UK's views on Zimbabwe's re-engagement process with International Financial Institutions
A transcript of Ambassador Catriona Laing's question and answer session with weekly newspaper - The Zimbabwe Independent.
Ambassador Catriona Laing
The Zimbabwe government is pulling out all the stops to rescue and revive its Lima Plan arrears clearance strategy, as the debt-ridden country seeks to settle outstanding obligations in order to secure US$2 billion in fresh funding. The government has already cleared its US$108 million debt with the International Monetary Fund (IMF). Zimbabwe has been in arrears since 2001 and had to use its allocation of Special Drawing Rights allocated to all IMF member states in 2009 as part of a global financial rescue package to clear the outstanding amount.
The Zimbabwe Independent deputy editor Faith Zaba (FZ) spoke to British ambassador to Zimbabwe Catriona Laing (CL, pictured) on the re-engagement process, debt clearance strategy and the proposed bailout by international private institutions, among other issues.
FZ: How far has the re-engagement process as set out in the Lima Plan gone?
CL: This is a fundamental part of the ultimate goal to normalise relations and this is the economic part of that pathway. In October last year, the government set out its plan in Lima. It is known as the Lima Plan as Lima, Peru, is where the World Bank and IMF were having their annual meeting in October2015.
That plan includes two main elements. The first is the proposal as to how the government would clear the debt they owe (the arrears) to the international institutions, that is, the IMF, World Bank, African Development Bank (AfDB) and the European Investment Bank (EIB). The second part was a fairly high-level economic plan which set out some of the key economic reforms they would need to be undertaken to get back on a sustainable growth path.
As a member of the international community, along with European Union (EU) colleagues and most of the member states, we welcomed that plan because it is a good thing for the government to clear its debt and to undertake economic reforms. It is a good thing because ultimately it is the way the economy gets back to a sustainable growth path and the people of Zimbabwe benefit from that. That is why we welcomed it.
FZ: Where is that process now?
CL: Fast forward a year and a bit on from that. Frankly, we are disappointed that the plan is not on track. So looking at the first part of that plan is the arrears clearance. The government has cleared the arrears to the IMF. That is a fairly technical accounting device whereby an account they hold at the IMF can be used to clear arrears. It doesn’t lead to any new money at this stage.
The bigger challenge is around the debt they owe to the AfDB and the World Bank, which is much larger and for which there isn’t a similar accounting mechanism. The government is trying to raise the funding to do this. That means that they are involved in discussions with private sector banks to secure loans to pay off that debt. Now I can understand why some people find this process confusing because the government is already in debt so why would it take more debt from the private sector. The reason why they are trying to do that is because they don’t have any alternative. Frankly, given the situation Zimbabwe is in. It is a means to an end.
Zimbabwe is not an easy country to lend money to. There is high political risk, there is high economic risk. We are not involved in those discussions. They are between the government of Zimbabwe and the various private sector financial institutions. So that is the first part that is ongoing and has not concluded. The second part is then the economic reform plan set out in Lima.
There was some progress, for example, around indigenisation after some long internal debate, they came out boldly in a better place, but not perfect. There has been some progress around ease of doing business and so on. But the really fundamental part of the economic reform is the fiscal part, the government’s budget deficit. It is spending more than it raises in taxes. No government can go on doing this, it is just building up more and more domestic debt.
We were encouraged when (Finance) minister (Patrick) Chinamasa set out his proposals in his mid-term fiscal statement back in September as to how the government might start the process of cutting the budget deficit, in cutting their costs in ways that are sustainable.
But this plan — as laid out in the mid-term fiscal statement — was overturned four days later. We have yet to see how the government proposes an alternative way of cutting the budget deficit.
FZ: What is the role of the UK government and other countries in the Lima process?
CL: The third part is where we — the international community — come in. We have said that the economic reform package is necessary, but not sufficient for us as the members of the boards of the IMF, the World Bank and the AfDB. That is our role. We sit on the board of these institutions. We are shareholders in these institutions . We have made it clear as the international community, very much spearheaded by us as the UK in line with our government’s commitment, that we want to see improvements in government’s rule of law and human rights, as well as the economic reform plan.
Unfortunately, at the moment on the human rights part, the evidence shows that there has been an increase in human rights abuses, particularly around the recent protests. On governance, rule of law, it is back to the constitution.
It is not just about a technical process of aligning laws, it is about living up to the spirit of the constitution through “constitutionalism”, respecting of the rule of law and not appropriating people’s property, land and so on.
We have some way to go on that. So that is the third part of the process.
FZ: And the role of bilateral creditors?
CL: The final part is a separate debt process, which is the Paris Club. As well as owing money to the International Financial Institutions (IFI), government also has bilateral debt to countries like ourselves, Germany, France, US and others. The Paris Club is the forum where the bilateral debt is discussed and agreement is reached on how we manage that debt.
As you can probably tell there are many steps in this process, many checks and balances, so when people say the government might be “bailed out” now that is not how the process works. There is no free money going to the government of Zimbabwe. There are many hurdles and the whole process has to come together as a package.
FZ: So how much is owed to the Paris Club?
