Will the IMF’s $ 961 million windfall save Zim?
By Learnmore Nyamudzanga
According to the International Monetary Fund (IMF), Covid-19 has caused a substantial long-term change in the global macroeconomic environment, and the pandemic has inflicted long-term scars on the global economy.
It has weakened external positions in many countries, increased external financing needs, exacerbated debt vulnerability and worsened poverty and inequality.
The global adjustment process is expected to continue, with a negative output gap persisting over the medium term amid heightened liquidity and solvency risks.
These poor global prospects have an impact on the ability of countries to meet future reserve needs.
A Special Drawing Rights (SDR) allocation is one of many sources of funding to meet long-term global reserve requirements.
That is why on August 23, 2021, the IMF implemented a general allocation of SDRs equivalent to approximately US $ 650 billion (SDR 456 billion).
The SDRs were distributed in proportion to the quotas paid by the participants in the Fund, and the allocation was made uniformly at 95.8455% of the quotas of the members.
The benchmark SDR exchange rate is 0.702283 SDR to the US dollar as of July 1, 2021.
This is the largest distribution of monetary reserves ever made by the IMF and covers about 30-60% of the world’s required reserves ($ 1.1 billion to $ 1.9 trillion).
Just to show global income inequality, reserves are allocated to the fund’s 190 members, of which around 70% goes to the group of 20 largest economies and only 3% ($ 21 billion) is allocated to low-income countries ( PFR).
Moving closer to my continent, Africa received around 4.98% ($ 32.3 billion).
Globally, the country that received the lowest allocation was Tuvalu (an island nation in the Pacific Ocean) which received only US $ 3.41 million, while the United States of America received nearly US $ 113 billion, or 17.43% of the total SDR allocation.
In Africa, the country that received the lowest amount was Eretria which received US $ 21.58 million (0.003%), while the bigger brother was South Africa which received US $ 4,153 billion. US (0.641%).
There is not a single African country that received even 1% of the allocation, but the United States received 3.5 times the amount received by Africa.
According to Finance and Economic Development Minister Mthuli Ncube, on August 23, 2021 at exactly 9 p.m. Southern African Time, Zimbabwe received SDR 677.4 million ($ 961 million) from the IMF.
Just 0.148% of the IMF’s US $ 650 billion SDR allocation was deposited with the Reserve Bank of Zimbabwe (RBZ).
An increase in the country’s foreign exchange reserve position of US $ 961 million was the immediate impact of this IMF support.
The RBZ and the Minister of Finance believe that this will go a long way in strengthening the stability of our national currency.
In their joint statement of August 24, 2021, they pledged to the nation that: “The funds will be used prudently, with the utmost responsibility, to support social sectors, namely health, education and vulnerable groups; productive sectors which include industry, agriculture and mining; infrastructure investments covering roads and housing; and foreign currency reserves and contingency fund, to support our national currency and macroeconomic stability… and that this disbursement will be used in accordance with the IMF guidance note ”
During The Mint Special, Ncube was unwilling to give actual numbers to spend in the areas specified in the joint statement.
He indicated that citizens were free to formulate their proposals which will be taken into account when drawing up the final position.
If the minister is to follow the rhetoric, the proposed areas on which the SDR allocation will be spent are acceptable provided they lead to an improvement in the quality of life of Zimbabweans.
The SDR facility must be presented to parliament and debated so that parliament through Article 299 of Zimbabwe’s constitution plays its oversight role.
SDR funds should be directed to their intended use, tracked, controlled and supervised just like the budget process, and should be treated and reviewed like any other loan agreement.
They should not fund political or government programs prone to corruption and should not be used to pay off unpaid debts but spend in areas that will improve the lives of citizens.
According to the 2020 IMF Report on Eligibility to Use Fund Facilities for Concessional Financing, Zimbabwe is eligible for the Poverty Reduction and Growth Fund (PRGT).
In addition, the IMF Guidance Note which is in line with the Six Principles of Public Financial Management (PFM) in Zimbabwe must be adhered to.
Citizens should be aware that the IMF guidance note referred to provides guidance on the processing and use of SDR allocations.
It presents a coherent framework for Zimbabwe to assess the macroeconomic implications of SDR allocation at the country level, covering the following areas: statistical and accounting treatment; General macroeconomic implications and advice; debt sustainability analysis; transparency and accountability; management of reserves; and Implications for the program supported by the Fund.
As I said in my previous article on What Zimbabwe Can Benefit From SDR? The SDRs create foreign exchange reserves which sequentially improve its solvency, thus giving it access to external loans.
They also help to cope with the Covid-19 crisis (through strengthening the health system and purchasing vaccines), to close the budget deficit, to stimulate savings, to pay for productive imports and investments. policies leading to a just transition and economic recovery.
In addition, they reduce the reliance on more expensive domestic or foreign debt to build up reserves.
In addition, SDRs are unqualified and do not carry high interest rates.
They can be converted into usable reserves as follows: can be used directly to pay IMF obligations in SDRs or can be exchanged for a freely usable currency through a designation mechanism or voluntary trade agreements.
The main question is who is ready to enter into a voluntary trade agreement with us, who will buy our SDRs given that the designation mechanism was last used since the 1980s.
These are new stories.
Citizens are reminded that the financial position of the fund as of July 31, 2021 shows that our net cumulative allocation was SDR 338.58 million against holdings of SDR 1.21 million.
As a result of the recent allocation, the net cumulative allocation will increase to SDR 1,016.02 million and our holdings of SDRs have increased to SDR 678.60 million.
The impact of the SDR on our debt depends on how it is used.
Zimbabwe pays interest on the difference between its allowance and its detention which amounts to 337.42 SDR.
A reduction in our holdings of SDRs (the obvious case) will further increase the difference, which means more interest payable. As of July 31, 2021, there were overdue interest obligations amounting to SDR 0.77 million and a scheduled payment plan that runs until 2025, paying an average of SDR 0.17 million each. year.
An allocation of US $ 961 million represents only 9% of our external debt which stood at US $ 10.5 billion at the end of December 2020.
Full debt cancellation on a humanitarian basis is still necessary, using our minerals, combating illicit financial flows and expanding our tax base to improve domestic resource mobilization if we are to face the current crisis of debt in Zimbabwe.
Find out more Nyamudzanga is an independent economist, tax consultant, member of ZES and holder of a master’s degree in tax administration and tax policy. E-mail: [email protected].
These weekly articles are coordinated by Lovemore Kadenge, independent consultant, former president of the Zimbabwe Economics Society and former president of the Institute of Chartered Secretaries & Administrators in Zimbabwe. E-mail: kaden[email protected] and mobile number +263 772 382 85