The Zimbabwe government, desperate to re-engage with international financiers after years of isolation, has reached out to the International Monetary Fund (IMF) for the Bretton Woods institution to help structure a deal that could help President Emmerson Mnangagwa’s administration expunge its unsustainable debt, Business Times can report.
Zimbabwe is saddled with external debt estimated to be US$10bn while domestic debt is about ZWL$20.9bn. This means Zimbabwe cannot receive the much needed fresh cash from international financial institutions, due to unsustainable external debt levels and arrears owed to international financial institutions including the Paris Club, the World Bank and the African Development Bank.
The country has been battling deep macroeconomic headwinds, which continue to severely hamper the functioning of the economy but has not been able to borrow from international lenders because of the unsustainable debt and arrears of around US$5bn to the World Band, the African Development Bank and other international financiers.
The Finance and Economic Development Ministry chief director for economic affairs Fidelis Ngorora confirmed the latest development to Business Times yesterday.
He said clearance of the debt will help Zimbabwe re-engage with international financial institutions.
“For our new arrears clearance strategy, we discussed with the IMF and the World Bank. We had options. But, we will work with the IMF on the Staff Monitored Programme, which is a key benchmark for arrears clearance,” Ngorora told Business Times. The administration expects that the IMF policies would help eliminate Zimbabwe’s troubles.
The government has been battling to find a sponsor to help the administration expunge its debt.
The unsustainable debt 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.
In 2015, Zimbabwe made an attempt to clear its debt arrears under the Lima Strategy.
LIMA was premised on a non-HIPC debt resolution strategy designed to clear debt Arrears amounting to US$1.8bn owed to the World Bank Group and the African Development Bank after which the government would commence negotiations towards a resolution with the Paris Club Zimbabwe has already 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 other creditors such as the World Bank, the African Development Bank and the Paris Club.
In the face of the local currency depreciation, external debt becomes expensive to service given that more Zimbabwe dollars are required to purchase the greenback as the local currency continues to depreciate against the United States dollars.
They said debt crises have been devastating, creating the need to cautiously monitor this debt build-up.
The rising debt burden is clearly a concern for lenders and the broader international community.
In terms of composition by creditor, according to official data obtained from the Ministry of Finance and Economic Development, 44% of external debt is owed to Paris Club creditors, 31% to multilateral creditors, 20% to non-partisan creditors and 5% to bilateral creditors.
Zimbabwe’s resources are insufficient to finance its vast development agenda. But, its failure to deal with the crisis of the now unsustainable debt, which is spiraling out of control, will merely sow the seeds for more trouble.
This has constrained the government from accessing foreign loans except from a few creditors because there are no guarantees.
The accumulation of external payment arrears resulted in the International Monetary Fund declaring Zimbabwe ineligible for the general resources account and the financing window.
Other international funders, who normally take a cue from the International Monetary Fund, notably the World Bank (WB), 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.