Zimbabwe s Debt and Related Issues MDB Meeting, July 6, Praveen Kumar Lead Economist, AFTP1, World Bank

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1 Zimbabwe s Debt and Related Issues MDB Meeting, July 6, 2011 Praveen Kumar Lead Economist, AFTP1, World Bank

2 Overview of Zimbabwe s Debt Two-thirds of external debt is arrears Almost three-fourths of debt is MLT World Bank arrears highest amongst IFIs and will continue growing faster than other IFIs if not resolved Domestic debt (mainly RBZ) is comparatively small but source of vulnerability. Debt data yet to be officially reconciled Zimbabwe: 2010 External Debt Stock (in million US dollars) Remaining Total Arrears Total Principal Due Debt Total MLT Debt Bilateral creditors Paris Club Non-Paris Club Multilateral institutions IMF AfDB World Bank EIB Others Private Creditors Short-term debt Suplliers Credits Source: Joint IMF/World Bank DSA June 2011

3 Sustainability Considerations Under baseline scenario (Real GDP growth 4.7%, no donor support to the budget, no debt relief etc.) all PPG external debt indicators, except the two debtservice ratios, exceed policy-based thresholds by wide margins in the medium-term The debt-to-gdp ratio will decline from 104% in 2010 to 96% in 2015 but remain high above sustainable levels NFA position negative even after taking into account the NPV of economy s mineral wealth. Therefore debt relief must be a part of any feasible option for external sustainability (IMF article 4, 2011)

4 Requirements for HIPC-based Arrears Clearance Process Exceptional support from IDA16 for arrears clearance possible if Zimbabwe meets the eligibility criteria for debt relief under HIPC initiative. This would, in turn, require: Re-classification from blend to IDA-only status (no issues here) Meeting the HIPC Initiative income and indebtedness criteria based on end-2004 data (preliminary assessment carried out in 2008 was inconclusive) Approval by the Boards of the Bank and IMF to add Zimbabwe to the list of countries grandfathered for HIPC eligibility (requires support of major shareholders) Furthermore, the Government would need to Undertake an IMF stabilization program Assemble a financing plan providing for the full clearance of arrears Prepare an I-PRSP Ensure pari passu treatment with other multilateral creditors

5 Current State of Discussions The Government has produced Zimbabwe Accelerated Arrears Clearance, Debt, and Development Strategy (ZAADDS). It is welcome: Displays authorities attention to clearance of arrears and engagement with IFIs Conveys authorities preference for a strategy that draws upon established mechanisms of debt relief ZAADDS adopts a hybrid approach entails leveraging natural resource endowment for economic development, which will also create capacity for debt repayment. Institutional strengthening for debt management is going on a Zimbabwe Aid and Debt Management Office set up Reconciling debt data with creditors has started The Bank plans to start discussion on an I-PRSP as a way to help the government develop and implement a medium-term growth oriented program The MoF has requested the IMF to put an SMP in place. Conditions laid down by the IMF for negotiating an SMP not yet met The Government has borrowed from China on non-concessional terms

6 Next Steps Completion of debt data reconciliation Wait to see the outcome of Government request for an SMP Bank starts dialogue on supporting an I-PRSP process Support for capacity-building for debt management All multilateral creditors seek pari passu treatment. Currently some creditors are receiving repayments out of proportion to their relative exposure If Zimbabwe seen as having embarked upon a path that will lead to clearance of arrears, then: Bank prepares pre-arrears clearance grant(s) Assessment against HIPC Initiative criteria if requested by the Government