Global Fund programs grapple with challenging monetary environment in Zimbabwe

4. ANALYSIS
26 Jun 2019
Global Fund grants struggle in context of de-dollarization reforms

Zimbabwe introduced recent reforms in monetary policy aiming to reduce the country’s reliance on the US dollar and other foreign currencies, and make its own currency, the bond note, the legal tender and main means of exchange. These reforms, begun in October 2018, have negatively affected the Global Fund’s grants in Zimbabwe.  The reforms have led to delayed implementation, financial and accounting challenges, lower healthcare-worker morale, and a reduced ability on the part of the state to procure ARVs, among other negative consequences, according to a new Aidspan analysis from which this article is drawn.

Data for the analysis came from a review of Zimbabwe’s funding request to the Global Fund, the Zimbabwe government’s monetary policies, and interviews with personnel of Principal Recipients (PRs), Global Fund grant implementers, the Global Fund Secretariat, and civil society. The interviews were conducted between the end of May and early June.

Zimbabwe, a land-locked southern African country, abandoned its previous currency, the Zimbabwe dollar, in April 2009 after the country recorded the highest hyperinflation in recent history: the Zimbabwe dollar lost 79.6 billion percent of its value at the peak of the hyperinflation episode in 2008 (this hyperinflation followed a land reform aiming to redistribute agricultural land from the minority white Zimbabweans). The country adopted the US dollar and other currencies as a means of payment, which stabilized the economy but led to a loss of competitiveness of locally produced products. In 2016, Zimbabwe introduced the bond note, a quasi-currency then used only for national transactions, into its economy, to make up for a US dollar shortage, as a result of US currency leaving the country in the form of payment for exports. These bond notes were issued at par with the US dollar.

 

Figure 1: Location of Zimbabwe within Africa

Zimbabwe HIV, TB and malaria profiles and monetary policy

Zimbabwe has one of the highest HIV prevalence rates in Africa, at 13.3% among adults, and is among the 30 countries in the world with the highest rates of tuberculosis, according to UNAIDS and WHO. In 2017, Zimbabwe’s TB incidence was high, at 221 new cases, when compared to the global rate of 133 new cases, for every 100,000 people. During the rainy season, almost half of Zimbabweans are at risk of contracting malaria. It is on this basis that the Global Fund to Fight AIDS, Tuberculosis and Malaria has been offering Zimbabwe support to fight these three diseases since 2003. The Global Fund allocated $500 million to Zimbabwe to fight HIV, TB and malaria during the 2018–2020 implementation period. The largest proportion of the funding was for HIV (85%), with 10% for malaria programs and 5% for TB.

Figure 2: Currently active Global Fund grants in Zimbabwe

On 1 October 2018, in a move to “de-dollarize” the economy, the Reserve Bank of Zimbabwe (RBZ) directed retail banks to separate foreign currency accounts into two categories; foreign currency transaction accounts, referred to as Nostro, and local currency transaction accounts denominated in bond notes, dubbed Real Time Gross Settlement (RTGS).

The RBZ decision set a fixed exchange rate of 1:1 between the US dollar and the bond note. But due to Zimbabweans’ lack of confidence in the bond note, its value depreciated and was exchanged on the black market at 1:4. The RBZ did not provide an interbank mechanism for foreign currency transfers among banks, making it impossible to make payments in foreign currency.

In February 2019, acknowledging the difficulties in the economy, the RBZ introduced the interbank foreign exchange (providing a mechanism for foreign-currency transfers among banks), and allowed market forces to determine the exchange rate of the local currency (since February 2019 referred as the RTGS dollar) to US dollar and other foreign currencies. As of 29 May 2019, the exchange rate of the RTGS dollar to the US dollar was 1:8 on the black market.

Delayed Global Fund grant implementation

The new monetary policy announced on 1 October 2018 in Zimbabwe slowed down Global Fund grant implementation due to various challenges in paying for goods and services, according to Aidspan’s interviewees. First, the transfer of foreign currency between banks was not possible, due to the absence (at that time) of a framework for interbank transfers in foreign currency. When payments were made in US dollars from the originator bank, receivers in another bank were paid with bond notes. However, service providers and suppliers were unwilling to accept payments in bond notes that had a lower value on the black market; they preferred US dollars, whose access was restricted.

Increased transaction costs

As part of its monetary policy reform, Zimbabwe introduced a 2% tax on all electronic transactions on 1 October 2018. That tax applied also to Global Fund grant implementers, with the exception of UNDP, the Principal Recipient (PR) for the Global Fund’s HIV grant in Zimbabwe, due to its UN privileges and immunities. For Global Fund grants, at country level, PRs implement Global Fund grants in a ‘trickle-down’ structure through other organizations, which act as ‘sub-recipients’ or ‘sub-sub-recipients’. Due to the new Zimbabwe monetary policy, cascading the funds down the hierarchical levels, from the PRs to smaller organizations, attracted the 2% tax at each level. Those transaction taxes decreased the final amount of Global Fund resources available for HIV, TB and malaria programs in Zimbabwe. The UNDP engaged the authorities in Zimbabwe on this issue, and they agreed in March 2019 to exempt Global Fund monies from this tax, and to refund the amount already paid in tax.

