It is not likely that Zimbabwe's debt arrears clearance plan will succeed without the support of the U.S.
Zimbabwe’s debt distress remains the major hurdle for achieving its development objectives. According to Zimbabwe’s Ministry of Finance, the total public and publicly guaranteed external debt was estimated to be $7.1 billion (51 percent of GDP) as of December 2015; and $5.6 billion (79 percent of total external debt) is in arrears. More specifically, $2.4 billion is owed to multilateral creditors (83.3 percent in arrears) and $4 billion is owed to bilateral creditors (72.5 percent in arrears).
It is important to highlight that Zimbabwe’s gross public debt-to-GDP ratio is low at 69 percent relative to the US’s debt-to-GDP ratio of 104 percent. By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country’s ability to pay back its debt. This in turn affects access to credit and interest rates. However, Zimbabwe’s debt-to-GDP measurement is misleading because 79 percent of its external debt is in arrears. That is, $5.6 billion is overdue. Thus, a measure of Zimbabwe’s arrears, $5.6 billion, against projected total revenue in 2016, $3.8 billion, is a more accurate measure of the country’s solvency.
As a first step toward normalizing relations with creditors, Zimbabwe’s authorities have developed a strategy for clearing arrears owed to International Financial Institutions (IFIs). The plan received strong support from creditors and development partners at a meeting on the sidelines of the 2015 annual meetings of the IMF and the World Bank in Lima, Peru.
Under the plan, it is envisioned that the authorities will repay $1.8 billion in arrears owed to IFIs by April 2016. The resolution of external debt arrears is to be achieved through a combination of the following: (a) using domestic resources to clear $110 million owed to the IMF; (b) a bridge loan to clear $601 million owed to the AfDB Group; and (c) a medium to long-term loan facility to clear $1.1 billion owed the World Bank Group.
After successfully making these payments, the authorities will seek IMF financial support for a medium-term reform program, with a view of, thereafter, seeking debt treatment—debt reduction, loan restructuring or debt relief—with bilateral creditors. The assumption is that a successful execution of the arrears clearance strategy will unlock new financing for the country—ending fifteen years of exclusion from international lending.
According to Moody’s, the international credit rating agency, “attempts to clear Zimbabwe’s arrears and re-engage with bilateral and multilateral partners are credit positive. They imply that the country would have renewed access to international financing and the private sector would access to financing at a lower cost.” Indeed, in the absence of a comprehensive economic reform plan that mobilizes financial support from the international community, it is not likely that the country can raise its growth prospects in a lasting manner.
Structural reforms that lead to sustainable growth are the key to the success of the plan. Without reforms, Zimbabwe will be locked in a cycle of debt distress—that is, simply using new loans to repay current obligations. Zimbabwe is currently in the process of completing an IMF Staff monitored Program (SMP); an informal agreement whereby IMF staff monitor the implementation of the authorities’ economic program. (SMPs do not entail financial assistance or endorsement by the IMF Executive Board.) Under the current SMP, Zimbabwe’s authorities have already made important reforms; measures which include strengthening the financial sector and liberalizing the labor market.
However, it is not likely that the arrears clearance plan will succeed without the complete support of the U.S. because of the restrictive provisions under the Zimbabwe Democracy and Economy Recovery Act (ZDERA). The Act holds that until the U.S. president makes certain certifications—relating to good governance—“the Secretary of the Treasury shall instruct the United States executive director to each international financial institution to oppose and vote against (1) any extension by the institution of any loan, credit, or guarantee to the Government of Zimbabwe; (2) or any cancellation or reduction of indebtedness owed by the Government of Zimbabwe to the United States or any international financial institution.”
And, it is unclear whether the U.S. will support the entirety of the plan. Anecdotal accounts suggest qualified support, at best. Just before departing Zimbabwe, in November 2015, Bruce Wharton, the immediate past U.S. ambassador to Zimbabwe noted that: “If you look at the track record of U.S. economic financial policy towards Zimbabwe in the last 12 months; first of all we have supported the IMF Staff Monitoring Program here and secondly at the big meeting in Lima we didn’t bang our shoe and say no! No! A thousand times, no! We were supportive of that as well.”
However, more recently, Senator Bob Corker, Chairman of the Foreign Relations Committee, wrote a letter to the U.S. secretary of the treasury stating, in important part, that:
Current law requires the President to make a number of certifications including the restoration of the rule of law in Zimbabwe; satisfactory election conditions in that country; equitable, legal, and transparent land reform; and the subordination of the security force to civilian authority as the necessary condition for a U.S. vote in support of Zimbabwe’s arrears clearance at an international financial institution. We urge the Treasury Department to act quickly to raise the lack of clear and meaningful governance and economic reforms with the IMF, World Bank, and African Development Bank, and to encourage creditors to require such reforms before supporting any new lending to the Government of Zimbabwe.
Unlike the SMP, which is approved by the IMF’s management, a Fund-financial arrangement (new loans/budgetary support) requires the approval from the IMF Executive Board. The U.S. effectively has veto power on the IMF Executive Board—to approve or deny Fund-financial arrangements. Specifically, the U.S. holds 16.85 percent of the board’s total votes. By comparison, German, Japan, and the United Kingdom have a combined 15.81 percent of the board’s votes. (The U.S. has similar controlling power in the World Bank.)
Accordingly, the arrears clearance strategy will not succeed without the necessary certifications from the U.S. president. Indeed, re-engagement with the U.S. should be an immediate high-priority objective. The importance of normalizing bilateral relations with the U.S. cannot be overstated: all pricing and 90 percent of trade, in Zimbabwe, is in U.S. dollars; and ZDERA restrictions will prevent the country from accessing new financing.
Furthermore, Zimbabwe is not benefiting from the African Growth and Opportunity Act (AGOA). All SADC current member states bar Zimbabwe and the DRC are AGOA beneficiaries. The legislation significantly enhances market access to the U.S. for qualifying sub-Saharan African countries. For example, South African exports to the U.S. have doubled under AGOA, with 36 percent of its exports entering the U.S. under AGOA preferences in 2015.
Recently, in February 2016, a delegation from the U.S. Congress—Representative Schiff, Senator Flake, Senator Cochran, Senator Cardin, and Senator Coons—met with President Mugabe, in Harare, behind closed doors for two hours. This meeting was very significant. It is the first time a U.S. elected official or cabinet member has met with the Zimbabwean president since land reform commenced fifteen years ago. Although the focus of the delegation’s visit was wildlife preservation, it was nonetheless a symbolic moment that could be the beginning of a thaw in relations between the two countries.
The authorities in Zimbabwe must build on this meeting to begin a dialogue about normalizing U.S.-Zimbabwe relations, with a view of gaining U.S. support for its arrears clearance strategy. Notably, in November 2014, the EU suspended appropriate measures under Article 96 of the Cotonou Agreement, enabling the EU provide direct financial assistance to the Zimbabwean Government. This was a significant step in the process towards normalizing relations between the EU and Zimbabwe, and represents a major shift in the EU approach. Zimbabwe must seek similar accommodation under ZDERA, as part of a broader strategy to normalizing relations with the U.S.
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