Candid Comment

Each one of us owes $3,2 million

By Dumisani Muleya

THE recent dramatic increase in Zimbabwe’s domestic debt from $15 trillion to about $48 trillion has painted a grim picture of the economic situation and cast a pall

over prospects of recovery of the economy.

Latest central bank statistics show the public debt was $42,9 trillion as at June 16. The debt was $21 trillion on June 2 and $27 trillion on June 9.  It is now $48,2 trillion. The debt shot up from $1,7 trillion in December 2004 to $15,9 trillion in December last year.

This means on average every Zimbabwean — including all those who are outside the country and newly-born babies — have a debt of $3,2 million if we assume the population is 15 million.

Officially the population is around 12 million people but estimates suggest if locals in foreign countries are to be included, the figure is actually much higher.

Zimbabwe’s running national budget is $124 trillion. The budget deficit is expected to be 4,6% because government anticipates collecting $110 trillion in revenue and spending $123,9 trillion.

The debt has been skyrocketing against a background of deteriorating macro-economic fundamentals and the socio-economic situation.

The central bank’s overnight accommodation rate yesterday stood at 850%, the inter-bank rate at 722,86% while treasury bills yielded 510%. Inflation is 1 193%, while the exchange rate has crashed to land at US$1:$400 000.

Internal debt is the part of government debt owed to creditors who are citizens of that country. It is a form of fiat creation of money in which the government obtains cash not by printing it, but by borrowing it.

The money created is in the form of treasury securities or securities borrowed from the central bank. The domestic debt forms a part of the national debt which includes the external debt.

Zimbabwe’s foreign debt is US$3,9 billion. Zimbabwe recently printed $21 trillion to pay the International Monetary Fund (IMF) arrears although the global fund refused to lift the sanctions it imposed on the country for non-payment.

Zimbabwe’s external arrears are not limited to the IMF, World Bank and African Development Bank. It owes a number of suppliers money for fuel and electricity, among other critical imports. Printing money can’t be the solution but improved economic and export performance is.

Currently the balance of payments position is extremely bad because the country had a negative trade balance of US$363 million last year after it registered total exports worth US$1,6 billion — a 6,4% decline — vis-à-vis imports of US$1,9 billion although the imports had fallen by 2,6%.

This means the country is now caught up in a debt trap which is detrimental to the already battered economy. The situation is worsened by the fact that Zimbabwe is isolated internationally and cannot get foreign direct investment, donor funds, or debt cancellation, which are all critical to economic growth.

The domestic debt has become a problem not only because of its massive size but also the rate at which it is mounting.
 
The other problem is that a large portion of the debt is held in short-term bonds that attract high real interest rates and this inevitably creates a debt vicious circle.

The strucure of the domestic debt reflects the dominance of short-term paper — more than 90% — with medium to long term debt taking up less than 10%. The structure of the debt is very expensive and certainly not sustainable.

The government amassed the debt mostly through its uncontrolled expenditure patterns. President Mugabe’s regime is notorious for dishing out money like confetti every time there is an election coming in a bid to purchase votes.

It also spends recklessly for other political reasons, for instance paying the ex-combatants to placate them when they show signs of unrest.

The government recently printed large amounts of money to pay an army of restless soldiers and civil servants, as well as pay its own debts. This came against a background of a public service wage bill which is above 40% of the budget, something clearly unsustainable.

The fiscal and monetary consequences of the debt are enormous. The debt situation leaves the government facing bankruptcy, even though this regime thinks a government can never get broke because it can always print money.
While this is true in simplistic terms, it betrays economic ignorance writ large. A government can get broke in real financial terms. Printing large sums of paper money — not backed by wealth — is a sign of bankruptcy,  a hallmark of economic failure.

Given the current situation, it would be difficult, if not impossible, in the short to medium-term to improve the fiscal position from a chronic deficit situation to a surplus to reduce the growing debt threat to the economy.

While there are a number of options which can be exercised to deal with the debt situation, there are no easy answers.

The government can divest from some non-performing national assets and use the proceeds to reduce the debt.

Privatisation and commercialisation are the main options although they always carry a political cost.

The domestic debt has grown rapidly over the past six years with the increasing deficit that has become structural.

Since Independence in 1980, Zimbabwe has always had a debt problem but the situation was worsened by government’s unsustainable populist spending policies.

Government has never been able to marshal enough revenue to finance its expenditures. This has resultantly created deficits that have to be financed either by borrowing from the domestic market or externally.

Since government has been over-borrowing locally and cannot borrow from outside, it has now resorted to printing money to finance its expenditure and pay interest on the debt.

This has become hyper-inflationary. Unless the government deals with the debt problem, it may soon find itself locked in a terminal fiscal crisis which can easily aggravate mounting political problems.

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