Zimbabwe: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
26 Mar 2020
eISBN:
9781513537726
Language:
English
Keywords:
ISCR; CR; Zimbabwe; government; debt; Zimbabwean authorities; currency; Zimbabwe dollar; Zimbabwean government; review government's shareholding; climate shock; Monetary base; Currencies; Agricultural sector; Sub-Saharan Africa; Africa; Global; sustainability analysis; dynamics equation; legacy debt; RBZ debt assumption; reconciliation exercise; Arrears; Debt sustainability; Stress testing
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Zimbabwe

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Zimbabwe

Background on Debt

1. Zimbabwe’s public debt has increased since the last published DSA (2017) as unsustainable fiscal deficits and quasi-fiscal activities of the RBZ increased domestic and external debt, including through further arrears accumulation.2 With negligible access to external financing, these deficits were financed domestically through the banking system and, until recently, the Reserve Bank of Zimbabwe (RBZ), as well as arrears. Domestic debt, which was negligible 5 years ago, reached ZWL$ 6.98 billion by end-2018. However, its value, in real terms3 and as a percentage of GDP, has fallen drastically since the introduction of the Zimbabwe dollar and the redenomination of domestic debt into the new currency in 2019. External debt is dominated by official creditors—both bilateral and multilateral—with the bulk of the debt in arrears. Text Table 1 outlines the debts of Zimbabwe under various categories, e.g. debt outstanding and disbursed (DoD) vs accumulated arrears, for 2018. In 2019, the authorities effectively secured several additional external loans, with some constituting almost-concessional borrowing4 for critical infrastructure projects, but also expensive commercial loans that are securitized by future mineral exports. These commercial loans mainly reflect borrowings to introduce and defend the new ZWL$ and facilitate the importation of essential goods (fuel, maize, pharmaceuticals)

Text Table 1.

Zimbabwe: Public and Publicly Guaranteed Debt

(USD millions; as of end-2018)

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Source: Zimbabwean authorities and IMF staff calculations. *Percentage of estimated nominal 2018 GDP, which is still subject to potential major revision

External public and publicly-guaranteed debt, including RBZ and SOEs.

Note: Domestic debt is unconsolidated domestic debt of the central government, which differs from the DSA that takes a broader perimeter of debt coverage for the analysis.

Contingent liability.

2. Public debt coverage includes external and domestic obligations of the central government, central bank, and some state-owned enterprises (SOEs), but coverage of the SOE sector remains incomplete (Text Table 2). The authorities are improving the monitoring of SOEs balance sheets, incomes, and debt levels. In 2019, led by the State Enterprises Restructuring Agency (SERA), which is based in the Office of the President and Cabinet and the Ministry of Finance, the Government of Zimbabwe adopted a policy for a broad overhaul of the SOE sector, including privatizations, mergers, and requiring a standardized set of reporting from all SOEs to the Ministry of Finance and Accountant General. While domestic arrears of the central government to nongovernmental entities are small (ZWL 108 million, 0.8 percent of GDP), this does not reflect all domestic non-governmental arrears (e.g., it excludes accounts payable) and more importantly, significant cross-debts within the public sector. Many of these arrears are between public sector units, in particular the state electricity generator and revenue agency. IMF TA provided in Q1/2019 recommended that the authorities revive a tracking system of ‘from whom-to-whom’ in order to get a database that would facilitate clearing intra-government cross public sector institution arrears. Also, given the high degree of indebtedness between public sector entities, including RBZ lending to central government, it would be beneficial for the authorities to update the Public Debt Management Act (PDMA) to clarify the appropriate reporting of public sector gross debt in terms of consolidation.

Text Table 2.

Zimbabwe: Coverage of Public Sector Debt

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Background on Macro Forecasts and Stress Tests

3. Zimbabwe’s current debt-carrying capacity is classified as ‘weak’ according to the methodology employed in the revised DSF Framework (2017). The country’s Composite Indicator (CI)5 index is 1.80 based on the October 2019 WEO and World Bank’s latest (2018) CPIA. The relevant indicative debt thresholds for this category are shown in the weak column of Text Table 3, and the benchmark of the PV of total public debt for countries with weak debt carrying capacity is 35 percent.

Text Table 3.

