HomeAnalysis‘Structural overhaul needed to complement debt repayments’

‘Structural overhaul needed to complement debt repayments’

BY TAURAI MANGUDHLA

THE commitment by the Zimbabwean government to clear its debts with multilateral lenders amounting to more than US$10 billion with token payments to the Paris Club of debtors for the first time in 20 years, has to be complemented with concrete structural reforms.

The Paris Club is a group of major creditor countries — including Japan, the United States, Germany, the United Kingdom and Belgium — whose role is to find coordinated and sustainable solutions to debt repayment difficulties experienced by debtors.

Finance minister Mthuli Ncube last week said during a Zimbabwe Independent webinar that the government had made its first debt repayment to the Paris Club under a refreshed plan to clear up to US$10,7 billion owed to several multilateral funders.

He did not disclose the actual amounts that have been paid.

Zimbabwe had defaulted since 2001, amid a severe economic crisis which resulted in inflation hitting a record 500 billion percent in 2008, with GDP falling by 50%.

This debt represents over 70% of the country’s gross domestic product (GDP) and has been blamed for the struggles to secure fresh bailouts from international financial institutions (IFIs) to stabilise the troubled economy.

After paying debts owed to the International Monetary Fund (IMF) two years ago and rolling out the Lima debt clearance plan in 2015, the country has failed to live up to its promise, and has been accumulating high interests on the arrears.

Under the Lima plan, Zimbabwe in 2019 cleared its arrears with the IMF amounting to US$107,9 million. Earlier this year, Ncube said arrears clearance remained a major challenge to the economy, making up over 77% of total external debt.

As a result, he said, the re-engagement with the international community for arrears clearance and debt relief remained a critical strategy of the National Development Strategy 1 to unlock new external financing required for sustained economic growth and transformation.

This comes amid a record of property rights violations by the government particularly during the fast-track land reform programme which has continued to date.  This has been coupled with gross human rights violations that have seen dissenting voices muzzled or intimidated and resulted in activists being allegedly abducted and tortured by state operatives.

Development economist Chenaiyimoyo Mutambasere said debt clearance without other major structural reforms would not yield meaningful results.

“Further, given the continued corruption, state infringement on property rights and state sponsored human rights abuses, debt repayment alone will not be enough to put Zimbabwe in right standing with its existing or potential creditors,” Mutambasere said. “This means that, it is unlikely that such a move would open up any new lines of credit for the country. So for Zimbabwe, in the absence of a system overhaul with new actors, there would be little-to-no gains from debt repayment.”

She said debt and arrears clearance may only help depending on the cost of capital if that is higher than the interest payable on the US$1 billion in SDRs.

“Given that the SDR interest currently is at 0,05% however it may increase to say 2% in a year’s time. This is the comparison that has to be made. That being said, token payments are not likely to make a significant difference in any case as overtime interest continues to accrue,” she added.

Markets analyst Batanai Matsika said the token payments were positive and part of broader re-engagements efforts pushed by the government with intent to develop relationships that could probably lead to a restructuring of the debt.

“So it’s a very important development showing that at least there is willingness to pay something whether it’s a token, but what’s important is the broader re-engagement efforts that are being pursued. This will then pave the way for things such as restructuring of the debt itself as a starting point,” Matsika said in a telephone interview on Tuesday.

Economist Prosper Chitambara said although the token payments were critical insofar as rebuilding trust among multilateral lenders and investors, there was a need for real structural reforms that make the country an ideal destination for capital.

“I think it’s useful to be making those token payments; we are debtors and we must be seen to be making that effort to pay off what we owe otherwise even our friends from the East may end up not trusting us. It’s critical to establish that track record of responsibility and accountability, it also helps to unlock investment, not necessarily fresh loans, but other investments,” Chitambara said.

“My view is that it’s critical, but obviously it’s also important to implement other reforms, broader institutional reforms, property rights in agriculture and other institutional reforms to strengthen and bolster confidence in the economy,” he added. “But it’s positive I think, it’s an acknowledgement that we owe you and we are making efforts to pay back but we also need to do other things, make other reforms.”

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