Ballooning debt dims economic recovery hopes

Dumisani Ndlela



ZIMBABWE’S latest domestic debt level has cast a pall on prospects for a quick economic turn-around and sparked fresh fears the government’s

profligacy could splurge ahead of a presidential election scheduled for 2008.


President Robert Mugabe’s government has traditionally shown a gargantuan appetite for extravagance ahead of elections, mainly to appease state employees.


Latest statistics revealed last week that public debt, which had significantly declined since the beginning of the year, increased to $21 trillion this month, surpassing all records since Independence in 1980.


The new figure, released by the Reserve Bank of Zimbabwe (RBZ), came against the background of tightening inflationary pressures likely to be worsened by a sharp fall in the Zimbabwe dollar on a thriving parallel foreign currency market and significant hikes in fuel prices over the past few weeks.


Zimbabwe’s debt has been growing steadily since 1980, and the government has attributed this to efforts by the post-colonial era regime of Mugabe to equitably distribute wealth among Zimbabweans and the expansion of the education and health delivery systems to cater for a larger population.


Domestic debt levels had, however, been kept under check by bilateral and multilateral support to the government, which dried up more than six years ago following Mugabe’s failure to implement viable economic reform programmes.


Following the withdrawal of multilateral and bilateral support to Zimbabwe by the international community, the government has been left with no other source of funds except the domestic market.


Huge government borrowings have been compounded by high real interest rates driven mainly by a hyperinflationary environment now prevailing on the market.


The huge financing costs and increased domestic borrowings have resulted in a remarkable explosion of debt, worsening the poor macroeconomic performance.


Real economic growth has suffered significantly as a result.


The central bank governor Gideon Gono, who was appointed in December 2003 to turn around the sickly economy, has so far had to deal with government financing requirements in his monetary policy.


Late last year, he adopted measures making government securities, especially treasury bills (TBs), more attractive to private sector investors in order to attract funds to finance the large government deficits.


This has been achieved by shortening the average maturity of TB debts and to increase the real returns on the money market instruments with the unwelcome effect of blowing up the domestic debt.


Of the government’s $21 trillion domestic debt as at June 2 this year, $1,6 trillion is in government securities while $8 trillion in TBs and $655 million in RBZ advances.


The interest component on TBs amounts to a staggering $10,7 trillion, way above the principal outstanding TB debt stock held by government.


Clearly, government has remained unfazed by the ballooning debts stock.


Last month, the government awarded civil servants a 300% salary hike, pushing the government wage bill to well over 50% of gross domestic product (GDP) and raising the prospect for increased money supply growth and consequently inflation through unbudgeted expenditure.


This, together with the latest spike in fuel and other commodity prices, has raised the prospect of pushing inflation to breach the 2 000% mark.


Inflation, which touched an all-time high of 1 194% year-on-year for May, appears to be roaring towards new territory.


The May salary increments for civil servants, counted among the least-paid in the struggling economy, followed another one in January this year of 230%, slightly above the $30 trillion government had budgeted for its entire wage bill.


The increases in civil servants’ salaries will push the wage bill further up by 300%, raising the prospect of increased money printing.


Money printing stokes money supply growth which provides impetus to soaring inflation.


Money supply expanded from 177,6% in January 2005 to 590,6% in April this year.


There are entrenched fears among economic players that the money supply growth figures might be understated, but a number of factors could contribute to this.


Money supply is the generation of new money — in other words, an addition to the stock of money already in circulation.


Sources indicated that the national budget for 2006 had already been largely spent, and a supplementary budget was expected in a few weeks time to cater for new expenditure requirements arising from new salary payments.


Since 2005, when the country experienced a 500 percentage points decline in inflation, the inflation rate has soared unabated.


Gono in January made a rare admission that the central bank had printed a whopping $21 trillion to purchase United States dollars for repaying debt arrears to International Monetary Fund (IMF) and stave off imminent expulsion of the country’s membership of the Bretton Woods institution.


This is besides cash printed to raise money for grain and fuel imports, as well as for other quasi-fiscal operations by the Reserve Bank.


The government last year borrowed heavily from the central bank mainly for grain imports against the backdrop of drought last year as well as for fuel imports, implying that cash from the Reserve Bank was used again to buy foreign currency.


Although the government projected that the budget deficit out-turn for 2005 had been 3% of GDP, the IMF revealed that the Zimbabwe government’s budget deficit out-turn for 2005 was in fact 60% of GDP.


Last year, the total domestic debt grew by about 1 000%, but this could have been understated given the remarks by the IMF.


And Gono acknowledged that the debt level was unsustainable.


Economists have often blamed the country’s inflation on government profligacy.


The cash-strapped government has resorted to an aggressive tax collection system many view as unorthodox, if not investor-unfriendly.


Recently, the government’s tax collection arm, the Zimbabwe Revenue Authority, ordered stockbrokers to pay value-added tax on instruments the tax law had clearly exempted.


It has raided car dealers and many companies in a bid to generate enough revenue for dwindling government coffers, suffering severely from a declining individual income and corporate tax base due to high unemployment and company closures.

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