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Vol 57 No 13

Published 24th June 2016


Political questions loom as debt deal is set for September

International creditors have agreed to the government's plan to repay arrears but politicians and activists voice concern

This week, the government is to finalise its agreement to repay some US$1.86 billion of arrears to multilateral financial institutions. That will trigger its re-entry into the international financial system after almost two decades out in the cold.

Zimbabwe Chart Copyright © Africa Confidential 2016

The news comes as Zimbabweans struggle with a chronic shortage of US dollar banknotes, the main denomination in the country's multi-currency financial system (AC Vol 57 No 7, Dollar curbs anger bigwigs). Facing a worsening balance of payments crisis, the government has announced it will be phasing the payment of June's salaries over the next three weeks. The army and air force are the first in line for payment.

The boards of the International Monetary Fund, World Bank and African Development Bank are to meet in September to confirm settlement of all outstanding payments and to discuss fresh loans. The road map for Zimbabwe's return to the international system was launched at the IMF and World Bank annual meeting in Lima, Peru, last September and was finalised at a special meeting at the AfDB in Lusaka, Zambia, on 27 May.

Finance Minister Patrick Chinamasa is due to arrive in France on 30 June for talks with the Paris Club of official creditors on a schedule to resolve arrears on bilateral debts. A team from the IMF arrived in Harare on 15 June for follow up discussions after its directors had assessed as satisfactory Zimbabwe's adherence to agreed reforms.

The next step is for the government to negotiate a medium-term programme of restructuring with the IMF which would include tougher measures and more rigorous monitoring but could be worth as much a $1 billion. Loan conditions will include deep cuts to the public sector payroll, privatisation of state-owned enterprises, and pro-business policies in agriculture, banking and industry. All that would require greater accountability and public audits of government institutions.

Quite how such policies can be implemented in the run up to elections in 2018 is where the political scepticism starts. Already, dissidents within the ruling Zimbabwe African National Union-Patriotic Front (ZANU-PF) are rejecting any measures which involve cuts to the public sector payroll, audits of state companies or compensation for white farmers whose farms were seized during the land resettlement programme (AC Vol 55 No 7, Grace under fire).

Opposition parties accuse the government of bad faith, trying to fix a deal with the IMF and World Bank so that ZANU-PF will remain in pole position to win the 2018 elections (AC Vol 57 No 9, Morgan goes it alone). Civic activists are demanding the formation of a national transitional authority led by technocrats to implement economic and political reforms before the next elections.

Zimbabwe Chart Copyright © Africa Confidential 2016

Last week, the Reserve Bank of Zimbabwe Governor, John Mangudya, had some difficult meetings trying to explain the government's strategy to business and citizens' groups. He faced a barrage of criticism in a discussion group organised by Evan Mawawire, the pastor who led a remarkable citizens' protest campaign, known as #thisflag on social media, in which he tied the national flag around his neck and called on all Zimbabweans to restore pride to the country.

Few seemed convinced by Mangudya's argument that the cash shortages were due to long-term trade deficits and low productivity rather than financial skulduggery. There was much antipathy to the government's plan to issue bond notes, a local non-convertible currency pegged to the US dollar, as a way of easing the crash crisis.

An economist sympathetic to Mangudya's efforts told Africa Confidential: 'This government tends to have ideas first, then implement them and finally start to consult… people have seen too much for that now.' Diplomats and foreign governments also differ over the government's plans.

China, India and Russia are broadly supportive but have been less forthcoming with budgetary cash than the government had hoped. Yet all three are lining up to invest in mining and power projects. China has provided about $1 bn. over the past five years in balance of payments support but its own economic slowdown seems to have prompted a change. It was the limitations of the government's 'Look East' strategy that drove it to reopen negotiations with the multilateral institutions.

After signing an agreement with Harare to normalise economic relations, European Union governments have given conditional support to the deal with the IMF and World Bank but want to see further political and constitutional reforms. Of the EU states, Britain is significantly now seen as the most supportive of the government's reform gestures: a sharp change from its former status as leading the charge against President Robert Mugabe and ZANU-PF.

Britain's shift has drawn fire from several opposition groups which say it is a panic reaction to the possibility of instability in the post-Mugabe era. Conservative Party politicians in Britain have had better relations than their Labour Party counterparts with President Mugabe's nationalist government. Anglo-Zimbabwean relations reached their nadir under Prime Minister Tony Blair's Labour government, 15 years ago.

In fact, European officials at the formal meeting with Chinamasa and Mangudya at the AfDB in Lusaka last month insisted there was a Western consensus on Zimbabwe policy: support for the arrears settlement and new loans if conditions are met, as well as much higher levels of financial transparency. However, the United States' officials pushed harder than the Europeans on governance issues, referring to recent policy 'mis-steps' and 'the importance of restoring confidence with the International Financial Institutions and the banks but most important, with the Zimbabwean people.' The official added that US support for the deal would depend on a 'demonstrated track record'.

