Zimbabwe: Settlement of Overdue Financial Obligations to the Poverty Reduction and Growth Trust, Lifting of Declaration of Noncooperation, Lifting of Restriction on Fund Technical Assistance, and Restoration of Poverty Reduction and Growth Trust Eligibility

On October 20, 2016, Zimbabwe fully settled its overdue financial obligations to the Poverty Reduction and Growth Trust (PRGT) using its SDR holdings.1 Zimbabwe had been in continuous arrears to the PRGT since February 2001. The authorities had been making regular monthly payments of US$0.15 million each since 2013, and four more such payments have been made since the last review of overdue financial obligations on May 2, 2016.2 As of the day of repayment, Zimbabwe's arrears to the PRGT amounted to SDR 78.3 million, which comprised overdue PRGT principal of SDR 61.7 million, and total interest obligations of SDR 16.6 million, (covering overdue interest and interest accrued through October 20, 2016 on overdue principal and interest amounts). The repayment of SDR 78.3 million has been applied towards the PRGT's Reserve Account.

Abstract

On October 20, 2016, Zimbabwe fully settled its overdue financial obligations to the Poverty Reduction and Growth Trust (PRGT) using its SDR holdings.1 Zimbabwe had been in continuous arrears to the PRGT since February 2001. The authorities had been making regular monthly payments of US$0.15 million each since 2013, and four more such payments have been made since the last review of overdue financial obligations on May 2, 2016.2 As of the day of repayment, Zimbabwe's arrears to the PRGT amounted to SDR 78.3 million, which comprised overdue PRGT principal of SDR 61.7 million, and total interest obligations of SDR 16.6 million, (covering overdue interest and interest accrued through October 20, 2016 on overdue principal and interest amounts). The repayment of SDR 78.3 million has been applied towards the PRGT's Reserve Account.

Introduction

1. On October 20, 2016, Zimbabwe fully settled its overdue financial obligations to the Poverty Reduction and Growth Trust (PRGT) using its SDR holdings.1 Zimbabwe had been in continuous arrears to the PRGT since February 2001. The authorities had been making regular monthly payments of US$0.15 million each since 2013, and four more such payments have been made since the last review of overdue financial obligations on May 2, 2016.2 As of the day of repayment, Zimbabwe’s arrears to the PRGT amounted to SDR 78.3 million, which comprised overdue PRGT principal of SDR 61.7 million, and total interest obligations of SDR 16.6 million, (covering overdue interest and interest accrued through October 20, 2016 on overdue principal and interest amounts). The repayment of SDR 78.3 million has been applied towards the PRGT’s Reserve Account.

2. In light of Zimbabwe’s settlement of its overdue financial obligations to the PRGT, staff proposes that the Board remove the remaining remedial measures. The outstanding remedial measures, posed against Zimbabwe because of its arrears to the PRGT, are: (i) the declaration of noncooperation with the Fund; (ii) the partial suspension of provision of Fund technical assistance (TA); and (iii) the removal of Zimbabwe from the list of PRGT-eligible countries (see Attachment I).3 Zimbabwe’s failure to settle its financial obligations to the PRGT had formed the basis for applying these remedial measures, which were aimed to encourage the authorities to make payments to the PRGT and to undertake policies that would enable them to become current on its financial obligations to the PRGT. Accordingly, staff proposes that the remedial measures be lifted in light of the full settlement of the overdue financial obligations to the PRGT, and as Zimbabwe has no outstanding obligations to the PRGT that could result in the re-emergence of PRGT arrears.

3. Zimbabwe is eligible for re-entry onto the PRGT-eligibility list. Decisions on re-entry onto the PRGT-eligibility list can be adopted in the interim period between the general reviews of eligibility to use the Fund’s facilities for concessional financing for any country that had been removed from the list in the context of overdue obligations to the PRGT, as long as the country at the time of re-entry does not meet the criteria for graduation.4 Zimbabwe has a GNI per capita of US$850, as of end-2015, well below the income thresholds required for graduation from the PRGT-eligibility list based on the income criterion or market access criterion, and continues to face severe short-term vulnerabilities as evidenced by the recent DSA rating (in debt distress).

4. The Zimbabwean authorities continue their efforts to resolve arrears to international financial organizations and official bilateral creditors. The authorities provided an updated arrears clearance plan on the sidelines of the 2016 Annual Meetings. The plan no longer envisages clearing Zimbabwe’s arrears to the Fund, the World Bank, and African Development Bank (AfDB), simultaneously, but sequentially within a defined period, through: (i) use of their SDR holdings to clear the arrears to the Fund (completed on October 20, 2016); (ii) bridge financing from financial institutions for clearing the arrears to the AfDB; and (iii) loans on market terms to repay the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA). As of end-September 2016, Zimbabwe’s total arrears to the IBRD and IDA amounted to US$1,156.7 million, and arrears to the AfDB amounted to US$632.5 million. The authorities also are engaging in discussions with the European Investment Bank (EIB) on an arrears clearance plan, and plan to seek debt treatment from official bilateral creditors, under the umbrella of the Paris Club.

