Currency reforms throw Zim debt plan off balance


Zimbabwe’s currency reforms and delays in validating compensating land allocated under the land reform programme have been cited as new hurdles to the country’s arrears clearance programme.

The country’s public debt has increased sharply in recent years due to unsustainable fiscal deficits that have fuelled debt issuances. External debt reached 40 percent of GDP at end 2017, most of which is in arrears.

Real GDP growth is projected to be negative in 2019 (-2.1 percent), as the significant consolidation and the impact of the drought and the cyclone drag down economic activity.

A rebound in economic activity is expected in 2020 and over the medium term, as uncertainty declines, distortions from multiple exchange rates are removed, and relations with external creditors normalise.

With limited access to external financing, the deficit has been, until recently, largely financed domestically through money creation by the RBZ, the accumulation of external arrears, and domestic banks purchasing Treasury Bills.

According to the International Monetary Fund (IMF) Staff Monitored Programme (SMP) the country’s arrears programme is facing headwinds and establishing a definitive picture of Zimbabwe’s debt outlook is difficult given the considerable uncertainty surrounding the current macroeconomic background and significant contingent liabilities.

“First, the recent currency reform has added significant uncertainty to the outlook for inflation and interest rates, as well as the level of GDP at the new domestic currency. These large uncertainties make it particularly difficult to assess the public debt outlook at present,
but the expectation is that an updated debt sustainability analysis (DSA) will be conducted at the first Review of the SMP (to be coupled with the Article IV consultation).

“Second, official debt data does not include contingent liabilities related to compensation for the expropriated farm land and expulsion of white farmers that occurred under the Mugabe-era Indigenisation program (current estimates vary from US$2.4-10 billion). The
government has committed to partially compensate farmers for costs incurred from the expulsion off the farmland, but the amount, as well as the modalities for the compensation, has not been agreed. A first payment of RTGS$60 million is included in the 2019 Budget.

Third, the authorities have committed to assume FX-losses of banks (related to their negative net open positions at the time of currency reform and non-financial corporates (related to foreign currency debt arrears that were accumulated prior to the currency reform).”

Official figures show that the country is saddled with a debt stock of $16,9 billion, with external debt accounting for approximately $7,4 billion.

Out of this, approximately US$5,6bn is in arrears, even though the country settled its IMF arrears of US$107,9m in November 2016.

Zimbabwe owes the World Bank US$1,4bn, African Development Bank (US$678m) and US$309m to the European Investment Bank.

The failure to resolve the external debt has stymied efforts to access cheap lines of credit to reboot the economy.

South Africa has pledged to assist Zimbabwe on its arrears and debt clearance plan as Harare steps up its efforts to access concessionary funding from multilateral financial institutions.

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