible funds under the 2021 allocation to be about US$975 million.

Although the quota seems insignificant as a ratio of total, the absolute allocation due to Zimbabwe is quite huge in the context of the country’s economy. For example, the SDR is equivalent to about 40% of the country’s 2020 budget in USD terms.

It is also almost equivalent to the total amount of remittances earned by the country in 2020. The country earned about US$1 billion in remittances in 2020. Since 2015 Zimbabwe has not been able to attract FDI flows of such magnitude and is currently gripped with exchange rate pressure on its foreign currency auction market.

This is just to demonstrate the implication such a huge chunk of forex inflows in the form of SDR would likely have on the economy. But first, let us look at the eligibility of the country in terms of accessing the windfall. There are a number of hurdles which the country has to deal first before accessing the funds, if ever it is to access the funds. The country has largely been isolated over the last 20 years and has not received any concessionary funding from IFIs, particularly the Bretton Woods institutions, which include the IMF and World Bank.

Typically, the country has to clear about US$3bn of the US$10bn external debt on its books, to start seeking funding from these institutions. Although Zimbabwe has cleared its debt with the IMF, the institution demands that the country has to clear its debt with other related institutions to restore eligibility of funding. This has proved a torid task over the last few years as successive budgets reduced allocations towards international debt servicing. Efforts to seek forgiveness and restructuring of the same debt have largely been unsuccessful. It would also follow that the unsustainable debt levels as a fraction of GDP, deters IMF from funding the country.

Luckily, these specific special funds, the SDRs, do not come with strict conditions similar to other facilities extended by the IMF such as programme financing. In fact, in 2009, Zimbabwe accessed the SDR funds allocated to it to the tune of US$400 million. About US$102m of the total was withheld because at that respective time, the country still had an arrear of about US$140m, due to the IMF. The withheld funds were subsequently used in 2016 to clear the IMF debt. This precedent clearly demonstrates that the country qualifies for the SDR, like any other member country.

Conversion of these funds, which has raised a potential hurdle given the US sanctions, is likely to be delayed but ultimately cleared, given the smaller window of member countries at the country’s discretion to facilitate conversion.

Once these funds are secured, they could potentially be a game changer in the Zimbabwe economy. The Finance ministry has said it will commit to long-term sustainable capital expenditure. This would mean spreading the flows over a number of years. While this sounds like a good plan it is very difficult to implement given the challenges at play. The country already runs an unsustainable external position and has no forex reserves. It has only a month’s import cover and its currency has been on a downward spiral since its relaunch in 2019.

The magnitude of depreciation is very unsustainable and has led to sustained economic instability. The country’s interbank forex market is dogged with inefficiencies and presently a back-log of US$200m.

The depreciation of the currency has resulted in continuous pumping in of local currency to sustain spend. Although Treasury data shows that the national spend has been in line with revenue, the growth in base money (Reserve Money) has been out of proportion with the growth in real sector production. A big challenge is that asset prices in ZWL have been highly inflated as a measure of hedging against a protracted currency weakness.

The widening variance between the interbank rate and the parallel rate have given impetus for further hedging and speculative bets especially on the stock market. Since 2020, valuations have shown gross variances to underlying asset value. The discrepancy is a function of both speculation/currency risk aversion and high local currency liquidity.

It would therefore follow that the immediate impact of new flows of such high magnitude would be to cool off the economy and stimulate growth through channeling of funds towards capital expenditure. Our view is that the government’s injection of new Zimdollar funds to support its expenditure would slow down and in fact be substituted by these new SDR funds, thus giving support to both the external position and the fiscus. Indirectly these funds will support the interbank market and possibly help close the gap between it and the parallel market, up to a certain point. We expect only about 12% of the funds to be channeled towards Covid-19 medicaments and support services, leaving out a huge chunk to facilitate economic recovery support.

A big danger is on assets repricing particularly the stock market. Prices on the ZSE will likely retrace southwards to align with the new forex liquidity. The market is likely to react to this development and trigger a downward repricing, which explains why growth has been tepid in recent weeks, despite rising parallel market premiums. The biggest challenge is that while stock market prices are flexible, currency prices are sticky downwards. The correction on the stock market will not necessarily be reciprocated by currency gain which would re-equilibrate gains. This means on the net, investors may have to incur losses. We however see this as only a short term phenomena. We believe that there is a huge gap in terms of outstanding foreign payments and debt associated with supporting the forex market which will have to be dealt with in the short term and thus reduce the impact depth of the new funds.

We also hold the view that the economy’s rebound in 2021 is very fragile and will need significant support both in terms of funding and discipline to be sustained. The government has done much to demonstrate discipline but election years are typically an exception and may see the government going out of the way to blow expenditure.

We thus caution that the effectiveness of the IMF funds will demand discipline on the government’s part, an attribute which has been elusive in Zimbabwe’s government for three decades.

  •  Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.ne

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