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Getting Zimbabwe working again: Options towards solving the debt crises
Liberty Bhebe
March 31, 2010

Zimbabwe is currently suffering under an odious and unsustainable debt. That Zimbabwe-s debt is unsustainable is not an issue of public debate. What has divided cabinet, civil society, policy analysts, academics and ordinary Zimbabweans has been the question of how to deal with the debt crises. There is clearly no agreement as to how the country can effectively deal with its unsustainable debt. Most of the debate on Zimbabwe-s debt Management process has been largely centred on the Highly Indebted Poor Country (HIPC) Initiative. This has even led to the birth to a misleading notion that this remains the only option of debt management outside the normal route of repayment. Thus the whole debate has been reduced to the two extremes of whether HIPC is good or not rather than exploring all the available options and weighing them against their pros and cons.

This discussion paper should thus be viewed as an ordinary Zimbabwean-s attempt at broadening the debate on debt Management by bringing into picture other available options. It is not going to provide answers to the ongoing debates but seeks to enrich them. The underlying belief is that when people are exposed to adequate information they will never make the wrong decisions. A free market of ideas must be allowed if better decisions are to be made.
In pursuit of the above objective, this paper shall be divided into two parts. The first part of this paper will look at the history of Zimbabwe-s debt and the factors that contributed to its growth to such unsustainable levels. The last part will lay bare the some of the options which government, civil society and ordinary Zimbabweans can explore as a means of dealing with the debt crises. I am fully aware that there could be other options hence the inconclusive nature of this discussion paper.

A short history of Zimbabwe-s debt

Zimbabwe-s current debt is both a combination of the colonial debt and a stabilisation and adjustment debt. By colonial Debt this discussion paper refers to the official debt which the post independence government inherited from the previous colonial government at Independence. The Adjustment debt refers to borrowings that were meant during the IMF/ World Bank initiated Economic Structural Adjustment Programme. However, it must be borne in mind that the accumulation of this debt has been as a result of a severe failure to service the debt owing to bad economic and political decisions, economic maladministration, poor monetary policies, corruption, amongst many other ills.
At the attainment of independence the new government inherited a colonial debt of approximately US$700 million dollars. This debt required an annual servicing of approximately US$65 million dollars. Due to under servicing of the debt, seven years later, debt servicing had spiralled to an estimated 35% of the country-s export earnings. By 1990, the country-s debt stood at US$3,24 billion. Three quarters of this debt was direct government debt and the remainder was owed by both public enterprises and the private sector.

A decade after independence, the country debt had become unsustainable. This, combined with a downturn in the economy, prompted the incumbent government to approach the IMF and its partner in crime the World Bank resulting in the adoption of Economic Structural Adjustment Programme, (popularly known as ESAP). This, the government did in the midst of glaring failures of IMF/WB policies throughout Africa and Asia . Under ESAP, the Zimbabwe absorbed approximately US$3,5 billion in more debt. This debt proved to be more costlier than the previous debt. This was because, between 1992-1993, global interest rates increased by approximately 15% more than it had been earlier on projected. This meant that the country was to pay more than earlier on projected by an extra 15%. All these changes were happening at a time when the economy was experiencing a 14% contraction in the manufacturing sector and the GDP per capita declined by 5.8%. This further crippled the country-s ability to service its external debt.

Zimbabwe-s decade of accelerated developmental erosion (1998-2008) made it increasingly difficult for the country to service its foreign debt. Whilst the country was burning and experiencing an economic downturn, as a result of disastrous economic and political choices, its foreign debt was continuously accumulating.

The genesis of these fatal policies was the unbudgeted payment of $Z50, 000 (about USD1, 300 at the time) compensation to each of about 50, 000 veterans of independence on November 14, 1997 culminating in what is known today as the black Friday. This day marked the beginning of a downward slide of the Zimbabwean dollar up to until the time it was replaced by multi-currencies.

As if those on the wheel of economic progress had been possessed by a demon of death, in 1998, yet another unbudgeted for involvement and financing of a foreign war in the Democratic Republic of the Congo was sanctioned by the authorities that be. Although the government has refused to make public the total amount it spent in financing this foreign war, it has been estimated that at the height of the Congo war, the Zimbabwean government was spending US$1 million dollars a day. Such expenditures put a further strain on Zimbabwe-s foreign currency reserves, which fell from 6 months of import cover to three weeks during the time of the war. This meant that foreign debt servicing was really out of the equation.

