Zim to fight Covid-19 impact without external support

Taking Stock Kudzanai Sharara

Zimbabwe’s efforts to fight the impact of Covid-19 on its already struggling economy will be seriously constrained by its inability to access external funding that most developing countries are turning to in efforts to ease the economic impact of the coronavirus pandemic.

The latest International Monetary Fund (IMF), in its sub-Saharan Africa Economic Outlook report released this week suggests that the ability of the regional countries to mount the required fiscal response is highly contingent on ample external financing, on grant and concessional terms, being made available from the international financial community.

The report suggests the absence of adequate external financing risks turning temporary liquidity issues into solvency problems, resulting in the effects of the Covid-19 crisis becoming long-lived, more so for countries like Zimbabwe which already have limited fiscal space.

In this regard International Financial Institutions and the G20 need to play a key role in easing financing constraints and helping countries smooth the shock.

In realisation, the global lenders have, since the start of Covid-19, availed various packages that are meant to ease the impact of the pandemic on economies.

The IMF is making US$100 billion available through rapid-disbursing emergency facilities. In addition, the IMF’s Catastrophe Containment and Relief Trust (CCRT) has also provided grants to the poorest countries to pay off debt to the Fund.

This week at least 25 countries including Malawi and Mozambique accessed the CCRT facility. The IMF has also been urging official bilateral creditors to suspend debt repayment for countries with gross national income per capita below US$1,175 in 2020 that request forbearance.

On its part, the World Bank Group is providing a US$14 billion package of fast-track financing to assist countries coping with the crisis, in addition to helping countries beef up health systems capacity.

The African Development Bank sold a record US$3 billion three-year Fight Covid-19 Social Bond to raise financing to help combat the fallout from the virus outbreak. Coordinating across IFIs and bilateral creditors will be essential to ensure adequate and timely support for the countries in the region.

However, Zimbabwe, which is in debt distress, according to the latest IMF-World Bank Debt Sustainability Analysis, will not have access to the financial packages.

One of the major reasons is that the southern African country is in debt arrears to the World Bank, AfDB, European Investment Bank and other bilateral creditors.

As far as these traditional channels are concerned, Zimbabwe is not eligible according to IMF country representative Patrick Imam.

To give countries breathing room during the crisis, the IMF and World Bank have proposed suspending debt service this year for the world’s poorest countries, but for Zimbabwe, which is already not servicing its debts and is in arrears, the move will not bring any fiscal relief. Even a debt cancellation will not benefit the immediate needs of Zimbabwe which requires at least US$2,2 billion in support.

Besides, the IMF is not at this stage endorsing the kind of broader relief and debt cancellation African finance ministers are calling for.

As a result, chances of having these debts cleared or restructured are very much unlikely in the near term, leaving Zimbabwe to turn to its limited domestic resources.

The other channel which could have availed funding support to Zimbabwe is the creation of a new allocation of Special Drawing Rights (SDRs).

SDRs are the IMF’s official unit of exchange which member countries hold at the Fund in proportion to their shareholdings.

The IMF last approved a $250-billion new allocation of SDRs in 2009, during the last financial crisis, boosting liquidity for cash-strapped countries including Zimbabwe which got US$510 million worth of SDRs.

Experts say issuing new SDRs could allow new lending to countries with “unsustainable” debt burdens, such as Zimbabwe.

Under the IMF’s Articles of Agreement, the Fund cannot withhold new SDRs to Zimbabwe, as it can other types of IMF lending.

The United State, which has been a stumbling block to Zimbabwe’s efforts to restructure its long standing debts is however opposed to the issuance of new SDRs.

According to a Reuters report, finance officials will debate the issue of SDRs during this week’s virtual IMF and World Bank Spring Meetings, but multiple sources familiar with the Fund’s deliberations say the United States, the IMF’s dominant shareholder, actively opposes such a move.

IMF managing director Kristalina Georgieva reportedly first raised the prospect of an SDR allocation last month, but was quickly rebuffed by US officials, who hold an effective veto over major IMF decisions.

“There hasn’t been interest in pursuing SDRs from the US side, in fact they went that far to say that they are not favouring SDRs,” she said in a podcast produced by the Economist magazine.

A glimmer of hope is, however, that the United States is not expected to block countries from “donating” existing SDRs to supplement IMF lending facilities for poor countries.

This is, however, a long route which does not guarantee Zimbabwe will get any financial support.

The country is forced to look elsewhere, but the prospects do not look promising.

Remittance flows, for long Zimbabwe’s significant source of foreign currency, might also decrease as global growth slows, reducing disposable income and adding to external pressures.  The fall of the South African Rand, where millions of Zimbabweans are based, will also be telling.

The other source of foreign currency, tourism, is also expected to be significantly reduced as travel restrictions severely hit the sector.

The sharp decline in demand for commodities, is an additional shock for a resource-intensive country like Zimbabwe, further compounding the impact of the pandemic.

The negative terms of trade shock will weigh on growth and add to Zimbabwe’s fiscal and external vulnerabilities. These shocks are compounding an already challenging economic situation in the country.

Zimbabwe has also been battered by multiple weather-related shocks, including cyclones and droughts.

Given the large but temporary nature of the shock, some discretionary fiscal support measures that alleviate liquidity constraints of firms and households is warranted, despite the limited fiscal space.

While other countries could turn to their fiscal policies, Zimbabwe again does not have much space, and its response to the crisis is reflective of its financial position.

While the IMF suggests that sizeable, timely and temporary fiscal support is crucial to protect the most affected people and firms, including those in the informal sector, Zimbabwe does not have that head room as it was already struggling to meet its obligations.

There is also little that can be done using monetary policies. While the IMF suggests a more supportive monetary stance and injection of liquidity can also play an important role in sustaining firms and jobs by supporting demand, Zimbabwe’s interest rates, liquidity ratios and money supply levels were already at unsustainable levels and can be hardly adjusted.