By Richard Mawarire, Economist
On the 2nd of August 2021 The International Monetary Fund (IMF)’s Board of Governors approved a general allocation of special drawing rights to the tune of USD 650b (SDR 456b) to IMF members to boost global liquidity.
The liquidity is expected to assist economies to navigate the negative effects of the COVID-19 pandemic and to build resilience, particularly for vulnerable countries struggling to cope with the effects of the COVID-19 crisis.
Questions have been asked as to whether this opportunity is a Marshall Plan or the economic stimulus which the economy of Zimbabwe so desperately required? The Marshall Plan, also referred to as the Post War European Recovery Plan was a program enacted by the US Secretary of State George C Marshall in 1948 to assist in the reconstruction of post-World War two Europe to the tune of $15b.
Under the IMF SDR facility, Zimbabwe will receive approximately USD 1b from its current SDR holdings of 706.8m as of Friday 30 July 2021. This article proposes (in no order of priority) possible areas of the funds’ deployment which the authorities may consider in a bid to maximize the benefit to the economy and build resilience within the existing framework of the National Development Strategy (NDS).
Urgent External Debt Repayments
According to the Midterm Fiscal Policy review presented by the Minister of Finance and Economic Development on the 29th of July 2021, the country’s external debt stock stood at USD 10.5b as at December 2020. Of the USD 10.5b, USD 6.5(77%) of it is in accumulated arrears.
In the first quarter of 2021, the country had only managed to commit USD 17.04m towards debt repayments. This scenario has complicated the re-engagement process with the International Community under the auspices of the Arrears Clearance & Debt Relief Strategy which is a key performance indicator before bilateral and multilateral lenders can unlock any concessional funding to Zimbabwe.
The USD 1b SDR liquidity provides a chance for the country to realign its debt obligations by committing a portion of these resources towards debt repayment. This will also be necessary to improve the country’s sovereign risk ratings with major lenders and thereby improving chances of getting new funding from both the private and public sectors of the economy.
Enhancing the Foreign Currency Auction System (FCAS)
Since its introduction on the 23rd of June 2020 the foreign currency auction system (FCAS) has grown in lips and bounce from a weekly average allocation of USD 21.95m in 2020 to USD 32.57m in 2021 according to the latest figures in the midterm fiscal policy review statement. Despite its growth, the market has largely failed to eliminate the exchange rate premium between the parallel market and the formal interbank rate.
The coming in of the USD 1b SDR liquidity widens the funding mix of liquidity sources for the interbank market which was to a greater extend being funded from 40% export retentions and the 20% foreign currency deposit retentions. The additional liquidity from the SDR facility ensures timeous settlement of auction allocations, thereby improving the ease of transacting on the part of importing customers.
Exchange Rate discovery and Building forex reserves
Despite proving to be a stable foreign currency market, the interbank auction has to a greater extent failed to sustain a process of discovery. Testimony to this is the volatile premium between the interbank and the parallel market which has remained above levels of 55%.
To eliminate this premium or at least reduce it to a level commensurate to the 20-30% threshold for frontier markets, the authorities will need to deploy a portion of the USD 1b liquidity towards building a healthy foreign currency reserves buffer to intervene in the foreign currency open market where there is need to support the exchange rate in line with desired macroeconomic objectives.
Blocked funds settlement
A total of USD 2,8b worthy of outstanding payments under the blocked funds arrangement is still outstanding to foreign suppliers from Zimbabwean entities. This obligation arose as a result of Statutory Instrument 33 of 2019 which separated historical foreign currency obligations (blocked funds) from historical local currency obligations.
Potentially if the Central Bank and Ministry of Finance Public Debt Management Office finalize on the proposed Blocked Funds Bill, the USD 2,8b could be added to the country’s stock of external debt currently at USD 10.5b. In light of this, the authorities must commit resources out of the USD 1b SDR funds to settle some of the blocked funds debts.
Most importantly such a move will lessen the burden for most companies reeling under the weight of foreign currency-denominated liabilities which undermine their balance sheets due to negative revaluations. Settlement also demonstrates goodwill and will go a long way in normalising frosty relationships with foreign suppliers.
Covid-19 vaccines procurement
Returning to normalcy entirely rests on the country’s ability to reach herd immunity by vaccinating at least 60% of the country’s population. This process requires funding support since the vaccines and consumables are procured outside of Zimbabwe. The availability of this USD 1b will enable the smooth running of vaccine rollout programs and resultantly a quicker return to normalcy and eliminating the need for lockdowns. A return to normalcy will naturally bring with it increased economic activity on the back of increased trading hours, unlimited movement, and the opening up of supply chains that cannot operate normally due to lockdowns.
Productive Sector Support
The economy is estimated to grow by 7.8% in 2021, up from initial estimates of 7.4%. The growth is anchored on agriculture which is set to post double-digit growth at 34% by the close of 2021. To unlock maximum value from the agriculture value chain whilst boosting export capacity, there is a need for the government to support the procurement of seed, fertilizer, chemicals, machinery, and other keys inputs from the USD 1b available from the IMF SDRs facility.
This could be achieved through the advancement of foreign currency-denominated loans through nominated commercial Banks for onward advance to players in the agriculture value chain. Targeted support could also be extended to strategic sectors like telecommunications for players to upgrade machinery and acquire better system capacities in light of the increase in demand for data and other services due to the COVID-19 induced new normal where digital platforms are now more prominent than they used to be.
Getting the balance right
From the discussion above, it is evident that there is just too much to do with the limited resources. However, the question of whether Zimbabwe will eventually manage to produce a Marshall Plan moment from this USD 1b will revolve on whether authorities strike the right balance between their spending choices.
Richard Mawarire is an alumnus of the US Department of State’s International Visitor Leadership Programme (IVLP). He writes here in his capacity. Feedback on [email protected] OR WhatsApp +263772242941.
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