“The situation on the ground is the worst it has been in ten years, it was the case even before this week’s riots,” said a fixed income strategist. “People face basic good shortages, spiraling inflation and total confusion about what items in the shop cost [due to the multiple currency system]. Urban-dwellers, who tended not to vote for the ruling Zanu PF in July’s elections, are being worse hit, and so are taking to the streets.”

Year-on-year inflation in December reached 42%, national statistics center Zimstat revealed this week, spurred by a US dollar shortage that shows no sign of abating. Zimbabwe’s three-tier payment system, underpinned by a nominal one-to-one exchange rate between the US dollar, bond notes and RTGS deposits, is broken.

The Finance Minister announced last week that week that the country would work towards floating its own currency in the next 12 months, but it is hard to see how they will secure the necessary FX with reserves at only two weeks’ worth of import cover, a special situations fund manager noted.

“They desperately need to secure US dollars from the international community, but this will not come unless they clear their USD 2.4bn in World Bank and African Development Bank arrears, that much has been made clear many times,” said a source close to the arrears clearance talks, which the government hoped to conclude in 1Q19.

“A commercial deal to clear these arrears was flatly rejected during the annual IMF meetings in Bali, so they have to go down the Heavily Indebted Poor Country (HIPC) route," the source close continued. "Liberia is a good example of what Zimbabwe could expect.” 

In 2008, Liberia secured a USD 888m bridge loan from the United States to clear multilateral debt outstanding since the 1980s, after successfully completing an IMF Staff Monitored Programme (SMP), seen as a sign of commitment to reform. This was the first step in a process that eventually led to Liberia winning USD 4.6bn in debt relief in 2010, reducing the war-torn country’s debt stock by 90%.

Zimbabwe is hoping to emulate a similar outcome by getting its own SMP with the IMF, and preparations are progressing, the source close said.

“The framework for this SMP is actually ready, and there should be an announcement on this in the coming weeks,” the source close continued. “But this week has shown how bad the situation on the ground is, and it won’t help the prospects of getting on the SMP. At this point, hopes of clearing the arrears by 1Q19 are optimistic to say the least.”

The quest for dollars

In an effort to allay Zimbabwe’s liquidity crunch, President Mnangagwa met his Russian equivalent in Moscow this week to seek loans and is set to attend the Davos Economic Forum next week, although whether this will result in any deals being signed remains to be seen.

“I doubt Russia will provide any budget support,” the source close to the debt talks said. “China is reluctant to finance them because they are also owed money. The United Kingdom is very supportive towards Zimbabwe, but cannot fund them without undermining the arrears clearance talks.”

Despite Zimbabwe’s international isolation, not all US dollar lending to the country appears to have dried up. Afreximbank is providing US dollars via several facilities, including a USD 1bn loan to guarantee RTGS convertibility and a USD 600m gold-backed loan to the National Reserve Bank, USD 150m of which remains in syndication, a source close to the deal said.

Gemcorp, an emerging markets investment management firm, reportedly arranged a USD 250m line of credit for the government to finance the import of essential goods to the country, but details of the five-year facility are scant. Yet while the braver among investors are watching developments in Zimbabwe closely, now is not the time to jump in, the special situations fund manager told Debtwire.

“The outlook for Zimbabwe is not encouraging,” the fund manager said. “Right now, the only way we would invest is in secured lending facilities and for specific purposes such as funding goods' purchases of some kind - government guarantees are not enough."

“But even then it's not something that is particularly appealing, there is too much uncertainty and the government has yet to prove it has a coherent macroeconomic strategy,” the fund manager continued. “Until Zimbabwe doesn't fix its currency, I don't see how they will get much traction from investors of any kind. I would rather buy Zambia 2022 Eurobonds at a 15% yield and collect those returns for the next three years.”

Laura Gardner Cuesta Senior Reporter Debtwire CEEMEA

Laura is a sovereign debt senior reporter for Debtwire CEEMEA. She holds an MSc in Conflict Studies from the London School of Economics and a BA in Philosophy, Politics and Economics from the University of Exeter.