CL: I think it is US$2,8 billion. This is on top of the IFIs debt which is US$2 billion. These are very very significant debts as you will see.
FZ: So what you are saying is if the private sector process works out and the money owed to the IFIs is paid, would that open up international funding?
CL: Not straight away. The arrears clearance process is step one. An additional challenge in the arrears clearance process is the pari passu, which means that no one of those lenders can have preferential treatment over another. There has to be a plan to clear all the debt. You can’t just do it piecemeal. This is one of the reasons why the process is so difficult. The government can’t move forward with the AfDB, until the World Bank part is also nailed down. That is one of many hurdles.
But let us assume that they find a way to do that. They raise the funds through private sector loans and pay off the debt they owe to the IFIs, the next stage is that the IMF will come to Zimbabwe and negotiate an economic reform plan with the government based on the government’s own proposals as set out in Lima, but now really nailing down on a lot of detail; the milestones that will need to be met around the wage bill, indigenisation, land reform, doing business, the banking sector, monetary sustainability, the currency and so on. There will be a whole set of macro conditions, which the IMF will agree with government. And there will be very clear milestones. That IMF plan also creates the framework within which the AfDB and the World Bank conduct their negotiations on the programmes they will support.
FZ: How does the IMF plan influence the World Bank and others in availing funding to Zimbabwe?
CL: That IMF plan is also the framework within which the Paris Club considers any rescheduling of the bilateral debt. They have to have some sense of the macro-economic numbers. The whole process obviously takes some time to negotiate.
New funding coming in from the IFI’s is then intended to help the country adjust and deliver benefits for the people.
Obviously, finance does help to deliver the plan that will be agreed with the IMF. It is extremely difficult for any government going through the sort of adjustment Zimbabwe will have to go through to do this without some external support.
The real prize, however, from this process is that if implemented properly it will rebuild confidence and through this start to attract increased domestic and foreign direct investment.
That is one of the reasons why it is important that the whole package comes together. And it will do that through the boards of IMF, World Bank and AfDB and the EIB. The executive directors sitting on these boards will receive instruction from their capitals, London, Paris, Washington and so on as to how they should intervene.
Frankly, the board will not take these decisions until pretty much everything is nailed down, the arrears clearance, the economic reform plan as well as the governance, the rule of law and human rights and the Paris Club. That has been made very clear to the government. They know that this is a difficult process and the hurdles are high. But frankly, there isn’t another pathway for Zimbabwe. Whichever government is in charge, whoever is running the country, will have to go through this process. There is no alternative.
FZ: You have met with Chinamasa, Vice-President Emmerson Mnangagwa and other government ministers and you have outlined these processes. What has been their response?
CL: I did see minister Chinamasa recently and I haven’t seen VP Mnangagwa for seven months. He is not easily available — at least not to me. Minister Chinamasa, I think, is in a challenging position, there is no question. He reassures me that the government is committed to this process and I think there is some evidence to support that because they have cleared their arrears to the IMF. They are also still in these discussions with various private sector institutions on arrears clearance. They are indicating that some economic reforms have been implemented and we will hear more about this in the budget.
We hope to hear that on Thursday (yesterday). What he has said to me is that he is not providing a running commentary on this. My understanding is that he wants the whole package to come together before he risks it being chipped away at. So that is what he said to me but we do hope that in the budget we will hear about his plans and intentions in a bit more detail.
FZ: What is the role of the private sector in the debt clearance process, is it fundraising or they are going to lend the money?
CL: The government is in discussions with the various private sector organisations to try and find a way to clear the arrears. That is correct. What is not correct is the indication that somehow the UK government blesses or not this process. We do not bless the dialogue the government is having on commercial terms with any bank, whether they are British or not British.
The fact that Standard Chartered Bank is British is not relevant to this. We do have a role as I have mentioned in the earlier question when it comes to the board of the IMF, AfDB and the World Bank and as a member of the Paris Club. I am not party to the discussions between Standard Chartered and government, but I assume they will be discussing the terms of any loan. Any lender be it a person or a government it needs to feel assured that there is a process by which it is going to be repaid. But even if terms are agreed this does not automatically lead to new finance to support development in Zimbabwe. That is just step one, the debt clearance.
We also need to see a detailed economic reform plan, and improvements on governance, rule of law and human rights.
Only then will the package come to the board and all of the board members will have to feel confident. The Paris Club part has also to be agreed. All the board members discuss in advance and they will want to reach a consensus on whether they are comfortable with the whole package.
FZ: But what is the British government’s view in Standard Chartered Bank’s involvement in all this?
CL: This is a discussion for Standard Chartered. As I mentioned, we want the government to be able to clear its arrears because it is step one towards this long, long process of re-engagement. How exactly they do this is for the government of Zimbabwe and the relevant bank. It is not a discussion that we can get involved in. We will look at it once the arrears clearance plan has come together, alongside the economic reform plan, the governance, rule of law proposals as well as the Paris Club part. That is when we come into the picture.
FZ: Is Zimbabwe on the AfDB meeting?
CL: No, it is not happening. Zimbabwe is not on the agenda for the AfDB meeting on the 7th of December.