5. The settlement of arrears is a step in the right direction to cooperate with the international community, but needs to be followed by reforms that address Zimbabwe’s structural imbalances. The authorities demonstrated strong commitment to implementing key macroeconomic policies and structural reforms under the most recent Staff-Monitored Program, despite economic difficulties. In the absence of external financing and reflecting delays in reform implementation, however, the authorities did not fully address the fiscal and external imbalances. More recently, Zimbabwe’s economic and social conditions and the health of its financial system have deteriorated, reflecting the impact of insufficient policy adjustment, and exogenous shocks (a drought, lower commodity prices, and the appreciation of the US dollar). The resulting cash shortages have led the authorities to delay wage payments, restrict imports, require export surrenders, and announce the issuance of bond notes backed by an external credit facility. The extremely difficult situation has been exacerbated by political uncertainty, social unrest, and loss of confidence.

6. The settlement of overdue obligations and lifting of remedial measures do not automatically provide Zimbabwe with access to IMF financing. Consideration of a request for IMF financing will also require Zimbabwe to comply with other applicable Fund policies, including to: (i) resolve its arrears to multilateral creditors (including the AfDB, the World Bank, and other multilateral institutions), bilateral official creditors, and external private creditors (if any);5 and (ii) implement strong fiscal adjustment and structural reforms to restore fiscal and debt sustainability and foster private sector development.

Staff Assessment

7. Staff proposes that the Board lift the declaration of noncooperation, remove the remaining restriction on the provision of Fund TA, and reinstate Zimbabwe on the list of PRGT-eligible countries. The basis for staff’s proposal is that Zimbabwe has settled its overdue financial obligations to the PRGT, which was the basis for the Executive Board’s decision to apply these remedial measures. Zimbabwe is now current on all of its financial obligations to the Fund, and has no outstanding financial obligations to the Fund. Zimbabwe does not meet the criteria for graduation from PRGT eligibility that would prevent the member from being reinstated on the list of PRGT-eligible countries.

Attachment I. Overdue Financial Obligations to the Poverty Reduction and Growth Trust—Timetable of Remedial Measures1

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Based on Decision No. 12545-(01/84), adopted on August 22, 2001.

1

The repayment resulted in the release of SDR 66.4 million received by Zimbabwe under the special one-time allocation of special drawing rights in 2009 when the Fourth Amendment of the Fund’s Articles of Agreement became effective. Pursuant to the Fourth Amendment, the SDR 66.4 million allocation to Zimbabwe was held in an escrow account due to Zimbabwe’s then arrears to the PRGT. As set out in the Articles, such SDRs held in escrow are released upon discharge of all of the member’s overdue financial obligations to the Fund. See paragraph 5(a) of Schedule M of the Fund’s Articles of Agreement.

2

Zimbabwe was the only case of protracted arrears to the PRGT.

3

See Press Release No. 02/28 on June 14, 2002 (on issuing the declaration of noncooperation and suspending Fund TA to Zimbabwe) and Press Release No. 01/40 on September 25, 2001 (on removing Zimbabwe from the list of PRGT-eligible countries). The suspension of the Fund provision of TA to Zimbabwe had been largely lifted, but the Fund provision of TA to Zimbabwe remained restricted, subject to the Fund’s periodic reviews of Zimbabwe’s arrears to the PRGT (see Press Release No. 09/152 on May 6, 2009). For the description of current TA areas that Zimbabwe may receive from the Fund, see Press Release No. 12/405 on October 30, 2012.

4

See Decision No. 14521-(10/3), adopted January 11, 2010; see also Eligibility to Use the Fund’s Facilities for Concessional Financing, 2015 (footnote 2 of Table 1).

5

For the Fund’s policies on arrears to multilateral creditors and external private creditors, see Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework, Annex I, paragraphs 8–13; for the Fund’s policy on arrears to official bilateral official creditors, see Reforming the Fund’s Policy on Non-Toleration of Arrears to Official Creditors and Press Release 15/555.

1

The Executive Board takes decisions under its lapse of time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.

Zimbabwe: Zimbabwe: Settlement of Overdue Financial Obligations to the Poverty Reduction and Growth Trust,Lifting of Declaration of Noncooperation, Lifting of Restriction on Fund Technical Assistance, and Restoration of Poverty Reduction and Growth Trust Eligibility-Press Release; and Staff Report
Author: International Monetary Fund. Finance Dept.