Between the year 2000 and 2008, strange monetary policies aggravated the country-s debt servicing quagmire. Faced with the challenge of the falling value of the Zimbabwean dollar and an overvalued exchange rate the central bank attempted to solve this problem by playing a central role in availing forex to parastatals, particularly to import fuel, grain and electricity on behalf of government. This happened despite the fact that it was at a direct loss to the reserve bank. The RBZ also provided subsidises to private sector exporters and producers, such as tobacco and mineral producers, and again this was happening despite the direct losses the bank suffered. As if this was not enough, the RBZ has created a subsidised lending programme to support what it termed as priority sectors eg. agriculture, through the Productive Sector Facility (PSF) and the Agricultural Sector Enhancement Facility (ASPEF). Lines of credit were made available through the commercial banking system at a heavily subsidised rate of 20 percent. The central bank also subsidised the Parastatals through the Parastatals and Local Authority Reorientation Programme (PLARP) through which it provide direct subsidised loans to public enterprises at relatively low interest rates. Despite all these losses, the central Bank always overstated its annual profits and capital. Hence it is not surprising that it is facing serious liquidity problems with most of its assets being attached by those it owes.

It has been observed that these quasi fiscal activities resulted in a sharp escalation of the Bank-s losses and by 2008, its deficit was dwarfing that of the country-s total deficit. The Bank tried to service the deficit through money creation activities which later on proved to be futile. With a collapsed central banking system and a collapsed economy, surely debt servicing was out of the question as there were more domestic challenges to deal with.

It is currently estimated that the country-s debt stands at US$5,7 billion, which represents over 192% of the country-s GDP. Of the total debt, it is estimated that about, US$3.8 billion is in arrears. The international monetary fund has predicted that if nothing is done with this debt it will balloon to US$13.4 billion by 2013. Arrears will account for US$10.4 billion of this whole amount. This makes Zimbabwe-s debt crises an issue of urgent priority.
Moving Forward: Zimbabwe-s options

The debate on Zimbabwe-s debt crises management has been largely focused on the Highly Indebted Poor Country (HIPC) initiative. There are strong voices in support of the intiative and what it stands for and yet at the same time there are others who vehemently oppose it. Those against HIPC have not gone beyond opposition to answer the question, what next?

The HIPC plan was first adopted in 1996 as a way in which donors thought they could reduce the debts of the world's 41 most highly indebted poor countries to "sustainable" levels. In 1999, as a response to growing criticism of the conditionalities of the first HIPC initiative, HIPC II (enhanced HIPC) was adopted as a way of making it easier for countries to meet the qualifying conditions. It also attempted to simplify the process countries needed to complete, in cooperation with the World Bank, to formulate national strategies for reducing poverty. Countries applying for HIPC were meat to complete poverty reduction strategy papers. These Poverty Reduction Strategy Papers (PRSPs) detail how the money saved will be spent on the social sector. To qualify for HIPC, the ratio between a country's debt and its net present value of exports should be higher than 150 per cent. This condition makes Zimbabwe a qualifying country. In Africa only two countries have qualified for full debt relief and these are Uganda and Mozambique.

HIPC works through a two point procedure. The first point is the decision point and the second one is the completion point. Countries reach the decision point once they have a track record of macro-economic stability and have prepared a poverty reduction strategy paper. At this point the country can start receiving interim debt relief on a provisional basis. The completion point is reached when a country has maintained macroeconomic stability under the IMF-s Poverty reduction and growth facility programme, implemented a PRSP and carried out structural and social reforms for at least one year. Once a country has reached completion point it means that the full amount of its debt relief becomes irrevocable.

Since inception, the HIPC initiative has covered 42 poor countries. There have been both tragic and success stories in its implementation and because of the limitations of space this paper will not deal with individual case studies. The greatest criticism of HIPC is that it continues to further the same policies as those of the structural adjustment programmes which were harmful to the African, Asian and Latin American economies. The average completion time for HIPC is 6-7 years and this could mean a long wait before debt cancellation. At the same time, in order to fully qualify for HIPC, Zimbabwe is supposed to meet its external debt obligations as a sign of good will. This could mean a short term increase in expenditures in debt servicing and this might have a prohibitive indirect cost to the already deleterious social indicators.

