An IMF staff paper published on Wednesday, detailing discussions with the Zimbabwean authorities in March, said neither the right economic policies nor the country’s mineral wealth could immediately resolve the country’s large debt problem.
“Zimbabwe is in debt distress, and the debt overhang cannot be resolved without debt relief even if policies are improved and mineral extraction is increased,” the paper said.
IMF staff estimated that Zimbabwe’s foreign debt is projected to reach 151 percent of gross domestic product by 2015, with 104 percent of GDP in arrears.
If current economic policies continue and donor financing is largely confined to humanitarian assistance in the medium term, the country’s large debt stock would remain unresolved and debt would continue to pile up, the paper said.
But to win debt relief Zimbabwe would need to improve ties with the international community and qualify for a global scheme for heavily indebted poor countries that would lead to debt cancellation after a two-year economic program.
“The government needs to reach consensus on a resolution strategy for external debt arrears and to improve relations with the international community, whose support would be vital for obtaining debt relief and rebuilding the Zimbabwe economy,” the IMF paper said.
Despite the formation of a unity government last year, Zimbabwe has struggled to win donor support, while private capital inflows have fallen over concerns about a government plan to force foreign-owned firms to sell majority shares to locals.
The IMF has slowly reengaged with Zimbabwe to try and help fix the economy but refuses to lend money to the country until the government shows it is willing to implement policies that stabilize the economy.
In March the IMF restored Zimbabwe’s voting rights, which were suspended in 2003 over policy difference with President Robert Mugabe’s previous ZANU-PF government.
Under IMF rules, the Fund cannot lend to a country that owes it money. Zimbabwe is $140 million in arrears to the IMF and the country’s total external debt is about $6 billion.
STILL SIGNIFICANT PROBLEMS
The IMF paper noted that while there has been some progress in Zimbabwe’s economy, there are still a significant number of problems.
These include recent large wage increases, a poor financial position of state-owned enterprises, rising risks in the banking system, weak governance at the central bank, growing weaknesses in the business climate, and a precarious external position threaten Zimbabwe’s economic recovery.
Staff said Zimbabwe had implemented an “unsustainable” wage-driven fiscal expansion financed with IMF special drawing rights, or SDRs.
The IMF last year approved a special allocation of SDR’s, its internal unit of account, worth some $250 billion to all of its member countries as part of a plan to boost global liquidity in the wake of the global financial crisis.
IMF staff said they had advised Zimbabwe not to use the SDR-related funds but the government had converted an equivalent of $150 million of the $410 million that went to Zimbabwe for budget financing. Reuters