THINK ON IT by CHRIS CHENGA
There is no way to go around debt accumulation. Without debt, it is difficult for governments, and individual companies operating within an economy, to finance expansive initiatives that stimulate economic activity. Debt is desirable. This is why vehicles such as debt markets exist. There is a demand for debt as a fundamental tool of financing various causes that range from infrastructure investment, asset acquisition, financing recurrent expenditures, amongst many other causes. Indeed the supply of debt is offered in a diverse range of debt instruments such as traditional fixed notes, bonds, debentures, certificates, leases, to more innovative sophisticated instruments such as credit default swaps which attract investor demand of debt. The debt instruments on supply and the amounts of debt demanded, provides for efficient markets that converge the wide needs of governments and individual companies, with the preference of suppliers and investors looking for different yields, coupons, and time horizons.
What African governments tend to overlook is that these deep debt markets are not of benevolence, or gestures of kindness. Or perhaps, they are aware of this, and it is what increasingly puts them off. So, African governments have a greater appetite for categories of institutional concessional debt offerings and grants from credit union such as the International Monetary Fund, World Bank, or Paris Club. But institutions come with standardized expectations, so maybe even better, bi-lateral debt, negotiated in confined proximity with friendly counterpart governments. Yet, all these “friendlier” debt arrangements of benevolence and kindness still merely just satisfy the large sums necessary for expansive initiatives that stimulate much economic activity. Just last week, many African presidents chartered flights to China for the Forum on China Africa Cooperation (FOCAC), and on their minds, was China’s perceived generosity that may underline debt relations. One can supposedly assume that debt underlined by generosity, issued in a spirit of benevolence and kindness, is more likely to be open-minded to debt forgiveness in the eventuality that it becomes burdensome, as it so often has in Africa. There is nothing outright wrong with bi-lateral debt relations that result in concessional loans and credit lines with eased terms. It is good. However, it is also arguably the propensity to seek out such debt that short changes African countries’ potential to access larger sums of debt in competitive deeper debt markets. But, maybe the affinity to benevolence and gestures of kindness remains desirable because such debt negotiations do not demand merely the level of hard work, fiscal or project preparation, and long term sustained diligence from these governments as competitive debt markets do.
The narrative must shift from China’s assumed significant role as the main financiers of African loans. According to data on external government debt from the World Bank, China’s $115 billion of credit to Africa between 2000 and 2016 is less than 2 percent of the total $6.9 trillion to SubSaharan debt stock. China is far from the leading lender to the continent. As African governments are drifting towards leaning on China to increase its debt stock, at the close of 2017, the majority of Sub-Saharan countries did not have credit ratings. Perhaps then a better narrative is why the continent is failing to enter deeper competitive debt markets that require sustained diligence, and instead, emphasizing China’s perceived benevolence for smaller sums of debt.
African governments must then be challenged to capacitate their debt seeking strategies with the kind of competitive and accountable diligence to re-enter deeper debt markets, and avert the perpetual debt cycles in which they have so frequently found themselves in due to this lack of diligence.
Firstly, governments such as those in Zimbabwe must comprehend the sums of debt they require in the short term to stimulate economic activity. They must study the fiscal transmission mechanisms that debt be spent on to actually stimulate potent economic activity that generates revenue for government. Today it remains difficult to trace that even though the debt stock is at over 50% of GDP, where was this debt stock targeted initially, and was such transmission of it into the economy effective or not? New Finance Minister Mthuli Ncube has briefly spoken of such matters, and done so in an encouraging rhetoric that conveys his understanding of the impetus at hand.
As deep debt markets price in multiple facets of risk, the new Minister must attend to all those fiscal key points that may mitigate Zimbabwe’s risk profile to attract more competitive debt rates. Granted, concessional loans and grants in from multilateral institutions such as the IMF or World Bank are a potential first steps; conviction that Zimbabwe is fiscally approved by such institutions could then open a way to global debt markets. Likewise, as a Minister literate to the alternative benchmarks used by creditors, Professor Ncube may instill a fiscal regime whereby debt seeking is matched to competitive alternative options that creditors have in global debt markets. More simply, Minister Ncube greater task may be to earn Zimbabwe a credit rating in the near term, and create a risk profile that is of competitive intrigue to fixed income investors.
Zimbabwe has an elevated fear of debt. This shouldn’t be perceived as debt being undesirable, rather a reflection of the low confidence the nation has in its own potential for effective debt utility. Well-structured and managed fiscal regimes actually grow greater appetite for debt. This is what the nation should strive towards. There are more borrowings to be earned in global debt markets, than simply abiding by the new mandate of African governments which is to seek out debt from the perceived benevolence of China.
