International Financial Institutions & Zim – A love – hurt relationship

The allocation of special drawing rights (SDRs) to Zimbabwe has stirred controversy about their use to bolster flagging public finances, while the fragile coalition government struggles with a total external debt burden projected to rise to almost $7 billion by year end.

In early September the IMF allocated $510 million worth of SDRs to Zimbabwe, its share under the recent $250 billion SDR increase (see Update 65). Despite being in arrears to the IMF, the country is still eligible for SDRs. Under the IMF’s Articles of Agreement, the Fund cannot withhold these new SDRs, as it can other types of IMF lending.

It would, however, be allowed to withhold the additional SDRs due to Zimbabwe as a result of the recent ratification of the 4th amendment (see Update 65).

However, controversy flared as reports indicated that the finance minister, who comes from the former-opposition party Movement for Democratic Change, was seeking to prevent the transfer of these interest-charging funds, preferring to maintain them as part of Zimbabwe’s reserves.

Zimbabwean newspapers reported that this brought him into conflict with the central bank governor, who was appointed by president Robert Mugabe’s Zanu-PF party.

Of the country’s total unsustainable external debt, $140 million is owed to the IMF, $673 million to the World Bank and $430 million to the African Development Bank (AfDB). Arrears and interest constitute over 50 per cent of the total external debt.

The causes of the debt crisis culminate from both internal mismanagement and externally prescribed policies by IFIs. The beleaguered country has over time evolved through a love and hurt relationship with the IFIs who have imposed harmful economic policy conditionalities on the country.

Zimbabwe inherited a $700 million external debt from the colonial government. $3.5 billion in new loans were added in the 1990s under the IFI-backed economic structural adjustment programme (ESAP).

When the IMF suspended a loan of $120 million in 1995 because the government had sustained a large deficit, the EU and other donors followed suit. During ESAP, external debt increased significantly, from around 175 per cent to nearly 250 per cent debt stock to exports.

IFIs noted their engagement with Zimbabwe would resume if Zimbabwe honored her obligations by repaying its debt falling due and its arrears. The country is not part of the Highly Indebted Poor Countries (HIPC) initiative and not eligible for debt relief under the multilateral debt relief initiative (MDRI), though the government has engaged the World Bank for assistance in clearing multilateral arrears and envisages benefiting from debt relief under the HIPC and MDRI frameworks.

As the coalition government grapples with rebuilding a country ravaged by more than a decade of economic and political turmoil it has indicated that it needs about $8.5 billion in emergency aid over the next two to three years to revive the economy.

With the assistance of the AfDB the government has contracted a debt expert to help formulate an external debt and arrears clearance strategy, expected to be the basis for debt relief.

The government has initiated the assistance of IFIs for debt relief and write-offs as a part of its re-engagement process and is in the process of carrying out a debt reconciliation exercise with external creditors. The government is now in the process of developing a Poverty Reduction Strategy Paper (PRSP) as a condition for debt relief from the IFIs.

The experience of many HIPC countries shows that the process is long, painful and may not ameliorate the suffering of 13.5 million Zimbabweans from the debt burden.