HIPC or debt audit, escalating Zim debt crisis

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    By Beaven Dhliwayo

    Harare – Zimbabwe government says it has a hybrid strategy for dealing with the debt, by seeking part in the best ‘bits’ of the IMF and the World Bank run Heavily Indebted Poor Countries (HIPC) process whilst using the proceeds from minerals – particularly diamonds to repay other debts, while some section believes a debt audit is the only way towards the clearance of the country’s legacy debt.

    The World Bank, the International Monetary Fund (IMF) and other multilateral, bilateral and commercial creditors began the Heavily Indebted Poor Country (HIPC) Initiative in 1996. The structured program was designed to ensure that the poorest countries in the world are not overwhelmed by unmanageable or unsustainable debt burdens. It reduces the debt of countries meeting strict criteria. As of the most recent annual report, the HIPC and related Multilateral Debt Relief Initiative (MDRI) programs have relieved 36 participating countries of $99 billion in debt.

    Currently Zimbabwe has a national debt stock of close to USD 18 billion comprised of both domestic and external. Nearly US$9 billion being owed to external creditors, and government has committed to repay some of the loans to international lenders by the end of this year.

    Speaking on his return from Bali, Indonesia, in October last year where heads of multi-lateral institutions had been meeting, Finance Minister Mthuli Ncube said his presentation on debt clearance and privatisation of loss-making parastatals was well-received and if rolled out, would be the panacea to the country’s economic crisis.

    He added that the country is actively seeking to have the foreign debt forgiven under the Highly Indebted Poor Countries (HIPC) programme by the IMF, a move that would spring the ailing economy into life and ease the liquidity crunch.

    However, the HIPC process takes several years, offering to cancel some or all of the debt owed to institutions such as the IMF and World Bank. To qualify for HIPC a country has to meet economic policy and other conditions set by the IMF and World Bank.

    During a media training on Debt Discourse in the capital recently, Zimbabwe Coalition on Debt and Development (ZIMCODD) Executive Director Janet Zhou pointed out that for a country to be considered for HIPC, it has also to meet some debt repayments, and in the case of Zimbabwe where the country has been in default for several years, cancellation does not get near 100 percent.

    “We roughly estimate completing HIPC would reduce Zimbabwe’s debt by half, but actually lead the country spending considerably more on debt repayments than it is at the moment. The financial benefit to complete HIPC is so that the country will be eligible for loans from the Western world again.”

    A good example of countries that followed the HIPC route is Liberia. On September 16, 2010, Liberia reached the Heavily Indebted Poor Country (HIPC) Completion point which facilitated the cancellation of 96 percent of the US$4.9billion external debt that had been accumulated, serviced, over two decades.

    Nevertheless, certain loans on the debt schedule did not qualify for cancellation. This comprised sixteen loans valued at US$415million of which US$156million represented reconciled restructured external debt and US$259.3million accounted for validated restructured domestic debt largely owed to the Central Bank of Liberia as Government’s capitalization of the Bank.

    As of December 2015, a total of thirty-two (32) loans amounting to US$802million have been contracted of which twenty-six (26) represent loans sourced from external creditors with a value of US$792million and six (6) sourced from domestic creditors at a value of US$10million.

    To date a total of US$315million of external loans have been disbursed leaving an undisbursed balance of US$477million. The US$10million domestic borrowing has been fully disbursed.

    Going back to Zimbabwe, economic analysts agree that it is difficult to estimate how much of Zimbabwe’s debt would be relieved under HIPC and MDRI because the debt figures are not certain, and it is not known how much each creditor would cancel.

    In his book, “Uncovering Zimbabwe’s debt” Tim Jones of Jubilee Debt Campaign says the major reductions in Zimbabwe debt would be that owed to western governments. He added that if loans were used to pay-off arrears, debt owed to the World Bank 60 percent and that owed to the African Development Bank would fall by just 10 percent. Moreover, he pointed out that there would be greater reductions in debt owed to multilateral institutions if grants were used to pay off old arrears rather than new loans which are not eligible will be cancelled.

    Regardless or not of the accuracy of the rough estimates, given that Zimbabwe is currently in default on most of its external debt service, HIPC will impose a financial cost on the country.

    Advocates of HIPC would argue that the reason to enter HIPC is that Zimbabwe would then be eligible for new loans from IMF, World Bank, AFDB and potentially some bilateral and private creditors. But taking out new loans would threaten to repeat the mistakes of the past.

    A further financial problem for countries completing HIPC has been vulture funds. Vulture funds buy up debt at a cheap price owed by countries in default or thought likely to default. Once HIPC has made the country solvent again, vulture funds then look to sue countries for the full amount of debt plus interest, making a huge profit.

    Vulture funds look to sue a country for debt repayments in third party country in which the debtor holds assets. The majority of cases, against countries such as Zambia, Liberia and Democratic Republic of Congo, have been in UK or US courts.

    In 2010 the UK Parliament passed a law which says vulture funds can only sue HIPC countries for the debt which would be remaining if they have taken part in HIPC debt relief. This effectively makes it worthless for vulture funds to now pursue cases against HIPC countries in UK courts. However, if the percentage HIPC debt relief for Zimbabwe was quite low – as estimated by various economists – vulture funds might still pursue Zimbabwe for debts, even in UK courts.

    Many of Zimbabwe’s neighbouring countries have completed the HIPC process in the last decade. Malawi had to privatise its agricultural marketing system, remove subsidies for inputs such as fertilisers and sell off some of the countries grain reserve. In 2001and 2004 the country was hit by a food crisis with production falling and fewer grain reserves available. Since completing HIPC in 2006, Malawi has introduced fertiliser subsidies – against the wishes of the World Bank – and maize production has increased.

    Zambia was not allowed to employ more healthcare workers, even when the Canadian government offered to foot the bill for five years, because it would have meant exceeding IMF spending limits.

    At this juncture one would agree that to qualify for the HIPC process, countries have to meet economic conditions set by IMF and the World Bank and these have tended to be the same liberalisation and adjustment condition placed on Zimbabwe during the 1990s.

    Rather than making lenders more accountable for their actions, HIPC continues to give power to creditors, whilst making it more difficult to empower local democratic control over economic decisions.

    Therefore, due to the harsh conditions posed by HIPC some sections in Zimbabwe believe that the country should not rush to pay its external debts or go the HIPC route until an official audit has been done to ascertain the validity of the arrears.

    A local pressure group, ZIMCODD said there was need to establish the country’s total debt, which dates back to pre-independence days, and the reasons for borrowing before it is cleared.

    “We are calling for an official debt audit so as to come up with a true picture of the debt stock and to know who is owed and how much is owed. The audit should consider all relevant legal, political and economic factors, which have led to the accumulation of illegitimate and odious debt in this country,” Zhou said at a media workshop recently.

    She added, “The audit commission must also consider social and environmental damages to the local populations caused by debt. Debts which are found to be illegitimate must not be paid. Debts which are legitimate must be reimbursed.”

    The latest development also comes at a time Treasury has confirmed that it is undertaking an audit to ascertain the Zimbabwean government’s debt and will present the findings to Parliament soon.

    Even if the Zimbabwean Parliament is not yet willing to undertake such an audit, the general populace and the parliamentarians must be able to access information on past debts and their impact from creditors, increasing transparency within the country.

    The country inherited at least a US$700 million debt from the Rhodesian government, the result of UN-sanction-busting loans to the white regime to buy arms during the civil war.

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