Money alone is not enough

Source: Money alone is not enough – The Zimbabwe Independent July 22, 2016

ZIMBABWE’S desperate attempts to settle US$1,8 billion to multilateral creditors — supposed to have been cleared by last month — to break its debt vicious cycle and secure US$2 billion in new funding to rescue a crumbling economy ravaged by company closures, job losses and a cash crisis must be commended.

Comment

Finance minister Patrick Chinamasa and Reserve Bank governor John Mangudya have been frantically travelling around the World – from Lima to Lusaka, Paris, London and Kigali — trying to garner support for their plan. Since they presented their strategy to multilateral and bilateral creditors in Lima, Peru, on October 8 last year, the two have been pulling out all the stops to make it work.

Currently saddled with a debt overhang of US$10,8 billion, the country’s debt arrears amount to US$5,6 billion split between multilateral creditors (US$2,2 billion), the Paris Club (US$2,7 billion) and non-Paris Club creditors (US$700 million). It has arrears estimated at US$1,8 billion with its three preferred creditors, International Monetary Fund (IMF), World Bank and African Development Bank (AfDB).

Under the repayment strategy, the country will secure US$819 million bridge finance from the Afreximbank to repay arrears to the AfDB (US$585 million); African Development Fund of the AfDB (US$16 million) and US$218 million to International Development Association, a World Bank fund for poor countries. To get new funding from the AfDB, Zimbabwe — classified as one of the vulnerable economies on the continent together with Sudan, Somalia and Eritrea — needs to clear its arrears first before the end of 2016 when the funds are still available. It will also need US$896 million to repay arrears to a World Bank associate, the International Bank for Reconstruction and Development and US$110 million to the IMF.

After paying off the US$1,8 billion to multilateral creditors, Zimbabwe will then approach the Paris Club — which it owes about US$6 billion — seeking either debt forgiveness or cancellation of penalties accrued on arrears.

Arrears contribute about US$1 billion. Arrears to non-Paris Club creditors amount to US$476 million.

Chinamasa has been going around with a begging bowl, declaring in Paris recently that “we have nothing”. He said in Kigali his plan is on course. This is encouraging.

However, it must be understood that even if Zimbabwe gets the money, its problems won’t go away. You can’t fix the current crisis by throwing money at it. It’s too deep and complex for that. The facts are clear. Zimbabwe’s economic difficulties are deepening. Production and trade are severely constrained by tight liquidity conditions resulting from limited external inflows and lower commodity prices on global markets. This is worsened by the El Nino-induced drought.

Inflation remains in negative territory as United States dollar — the country’s main currency — rallies. Massive company closures, job losses, poverty and suffering are worsening. Zimbabwe remains in debt distress and its international reserves are precariously low.

While money will help the situation, that alone is not enough. Unless the country bites the bullet of political and economic reform, the crisis will continue.