Rescheduling debt arrears now a real possibility

24 Feb, 2023 - 00:02 0 Views
Rescheduling debt arrears now a real possibility

eBusiness Weekly

Zimbabwe has external debts of just over US$14 billion by September last year of which almost half, more than US$6 billion, is in arrears, and those arrears make it almost impossible to access low-interest capital loans from multilateral or private sector lenders.

Access to new World Bank or other multilateral funding will, so long we are careful, accelerate economic growth as the interest rates are sufficiently low, well below commercial rates, and repayment terms are sufficiently good, that if it used to fund the correct infrastructure the general resulting economic growth generates the extra tax revenue and foreign currency somewhere along the value chain to service the loan with a bit of profit left over for general recurrent expenditure.

So we all need to hope that the present discussions led by African Development Bank president Dr Akinumwi Adesina and retired Mozambique President Joaquim Chissano, and they have been detailed and include all creditors, are successful so we can get a payment plan that makes sense and opens the required new lines of credit, which this time we will use very carefully.

There is the additional problem of western financial sanctions. Crucial clauses of the United States Zimbabwe Democracy and Economic Recovery Act, the United States representatives on multilateral financial institutions, such as the World Bank, the International Development Association and the International Monetary Fund are compelled to oppose any new lending, which the arrears tend to block in any case, but more importantly any Zimbabwean participation in debt forgiveness programmes.

It is this set of financial sanctions that are the critical US sanctions. Banning a few individuals from visiting the US, or blocking non-existent US bank accounts, or more damaging, blocking US banks from processing loans or transfers to entities where the listed individuals might be benefiting, are a nuisance, or in the case of the private-sector bank area, a serious nuisance, but are not disastrous.

ZDERA laid down a number of conditions. In theory the clause about land reform, which actually triggered the US actions, has also fallen away with the deal signed between the Government and the former land owners, a deal that is being implemented but which could be implemented a lot faster if Zimbabwe had access to international finance so cheap bonds could be issued and redeemed at least partly from the growing taxation revenue from the rising number of profitable new farmers and the extra VAT they pay when they buy things.  But whether that theory would be acceptable to ideologues is a moot point.

That leaves the political conditions, and here there appears to be a strong US feeling that free elections mean elections lost by Zanu PF, regardless of how people vote, with opposition access to key US legislators not helping. The main opposition in the 2018 election accepted a two-thirds Zanu PF majority as the result of a fair election but not the results of the Presidential election, and managed to persuade their US friends that a lot of people who voted for a Zanu PF MP would have switched votes in the Presidential poll, which seems a bit odd and tends to confirm the practical interpretation of the US position that a free election must dump Zanu PF.

The other factors, mainly concerned with legal reforms and practical implementation of Constitutional rights have been favourably commented on by most neutral external observers and certainly Zimbabwe is much higher up the lists of countries that do give practical implementation of stated rights.

The US does not have a majority in any of the main finance institutions, but it is definitely the big elephant and largest shareholder on their boards, with 15,47 percent of the voting power of the International Bank for Reconstruction and Development, the heart of the World Bank, 18,61 percent of the International Finance Corporation, another arm of the World Bank, and 16,5 percent of the votes in the International Monetary Fund.

Most of the other really large shareholders are US allies: Japan, Germany, United Kingdom, France, Canada and most western European countries who tend to vote together and between them can assemble half the votes without that much difficulty. So any attempt to ignore the practical effects of ZDERA, assuming the US President does not issue the certificate that suspends certain sections or Congress repeals the law, requires enough countries close to the US to vote differently from the US representative. Growing ties with the European Union and its member states can at least modify that majority, with even abstentions helping.

Zimbabwe, for its part, has agreed it owes the money it borrowed, agrees that it is in arrears, and has stated firmly it want to pay its debts. What are termed token payments are being made. These are designed to show that we accept the debts exist, and that we wish to pay back. So the main area left is the practical way we can do this.

Forgiveness of debt is probably a non-starter, even if financial sanctions were lifted. Zimbabwe, while undeveloped, is not the sort of total basket case that meets most criteria of most lenders for emergency debt relief. We are not yet an upper middle-income country, but we are not on the bottom rungs of the ladder. And there is the additional complication that quite a lot of what we borrowed was squandered on consumption, rather than on infrastructure, which tends to hearten hearts in multilateral lending institutions.

Normally, a country like Zimbabwe which has under the Second Republic taken a very deep breath and pushed through the fiscal and monetary reforms now seen in Zimbabwe over almost five years would get a decent hearing and almost certainly a rescheduling of debt. Rescheduling does not wipe out the debt but creates the agreed payment plan that sees the repayments move into the realm of practical possibility. This would probably be based on a percentage of Zimbabwe’s rapidly rising export earnings and resulting positive balance of payments.

Now we have that, and that is a necessary starting point for rescheduling, we would in normal circumstances be able to negotiate the conditions that officials in the World Bank and private lenders would almost certainly want to see, starting with a continued commitment to maintain our fiscal and monetary reforms and balance of payments surplus so we actually had the money. The detailed negotiations would deal with the interest rates, the time given for the rescheduling and how much is actually paid to whom each year.

Rescheduling would remove the arrears block on new borrowing in both multilateral and banking circles. Technically a rescheduled debt is not in arrears and doors can open. In the multilateral arena we need to remember that the main institutions talk to each other, and that if you are in arrears to one generally the rest, even if your record is now clean, will not open new borrowing, so we need everyone on board.

Banks in the private sector are not so fussy, but they stress risk as the major factor, both when approving borrowing and when setting interest rates. A pile of arrears means the risk would be rated as very high, even if the particular private sector bank was not owed anything, and that would generate reluctance for new loans, and if they were granted would tend to push up interest rates.

The reformed policies of the Ministry of Finance and Economic Development are that there can be zero borrowing for recurrent expenditure; that must come from taxes. Borrowing for capital expenditure can be considered, as is being done, but even here there must be a source of present revenue or at least conservative predictions of immediate new revenue to arise from what the borrowed money is used for, that can be earmarked for the repaying the loan.

So we have seen some borrowing for major roadworks, such as the Mbudzi interchange in Harare, which can be set off against tollgate revenue. We have seen the complete rebuild and upgrade of Beitbridge Border Post in a deal that allows the development partner to recoup the investment from the agreed fees charged to users over 17,5 years. A fair amount of credit for new electricity generating capacity is tied to the revenue from selling that electricity.

Other infrastructure, and especially the infrastructure on the social side, such as new hospitals or new schools or new universities, has to come from tax revenue, directly or indirectly, since there is no new revenue stream generated that can be used to pay off a loan. So there we do not borrow.

You have certain areas where a lot depends on just who is going to use the results of a new piece of infrastructure. For example, Zinwa is totally unworried about Kunzvi Dam since most of the water will be sold to urban people in Harare Metropolitan, at least indirectly, and in small quantities, less than 10 cubic metres a month for each buyer so they can afford it. Much the same applies to the major expenditure to get water from Lake Gwai Shangani to Bulawayo.

Irrigation water is trickier, since farmers need to be able to afford the price charged, and this could well require a lot longer to recoup the cost of the dam, so probably needs a tax contribution or even pure tax funding, with the extra wealth created eventually being taxed somewhere, even if it is only VAT on what the farmers buy, or company tax on the rising profits of their suppliers.

Zimbabwe has one of the lowest budget deficits in the world under the tight fiscal policies of the Second Republic, and careful analysis of the budget shows that this deficit, raised from careful borrowing, is a fraction of the capital budget and requires a revenue stream to service it.

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