Zim sitting on debt time bomb
…spiralling out of control
PHILLIMON MHLANGA
Zimbabwe is now sitting on a sovereign debt time bomb that could trigger at any time due to the ballooning external and domestic debts.
Analysts who spoke to Business Times say the debt has contributed significantly to the crisis facing Zimbabwe, which is in debt distress.
The crisis is likely to worsen if the government fails to act.
Three key factors—penalties on overdue external debt, budget deficit, and the depreciation of the local currency—is driving Zimbabwe’s debt crisis.
Put it all together, it looks like a very toxic mix as the country can no longer safely carry the debt.
The dramatic increase within the last seven months is a source of concern, according to analysts. Zimbabwe’s total debt, which was ZWL$66.8bn at end of June 2019 is said to have quickened to ZWL$287.3bn as of this week.
In June last year, external debt stood at US$8.1bn (ZWL$58.8bn using a direct conversion of the interbank rate of ZWL$7.25: US$1 in June last year) but, has skyrocketed by 134.18% to ZWL$137.7bn (using the interbank rate ZWL$17: US$1 this week).
Out of this, about US$5.9bn is accumulated arrears, interest arrears and penalties, which constitute about 72.8% of external debt.
This means the principal debt is merely about US$2.2bn. In the face of the local currency depreciation, external debt becomes expensive to service, given that more Zimbabwe dollars are required to purchase the greenback as the local currency continues to depreciate against the United States dollars.
Domestic debt was about ZWL$8.8bn in June last year, which translated to about 13% of total debt. In United States dollar terms, after the government abandoned the 1:1 parity policy, it was about US$1.33bn using the ZWL$7.25:US$1 interbank rate.
Now, the debt has shot up 1 600% to ZWL$149.6bn. Another catch is that despite government benefitting from domestic debt being eroded by the massive depreciation of the Zimbabwe dollar against the US dollar, local creditors have been ripped off the real value of their loans which may further threaten Zimbabwe’s country risk profile.
They lost nearly a tenth of their money in real terms.
The thorny issue regards the legal framework on what happened to the domestic debt on change over from the multiple to the mono currency regime in June 2019.
Domestic debt to GDP was 37% last year which was very significant compared to that of regional counties which is lower than 20%.
This implies that pressures on government are significant.
The domestic debt figure, however, could be significantly lowered following a landmark ruling by the Supreme Court on Tuesday this week. Chief Justice Luke Malaba, in an appeal case involving Zambezi Gas against N.R Barber and the Sherriff of Zimbabwe, ruled that all debts incurred before February 22 last year must be settled in the local currency at 1:1 rate against the United States dollar in line with Statutory Instrument (SI) 33 of 2019.
The SI abolished the multicurrency regime and reintroduced the Zimbabwe dollar. Analysts told Business Times this week that the domestic and external debt is now unsustainable. They said debt crises have been devastating, creating the need to cautiously monitor this recent debt build-up.
In terms of composition by creditor, according to official data obtained from the Ministry of Finance and Economic Development, 44% of external debt is owed to Paris Club creditors, 31% to multilateral creditors, 20% to non-partisan creditors and 5% to bilateral creditors.
IMF resident representative to Zimbabwe Patrick Imam said the public debt is an issue that has contributed significantly to the economic crisis facing Zimbabwe”.
“Seven countries are in debt distress, Eritrea, Zimbabwe, Gambia, Mozambique, Republic of Congo, Sao Tome and Principle and South Sudan.
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 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.
Analysts told Business Times this week 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 if it is investment in key enablers in the country.
In the absence of loans, not much is happening on development. According to a recent research by the African Forum and Network on Debt and Development (AFRODAD) Zimbabwe’s high debt service requirement inhibits future investment in social expenditure such as education and health, thereby perpetuating low productivity and poverty.
AFRODAD said social sectors would suffer more given the constrained fiscal space the country is grappling with, in the event that Zimbabwe decides to service its debts.
There are four major pieces of legislation that government 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 has been failing to comply with the law. “[Issues included with the failure by the government] to observe the borrowing limits and were not fixed by the National Assembly resolution. The other issue is the failure by the Ministry of Finance to present to Parliament a report on loans raised and guarantees issued by the State and a comprehensive report on public debt,” AFRODAD report said.
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 unitwithin the Ministry of Finance and Economic Development.
“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,” AFRODAD said.
It is also argued that the front office for domestic debt is housed in the RBZ.
Depending on information flow from RBZ to the Ministry of Finance, this set up could also pose coordination issues thereby compromising sound debt management.
On several occasions, the Parliament of Zimbabwe last year 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.
Tafadzwa Chikumbu, Zimbabwe Coalition on Debt and Development socioeconomic analyst said Zimbabwe has reached a critical moment and needs to wean itself from the debt trap and associated macroeconomic stagnation.
“The government’s ambitious Vision 2030, where it aspires to be a middle income economy by 2030, will remain a fallacy unless critical steps are taken to resolve the debt crisis.
The national debt should therefore be viewed and treated as a symptom of the wider structural and political challenges inherent in the economy.
Dealing with these challenges will form an integral part of a sustainable debt strategy,” Chikumbu said.
“The Zimbabwean case remains unique and challenging in that the country’s indebtedness has been exacerbated by the huge debt arrears currently at 76% of the total external debt, continuously violation of legal and constitutional provisions, secrecy and exclusionary decision making by policy makers.
Resolving the country’s debt crisis therefore remains central in reforming the broader macroeconomic framework for Zimbabwe.”
He said the government should simultaneously implement structural, political and sound macroeconomic policies as part of a sustainable and inclusive debt management strategy.
The performance of a sustainable debt management framework is hinged on sound public finance management.
However, even without a sound debt management framework in place, Zimbabwe has continued to contract new loans from China.
This threatens the repeat of past mistakes of over-reliance on foreign borrowing rather than using domestic resources and using foreign borrowing for activities which will not create sufficient returns to repay the loans.
In its 2020 economic outlook, Invictus Securities noted the deficit is likely to widen this year, forcing government to borrow more.
“Fiscal policy will be expansionary, while monetary policy will have to be accommodative to finance government expenditure which is expected to substantially exceed the budgeted Z$64 billion,” Invictus said in its latest research note, adding the budget deficit is expected to exceed ZWL$5bn this year.
