Reconnecting with the old rudder

THE IMF recently released a paper showing that most countries in Sub-Saharan Africa will not be able to accomplish the Millennium Development Goals (MDGs) whose deadline is 2015. This is because of the global financial crisis that resulted in less funding flowing to third world countries.

Zimbabwe likewise, though it was not directly affected by the global financial crisis, will not accomplish these goals. This is because of the current tight liquidity in the economy that has resulted in restricted credit and the cost of funds going up. Other policies that were enunciated since the adoption of multiple foreign currencies are also failing to stimulate growth. The country; on the other hand, is failing to access significant external lines of credit because of its huge external debt obligation.

The high external debt of US$6,7 billion that Zimbabwe is saddled with has increased its sovereign risk profile, hindering efforts to achieve the various development goals that have been set several times. External debt has been building over several years, something that is common in developing countries as they view external borrowing as a necessary cornerstone for financing growth. Like any corporate, governments borrow assuming that they will be able to generate enough revenue to cover the debt plus any interest that would have accumulated. However, there are some instances where debt accumulates to unmanageable levels.  This is especially true when the borrowed funds do not result in real production increases to levels that enable the government to improve revenues. Also, it could be a case whereby the borrowed funds have been used for other unintended purposes.

The greater part of the country’s external debt of US$6,7 billion is not new money but interest accumulating on arrears. This is highly unsustainable given that currently the country is actually seeking more funding while its capacity to repay the loans is crippled. Sovereign debt has a negative multiplier effect in that it sours relations with the rest of the world and impedes progress in the domestic economy.

Greece is an example of how imprudent debt management strategies can be harmful to an economy. The country’s debt rating was downgraded to junk status. This did not only impact negatively on the country but on the region as a whole as it adversely impacted the attractiveness of the Euro as an alternative asset. Zimbabwe therefore needs to come up with strategies to clear its external debt so that it will be able to access more external funding essential for growth.

There are several areas which can be dwelt on to refocus Zimbabwe on its various development goals. The private sector accounts for only 5% of current debt while government and parastatals have 61% and 34% respectively. Given such a scenario, carrying out austerity measures implies reducing public sector services and employment. But there is still much to do on Zimbabwean debt. The apparently easy but in fact hard compromise is declaring Zimbabwe a Highly Indebted Poor Country (HIPC), a suggestion which has not been palatable to political circles. For example, Zambia had waived a US$7 billion debt following the attainment of the HIPC completion point. An analysis of the national debt shows that there are idle elements in the government and the economy at large which continuously contribute to debt and these require immediate attention.

Streamlining of government revenue to productive expenditure; spreading the expenditure burden; revamping revenue collection; improving capacity utilisation in various sectors; sustainable or reduced wage expenditure in the public sector and implementing tough tax evasion regulations are some of the measures the government can adopt. It is not surprising to note that of the US $937 million tax revenue, the informal sector contributed an insignificant amount. The recent introduction of an electronic tax register system to increase accountability of revenue is highly commendable in response to modern computer-based debt management systems.

The authorities should again capitalise on the strong skills base the country has to facilitate the operation of these systems. Effective communication, coordination and cooperation amongst data suppliers and users is key in the formulation of effective debt management strategies. There should again be close coordination amongst the CSO, Zimra, RBZ and the National treasury in the implementation of debt management strategies.

Build, Operate and Transfer models can also be implemented to help create fiscal space. Instead of waiting for continuous government funding, private players can be invited to carry out projects like road and railway construction. These models were also used by Mozambique, Tanzania and Malawi, among others, in railway and road construction.

Zimbabwe also needs to engage the international community. This can be done through improvement in the country’s ease of doing business indices which have declined since the adoption of MDGs. Much more needs doing to protect both domestic and foreign investment from arbitrary confiscation and to provide a just, legal environment in which disputes can be settled in the courts on the basis of relevant Acts and regulations rather than through force or political connections.

An acknowledgement that the country cannot operate as an island is important to unlock the export market for locals, more FDIs and foreign currency inflows hence improved tax revenue. Improvement in the depth of capital markets can also reduce over reliance on external borrowing. Sovereign balance sheets have been haunted by debt which has resultantly obstructed the achievement of goals set.

The government therefore needs to show commitment and incorporate more aggressive debt management strategies to improve its credibility which then completes the circuit of development goals the country adopts. Such a commitment is also essential in negotiating funds to finance growth regionally and internationally.

 

By Jealous Chishamba

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