DEBT-TROUBLED Zimbabwe has launched its arrears clearance and debt management programme at a time the economy is struggling to access concessional facilities to finance capital projects.
BERNARD MPOFU
After years of neglect, the government has in recent years been using domestic financial resources to mend key infrastructure such as the road network. But that has not been enough. Rail network is rundown, schools are poorly resourced and hospitals are under-stocked.
The continuing accumulation of arrears is also seriously undermining the country’s credit rating and severely compromising the country’s ability to attract foreign direct investment. It is also hampering efforts to mobilise direct budgetary and balance of payments support.
Official figures from Treasury show that the country remains in debt distress, with an unsustainable Public and Publicly Guaranteed (PPG) external debt overhang amounting to US$14.4 billion as at the end of December 2021.
The country has been unable to meet its debt servicing obligations and has, therefore, been accumulating external debt arrears since 2000, which are now estimated at US$6.6 billion as at the end of December 2021.
PPG external debt owed to the multilateral creditors, as at the end of December 2021, amounted to US$2.7 billion, of which US$1.5 billion is owed to the World Bank Group, US$711 million to the African Development Bank, US$358 million to the European Investment Bank, and US$66 million to other multilateral creditors.
On the other hand, bilateral PPG external debt as at the end of December 2021 amounted to US$5.6 billion, with US$3.9 billion owed to the Paris Club creditors and US$1.8 billion owed to Non-Paris Club creditors.
Arrears, according to the latest Treasury statistics, remain a major challenge to the economy, constituting more than 77% of total external debt. Almost all external debt owed to multilateral development financial institutions (MDBs) is now in arrears, (World Bank Group, US$1.4 billion or 88%, African Development Bank, US$681 million or 95% and European Investment Bank, US$344 million or 95%).
Furthermore, indicators confirm that the country is in debt distress and urgently needs a comprehensive debt resolution strategy, supported by the international community in order to achieve debt sustainability and sustainably grow the economy.
As part of re-engagement with international financial institutions and other creditors, the government, in March 2021, resumed making quarterly token payments to the Multilateral Development Banks (MDBs), the World Bank Group (US$1 million), the African Development Bank Group (US$500 000) and the European Investment Bank (US$100 000).
Treasury also began making quarterly token payments amounting to US$100 000 to each of the 16 Paris Club bilateral creditors in September 2021, as a sign of its commitment to the engagement and re-engagement process with the international community.
The country is also facing serious debt service capacity challenges – liquidity challenges, as reflected by low debt service ratios (actual debt service to revenue and exports), while at the same time accumulating arrears. Experts say, looking ahead, the country will face similar challenges in debt servicing which requires on average US$140 million annually, hence, the need for debt restructuring.
The NewsHawks this week outlines how Zimbabwe, which has engaged the African Development Bank, seeks to settle its arrears.
OPTION A: HIPC Initiative
Zimbabwe has been exploring traditional debt relief options, especially the Highly Indebted Poor Country (HIPC) Initiative, which provides maximum debt relief for beneficiary countries.
To this end, the Joint World Bank-IMF HIPC Initiative assessment, which was conducted in June 2014, based on end-2004, end-2010 and end-2013 data on public and publicly guaranteed external debt and the respective macroeconomic data, concluded the following:
• the ratios of present value (PV) of debt-to-exports after traditional debt relief at end-2004 and end-2010 are estimated to be above the HIPC Initiative threshold of 150%; and
• the ratios of PV of debt-to-exports and to revenues as of end-2013, are estimated at 130% and 146%, respectively, which are below the HIPC Initiative thresholds of 150% and 250% respectively.
Based on the outcome of the June 2014 assessment, Zimbabwe did not qualify for the HIPC Initiative.
The joint World Bank–IMF HIPC Initiative assessment was undertaken despite the fact that Zimbabwe could not qualify due to the HIPC Initiative’s sunset clause. The sunset clause restricted access to the HIPC Initiative to countries not meeting the Initiative’s income and indebtedness criteria based on the end-2004 data.
The sunset clause was introduced to the HIPC Initiative to prevent the Initiative from becoming permanent, minimise moral hazard and to encourage early adoption of reforms. The last sunset clause extension was in 2006 and Zimbabwe was not among the five countries that were declared eligible, namely, Comoros, Eritrea, Liberia, Somalia and Sudan.
If the window for the HIPC Initiative eligibility is availed, Zimbabwe is keen to undertake the HIPC Initiative process in order to ensure that the country benefits from maximum debt relief. This would require a modification or exception granted by International Development Assiciation (IDA)’s executive board, to the World Bank HIPC Initiative eligibility criteria, for the reclassification of Zimbabwe as an IDA-only country. This will also require the IMF board’s grandfathering of Zimbabwe to the HIPC Initiative. In addition, a HIPC Initiative eligibility assessment based on end-2020 data would be needed.
OPTION B: Alternative arrears clearance, debt relief and restructuring strategy
The following is the proposed alternative option for external debt arrears clearance, debt relief and restructuring strategy, if the HIPC Initiative is not available to Zimbabwe.
This entails a combination of using Zimbabwe’s own resources, and bridge concessional loans from bilateral development partners who are willing to voluntarily channel their excess resources to support Zimbabwe’s arrears clearance, debt relief and restructuring strategy. The process includes the following components:
• Arrears clearance to IFIs:
o Component 1: World Bank Group (US$1.4 billion): Zimbabwe will use its own resources, including part of its allocated SDRs, to clear the arrears to the World Bank Group, based on the expectation that disbursements will typically occur post arrears clearance. Additional arrears will be cleared using a 48-hours bridge loan from the G7/G20 countries, which will be repaid using resources from IDA-19 or IDA-20 and the Arrears Clearance Fund for the HIPC Initiative. In addition, arrears will also be cleared from concessional loan borrowing or grants.
This strategy will need the support of G7/G20 countries and the leadership and coordination of champions/sponsors among these countries. The champions/sponsors, would ideally be from the G7 member countries, with five of them being the country’s major Paris Club creditors, namely: Germany, France, UK, Japan and the US, to whom the country owes a total of US$2.36 billion debt (58% of total bilateral external debt). Other countries will, however, also be approached to participate in the process.
o Component 2: African Development Bank Group (US$681 million): Zimbabwe will use its own resources, including part of allocated SDRs, to clear the arrears to the AfDB, based on the expectation that the bank will disburse new resources. For the balance of the arrears to the AfDB, the country will negotiate for a concessional bridge loan from emerging market economies (EMEs) who are willing to voluntarily channel their excess resources to support Zimbabwe’s arrears clearance, debt relief and restructuring strategy.
Zimbabwe will use resources allocated from the AfDB under the Transitional Stabilisation Facility (TSF) Pillar II to repay the concessional bridge loan.
o Component 3: European Investment Bank (US$344 million): Zimbabwe will also borrow US$344 million concessional bridge loan from developed countries with excess resources, to clear arrears to the European Investment Bank (EIB). There are indications that EIB is prepared to cancel all the penalties accrued amounting to US$153 million which would reduce the amount required to US$191 million.
• Bilateral creditors arrears clearance, debt relief and restructuring;
o Component 4: Paris Club creditors o Component 5: Non-Paris Club creditors
• Rescheduling of outstanding and disbursed debt falling due after arrears clearance
o Component 6: Negotiate for rescheduling with bilateral creditors (Paris Club and Non-Paris Club).
