JOINT IMF/WORLD BANK DEBT SUSTAINABILITY ANALYSIS1
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International Monetary Fund
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Publication Date:
14 Jun 2011
eISBN:
9781455271481
Language:
English
Keywords:
ISCR; CR; Zimbabwean authorities; authority; US$ million; Real GDP growth; financing need; creating flow; long-term debt; debt burden indicator; financing gap; Arrears; Debt service; debt outlook
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Stronger policies, favorable external environment, and notable improvement in the humanitarian situation supported a nascent economic recovery in Zimbabwe. Executive Directors welcomed this, and urged authorities to take advantage of the favorable external environment to strengthen their macroeconomic framework. They stressed the need to strengthen the fiscal position and expressed concern about rising vulnerabilities in the banking system. They welcomed the authorities strategy for arrears clearance. Directors agreed that the Staff Monitored Program (SMP) would help establish a track record of sound policies, and encouraged the authorities to continue timely data reporting.

Abstract

Stronger policies, favorable external environment, and notable improvement in the humanitarian situation supported a nascent economic recovery in Zimbabwe. Executive Directors welcomed this, and urged authorities to take advantage of the favorable external environment to strengthen their macroeconomic framework. They stressed the need to strengthen the fiscal position and expressed concern about rising vulnerabilities in the banking system. They welcomed the authorities strategy for arrears clearance. Directors agreed that the Staff Monitored Program (SMP) would help establish a track record of sound policies, and encouraged the authorities to continue timely data reporting.

BACKGROUND

1. Zimbabwe is in debt distress, with arrears to most of its creditors continuing to build up. At end-2010, total external debt is estimated at $8.8 billion or 118 percent of GDP (Table 1). Total public and publicly-guaranteed (PPG) external debt is estimated at $7.1 billion or 95 percent of GDP, with 77 percent of GDP in arrears. Most PPG external debt is medium- to long-term and owed to official creditors. Zimbabwe’s overdue financial obligations to IFIs include the World Bank ($807 million), African Development Bank ($510 million), EIB ($239 million) and the IMF ($134 million).

Table 1

Zimbabwe: External Debt Sustainability Framework, Baseline Scenario, 2007-30 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. Data on external debt was estimated based on information from the authorities, Paris Club, WB, and EIB.

External private debt, and public and publicly guaranteed debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Residuals are accounted for by the following factors: (i) portfolio and equity investment, (ii) capital transfers, and (iii) errors and omissions. Exceptional financing consists primarily of the accumulation of arrears. From 2010 onwards, residuals include contributions to price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief coursed through the central government budget. Except for very small amounts, all grants to Zimbabwe from 2010 onwards are assumed to be off-budget grants.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2

Zimbabwe: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007–30

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Public and publicly guaranteed debt and residents’ claims on the RBZ denominated in foreign currency. For 2007, excludes local-currency denominated debt of about 1 percent of GDP.

Includes accumulation of arrears. The residuals for 2007-2008 in part reflect RBZ’s quasi-fiscal activities. In 2010, the residual in part reflects use of the SDR allocation. Residuals also reflect the difference in coverage between the public debt stock (PPG) and the flow variables (central government only). State-owned enterprise (SOE) debt is included only if guaranteed by the government.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Zimbabwe: 2010 External Debt Stock

(in million US dollars) 1/

article image
Sources: WB, AfDB, Zimbabwean authorities, and staff estimates.

For the multilateral institutions, short-term debt, and suppliers credits, estimates reflect compound factor; late interest is included under interest arrears.

2. While domestic public debt remains a comparatively small component of the total, it is, nevertheless, another source of vulnerability. The domestic debt incurred by the Reserve Bank of Zimbabwe (RBZ) is estimated at about $690 million at end-February 2011. This figure is only an estimate, and could prove to be larger, if new liabilities of the central bank and its subsidiaries are identified. Unidentified domestic contingent liabilities within the parastatal sector are another source of potential downside risks.