The second option is that of the Highly Robbed Poor Country initiative. This initiative largely linked to the restitution of the country-s stolen assets. This initiative is based on the argument that Government officials milked the state coffers dry and enriched themselves through unorthodox means. The huge amounts in foreign currency accounts and the large number of foreign assets owned by government officials were illegitimately acquired and must thus be returned to Zimbabwe to facilitate development and compensate for lost decades of development. It has been strongly argued that most of the country-s debt would have been easily serviced had the chefs not corruptly converted national wealth into their own personal accounts. These foreign assets held by government officials are said to be worth billions of dollars. Once solved and the money in those foreign accounts is returned home, it is believed that Zimbabwe will be able to clear it foreign debt and use part of the money to finance industrial growth. This initiative is expected to follow the international framework on asset recovery. This initiative was used by the Nigerian government to claim back billions of dollars which had been stolen by Sani Abacha

The third option is the "Look East option". The "look East" option has largely been linked China and India as emerging economic giants in Asia. The 'look-East- option, is largely linked to the mortgaging of Zimbabwe-s significant natural resources to these emerging lenders. However, it must be noted that it is certainly not true that these funds come with no strings attached. Development AID has never been administered without certain conditionalities as will be shown below. In Zimbabwe, the "Look East" option is already littered with Chinese involvement in the economy and yet the there have been very little benefit intermesh of direct GDP growth ratios. It is an open secret that China, will for the next 25years be entitled to 25% of the coal produced in Hwange but ordinary Zimbabweans are yet to benefit from this huge economic deal. One wonders who is benefiting?

Although there is a pretence there that there are no conditions to Chinese AID, what is clear is that the Chinese nationals tend to follow the money hence the huge influx of Chinese in the country. The Chinese have a tendency of influencing governments in such a way that the tender system should favour Chinese companies if the AID is to be provided. This is done so that China continues to benefit from the repatriated profits from Africa.

Most if not all Chinese Multinational corporations that are doing business in Africa are owned by the Chinese government or the Military. This explains why Chinese money has been used to finance dictatorships in Africa. Thus the growth of Chinese influence in Africa can be viewed as an anti-thesis of democracy. A clear example of this has been the notorious ship of death which supplied the Zimbabwean government with weapons at a time when the whole world had halted its trade in weapons with Zimbabwe since those weapons were being used to violate human rights in the country.

The fourth option, which is hardly debated is what I will call the South African option. It is estimated that South African companies are sitting on more than US$300 billion. These companies are also backed up by a strong banking sector which is sitting on more that US$324billion in Deposits. Thus South African companies possess greater investment potential into an economy whose GDP is calculated to be around US$4 billion. These investments from South Africa can only be made possible through the Bilateral Investment Promotion and Protection Agreements (BIPPAs). However, these agreements hold greater potential in a country that respects its rule of Law. They will only be effective and yield results in Zimbabwe if they are honoured, otherwise no investor would want to take the risk of investing in a country were regulations might be changed in such a manner that they risk losing all their investment. Already, Zimbabwe is known for violating such agreements.

The fifth option is largely related to a campaign towards delegitimizing a certain fraction of Zimbabwe-s debt and thus leaving the country with a sustainable debt without going through the whole HIPC process. This process requires that the country must put together a team of lawyers and economists who will advance the argument that all debt arrears that accrued during the time when its voting rights had been suspended are illegitimate and thus cannot be calculated as part of its current total debt. This option should begin by a thorough audit of Zimbabwe-s debt and establishing how much of the arrears accrued during Zimbabwe-s voting rights suspension under the IMF. Such arrears will then be delegitimized as illegal and Zimbabwe then makes a legal case against both the IMF and World bank that it can not honour that part of the debt. It is estimated that under such an initiative, Zimbabwe will be left with a total debt of less than US$2 billion and that would be a sustainable debt given the growth potential in its economy.

From the foregoing, it is clear that Zimbabwe has a number of alternatives in dealing with the debt crises. The inclusive government must therefore explore these options and opt for those that will get Zimbabwe Moving again without disastrous consequences for the future.

*Liberty Bhebhe is a Zimbabwean who is currently studying at the University of Manchester in the UK. He can be contacted by email on: liberty_bhebhe@yahoo.com

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