Zimbabwe may soon attain Heavily Indebted Poor Countries (HIPC) status after the International Monetary Fund (IMF) asked it to prepare an urgent request for debt relief under the initiative in order to offset the debt distress the country is facing.

The request was made last month during a visit to Zimbabwe by an IMF mission led by Vitaly Kramarenko.

In a report released this week, the IMF stated that the country, which is recovering from a decade-long economic decline, is severely debt-distressed and that neither income from the huge mineral resources nor the implementation of the Fund’s policy recommendations could resolve the country’s debt overhang without debt relief.

“The (IMF) authorities agreed that the country was in debt distress. Following intense debate within the government on possible use of mineral wealth to resolve external debt arrears, consensus is emerging among key government officials that mineral wealth alone would not be sufficient to achieve debt sustainability. As a result, the government is working on a comprehensive ‘hybrid’ strategy involving both a request for debt relief under the HIPC Initiative to resolve external payments arrears and use of fresh international financial institution financing and mineral wealth to achieve sustainable development,” the IMF stated.

Zimbabwe is struggling to repay its US $7.145 billion external debt and is currently in arrears of US $4.575 billion.

According to the IMF, the country’s external position was so unsustainable that without intervention, external debt could reach 151 per cent of Gross Domestic Product (GDP) by 2015, with 104 per cent of GDP in arrears.

Finance minister Tendai Biti this week said the country’s economy was “sick” from an array of factors including lack of capital resulting from a lack of foreign direct investment, lines of credit and budgetary support from donors as well as mounting inflation and a lack of fiscal space.

Zimbabwe, which needs around US $10 billion to turn its economy round from a severe depression of 10 years resulting from a political crisis brought about by unprecedented land reforms, has been struggling to attract investors and donors to provide the much-needed capital.

Biti said the first quarter of 2010 was the most challenging and the economy’s “factors of sickness” had dampened the prospects for recovery and had returned inflationary pressures.

Between January and June, inflation surged from a target regime of one per cent to 6.1 per cent, and researchers project that it may surpass 10 per cent by August.

The IMF stated in its report that there was no way out for Zimbabwe but through debt relief. It recommended that the country prepares a request for HIPC status.

The HIPC initiative was initiated by the IMF and the World Bank in 1996, following extensive lobbying by NGOs and other bodies.

It provides debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels for countries with high levels of poverty and unsustainable debt levels.

It has worked for several poor countries including Zambia, which, in 2005 won massive debt relief that saw its debt falling from US $7.1 billion to only US $500 million while some of it was rescheduled and spread over a period up to 2022.

“There is a debate in Zimbabwe on whether the country’s mineral wealth can be used to resolve external debt arrears. (IMF authorities) estimate that at end-2009, Zimbabwe’s net foreign asset (NFA) position, including the net present value of future mineral receipts under an optimistic scenario for the extraction of high-value minerals, is significantly negative, in the order of 63 per cent of GDP,” the IMF stated.

“Just maintaining this high level of the negative NFA would require generating non-mineral primary external current account surpluses whereas this balance now stands in deficit at over 35 per cent of GDP.

Closing such a large gap without debt relief is not feasible in the foreseeable future, even if the challenges with competitiveness and the business climate are addressed without further delays.”

The IMF recommended a Staff Monitored Programme for Zimbabwe, in which it will seek to strengthen the country’s policies and data reporting, as well as improve relations with the international community.

“The authorities agreed that making timely quarterly payments to the Fund and increasing them over time, as the payment capacity improves, will strengthen the credibility of their commitment to normalizing relations with the Fund,” it stated.

(Source)