3. Zimbabwe’s debt sustainability analysis (DSA) suffers from significant data shortcomings. The authorities are currently reconciling their debt stock and debt service data with individual creditors, with significant differences remaining. As a result, this DSA is largely based on non-reconciled official debt numbers, and where available, data collected directly from individual creditors, as well as staff estimates of accrued interest and penalties on arrears. In light of these factors, the results of this exercise should be treated with caution.

MACROECONOMIC AND FINANCING ASSUMPTIONS

4. The baseline scenario assumes a more positive macroeconomic outlook largely due to more favorable external environment compared with the previous DSA, but a weakening policy stance is increasing downside risks.2 Significantly higher export commodity prices and the resumption of official diamond trade have improved the outlook for real GDP and export growth. However, somewhat weaker fiscal discipline, the fast-track approach to mining indigenization,3 and uncertainties on ownership requirements in other sectors may undermine investors’ confidence and discourage new private capital inflows. The government’s contracting of non-concessional loans4 would continue to worsen the debt outlook and complicate the normalization of the authorities’ relationship with the donor community. Annual real GDP growth is projected to average about 4.7 percent for the period 2010–15 and about 3 percent for 2016–30 (Box 1). The external current account deficit, net of interest, is projected to improve from 18 percent of GDP in 2010 to about 3 percent in 2015, in part due to the impact of higher commodity prices on exports and volumes.5

5. It is assumed that the central government would run deficits in 2011 and 2012, financed by recently contracted non-concessional loans, but would maintain a balanced cash budget in the medium and long terms. Central government revenues are projected to be broadly stable at around 28 percent of GDP over the long term, slightly below the current level. Customs revenues are anticipated to decline, as Zimbabwe simplifies its tariff structure in line with its commitments under regional trade agreements. Other revenues are expected to remain broadly unchanged relative to GDP. On the expenditure side, the baseline scenario projects only a very marginal increase in fiscal space for nonwage expenditures, and the continuation of large financial support for parastatals. Although the employment costs to GDP ratio is projected to decline slightly, it would continue to claim a high ratio of total revenues. Therefore, both nonwage current expenditure and public investment would remain constrained over the medium to long term.

Key Macroeconomic Assumptions: Baseline Scenario

  • Real GDP is projected to grow by about 4.7 percent in the medium term and 3 percent in the long term. Growth is projected to decelerate mainly due to a sharp slowdown in mining, which would be caused by the recently announced fast-track indigenization. Slow progress in addressing structural bottlenecks, including relatively high public wage costs, poorly maintained infrastructure, and a poor business climate, is expected to pose constraints to higher growth in other sectors. Inflation would remain contained at an average of about 5 percent in the medium to long term.

  • Donor support is assumed to be confined to humanitarian assistance. It is also assumed that the end-2010 arrears will remain unresolved and new projected debt service payments on PPG external debt will fall into arrears over the entire projection period.1/ No debt relief is expected under the baseline scenario.

  • FDI, portfolio investment, and private sector borrowing will remain limited in the medium and long term.

  • Import growth would gradually decline over the long term constrained by a slackening in export growth and limited private capital inflows and lack of access to non-humanitarian assistance.

  • On the fiscal sector, a financing gap of about 4.4 percent of GDP is projected in 2011 due to a likely revenue shortfall and higher-than-budgeted expenditure, to be covered mostly by further accumulation of expenditure arrears and cuts in capital expenditure.

1/ The DSA is conducted on an accrual basis.

RESULTS OF THE BASELINE DEBT SUSTAINABILITY ANALYSIS

Public and Publicly-Guaranteed External Debt Sustainability

6. Under the baseline scenario, at end-2010, all PPG external debt indicators exceed thresholds for LICs that have low Country Policy and Institutional Assessment (CPIA) scores, except the two debt service ratios (Figure 1).6 Most ratios are projected to continue to exceed their respective thresholds by a wide margin in the medium term, and decline only gradually over the long term.

