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Debt crisis deepens | Business Times

 

CLOUDINE MATOLA

 

Multiple economists yesterday warned that a major primary cause of Zimbabwe’s current financial crisis is the government’s inability to extricate itself from mounting sovereign debt.

They cautioned that the crisis will likely worsen if the government does not take swift action.

According to official data obtained from the Ministry of Finance, Economic Development and Investment Promotion this week, the total estimated debt burden  for Zimbabwe  is approximately US$18bn with an external debt load of more than US$12.7bn, including liabilities on the Reserve Bank of Zimbabwe balance sheet assumed by the Treasury. Of the total external debt stock, the bilateral and multilateral debt amounted to US$9.1bn  and the balance is owed to the Paris Club and others.

Of that amount, about 76% are principal arrears, interest arrears and penalties.

Domestic debt  amounts to about US$5bn.

 

According to the Public Debt Management Office, Zimbabwe’s total public and publicly guaranteed external and domestic debt stood at US$10.7bn in 2022, comprising US$8.4bn (external) and US$204m (domestic). Now , the debt has ballooned to US$18bn.

Zimbabwe’s debt issue has been primarily caused by factors that include the depreciation of the local currency and penalties on past-due foreign debt. Put it all together, it looks like a very toxic mix as the country can no longer safely carry the debt.

 

On his X handle (formerly twitter) yesterday President  Emmerson Mnangagwa who was set to depart for meetings of the African Development Bank in Nairobi , Kenya said his administration was committed to advancing its arrears clearance and debt settlement plan to pave way for the country’s economic stabilisation.

President Emmerson Mnangagwa, has since appointed a high-level debt resolution team led by AfDB president Dr Akinwumi Adesina, who is the facilitator of the high-level dialogue, and former President of Mozambique, Joaquim Chissano, who is also a facilitator of the debt resolution process.

“Today, I travel to Nairobi for the African Development Bank annual meetings. Zimbabwe is committed to advancing our Arrears Clearance and Debt Settlement Plan, paving the way for economic stability and growth,” President Mnangagwa said.

It also comes as President Mnangagwa’s administration  is planning to borrow about US$3.5bn to compensate former  commercial white farmers  for assets expropriated during the fast track land reform exercise.

Economists said the public debt is an issue that has contributed significantly to the economic crisis facing Zimbabwe. This has left Zimbabwe in debt distress, alongside six other countries Eritrea, Gambia, Mozambique, Republic of Congo, Sao Tome and Principle and South Sudan.

Economists told Business Times yesterday that the debt level is generating elevated levels of worry.

They are sounding the alarm that it won’t end well.

High debt levels have massive negative impacts on the economy.  Lenders have long called up the debt.

 

Economist, Vince Musewe , told Business Times that the country’s debt is affecting the economy and the government should clear this debt so that they can access funds needed for developing the country.

 

“Zimbabwe can clearly never afford to clear that debt which has been used to stifle our economy. That debt will need to be written off. Until then we will not be able to access much needed development funds and as always it is the poor who suffer the consequences,” Musewe said.

 

Another economist Prosper Chitambara said due to these arrears, the country will not be able to unlock capital and investments into the economy since it increases the risk factor.

 

“So it makes it difficult for the country to unlock capital and investments into the economy because it increases the country’s risk factor or the risk premium. So it is more expensive to invest in Zimbabwe and that affects the economic development process because without investments the country can’t grow sustainably.

 

“To address that we must make sure that the economy grows, get the economy into a sustained growth trajectory of at least 10% so that at least we outgrow the debt. So it’s about sustained growth and also ensuring there is even political  and economic stability because those are preconditions for sustained growth,” Chitambara said.

 

Another economist Professor Tony Hawkins  said Zimbabwe has been defaulting on paying its debt for more than a decade and the only solution that is needed is a debt resolution and negotiations with western creditors

 

“Zimbabwe has been a serial defaulter for 25 years. For at least 10 years it has been in debt distress. Only solution is debt restructuring but the government is more interested in close relationships with undemocratic allies like China, Russia and Iran than serious negotiations with Western creditors.

 

“Solution is more realistic economic and political policies which include greater reliance on local capital instead of foreign borrowing foreign aid and Chinese ownership. This government believes others will pay which is why it has an absurd interest rate policy, reckless money supply growth and 10 years of collapsing exchange rates,” Hawkins said.

 

Yet another economist, Persistence Gwanyanya  agrees that debt levels are worrying , particularly given persistently higher rates.

 

 

He doesn’t think that the debt is particularly  a problem.

 

 

“But what is important is the sustainability of debt to be able to live as a going concern.

“The going concern aspect is the most important thing. So, all I’m trying to say is that Zimbabwe is highly indebted. It is common knowledge. But so are all other countries. They are also highly indebted. But the difference now is they manage their debt.

 

“There’s nothing wrong with debt, but what you need is to manage the debt. In actual fact, the countries grow by measure of debt. But it has to be sustainable. It has to be sustainable and to be able to aid growth. So in our situation, all we are trying to do is resolve our arrears situation and the debt situation which is becoming an albatross in the neck of the country,” Gwanyanya said.

 

He added: “The arrears have been taking us back in the country and we want them resolved but you may you must also understand that the country is embarked on massive infrastructure development and yes you may say we do not want debt but sometimes you need to balance debt and short-term financing especially for infrastructure so this brings me to the issue of the US$400m  facility that we secure but I think from Afrexim Bank and which I think those kind of facilities are necessary to assist in infrastructure financing so we start to finance infrastructure with appropriate financing options. We actually need more of the long-term and favorable debt as a country.

 

”Increase in debt is not a concern to me but the type of debt that you are contracting. If it continues to be short term investments, it’s not the best way to do it.