Other financial and accounting challenges

In Zimbabwe, after the implementation of the new monetary policy, the official and black market exchange rates differed significantly, with the black market exchange always higher than the official rate. This difference in exchange rate and the depreciation of local currency contributed to different pricing of goods and services depending on the suppliers’ preferred currency, creating a discrepancy between the grant-budgeted and quoted unit cost. Such variance in prices generates accountability challenges because the prices of goods and services vary depending on the quoted currency. Worse, goods and services quoted in local currency were more expensive to the grants because of the obligation to use the official exchange rate set by the RBZ.  “Value for money” became difficult to establish.

Impact on healthcare-workers’ morale

Following the Zimbabwe government’s challenge to pay health workers salaries at the peak of hyperinflation in 2008, the Global Fund, together with the government and other development partners, set up the Harmonised Health Worker Retention Scheme (HHWRS), to combat health-worker migration to other countries. The retention scheme provided monthly top-up allowances to health workers.

Since then, the Global Fund grants in Zimbabwe have been providing top-up allowances to healthcare workers involved in service delivery, in order to incentivize and retain the health workforce. The monetary reforms required that local payments be made in local currency, although healthcare workers preferred payments in US dollars. Payments of top-up allowances were therefore delayed to the more than 24,000 healthcare workers from the Global Fund grants, lowering workers’ morale and damaging their ability to deliver services, according to our interviewees. Eventually, the authorities relented and accepted that healthcare workers’ payments be made in US dollars.

State's inability to procure ARVs

As part of its co-financing commitment to the Global Fund, Zimbabwe committed to procure 20% of the ARVs it needed using domestic resources obtained through the AIDS levy, an innovative fund that is regarded as an international best practice to increase domestic financing for HIV programs.  Formal employers and their employees contribute 3% of their profits and income, respectively, to the AIDS levy, which is managed by the National AIDS Council (NAC).

The AIDS levy collection is now in RTGS dollars, the local currency, while the NAC needs US dollars to procure ARVs. Since the NAC has limited access to US dollars, Zimbabwe has not yet honored its commitment to procure its share of ARVs. In addition, the amount collected as the AIDS levy has depreciated over time (given the US dollar-to-RTGS dollar depreciation) and so cannot buy drugs to the same value as projected before the depreciation. Moreover, the amount collected as the AIDS levy is lower in absolute terms due to the pro-cyclical nature of this tax: in other words, when the economy is performing well (increased employment and profit for firms), the AIDS levy revenue is higher, and vice versa. As Zimbabwe is going through an economic contraction since 2015, due to drought and a fall in commodity prices, the amount collected as the AIDS levy is predictably lower. To avoid stockouts and treatment disruption for the 1.1 million people who are on treatment, the NAC requested UNDP to procure more ARVs using Global Fund resources.

Despite the current inability to procure ARVs using RTGS dollars from the AIDS levy, Zimbabwe is still committed to meeting its co-financing commitments, according to Major General Dr Gerald Gwinji, the former Permanent Secretary of the Ministry of Health and Child Care (MOHCC). The country is considering swapping its co-financing commitment, which needs foreign currency, with other HIV-related activities that are payable with local currency.

Expanding UNDP’s role

Since 2009, the Global Fund has placed Zimbabwe under the additional safeguard policy (ASP) with UNDP as the Principal Recipient. During the 2015-2017 implementation period, the MOHCC became the PR for the Global Fund’s TB and malaria grants while UNDP remained the PR for the much larger HIV grant. UNDP also remained fund administrator for the MOHCC. The monetary policy reforms reduced the ability of the MOHCC to procure health products due to limited access to foreign currency. To overcome this challenge, UNDP’s role was expanded to include procurement of health commodities at the expense of the MOHCC. The monetary policy did not affect procurement of HIV and TB health products obtained through the Global Fund Pooled Procurement Mechanism (PPM) and the Global Drug Facility (GDF), respectively.

Conclusion

Because the change in monetary policy negatively affected Global Fund grant implementation in Zimbabwe, programs supported by the Global Fund in Zimbabwe are at risk of delayed implementation, unless implementers put in place plans to accelerate program implementation.

Editor’s note: As the GFO was going to press with this edition, news reports announced President Emmerson Mnangagwa’s outlawing the use of foreign currencies, as of 24 June 2019. The RTGS will now be the sole legal tender in the country. Zimbabwe intends to introduce its own, new currency by March 2020. In May 2019, Zimbabwe agreed on measures to re-engage with the International Monetary Fund for the first time in almost ten years. To this end, the IMF will assess Zimbabwe’s economic progress in January 2020.

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