Figure 1
Figure 1

Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010–2030

Citation: IMF Staff Country Reports 2011, 135; 10.5089/9781455271481.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Based on the standard template. The baseline scenario excludes arrears and principal on short-term debt. The historical and most extreme shock scenarios exclude arrears and principal on short-term debt, as well as interest and penalties on arrears.

7. The sensitivity analysis illustrates that Zimbabwe’s unsustainable debt situation could worsen further (Table 4). Historical analysis shows that all external debt indicators could deteriorate rapidly in the medium to long term compared to the baseline scenario reflecting the country’s poor macroeconomic performance in the past decade and the volatility of commodity prices. Results of the most extreme stress test show that the present value of debt-to-GDP could more than double by 2012.7

Table 3

Zimbabwe: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Table 4

Zimbabwe: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010–2030

(In percent)

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. For real GDP growth, historical period covers only from 2005 onwards due to unavailability of reliable data prior to this period.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

An ellipsis (“…”) indicates a negative value, as generated by the standard template. Negative values reflect the fact that debt service excludes arrears and principal on short-term debt, as well as interest and penalties on arrears in the alternative scenarios and bound tests.

Public Debt Sustainability

8. While Zimbabwe’s overall public debt indicators are expected to improve over the long term, they will remain elevated. The schedule of debt service payments will remain high. The authorities are unlikely to generate sizable primary surpluses, which would be necessary to achieve public debt sustainability. Reflecting assumed real GDP growth, the debt-to-GDP ratio is projected to gradually decline from 104 percent of GDP in 2010 to about 96 percent of GDP in 2015. The present value of public debt will fall from 119 percent of GDP to about 104 percent in 2015. Nevertheless, these ratios would remain elevated, well above sustainable levels. Debt service, including arrears, would remain unaffordable due to the large size of arrears. Results of the most extreme stress test show that the present value of the public debt-to-GDP ratio more than doubles by 2030 (Table 3).8

ALTERNATIVE SCENARIO

9. An alternative scenario assumes that the government would implement strong policy measures to address existing impediments to sustainable growth.9 Under this scenario, debt burden indicators would decline faster than under the baseline scenario, but the country’s external debt ratios would still remain above the indicative thresholds. If the government strengthens fiscal discipline, improves the quality of expenditures, ensures that the implementation of the indigenization legislation takes into account investors’ concerns, presses ahead with key structural reforms, and takes forceful steps to address financial sector vulnerabilities, the country could potentially boost growth performance by about 3 percentage points relative to the baseline scenario over the medium term. This would allow debt indicators to decline faster (Tables 5-8 and Figures 3 and 4). Higher growth would be supported by a positive response of private investment in mining and industry to a better business climate. In addition, a lower wage bill would help contain wage costs and leave more resources for higher public spending on infrastructure.

Figure 2
Figure 2

Zimbabwe: Indicators of Public Debt Under Alternative Scenarios, 2010-2030

Citation: IMF Staff Country Reports 2011, 135; 10.5089/9781455271481.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Revenues are defined inclusive of grants.2/ Excluding arrears.
Figure 3.
Figure 3.

Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010-2030

Citation: IMF Staff Country Reports 2011, 135; 10.5089/9781455271481.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Based on the standard template. The baseline scenario excludes arrears and principal on short-term debt. The historical and most extreme shock scenarios exclude arrears and principal on short-term debt, as well as interest and penalties on arrears.
Figure 4.
Figure 4.

Zimbabwe: Indicators of Public Debt under Alternative Scenarios, 2010-2030

Citation: IMF Staff Country Reports 2011, 135; 10.5089/9781455271481.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Revenues are defined inclusive of grants.2/ Excluding arrears.
Table 5

Zimbabwe: External Debt Sustainability Framework, Alternative Scenario, 2007–30 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. Data on external debt was estimated based on information from the authorities, Paris Club, WB, and EIB.

External private debt, and public and publicly guaranteed debt.

Derived as [r - g - ρ(1 +g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Residuals are accounted for by the following factors: (i) portfolio and equity investment, (ii) capital transfers, and (iii) errors and omissions. Exceptional financing consists primarily of the accumulation of arrears. From 2010 onwards, residuals include contributions to price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief coursed through the central government budget. Except for very small amounts, all grants to Zimbabwe from 2010 onwards are assumed to be off-budget grants.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 6.

