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Pari passu principle waived for Zim on arrears

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ZIMBABWE has committed to making token payments to the United Kingdom as international financial institutions (IFIs) ease the rigid pari passu principle on arrears repayment requirements for the financially troubled southern African nation, The NewsHawks has established.

BERNARD MPOFU

 The pari passu rule requires that Zimbabwe pays IFIs – the International Monetary Fund (IMF), World Bank (WB) and the African Development Bank (AfDB), which in terms global financial architecture enjoy “preferred creditor status” – simultaneously and without preference, but Harare does not have the money to do so.

The public and publicly-guaranteed external debt owed to the multilateral creditors is US$2.68 billion, of which US$1.53 billion is owed to the WB. About US$729 million is owed to the AfDB, US$356 million to the European Investment Bank, and US$68 million to other multilateral creditors.

Bilateral external debt amounts to US$5.75 billion, with US$3.79 billion owed to Paris Club bilateral creditors, mainly comprising Germany (US$1.02 billion), France (US$724 million), Japan (US$435 million), UK (US$416 million) and United States (US$285 million).

The Non-Paris Club creditors are owed US$1.67 billion, which comprise mainly China (US$1.57 billion) and India (US$70 million).

Waiving of the pari passu rule gives Zimbabwe fiscal space to settle arrears. So far it has only paid the IMF US$110 million. It has, however, failed to pay the WB and AfDB.

Three years ago, Finance minister Mthuli Ncube began renegotiating repayment terms under the Lima arrears and debt settlement strategy.

Information gathered by The NewsHawks shows the UK, a member of the Paris Club, an informal grouping of creditor nations whose objective is to find workable solutions to payment problems faced by debtor countries, has influenced the WB, IMF and AfDB to waive the pari passu principle in order to create fiscal breathing space for Zimbabwe.

“This is a culmination of meetings held three years ago when Zimbabwe requested for a more accommodative treatment under the pari passu principle and this received positive consideration from the creditors, wherein they agreed that Zimbabwe can use the sequential approach to clear World Bank and AfDB arrears, starting with the AfDB then paying the World Bank within three months,” an informed source said.

“Ncube implored the World Bank to reconsider its insistence to apply the pari passu principle on the clearance of the remaining arrears to the World Bank Group and the African Development Bank. That has been agreed and Zimbabwe is now expected to walk the talk on the reforms it undertook to make.”

In 2020, due to the Covid-19 pandemic, government faced challenges in making external debt service payments, hence no token payments were made to the WB, AfDB and EIB. IMF has already been paid.
Total debt service payments for 2020 amounted to US$20.39 million. The payments were made to creditors with active portfolios.

Debt service payments were made to the International Fund for Agricultural Development (US$2.2 million), OPEC Fund for International Development (US$0.92 million), Arab Bank for Economic Development in Africa  (US$0.17 million) and China-Exim Bank (US$17.1 million).

External debt arrears remain a major challenge to Zimbabwe’s economy, making up over US$6.6 billion (62%) of total external debt.

Almost all external debt owed to MDBs is now in arrears: World Bank Group, US$1.3 billion (88%), African Development Bank, US$699 million (95%) and European Investment Bank, US$339 million (95%).

Only a small proportion of the debt owed to most creditors is yet to mature.

The re-engagement, external debt resolution and arrears clearance strategy will assist Zimbabwe to regain access to concessional financing from both multilateral and bilateral development partners.

The clearance of external debt arrears and debt relief will unlock new lines of credit for the economy.

Zimbabwe is in debt distress mainly due to the continued accumulation of external debt arrears.

The 2017 Debt Sustainability Analysis for Zimbabwe indicates a breach of the key debt indicators, including the ratio of total public and publicly-guaranteed debt to Gross Domestic Product, which is currently at 72.6%, against the limit of 70% provided for in the Public Debt Management Act (Chapter 22:21).

Ncube had requested a grace period for Zimbabwe to settle WB arrears, three months after paying the AfDB.

The minister, who attended the IMF/WB annual meetings in Nusa Dua, Bali, Indonesia from 8-14 October 2018, pushed for the relaxation of the Zimbabwe arrears clearance plan agreed in Lima, Peru, in 2015, after government missed its timelines.

Contacted for comment on the developments, Reserve Bank of Zimbabwe governor John Mangudya referred this reporter to the Finance ministry.

Clive Mphambela, Finance ministry spokesperson, could not be reached for comment at the time of going to print.

 

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