Washington's position on Zimbabwe is particularly important because it is the biggest shareholder in the IMF and World Bank: that gives it great influence but not an effective veto when their boards vote on loans. Under its Zimbabwe Democracy and Economic Reform Act of 2001, the US government instructs its officials to vote against loans to Zimbabwe, unless these are to provide for basic needs or good governance.

At the fairly cordial meeting with international officials at Lusaka's Mulungushi International Conference Centre, Chinamasa responded diplomatically to the scepticism: 'We are not a perfect society but we do not fare badly on a comparative basis… we've suffered criticisms from the outside media for alleged human rights abuses.' Addressing US concerns directly, he added: 'We will never tire of trying to engage with you… but please do not try to torpedo the process… we will all be worse off it fails.'

Outside the meeting, other Western officials said the USA would adapt its position as the current plan had to work: 'there is no plan B,' one senior official said. There was broad consensus that 'economic reforms were not sufficient' and, in a nod to the USA, officials would keep up pressure on governance and human rights issues. However, there will be no overt political conditions attached to the IMF loan.

Strengths, such as a highly educated population and a strong diaspora in neighbouring South Africa and in Europe, have to be balanced against the currently desperate conditions, with just 700,000 people in formal jobs against a total population of 13 million, combined with the worst drought for two decades which is wrecking local food production. 

Both the IMF and World Bank, whose officials are due in Harare this week, together with the AfDB have agreed the terms of arrears repayment presented in Lusaka by Chinamasa and Mangudya, we understand. At the centre of the plan is the Afreximbank, a trade finance affiliate of the AfDB based in Cairo, Egypt, which is providing bridging finance to Zimbabwe to clear its $601 mn. arrears to the AfDB and $218 mn. arrears to the International Development Association, the World Bank's soft loan affiliate.

Zimbabwe will use its own special drawing rights to repay a $111 mn. poverty reduction credit to the IMF. Most significantly, Afreximbank has secured a long term loan from Lazard Bank and Britain's Standard Chartered Bank for Zimbabwe to repay its a further $896 mn. of arrears to the World Bank. Mysterious talk of a $900 mn. loan from Algeria has quietly been dropped.

Mangudya and Chinamasa spelt out their government's 'Economic Revival and Transformation Programme' in Lusaka, a familiar template of reforms to public finance management and the banking sector, sale of state-owned companies and cutting red tape for business. Several banks went out of business over the past three years, so the government is to set up the Zimbabwe Asset Management Company to manage them.

More problematic are the agricultural reforms, which include security of tenure for farmers, land registration and audit, and compensation for the mainly white commercial farmers who saw their farms seized during the government's resettlement programme after 1999.

Planned indigenisation rules have been amended so that the minimum 51% Zimbabwean ownership stipulation applies only to the mining sector. Nevertheless, foreign owners will have to follow tough – 75% – local content rules on procurement. Manufacturers and banks will have to earn 'empowerment credits' in return for transferring skills and technology, and setting up employee share ownership schemes.

Agreeing on the size and procedure to compensate evicted farmers will take more time, with estimates of the potential bill varying but starting at around $2-3 bn., which raises the question of how the money would be raised, even if there were political agreement on the arrangements. Indigenisation rules are likely to be easier to set, with the Bank and the IMF calling for 'clear rules' that should be 'implemented transparently.'

Toughest of all politically is likely to be the plan to reduce wage costs to 50% of public spending in 2019 from what Chinamasa said was the current level of 66%. Other sources say wages currently exceed 80% of all public spending. The Economist Intelligence Unit forecasts that total employment costs will reach about $3.2 bn. this year, with the budget deficit hitting 3.2% of gross domestic product.

That would involve, Chinamasa told the Lusaka meeting, cuts to the public sector workforce, a continuing employment and salary freeze, and audits to boost efficiency and save costs. The other politically sensitive move is the introduction of audit trails in the diamond industry to stop the untrammelled outflow of stones and revenue, which may have cost the country as much as $15 bn. over the past five years, according to Mugabe.

Formal efforts by the Auditor General's Department to investigate those losses have met obstruction and worse. After the Lusaka meeting, Chinamasa insisted to journalists that new revenue tracking measures were effective and already boosting revenue.

Mining activists, however, remain deeply sceptical. Changing technical conditions could help accountability because the next phase of mining in the Marange fields will involve much more investment and technology, working on kimberlite shafts that should be easier to monitor than the more random artisanal production. Even then more accountability will be far from automatic (AC Vol 55 No 10, Mugabe moves on Marange).

Much of the success of the economic policies now under discussion, especially the contentious ones on public payroll cuts, farmers' compensation and mining revenue management, look set to prompt widespread disagreement in an already febrile political climate. Although the arrears deal will go through and will unlock some new financing, the chances of a properly funded medium-term programme for economic restructuring, particularly to revive industry and farming, will be critically dependent on the government's ability to convince its own supporters, as well as a very hostile opposition, to back the new policies. For now, that looks like a mountain to climb.

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