How there's hope for Zimbabwe as it starts tackling legacy debt
The African state now has to navigate obstacles to receive global funding to revive its economy
Common wisdom holds that the first mover has the advantage. But for international debt relief, this may not necessarily be the case. When many of its peers were receiving unprecedented support from the international community in the early 1990s, Zimbabwe was left in limbo. The IMF and World Bank avoided a definitive decision on the country’s eligibility for debt relief under the heavily indebted poor countries initiative (HIPC).
Any meaningful engagement with the Bretton Woods institutions was precluded by global and domestic politics, including the position of former president Robert Mugabe, who rejected the so-called stigma that HIPC might cast upon the country and its policies. The conditions that would come with a debt relief programme were viewed as imposing an unwanted restraint on the policy makers.
In a strange twist of fate, the failure to receive debt relief 15 years ago might be to Zimbabwe’s advantage as it allows the country to avoid the pitfalls experienced by other HIPC countries. Many countries in the region, having removed from their sovereign balance sheets substantial bilateral and multilateral debt, and in some cases private sector debt as well, were able to market themselves successfully to international financiers and investors.
Awash with cash, fund managers hungered for a new asset class and sub-Saharan Africa proved relatively uncorrelated with other markets and provided a handsome yield. And on the side of state lenders, new creditors also increased their exposures, some on nontransparent terms. Easy access to capital, coupled with the region’s unmet demand for financing infrastructure and other development needs, led to a rapid reaccumulation of debt.
Last week, in its Regional Economic Outlook for sub-Saharan Africa in 2018, the IMF said that 40% of low-income countries in the region are either in debt distress or at high risk of being in debt distress.
Less than two decades following HIPC relief, we have witnessed sovereign debt defaults, including in Mozambique, Republic of the Congo and Chad. Meanwhile, Zimbabwe has been frozen in time, still burdened by its legacy debt of the 1980s. Public and publicly guaranteed external debt stood at close to 50% of GDP as at the end of 2016, of which 70% was in arrears.
All observers agree that the country remains in debt distress, and the options for Zimbabwe’s debt relief will certainly be an important topic this week as the governors of the African Development Bank — itself a creditor to Zimbabwe — convene in Busan, South Korea for the bank’s annual meeting.
At this gathering, development partners keenly await the outcome of Zimbabwe’s presidential elections due in July. If the elections are deemed "free, fair and credible", Zimbabwe’s fortunes will certainly improve, and comprehensive debt relief will finally be on the table.
To benefit from the HIPC initiative, which would take into account multilateral, official bilateral and private external debt, Zimbabwe must navigate its way through some important obstacles. The IMF and World Bank would need to reopen the HIPC eligibility requirements and make a positive finding of Zimbabwe’s eligibility and qualification for such relief.
The financial actors would also need to come together to finance Zimbabwe’s HIPC debt relief. To receive full and irrevocable reduction in debt available under the HIPC initiative, Zimbabwe would, among other things, need to establish a track record of good performance under economic adjustment programmes backed by the IMF and World Bank.
No matter what level of debt relief Zimbabwe ultimately receives, it will represent an important landmark in the financial and economic reawakening of the country.
If qualification to HIPC is unsuccessful, Zimbabwe would have other options for tackling its debt problem. For example, the international community may be willing to create a sui generis international debt relief approach for Zimbabwe.
Alternatively, an ad hoc debt restructuring could be orchestrated through the Paris Club, as was done for Iraq in 2004 and Myanmar in 2013, at least with respect to official bilateral and private external debt.
No matter what level of debt relief Zimbabwe ultimately receives, it will represent an important landmark in the financial and economic reawakening of the country. From there, Zimbabwe would be able to leverage its resources to access the efficient financing needed to meet its economic and development objectives, while avoiding the pitfalls experienced by some countries in sub-Saharan Africa.
Zimbabwe cannot afford to be complacent. In particular, the authorities would need to act immediately to lay the technical groundwork for the debt sustainability analysis and for enhancing debt management capacity. That groundwork would inform decisions to unlock the commitments from the international community as soon as the elections are successfully completed.
Given Zimbabwe’s many distinctions, its long-term prospects are positive. In order to meet these prospects, we encourage decisive action within Zimbabwe and the global community to overcome the legacy debt issues and to support the path to sustainable growth and development.
• Dauchy is a debt restructuring expert at the Potomac Group, Laryea is a debt restructuring expert and Ncube is a former vice-president of the African Development Bank.