Zimbabwe: Debt Carrying Capacity and Relevant Indicative Thresholds

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A. The Baseline Scenario and Realism Tools

4. Establishing a definitive picture of Zimbabwe’s outlook for debt sustainability is challenging given the considerable uncertainty surrounding the estimates of key macroeconomic statistics. The re-adoption of the Zimbabwe dollar has removed an important distortion in the economy, but additional time is needed for markets to settle, inflation (and interest rates) to normalize, and the country’s statistical agency (ZIMSTAT) to recompile national accounts statistics in the new currency. ZIMSTAT is making good progress on the work of rebasing and redenominating its national accounts statistics so that once completed it will have a complete and consistent set of historical national accounts statistics. However, for the exercise to be completed and avoid large revisions to the data, additional time is needed to collect, analyze, and integrate 2019 data (e.g. the new base year GDP).6 The IMF and World Bank are providing extensive TA to support ZIMSTAT’s endeavor. In the interim, staff and the authorities continue to collaborate on a set of mutually agreed national accounts statistics that are sufficient to conduct a DSA, but an external debt reconciliation exercise and an official time series for national accounts should be considered prerequisites for clarifying debt sustainability and forming the basis for any further engagement with creditors.

5. The economy contracted sharply in 2019 and the outlook for 2020 is for near-zero growth and gradual disinflation. Negative growth in 2019 reflects declines in agriculture and electricity generation from the drought, and the impact of electricity shortages on other sectors. For 2020, the economy is expected to remain basically flat as agriculture and electricity generation endure another year of drought. With grain stocks already depleted, a poor coming agriculture harvest would put additional pressures on the balance of payments for imports. Inflation is expected to remain high through mid-2020, with the pass-through from the exchange rate depreciation in 2019H2 running its course, and fall thereafter as the RBZ contains money growth.

6. Over the medium term, investment and growth will be constrained by a continuation of protracted external arrears and the consequent lack of access to external finance. Nevertheless, sustainable fiscal deficits and a more flexible exchange rate regime allow the economy to achieve some growth. The lack of external financing also constricts the size of the current account deficits, which in the current DSA is forecasted to be smaller than in the previous one.

7. The baseline assumes that the authorities have also exhausted their ability to contract non-traditional commercial external debt (Text Table 4), which the RBZ has done repeatedly since the last DSA by collateralizing future sales of commodity exports, primarily gold. Staff has reiterated concerns that continued external borrowing on commercial terms would likely worsen debt sustainability and complicate finding a consensus on arrears clearance and debt relief. For the purposes of this DSA the standard assumption that the financing gap in the forecast period is filled by domestic debt issuances has been held, which results in a higher forecast level of public debt than if the gap was filled through a combination of revenue mobilization, expenditure rationalization, and grant support.

Text Table 4:

Macroeconomic Framework, 2017–23

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Sources: Zimbabwean authorities; IMF staff estimates and projections.

8. The current DSA includes commitments by the RBZ to fully compensate some stakeholders for losses relating to currency reform, through the issuance of FX-dominated domestic debt securities in 2020. Following currency conversion, the RBZ announced that it would compensate stakeholders for losses, estimated then at US$1.2 billion. The legal channels for assuming and the method for compensating (e.g. the tenor of the debt instrument) these ‘legacy debts’ remain unclear. With indications that the debt to be assumed could reach US$2 billion, the difference has been included in the customized shock discussed below along with the contingent compensation to displaced farmers. Staff expressed concern that assuming these debts would significantly deteriorate the Government’s balance sheet, worsen Zimbabwe’s debt distress, and affect the prospects for future normalization of Zimbabwe’s external arrears.

9. Risks to the baseline scenario are multi-dimensional. The change in the currency regime, while unavoidable, is also unparalleled and presents numerous challenges that are difficult to anticipate, including high and volatile levels of inflation, exchange rate, and interest rates. The fiscal adjustment, without external and RBZ financing is substantial, raising risks of austerity fatigue and a loss of social support for fiscal consolidation. Together, the sharp spike in inflation, the impact of drought and cyclone, and large losses by bank depositors following the currency reform have reduced significantly purchasing power and living standards, disproportionately affecting the most vulnerable in society. Risks to 2020 are to the downside as rainfall is well below average (similar to last year’s drought levels), and distortions in the mining sector continue to adversely affect production. Upside risks over the long term include a successful resolution of Zimbabwe’s arrears that could be followed by a normalization of financial relationships and a superior growth-investment and poverty reduction path. Normalization of its external financial relationships is a necessity if Zimbabwe is to achieve the Sustainable Development Goals (SDGs).

10. The realism and forecast error tools highlight the more pessimistic baseline that operates under the assumptions of no progress on international re-engagement (or arrears clearance), a debt overhang, limited external support, and lower investment. The large implied fiscal multiplier in the baseline arises as the model does not capture adequately the effects of idiosyncratic shocks in 2019, particularly drought and the cyclone, and measurement challenges relating to high inflation and a large parallel market premium.

