Govt scramble to rescue debt deal

STAFF WRITER

The Government of Zimbabwe is scrambling to extricate the economy out of the debt crisis and related macroeconomic stagnation and will this month meet with international creditors in the capital Harare, as part of its efforts to find a lasting solution to the crisis, Business Times can report.

 The latest crunch meeting scheduled for November 25, 2024, follows a series of previous meetings after the Government of Zimbabwe established a structured dialogue platform with all its creditors and development partners in December 2022 , to institutionalise dialogue on economic and governance reforms to underpin the arrears clearance and debt resolution process.

The situation is so bad that as of June this year, the total public debt had risen to US$20.96bn, of which external debt stood at US$12.3bn  with the remainder  being domestic debt, according to official data obtained from the Ministry of Finance, Economic Development and Investment Promotion.

Out of this amount US$8.3bn are arrears.

Zimbabwe owes US$1.5bn to the World Bank, AfDB (US$681m), the European Investment Bank (US$372m) while the Paris Club and non-Paris Club are owed US$3.55bn and US$2.22bn respectively.

The balance is owed to bilateral creditors, multilateral creditors, blocked funds, Treasury bonds and other creditors.

According to information obtained from the Ministry of Finance, Economic Development and Investment Promotion this week, President Emmerson Mnangagwa, will address the crucial meeting.

The crunch meeting will also be attended by His Excellency Joaquim A. Chissano, former president of the Republic of Mozambique and the high-level facilitator, as well as Dr. Akinwumi A. Adesina, president of the African Development Bank Group and an advocate for the process.

According to several observers, one factor that has greatly exacerbated Zimbabwe’s economic problem is the country’s public debt.

The government’s lofty Vision 2030, which aims to become a middle-income economy by 2030, will remain a myth if it is not properly managed, they claimed.

The debt , analysts said, has contributed significantly to the crisis facing Zimbabwe, which is in debt distress.

The crisis is likely to worsen if the government fails to act.

Three key factors—penalties on overdue external debt, budget deficit, and the depreciation of the local currency—is driving Zimbabwe’s debt crisis.

 In the face of the local currency depreciation, external debt becomes expensive to service, given that more Zimbabwe Gold (ZiG) are required to purchase the greenback as the local currency continues to depreciate against the United States dollars.

Put it all together, it looks like a very toxic mix as the country can no longer safely carry the debt.

Zimbabwe’s debt is  about 80% in interest accruals while only 20% is the principal debt.

As interest payments have been rising, this will divert a larger portion of fiscal revenues going forward away from more urgent spending such as health, education, and infrastructure.

Zimbabwe’s resources are insufficient to finance its vast development agenda.

But, its failure to deal with the debt will sow the seeds for more trouble.

The events that led to a spike in borrowing started in the 80s from a public spending spree by the Zimbabwe government to stimulate the economy through rapid finance developmental expenditure.

 But, for the past 24 years Zimbabwe neglected to service its debts.

This has constrained the government from accessing foreign loans except from a few creditors because there are no guarantees.

Apparently, the accumulation of external payment arrears resulted in the International Monetary Fund (IMF) declaring Zimbabwe ineligible for the general resources account of the IMF financing window.

Other international funders, who normally take a cue from IMF, notably the World Bank, the African Development Bank and traditional creditors from the Paris Club and others also suspended disbursements of existing loan facilities and also declared the country ineligible for new loans.

Failure to meet international debt payment obligations has left the country out of the international financial markets.

This implies that the country can only tap into domestic savings for borrowing which seriously limits investment opportunities at a time when the country requires financial resources in line with its aspirations of becoming a middle-income country by 2030.

While tapping into the domestic debt market provides a sound alternative and does not expose the country to foreign exchange risk, it has the potential to crowd out private sector borrowing, thus hampering investment and output growth.

In the absence of any foreign loans, it is difficult for Zimbabwe to implement any development programme.

It forces the government to resort to domestic borrowing crowding out private investment leading to slow growth since governments are usually inefficient compared to private sector investments unless it is investment in key enablers in the country.

In the absence of loans, not much is happening on development.

According to a recent research by the African Forum and Network on Debt and Development (AFRODAD) Zimbabwe’s high debt service requirement inhibits future investment in social expenditure such as education and health, thereby perpetuating low productivity and poverty.

AFRODAD said social sectors would suffer more given the constrained fiscal space the country is grappling with, in the event that Zimbabwe decides to service its debts.

There are four major pieces of legislation that help the Government manage the public debt in Zimbabwe—the Constitution of Zimbabwe, Public Debt Management Act, Public Finance Management Act and the Reserve Bank of Zimbabwe Act.

The Constitution sets limits on State borrowing, public debt, and State guarantees, full disclosure and transparency about public debt in a comprehensive manner among others. Section 300(3) of the Constitution prescribes the Minister responsible for Finance to gazette the terms of a loan agreement or guarantee concluded by the government within 60 days and accountability on public debt issues.

Further, Section 300(5) requires the Minister of Finance to present a comprehensive statement of the public debt of Zimbabwe biannual lyrics before Parliament.

The Constitution also stipulates major guidelines on borrowing, maintenance, extinction of the debt, definition of contingent liabilities, exposure of government, borrowing powers of the Minister as well as the Minister’s powers to give guarantees, borrowing by local authorities and public entities among other issues.

Zimbabwe’s debt management legal framework is rated quite strongly by development partners such as the World Bank and the Macroeconomic and Financial Management Institute as one that meets minimum standards for debt management.

But, the government has been failing to comply with the law.

 “[Issues included the failure by the government] to observe the borrowing limits and were not fixed by the National Assembly resolution. The other issue is the failure by the Ministry of Finance to present to Parliament a report on loans raised and guarantees issued by the State and a comprehensive report on public debt,” part of AFRODAD report reads.