Zimbabwe: Public Sector Debt Sustainability Framework, Alternative Scenario, 200730 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Public and publicly guaranteed debt and residents’ claims on the RBZ denominated in foreign currency. For 2007, excludes local-currency denominated debt of about 1 percent of GDP.

Includes accumulation of arrears. The residuals for 2007-2008 in part reflect RBZ’s quasi-fiscal activities. In 2010, the residual in part reflects use of the SDR allocation. Residuals also reflect the difference in coverage between the public debt stock (PPG) and the flow variables (central government only). State-owned enterprise (SOE) debt is included only if guaranteed by the government.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 7.

Zimbabwe: Sensitivity Analysis for Key Indicators of Public Debt, (Alternative Scenario) 2010-2030

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Table 8.

Zimbabwe: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, (Alternative Scenario) 20102030

(In percent)

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. For real GDP growth, historical period covers only from 2005 onwards due to unavailability of reliable data prior to this period.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

An ellipsis (“…”) indicates a negative value, as generated by the standard template. Negative values reflect the fact that debt service excludes arrears and principal on short-term debt, as well as interest and penalties on arrears in the alternative scenarios and bound tests.

CONCLUSION

10. Zimbabwe is likely to remain in debt distress for the foreseeable future. Achieving debt sustainability will require a further considerable strengthening of economic policies and debt relief, which would necessitate normalization of relations with the international community. The realization of contingent liabilities, including related to the RBZ restructuring, financial sector vulnerabilities, and SOEs, could make the debt situation even worse.

1

This exercise was guided by the Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries (SM/10/16).

2

See SM/10/108, Supplement 1. Albeit not a joint World Bank-IMF DSA, this analysis compares with the previous analysis included in the 2010 Article IV report. The baseline scenario is referred to as the unchanged policies scenario in the 2011 Article IV report.

3

Under the Indigenization legislation, in the mining sector, a sector-specific ownership threshold of 51 percent should be met by September 25, 2011 for all firms regardless of their value.

4

On March 21, 2011, the government contracted nonconcessional loans from the China Exim Bank amounting to US$566 million for agricultural equipment, medical equipment and supplies, and rehabilitation of water and sewage treatment plants. The terms of these loans are: i) interest rate of 6 months LIBOR plus 3 percent, ii) down payment of 10 percent, iii) management fee of 0.375 percent, and iv) commitment fee of 0.375 percent.

5

There is a structural break in the trade data in 2010. The Reserve Bank of Zimbabwe (RBZ) shifted to the use of customs data for exports and imports. In prior years, the main source of trade data was the Exchange Control Department of the RBZ.

6

Zimbabwe is considered as a country with weak institutions for the purpose of this LIC DSA with a CPIA of 2.0. The policy-based thresholds for the present value (PV) of PPG external debt are as follows: 200 percent of revenue, 100 percent of exports, and 30 percent of GDP. For debt service indicators, the ratios are 15 percent of exports and 25 percent of revenue.

7

The most extreme stress test is a combination shock which assumes that real GDP and export growth, the GDP deflator and net non-debt creating flows would be at their historical averages less V standard deviation.

8

The most extreme stress test assumes that real GDP growth is at historical average minus one standard deviation in 2011-12.

9

The alternative scenario is referred to as the recommended policies scenario in the 2011 Article IV report.

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Cover IMF Staff Country Reports
Zimbabwe: 2011 Article IV Consultation-Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Zimbabwe
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 135
Publisher:
International Monetary Fund
ISBN:
9781455271481
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781455271481.002
Figure 1

Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010–2030
Figure 2

Zimbabwe: Indicators of Public Debt Under Alternative Scenarios, 2010-2030
Figure 3.

Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2010-2030
Figure 4.

Zimbabwe: Indicators of Public Debt under Alternative Scenarios, 2010-2030