I was privileged to attend an investment conference hosted by the ZDDI in London a week ago at which the Honourable Minister of State in the Prime Minister’s Office Mr Gorden Moyo was the guest of honour. Among other topics, the conference discussed a controversial but critical issue regarding Zimbabwe’s foreign debt and the appropriateness of the Minister of Finance’s initiative to have the country classified under the Highly Indebted Poor Countries (HIPC) Initiative. The debate surrounding this issue is whether the country will benefit from this arrangement and whether we should be accepting international loans from the IMF or seek for debt forgiveness or cancellation of what is often considered an odious debt incurred by the ‘previous government’. Is the international community being stingy Samaritans, or playing double standards when it comes to dealing with the country’s debt burden?

Many developing countries have suffered significantly high levels of unsustainable debt. The debt crisis is largely a result of World Bank and IMF loans taken up under Structural Adjustment Programmes (SAPs). Evidence from several countries suggests that SAPs have led to increased poverty levels, widening inequalities and a mounting debt burden. Countries had to repay these debts in full or face suspension of assistance programs and a cut off in aid from other donor countries. It is no secret that assistance to Zimbabwe was suspended by the IMF and the World Bank as a result of the country’s failure to service the debt.

The delegates at the ZDDI conference discussed at length the distinction between grant suspension as a result of non-payments and targeted sanctions and on several individuals within the previous government. For his part, Minister Moyo was quite persuasive in his argument that people should not confuse Zimbabwe’s suspension from the fund as a result of the default as if they were sanctions.

Zimbabwe’s debt to various creditors, the majority of which is to the Bretton Wood Institutions is estimated at $5.7 billion, of which $1.1 billion is an RBZ debt (hardly surprising as the RBZ was the epicentre of all economic activity before the GNU). The total debt as a percentage of GDP is more than 150 percent and the Net Present Value (NPV) of our debt to export is 231.5 percent meaning that our debt is two and half times greater than the total value of the country’s exports. Based on these figures alone, whichever superlative you choose, the country is poor and highly indebted and requires the support of the international community. If we are to compare the total debt to the last revenue figures released in June 2009 which showed monthly revenue inflows of US$70m, and assuming that the government had no other expenditure except pay the debt, it would still take the country more than a decade to fully service its external debt.

Faced with such a huge debt, perhaps the Minister of Finance was wise when he allegedly refused to draw down on a US$510 million IMF loan to Zimbabwe arguing that the country could not afford such a proposition considering the nature and extent of the current debt levels. Picking up another loan from the IMF to meet the finance payments on original loans and to cover for budget and trade deficits, seems like a suicide mission and in comparison, the HIPC alternative does not seem such a bad idea after all. 

The HIPC initiative was launched by the World Bank and IMF in 1996 as the first comprehensive approach to debt reduction providing relief from multilateral debt. The initiative provided a framework for supporting a country when its debt level was considered unsustainable with the net present value (NPV) of its debt-to-export ratio exceeding 150 percent, or the NPV of its debt-to-fiscal-revenue ratio remaining above 250 percent. On paper, Zimbabwe would be a good candidate for the programme. However, the results from other countries that have qualified for the scheme are somewhat discouraging, with excessive conditionality and restrictions over eligibility criteria. No doubt, the IMF would want Zimbabwe to agree to a second round of structural adjustment programmes as a precondition for receiving debt relief. Another sticking issue could be an outstanding demand for further political and economic reform under the unity government or at the minimum a fulfilment of the terms and conditions of the GPA.

The resistance against HIPC especially by ZANU PF ministers and monetary authorities is predictable, they argue that it will open the floodgates to foreign interference and can be used by Western countries as an instrument of regime change. They also argue that with such abundant natural resources, Zimbabwe is ‘too rich to be poor’. Compare this to the Minister Biti’s position which is shared by most MDC ministers that their colleagues argument is denialism, the reality being that the country is a ‘poor little struggling failed state’. These divergent views reflect parallel ideological approaches between the two parties. 

Based purely on the conditionalities and the restrictions on eligibility, it is difficult to see how the country can quality for the scheme anyway. The HIPC initiative places too much importance on the role of exports and does not reflect the true burden of debt on social spending. Morally however, IMF should consider debt cancellation to Zimbabwe purely as an act of goodwill for the very consummation of the GPA which was as much a miracle as ‘extracting diesel from a rock’. Judging from its record in several developing countries struggling with crippling debt, the IMF can hardly be considered as an institution with a moral compass. 

The advantage of debt forgiveness is that the sovereign risk profile and creditworthiness of the country will improve, which will help in attracting investors into the economy. Biti’s HIPC argument is premised on some expected benefits from the scheme which could reduce the country’s debt burden by 90% after full delivery of debt. He also bases his optimism on the experience of 35 countries under the scheme whose debt servicing declined by 2.5 percent between 1999 and 2007. There is certainly need for cautious optimism as evidence from other HIPC countries does not show real progress towards economic growth or debt sustainability.

In hushed tones, MDC ministers have often controversially labelled the debt incurred over the last decade as an odious debt which should be cancelled. In international law, an odious debt is a debt incurred by a regime for purposes that do not serve the best interests of the nation; such debts are considered by this doctrine to be the personal debts of the regime that incurred them and not debts of the state. The MDC is unlikely to pursue this approach publicly for fear of embarrassing their strange bed-fellows in the unity government. Although it is certainly logical to assume that where the international community has imposed targeted sanctions on senior government officials, based on their perceived illegitimacy, whatever debt or contractual obligations consummated by the sanctioned leadership would be patently invalid. In theory this seems a very persuasive argument but one that’s unlikely to go far anyway.

Whatever the case, it seems almost unpalatable that at a critical time of stabilisation, the choice is between servicing our foreign debt and feeding the people, rebuilding infrastructure, paying civil servants, putting more medicines in hospitals or restoring industry and agricultural capacity. Re-integrating Zimbabwe into the world economy has to seriously consider debt rescheduling either under HIPC or outside the HIPC initiative, which will involve a formal deferment of debt service payments and the application of new and extended maturities to the deferred amount until the economic conditions in the country have improved.

Lance Mambondiani is an Investment Executive at Coronation Financial. The view expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial. To join the discussion on this article visit Lance blog or his facebook discussion forum

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