The institutional arrangement for debt management in Zimbabwe includes but is not limited to the Ministry of Finance and Economic Development, Debt Management Office (DMO), External and Domestic Debt Management Committee, Reserve Bank of Zimbabwe, Parliament of Zimbabwe.

The DMO is housed as a unit within the Ministry of Finance and Economic Development.

“Concerns have been raised by some stakeholders regarding the independence of this office (DMO).

They said its efficiency and effectiveness in debt management is more critical than where it is placed.

Others strongly felt it requires operating autonomously to ensure checks and balances within the Ministry of Finance,” AFRODAD said.

It is also argued that the front office for domestic debt is housed in the RBZ.

Depending on information flow from RBZ to the Ministry of Finance, this set up could also pose coordination issues thereby compromising sound debt management.

On several occasions, the Parliament of Zimbabwe last year highlighted non-compliance of the Ministry of Finance to the Constitution with regards to the gazetting of loans contracted and guarantee issued as well as failure to present a report on loans raised and guarantees issued by the State and a comprehensive report on public debt.

Parliament highlighted breaches of many provisions in the Public Debt Management Act by the Minister of Finance.

In an attempt to address the debt problem in Zimbabwe, the government undertook a number of initiatives. Between 2001 and 2008, it undertook the Domestic Debt Restructuring policy.

It, however, did not produce intended results due to the poor performance of the economy.

The other was the Sustainable and Holistic Debt Strategy of 2010.

No debt was, however, paid following the intervention. Government also formulated the Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy in considering a debt relief mechanism under the Heavily Indebted Poor Countries (HIPC) initiative and make use of fresh financing from international institutions and mineral wealth to achieve sustainable development.

There was also the Lima Strategy of October 2015, yet another attempt Zimbabwe made to clearing debt arrears.

It was premised on a non-HIPC debt resolution strategy designed to clear debt arrears amounting to US$1.8bn owed to IMF, World Bank Group and the African Development Bank as the first step towards seeking a debt treatment by the Paris Club after which the government would commence negotiations towards a resolution with the Paris Club.

Zimbabwe cleared its overdue obligation to the IMF in October 2016.

However, the country cannot acquire new debt from the international financial institutions and other creditors until they clear all the arrears they owe to creditors.

Despite all these strategies there has been limited success achieved in addressing Zimbabwe’s debt problem.

The performance of a sustainable debt management framework is hinged on sound public finance management.

However, even without a sound debt management framework in place, Zimbabwe has continued to contract new loans from China.

This threatens the repeat of past mistakes of over-reliance on foreign borrowing rather than using domestic resources and using foreign borrowing for activities which will not create sufficient returns to repay the loans.

As part of a sustainable and inclusive debt management approach, they argued, the government should simultaneously undertake strong macroeconomic policies and structural measures.

“The Government of Zimbabwe will host at the Harare International Conference Centre, a High-Level Structured Dialogue Platform Forum on  November  25, 2024, to update all stakeholders on the progress made to date and to discuss the roadmap for the arrears clearance and debt resolution process.

“President Mnangagwa will address the forum. Dr Akinwumi A Adesina, president of the African Development Bank Group and champion of the process, along with His Excellency Joaquim A Chissano, former president of the Republic of Mozambique and the high-level facilitator, will participate in the forum.

“Various stakeholders will attend, including Government representatives, creditors, development partners, international organisations, civil society organisations and the private sector among others.

“The Government of Zimbabwe remains strongly committed to implementing a transparent and collaborative arrears clearance and debt resolution process to ensure the country’s long-standing debt challenges can be resolved in the most sustainable manner,” Treasury said.

Zimbabwe is one of the seven countries that are in debt distress. Other countries in debt distress are Eritrea, Gambia, Mozambique, Republic of Congo, Sao Tome and Principe and South Sudan.

For the past 24 years, Zimbabwe has neglected to service its debts.

This has constrained the government from accessing foreign loans except from a few creditors because there are no guarantees.

Failure to clear arrears has affected Zimbabwe’s credit ratings, making it a pariah in international capital markets.

Even though Zimbabwe paid off its arrears with the International Monetary Fund in 2016, it still owes other international financial institutions such as the World Bank and the African Development Bank, the African Development Bank, hampering its ability to tap into development financing from the institutions.

According to the ministry, the Government is committed to implementing a transparent and collaborative process.

Implementation of the process is being spearheaded by Sector Working Groups (SWGs) tasked with centring discussions on the Government’s implementation of reforms under three key strategic pillars.

These are Economic Growth and Stability Reforms, Governance and Land Tenure, Compensation of Former Farm Owners and Resolution of Bilateral Investment Protection and Promotion Agreements (BIPPAs).

Treasury said the three co-chairs of the SWGs representing the Government under the Structured Dialogue Platform are expected to present their progress reports during the forum.

“These presentations will be followed by statements from the co-chairs representing Development Partners in the Sector Working Groups.

“The three Sector Working Groups are as follows: Economic Growth and Stability Reforms; Governance Reforms; and Land Tenure Reforms (bankable 99 Year Lease), Compensation of Former Farm Owners and the Resolution of Bilateral Investment Protection and Promotion Agreements (BIPPAs).

“The forum will conclude with a plenary discussion and a presentation on the Roadmap and Way Forward for the Arrears Clearance and Debt Resolution Process,” said the Ministry.

The High-Level Forum follows the technical meeting of the co-chairs of the SWGs of the structured dialogue platform on the arrears clearance and debt resolution process that took place last month.

“The meeting highlighted the significant progress made by the Government in implementing reforms underpinning the Process and identified the next steps.