Figure 1.
Figure 1.

Zimbabwe: DSA Realism and Forecast Error tools

Citation: IMF Staff Country Reports 2020, 082; 10.5089/9781513537726.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low -income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

11. Zimbabwe has protracted arrears on external debt, which has cut off access to official financing. The authorities have expressed a renewed commitment to reengagement with the international community, beginning with the clearance of arrears at the World Bank, African Development Bank, and European Investment Bank. With the authorities unable to finance arrears clearance, the timing and scope of repayment is still uncertain, and the results of this DSA could change significantly depending on the modalities and timing of arrears clearance. Technically, arrears can be cleared using a (commercial or concessional) loan, grants, or internal resources of the IFIs (facilitated via a bridge loan). There is currently no consensus on an agreed path forward as there is a multiplicity of views from the international community on how to restore debt sustainability and what would be the requisite actions for a comprehensive treatment of Zimbabwe’s debt. The most practical starting point would be a comprehensive debt reconciliation exercise and a creditor agreement on clearing arrears at the IFIs. Given Zimbabwe’s large external arrears there is a need to develop, and reach broad consensus on, affordable solutions to Zimbabwe’s arrears.

B. Determination of Scenario Stress Tests

12. The standard contingent liability stress test is calibrated to account for debt coverage weaknesses (Text Table 5). To reflect the incomplete coverage of SOE debt, the default shock of 2 percent of GDP is modified to 5 percent. Potential liabilities from the domestic banking system, including those related to recent RBZ measures to support domestic credit, are captured by the standard 5 percent of GDP financial market shock. Given that the latest World Bank estimate of the public private partnership (PPP) capital stock is less than 3 percent, no PPP shock is applied. Finally, a further 10 percent shock is added to reflect the elevated risk of additional private sector bailouts.

Text Table 5:

Calibration of the Standard Contingent Liability Shock

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13. However, the main risk to Zimbabwe’s debt stems from additional contingent liabilities relating to a compensation agreement for displaced farmers and additional fiscal costs from RBZ debt assumption and quasi-fiscal activities, for which staff have prepared a customized scenario (Text Table 6). The authorities have a large contingent liability to previous farmers in Zimbabwe who had their assets expropriated during the land reform process. For purely illustrative purposes, staff has simulated the effects of an agreement on farmers compensation and additional costs related to the absorption of ‘legacy debts’ (including relating to the currency reform) on the country’s debt dynamics. The scenario assumes: (i) an agreement is reached with the new debt crystalizing in 2020; (ii) valuation is in the middle-ranges of ongoing discussions between the authorities and claimants (e.g. US$6.25 billion in total; and (iii) the financing of the debt will be on commercial-like terms (e.g. 5 percent interest, 1 year grace, 10 year maturity). The result is a jump in the PV of debt in 2020 of approximately 30 percent of GDP, further aggravating the debt overhang.

Text Table 6:

Contingent Liability Shock Farmers Compensation and Legacy Debts Absorption 2018–20291/

(In percent of GDP)

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Sources: Country authorities; and staff estimates and projections.

The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

Debt Sustainability and Risk Rating

A. External Debt Sustainability Analysis

14. Zimbabwe’s public and publicly-guaranteed external debt burden indicators are high, and the external debt overhang is massive. Under the baseline scenario, external public and publicly-guaranteed (PPG) debt indicators breach the policy-relevant thresholds over the relevant forecast period under the baseline and the stress tests (Figure 2). The PV of external debt-to-GDP ratio is above the 30 percent threshold for the entire projection horizon under the baseline and the stress tests; a similar result holds for the PV of debt-to-exports with a threshold of 140 percent and the debt service-to-revenue ratio. The stress tests with the most severe impacts are the combination shock (for the PV of external debt-to-GDP), the exports shock (for the PV of external debt-to-exports and debt service-to-exports) and the commodity price shock (for debt service to revenue).

Figure 2.
Figure 2.

Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–291/,2/

Citation: IMF Staff Country Reports 2020, 082; 10.5089/9781513537726.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

15. Risks to external debt are heightened further by the lack of foreign exchange and the weak external position. The increase in the stock of external debt has been modest not because of a lower financing need but owing to Zimbabwe’s almost non-existent access to financing. Weak export competitiveness, the withdrawal of foreign investment, and FX precautionary hoarding have further hampered the country’s debt service capability.

16. These results suggest that absent stronger growth, monetary policy normalization, access to concessional financing, and some form of debt relief, Zimbabwe has little chance of escaping its debt trap. While the authorities have announced their intention to redouble efforts to find an agreeable debt restructuring plan with Zimbabwe’s external creditors, beginning with the clearance of arrears at the IFIs, the timelines and modalities of such a process remain undetermined.

