ZIMBABWE is pushing to be classified a Heavily Indebted Poor Country (HIPC) as the country seeks debt relief in what could be a volte-face on the long-held official aversion to the initiative, a new report by the International Monetary Fund (IMF) has shown.
The southern African nation remains in debt distress, battling to access long-term cheap capital from multilateral lenders like the World Bank, African Development Bank and the IMF. With limited budgetary support, Zimbabwe has over the years relied on internal resources and loans with usurious interest rates to finance some of its critical projects.
Following several failed attempts to settle the ballooning debt such as the Zimbabwe Accelerated Arrears Debt and Development Strategy (ZAADS) and later the Lima plan of 2015, Zimbabwe, according the IMF, is now pursuing the HIPC model, which during the Government of National Unity was frowned upon by Zanu PF.
During the tenure of the power-sharing government which comprised Zanu PF and two MDC factions, hawkish Zanu PF politicians rejected proposals made by then Finance minister Tendai Biti to pursue the HIPC initiative, arguing that the country was not poor. Biti, a former MDC stalwart, was appointed the country’s Finance chief under the shaky coalition government which ended in 2013.
According to a detailed IMF report published this month following the conclusion of Zimbabwe’s 22 Article IV Consultation, the country’s public and publicly guaranteed external debt is this year expected to rise to US$17.4 billion from US$17.2 billion in 2021.
External public debt, the IMF said, stood at 100% of gross domestic product (GDP) at the end of 2020 but declined to an estimated 64% of GDP at tge end of 2021, reflecting the impact on the nominal GDP of the sharp parallel exchange rate depreciation.
International re-engagement, the IMF says, has lagged as stakeholders seek political and economic reforms. The 2019 Staff-Monitored Programme experienced significant policy slippages and elapsed without a review.
“Directors (IMF) noted that Zimbabwe remains in debt distress, with large external arrears to official creditors,” the report reads.
“A new Medium-Term Debt Strategy (MTDS), under preparation, would guide future debt management operations. ..In a bid to revive international re-engagement, the authorities have prepared a debt resolution strategy to re-engage with external creditors. The strategy includes plans to clear external arrears and seek debt relief under two approaches: a HIPC Initiative process; or a non-HIPC Initiative process, involving debt restructuring, and arrears’ clearance via bridge financing and own resources. The specific timeline and modalities of this plan are yet to be finalised.”
The Zimbabwean authorities, the IMF further noted, have resumed token payments to multilateral and Paris Club creditors.
According to the IMF, the level of extreme poverty in Zimbabwe has risen and about a third of the population is at risk of food insecurity. The international community seeks improvements in domestic political conditions and economic policies to initiate re-engagement with Zimbabwe.
What is HIPC?
The HIPC Initiative was launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. Since then, the international financial community, including multilateral organisations and governments, have worked together to lower to sustainable levels the external debt burdens of the most heavily indebted poor countries.
In 1999, a comprehensive review of HIPC allowed the IMF to provide faster, deeper, and broader debt relief and strengthened the links between debt relief, poverty reduction, and social policies.
In 2005, to help accelerate progress toward the United Nations Sustainable Development Goals (SDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI) . The MDRI allowed for 100% relief on eligible debts by three multilateral institutions—the IMF, the World Bank, and the African Development Fund (AfDF) — for countries completing the HIPC Initiative process. In 2007, the Inter-American Development Bank (IaDB) also decided to provide additional (“beyond HIPC”) debt relief to the five HIPCs in the western hemisphere.
HIPC’s two-step process
Countries must meet certain criteria, commit to poverty reduction through policy changes, and demonstrate a good track record over time. The IMF and World Bank provide interim debt relief in the initial stage and, when a country meets its commitments, full debt relief is provided.
First step: decision point. To be considered for HIPC Initiative assistance, a country must fulfill the following four conditions:
· Be eligible to borrow from the World Bank’s International Development Agency, which provides interest-free loans and grants to the world’s poorest countries, and from the IMF’s Poverty Reduction and Growth Trust, which provides loans to low-income countries at subsidised rates;
· Face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms;
· Have established a track record of reform and sound policies through IMF and World Bank-supported programmes; and
· Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process in the country.
Once a country has met or made sufficient progress in meeting these four criteria, the executive boards of the IMF and World Bank formally decide on its eligibility for debt relief, and the international community commits to reducing debt to a level that is considered sustainable.
This first stage under the HIPC Initiative is referred to as the decision point. Once a country reaches its decision point, it may immediately begin receiving interim relief on its debt service falling due.
Second step: completion point.
In order to receive full and irrevocable reduction in debt available under the HIPC Initiative, a country must
· Establish a further track record of good performance under programmes supported by loans from the IMF and the World Bank;
· Implement satisfactorily key reforms agreed at the decision point; and
· Adopt and implement its PRSP for at least one year.
Once a country has met these criteria, it can reach its completion point, which allows it to receive the full debt relief committed at the decision point.
Countries receiving debt relief.
Of the 39 countries eligible or potentially eligible for HIPC Initiative assistance, 36 are receiving full debt relief from the IMF and other creditors after reaching their completion points. Sudan has made tangible progress toward establishing a strong track record of policy required to achieve this milestone and eventual debt relief.