 

“You always want to start negotiating for some favourable terms on debt and as we start doing so you find out that even the quantity of debt becomes not so much of a problem, but we are then able to finance your long term investments from the long term funding sources.

 

So all I’m saying is as long as the increase in borrowing is long term then I think it will complement our efforts of financing infrastructure from appropriate funding structures.”

 

Zimbabwe’s debt is more than 70% in interest accruals while only 20% is the principal debt. As interest payments have been rising, this will divert a larger portion of fiscal revenues going forward away from more urgent spending such as health, education, and infrastructure,” Imam said.

Zimbabwe’s resources are insufficient to finance its vast development agenda. But, its failure to deal with the debt will sow the seeds for more trouble.

The events that led to a spike in borrowing started in the 80s from a public spending spree by the Zimbabwe government to stimulate the economy through rapid finance developmental expenditure.

But, for the past 20 years Zimbabwe neglected to service its debts.

This has constrained the government from accessing foreign loans except from a few creditors because there are no guarantees.

The accumulation of external payment arrears resulted in the International Monetary Fund (IMF) declaring Zimbabwe ineligible for the general resources account of the IMF financing window.

Other international funders, who normally take a cue from IMF, notably the World Bank, the African Development Bank and traditional creditors from the Paris Club and others also suspended disbursements of existing loan facilities and also declared the country ineligible for new loans.

Economists told Business Times yesterday that financial turmoil emerged as the country was navigating dangerous waters.

Failure to meet international debt payment obligations has left the country out of the international financial markets. This implies that the country can only tap into domestic savings for borrowing which seriously limits investment opportunities at a time when the country requires financial resources in line with its aspirations of becoming a middle-income country by 2030.

While tapping into the domestic debt market provides a sound alternative and does not expose the country to foreign exchange risk, it has the potential to crowd out private sector borrowing, thus hampering investment and output growth.

In the absence of any foreign loans, it is difficult for Zimbabwe to implement any development programme.

It forces the government to resort to domestic borrowing crowding out private investment leading to slow growth since governments are usually inefficient compared to private sector investments unless it is investment in key enablers in the country.

In the absence of loans, not much is happening on development.

Experts said Zimbabwe’s high debt service requirement inhibits future investment in social expenditure such as education and health, thereby perpetuating low productivity and poverty.

This means that if Zimbabwe decides to pay off its debts, social sectors will be impacted more severely because of the limited fiscal space the nation is currently facing.

There are four major pieces of legislation that govern public debt management in Zimbabwe—the Constitution of Zimbabwe, Public Debt Management Act, Public Finance Management Act and the Reserve Bank of Zimbabwe Act.

The Constitution sets limits on State borrowing, public debt, and State guarantees, full disclosure and transparency about public debt in a comprehensive manner among others. Section 300(3) of the Constitution prescribes the Minister responsible for Finance to gazette the terms of a loan agreement or guarantee concluded by the government within 60 days and accountability on public debt issues.

Further, Section 300(5) requires the Minister of Finance to present a comprehensive statement of the public debt of Zimbabwe biannual lyrics before Parliament.

The Constitution also stipulates major guidelines on borrowing, maintenance, extinction of the debt, definition of contingent liabilities, exposure of government, borrowing powers of the Minister as well as the Minister’s powers to give guarantees, borrowing by local authorities and public entities among other issues.

Zimbabwe’s debt management legal framework is rated quite strongly by development partners such as the World Bank and the Macroeconomic and Financial Management Institute as one that meets minimum standards for debt management.

But, the Government of Zimbabwe has been failing to comply with the law.

The institutional arrangement for debt management in Zimbabwe includes but not limited to the Ministry of Finance and Economic Development, Debt Management Office (DMO), External and Domestic Debt Management Committee, Reserve Bank of Zimbabwe, Parliament of Zimbabwe.

The DMO is housed as a unit within the Ministry of Finance and Economic Development.

However, concerns have been raised by some stakeholders regarding the independence of this office (DMO).

They said its efficiency and effectiveness in debt management is more critical than where it is placed.

Others strongly felt it requires operating autonomously to ensure checks and balances within the Ministry of Finance.

On several occasions, the Parliament of Zimbabwe has over the last few years highlighted non-compliance of Ministry of Finance to the Constitution with regards to the gazetting of loans contracted and guarantee issued as well as failure to present a report on loans raised and guarantees issued by the State and a comprehensive report on public debt.

Parliament highlighted breaches of many provisions in the Public Debt Management Act by the Minister of Finance.

In an attempt to address the debt problem in Zimbabwe, the government undertook a number of initiatives. Between 2001 and 2008, it undertook the Domestic Debt Restructuring policy.

It, however, did not produce intended results due to the poor performance of the economy. The other was Sustainable and Holistic Debt Strategy of 2010.

No debt was, however, paid following the intervention. Government also formulated the Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy in considering a debt relief mechanism under the Heavily Indebted Poor Countries (HIPC) initiative and make use of fresh financing from international institutions and mineral wealth to achieve sustainable development.

There was also the Lima Strategy of October 2015, yet another attempt Zimbabwe made to clearing debt arrears.

It was premised on a non-HIPC debt resolution strategy designed to clear debt arrears amounting to US$1.8bn owed to IMF, World Bank Group and the African Development Bank as the first step towards seeking a debt treatment by the Paris Club after which the government would commence negotiations towards a resolution with the Paris Club.

Zimbabwe cleared its overdue obligation to the IMF in October 2016.

However, the country cannot acquire new debt from the international financial institutions and other creditors until they clear all the arrears they owe to creditors.

Despite all these strategies there has been limited success achieved in addressing Zimbabwe’s debt problem.

 


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