17. These outturns, together with the existence of substantial external arrears, support the determination that Zimbabwe is in external debt distress.

B. Public Sector Debt Sustainability Analysis

18. Driven by government’s rising spending—especially quasi-fiscal activities of the RBZ to support agriculture and other activities—the stock of domestic debt increased since the last DSA, but the recent very high inflation has radically reduced its real value. Domestic debt has fallen in real terms because of currency conversion and the lack of ability of banks to absorb new sovereign debts. Previous recapitalization and debt assumptions of the SOEs, subsidies to agriculture, and expansion in RBZ obligations have pushed public debt to well beyond the indicative threshold of 35 percent of GDP (PV terms) under both the baseline and the stress tests. Even with fiscal consolidation, the amount of public debt will carry a heavy burden on the Government of Zimbabwe.

19. Domestic debt obligations, external arrears, and large contingent liabilities support the assessment that the Zimbabwean government is in debt distress.

Restoring Debt Sustainability

20. Restoring debt sustainability will require a combination of fiscal adjustment and a comprehensive debt restructuring plan with appropriate burden sharing. Text Table 7 shows the distance between relevant fragility ratios to threshold values for determining that a country has a ‘weak debt-carrying capacity’. These estimates become even larger if considering possible over-estimation of GDP or compensation to the farmers whose assets were expropriated.

Text Table 7.

Zimbabwe: End-2019 Projected Debt and DSA Thresholds

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21. Zimbabwe also currently carries a sizeable domestic debt load, a legacy from financing previous years’ deficits almost entirely from domestic sources. Text Table 7 also provides the difference between Zimbabwe’s end-2018 public debt stock and the applicable threshold given the CI assessment.

Conclusion

22. Zimbabwe is in debt distress. The external debt burden is excessive and the country is incuring arrears. While the real value of domestic debt has fallen significantly given the high inflation, contingent liabilities (related to a compensation agreement for displaced farmers and additional fiscal costs from debt assumptions for losses following the currency conversion) could sharply increase domestic debt, further aggravating the debt overhang.

23. Steady implementation of the reform strategy outlined in the TSP is critical for Zimbabwe to emerge from its current difficulties. Prudent fiscal and monetary polices are necessary, as are bold structural reforms to restore growth and attract investment. Furthermore, external support and debt relief from the international community must be part of the strategy. Supported by a robust reform program, the envisaged reengagement process could bear fruit and restore growth and sustainability.

Table 1.

Zimbabwe: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r-g -ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and ct= share of local currency-denominated external debtin total external debt3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Zimbabwe: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Residency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSAwith the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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 and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Figure 3.
Figure 3.

Zimbabwe: Indicators of Public External Debt under Alternative Scenarios, 2018–28

Citation: IMF Staff Country Reports 2020, 082; 10.5089/9781513537726.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Zimbabwe: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Zimbabwe: Sensitivity Analysis for Key Indicators of Public Debt, 2019–2029

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Zimbabwe’s Composite Indicator (CI) index is calculated at 1.8 based on the October 2019 WEO and the 2018 CPIA data, indicating that the county’s debt-carrying capacity is ‘weak’, which is the same classification as under the previous DSA.

2

In this DSA, external debt is defined on a residency basis.

3

Inflation spiked to 521 percent (y-o-y) in December 2019.

4

Staff estimates a grant element of approximately 30 percent, which is below the 35 percent requirement for it to be considered officially concessional.

5

To capture the various factors affecting a country’s debt carrying capacity, the DSF uses a composite indicator (CI). The CI captures the impact of the several factors through a weighted average of the World Bank’s CPIA score, the country’s real GDP growth, remittances, international reserves, and world growth.

6

2019 GDP will also be the first full year of estimation where the Zimbabwe dollar is used to collect the data, hence it will be an important benchmark for many of the assumptions made to convert 2018 national accounts statistics from USD to ZWL.

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Cover IMF Staff Country Reports
Zimbabwe: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Zimbabwe
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 082
Publisher:
International Monetary Fund
ISBN:
9781513537726
ISSN:
1934-7685
Pages:
127
DOI:
https://doi.org/10.5089/9781513537726.002
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    Zimbabwe: DSA Realism and Forecast Error tools

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    Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–291/,2/

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    Zimbabwe: Indicators of Public External Debt under Alternative Scenarios, 2018–28

Zimbabwe: DSA Realism and Forecast Error tools

Zimbabwe: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–291/,2/

Zimbabwe: Indicators of Public External Debt under Alternative Scenarios, 2018–28