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Zimbabwe hamstrung by rising debt

SADDLED with an external debt of US$6,9 billion, Zimbabwe’s credit-risk profile  has scared away potential local and multilateral financiers from supporting the nation’s negative balance-of-payments position.

In addition, prospective donor support to the fiscus has thinned whilst indigenous means to finance the budget remain hamstrung by a host of structural complications.

As GDP growth is not export-oriented but driven by domestic demand, the impact of the rising debt stock needs to be seen, more appropriately, against the background of the widening current account deficit.

Politicians seem to worry more about their money piling up as opposed to finding a viable lasting solution to service the debt to avoid future high taxes.
The International Monetary Fund (IMF) sees Zimbabwe’s domestic and foreign debt increasing by US$1 billion to US$8,6 billion by year-end.

The debt will be almost thrice the GDP estimated at US$3,5 billion.

With a US$6,9 billion debt and an estimated population of 14 million, it means every Zimbabwean would owe local and foreign creditors US$492, a figure that is almost the same as the November Consumer Council of Zimbabwe’s family basket of six which is US$498.

Economic analyst Eric Bloch told businessdigest on Tuesday that the magnitude of Zimbabwe’s foreign and domestic debt (US $6,9 billion and rising) impacts negatively on the economy.

Bloch said the debt was a major deterrent to Foreign Direct Investment (FDI), critically required for a meaningful economic upturn.

“Similarly, foreign supplier lines of credit to Zimbabwean commerce and industry are minimally forthcoming because of Zimbabwe’s low credit rating,” he said.

Bloch said the rising debt was constraining government’s access to funding for rehabilitation and enhancement of infrastructure, energy generation, rail and air services, telecommunications and water supply to the prejudice of all economic sectors and the populace.

Historic examples of countries whose economic performance was adversely affected by the magnitude of their national debt include Germany between 1922 and 1924, Hungary (1946), Israel (1977), Bolivia (1981) and Argentina between 1983 and 1984.

Recent and current examples are Greece, Ireland and Portugal.

“Government can only control and contain the debt by minimal recourse to further borrowings through pursuit of policies that stipulate that expenditures should not exceed revenues,” Bloch said. “Seeking international relief under the Heavily Indebted Poor Countries (HIPC) policies of progressive debt forgiveness,” he said.

However, economic consultant and analysts Sonny Mabheju told businessdigest on Wednesday that public debt can be a useful source of funding for financing economic and social development in a country.

“Governments have often resorted to borrowing to finance budget deficits and large infrastructure projects. It has also been used to balance external accounts and as an instrument for monetary and fiscal policy. However, it has also been increasingly seen as a threat to economic stability where it is badly managed leading to overburdening the economy, companies and individuals,” he said.

Mabheju said Zimbabwe’s debt can be contained by monitoring of government expenditure against the country’s gross domestic product (GDP). 
“Public disclosure of total debt by government can be an effective way of containing debt. If appropriate and adequate disclosure is made timeously, governments will be made to justify the levels of debt before it is incurred or reduce levels of future debt given the levels of current debt disclosed and its effects on the economy,” he said.

Mabheju said it was important for governments to adequately and timeously disclose the impact of current and projected borrowings using well explained (to the understanding of the ordinary man) indicators like, interest bite, the expenditure ratio, the tax bite, debt to GDP, budget-to-actual score card, comparing forecast deficit and debt levels with actual results.

The Zimbabwe Coalition on Debt and Development (Zimcodd) said it was actively lobbying for a debt audit in order to ensure that the country only owned up to legitimate debt.

Debt experts categorise debts into two: legitimate debts and odious debts. Legitimate debts were classified as debts incurred by legitimate debtors and creditors, while odious debts were those that were incurred other than for the needs of the state.

Economist Brains Muchemwa said high government debt levels continued to constrain its ability and indeed private sector to secure or guarantee cross-border lines of credit as the country risk elements remain high.

“It becomes imperative therefore for Zimbabwe to coin workable domestic strategies that harness the few available financial resources to benefit the economy under liquidity challenges,” he said.

Muchemwa said government has to shore up its revenue to manage the spiralling debt, and higher taxes should be levied on key minerals such as diamonds and platinum that are exhibiting “excessive surplus profits.”

“There is no reason whatsoever for the inclusive-government to be apologetic on that aspect. Equally, engaging creditors for debt forgiveness should be a priority,” said Muchemwa.

Presenting the 2011 national budget, Finance minister Tendai Biti confirmed the full extent of Zimbabwe’s indebtedness and the effect of capitalisation of interest due to arrears accumulation, which were yet to be quantified.

He hinted government has already initiated a debt validation and reconciliation programme to ascertain the full extent of its external indebtedness.

Economist Farayi Dyirakumunda, who is the executive director at African Investment Markets, said credit finance in Zimbabwe was not a new concept, since credit has been availed to consumers by the various financial institutions.

“When kept within reasonable levels, debt is an effective way of enhancing spending capacity and stimulating demand to the benefit of the economy,” he said.

“What is imperative in allowing consumers to enjoy the extra spending dollar within reasonable levels is a first class credit risk management system that will reward good credit from bad credit standing. This is gradually taking shape in the economy and as liquidity improves more favourable rates and tenure will be available to the borrower,” Dyirakumunda said.

 

Paul Nyakazeya

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