Zimbabwe’s debt situation remains an impediment to both external sustainability and economic development. The country is in debt distress with large external payment arrears, against a context of limited fiscal space.
by Prosper Chitambara
Total public debt comprises of an external debt of US$7,225 billion and, domestic debt of US$1,171 billion. Of the US$7,225 billion external debt, the stock of accumulated arrears accounts for 81% of the total external debt.
External debt has continued to outgrow exports as shown by the external debt to export ratio which increased from 168% in 2000 to 380% in 2009 declining to 225% in 2013 and 200% by 2014. The high external debt to export ratio is of great concern because of its negative effects on investment and savings.
The high ratio points to potential debt servicing problems, because most of the cash required to service foreign debt largely comes from export earnings. The high debt-to-exports ratio also points to the fact that Zimbabwe’s debt is unsustainable and likely unrepayable.
The debt overhang has also significantly downgraded the country’s credit rating, constraining access to concessional financing and to international capital markets.
The high public debt burden has been further exacerbated by the structural weaknesses inherent in the Zimbabwean economy such as lack of diversified export base and declining terms of trade and competitiveness, which make it difficult for the country to adjust to changing world demand for tradable goods and changing production patterns. These structural weaknesses have constrained the country’s ability to generate high and sustainable growth that is necessary to mitigate and even forestall needless debts and their attendant problems.
William Easterly, a renowned development economics professor, has noted that highly indebted poor countries became highly indebted mainly because of poor policies, not because of external shocks or wars. This is partly true for Zimbabwe as well although exogenous factors also played a key role. At Independence, Zimbabwe inherited a debt of US$700 million. The first decade of independence saw the stock of debt increasing markedly as the government sought financing for social and physical investments to achieve equity and redress colonial imbalances.
The adoption of the Economic Structural Adjustment Programme (Esap) further exacerbated the country’s indebtedness. A number of internal factors also contributed to the debt crisis. These factors include: the unbudgeted for war victims and veterans compensation as well as the DRC war among others.
In the year 2000, the Bretton Woods institutions suspended further lending to Zimbabwe as a result of failure to service arrears. The quasi fiscal activities undertaken by the RBZ between 2007 and 2009 by the Reserve Bank of Zimbabwe also adversely affected the debt situation.
Furthermore, declining output and escalating current account deficits led to increasing debt accumulation and rising debt servicing obligations.
Professor Ayittey argues that, Africa’s debt crisis originated from three basic missteps which are all equally relevant to Zimbabwe. First, many of the loans were simply consumed and therefore did not generate the returns needed to repay the loans.
Consumption loans were borrowed to finance recurrent expenditures such as paying civil servants’ salaries, import of consumer goods and purchase of arms and ammunition.
Use of the loans did not produce any foreign exchange earnings. Second, the loans were invested in projects that turned out to be hopelessly unproductive. Africa has more than 3 000 state enterprises, majority of them being ‘white elephants’.
These enterprises, set up with foreign loans, were supposed to earn or save the foreign exchange needed to service the loan. Instead, they racked up losses upon losses, used up additional foreign exchange and compounded the debt crisis. Third, many foreign loans were contracted under dubious and corrupt circumstances.
When a country’s debt service burden is so heavy that a large portion of its current output accrues to foreign lenders and consequently creates disincentive to invest, it results in debt overhang.
The debt overhang hypothesis suggests that if there is some likelihood in the future that external debt will be larger than the country’s repayment ability, then, the expected debt service costs would discourage further domestic and foreign investment and harm economic growth.
Investors would be less willing to incur costs today for increased output in the future, as the additional output would be used to meet external debt servicing demands.
High debt service burden increases expected future taxes on the private sector and lowers private investment. In addition, debt overhang can worsen economic performance by changing the quality of investment when quick-yielding projects are preferred to higher value long-term.
Another consequence of high public debt is the crowding-out effect. High debt service payments put great pressure on budgets, leading to rising fiscal deficits in the highly indebted countries. The stiff demand of high debt service payments on the budget results in forced reductions in public spending, thus “crowding out” spending on education and health care. Servicing of external debt also crowds out domestic investment.
Multilateral institutions and creditor countries have come up with several debt management initiatives. In 1987, the Venice terms were introduced for the poorest countries that were undertaking adjustments.
Several countries benefited from this rescheduling arrangement, which provided for lower interest rates, and larger payments and grace periods. The Toronto terms succeeded the Venice terms in June 1988 and were made available for the low income, heavily indebted International Development Association (Ida) countries only.
This arrangement provided lower interest rates, further lengthening of maturities and partial debt service write-offs that could provide about 33% debt service relief. The Houston terms were proposed in July 1990 for middle income countries and allowed for deferral of payments, rather than debt reduction.
These articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (Zes). Email; email@example.com cell +263 772 382 852