BY CATHERINE MUCHIRI
THE International Monetary Fund (IMF) has warned that Zimbabwe’s debt burden will worsen considerably due to the country’s inability to compensate its displaced white former farmers, and the Reserve Bank of Zimbabwe’s failure to fully compensate for losses incurred when the country embarked on currency reforms.
In the 2022 national budget statement, Finance minister Mthuli Ncube stated that the country had an external debt burden of US$13,7 billion.
In July 2020, government signed a deal with white former farmers to pay them US$3,5 billion in compensation for improvements on farms taken over for resettlement under its often-violent land reform exercise.
The latest comprehensive 2022 Article IV Consultation report said the country’s consolidated debt was now projected at US$19,03 billion, which would further constrain its ability to access development funding.
“The external debt burden is excessive and the country is incurring external arrears,” read the IMF report.
“While the real value of domestic debt has fallen significantly given the high inflation, plans to settle unfunded liabilities related to blocked funds and a compensation agreement for displaced farmers aggravate the debt situation.”
Government’s agreement with white former farmers envisaged a 50% down payment within 12 months and full payment over a period of 48 months thereafter.
Government has so far paid US$250 million towards the compensation by providing shares in Kuvimba Mining Company to the displaced farmers.
The remainder of the compensation, about US$3,25 billion, is yet to be funded.
“Securing financing for the compensation is constrained by Zimbabwe’s lack of market access. In April 2021, the government appointed a financial advisory firm to identify possible financing instruments and funding options and expects a report on financing options by mid-2022,” the IMF noted.
“In the absence of financing, the unfunded US$-denominated liabilities from the farmers’ compensation agreement have been incorporated under external arrears as of end 2020 for the purpose of the DSA [Debt Sustainability Analysis].”
The Bretton Woods institution said in the absence of an agreed repayment schedule and financing, the US$2,5 billion of central government obligations stemming from blocked funds is treated as external arrears for the purposes of the DSA as of end of 2021.
The transfer of these losses, known as “blocked funds” or “legacy debt”, from the RBZ and the private sector to central government was approved by Parliament in December 2021.
Government intends to settle these liabilities through the issuance of long-term US dollar-denominated government bonds.
Despite the decline in the domestic debt burden in real terms since the last DSA owing to the sharp rise in inflation, IMF warned that total public debt remained above the indicative threshold of 35% of the gross domestic product.
“Even with fiscal consolidation, the amount of public debt will carry a heavy burden on Zimbabwe,” IMF said.
While government has prepared a debt resolution strategy and resumed token payments to external creditors, a complete picture of the specific timeline and modalities of this plan was yet to be finalised.
IMF said restoring debt sustainability required the sustained implementation of prudent monetary, exchange rate, and fiscal policies, and cessation of quasi-fiscal activities that lead to debt increases, structural reforms to set growth on a sustainable path, as well as agreements with creditors on a comprehensive debt restructuring plan.
In a statement, the Zimbabwe Coalition for Debt and Development said Zimbabwe’s debt burden would deepen poverty and affect health and other key sectors and basic services at a time when the country is experiencing exogenous shocks due to natural disasters like cyclones, drought and the COVID-19 pandemic which lead to deep recession and high inflation.
“The key drivers of the debt, officially recorded as US$13,7 billion in December 2021, are embedded in governance challenges post-2000 land reform programme and the Democratic Republic of Congo (war), which precipitated extrajudicial fiscal processes covered by an overdraft from the central bank,” Zimcodd said.
“Compensation of 60 000 liberation war heroes at 3% of the 1997 gross domestic product (GDP) was a cataclysmic point, whose immediate effect was the inflation of the budget by 55% as well as a currency meltdown. The Reserve Bank of Zimbabwe (RBZ) quasi-fiscal activities, loans and guarantees by government, as well as interest and penalties on debts has also exacerbated the debt crisis as these are stamped without parliamentary oversight.”
It said some of the solutions to the country’s debt burden included engaging multilateral creditors and cutting government recurrent expenditure.
“Current efforts of engagement with multilateral creditors are hanging by the thread of token payments to creditors as well as faltering efforts to re-engage the international community after years of pariah status. Debt distress has had a debilitating impact on people and communities, compounded by government austerity measures introduced under National Development Strategy 1,” Zimcodd said.
IMF recommended broadening of the tax base and improving tax administration compliance.