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Zim in debt distress

Melody Chikono

LACK of transparency in public debt management and the failure to comply with legal stipulations are now manifesting in depressed fiscal space and low domestic resource mobilisation, analysts have said.

The country’s domestic debt is also having a crowding out effect on private sector lending, with large fiscal deficits having been financed through domestic borrowings.

While all these issues have been treated as non-urgent, civil society contends that debt has an effect on economic growth coupled with deteriorating growth and quality of life, thereby affecting aggregate demand.

Zimbabwe is currently in debt distress with public and publicly guaranteed debt at unsustainable levels of 97% of GDP against the statutory provision of 70% at a time there is also vagueness and conflicting views on the current state of Zimbabwe’s public debt.

According to the 2019 Budget Statement, Zimbabwe’s total public debt stood at US$17,69 billion as at the end of September 2018, while the 2019 Budget Statement stated that external debt was valued at US$7,7 billion and domestic debt was US$9,6 billion

Presentations made at the just-ended Zimbabwe multi-stakeholder debt conference organised by the African Forum and Network on Debt and Development (Afrodad) and the Zimbabwe Coalition on Debt and Development (Zimcodd) revealed that some of the economic issues the country is grappling with stem from a debt overhang.

Of the county’s debt, only 25% represents the principal amount while 75% is an accumulation of arrears and interest owing to Zimbabwe’s reluctance to settle its external debts in the past two decades.

External debts are owed to multilateral institutions such as the World Bank, African Development Bank and the European Investment Bank (US$2,6 billion) and bilateral creditors (US$4,7 billion). A total of US$5,9 billion, more than 70% of the external debt, consisted of arrears and penalties for non-payment.
Despite having promised borrowers a comprehensive debt plan since last year, government is yet to present the document.

In its paper to the conference, Transparency International Zimbabwe (TIZ) said section 298 of the national constitution sets out principles guiding all aspects of public finance management in Zimbabwe: public borrowing and all transactions involving the national debt must be carried out transparently and in the best interest of Zimbabwe.

“Despite all the legislation, there is continuous violation of the provisions. “A study of recent budget statements reveals that the government issued TBs (Treasury Bills) to fund various government commitments including paying debts assumed from the RBZ in 2015 and funding broke public enterprises such as NRZ (National Railways of Zimbabwe), POSB (People’s Own Savings Bank), etc the fancy term used for the latter is called ‘recapitalisation’.

There is need for a national anti-corruption strategy with pillars: judicial integrity, land sector governance, mining sector governance, business integrity, public finance management and empowered citizenry,” noted TIZ.

Countries with high and unsustainable public debt tend to grow slowly, stymying private sector growth as well.“When government debt grows, private investment shrinks, lowering future growth and future wages. Public debt wherein the bulk of the funds go to recurrent expenditure can result in slowed growth.

It adversely affects capital accumulation and growth via higher longer-term interest rates, higher future distortionary taxation (2%), inflation and greater uncertainty about prospects and policies. High government debt is also likely to constrain the scope for countercyclical fiscal policies, which may result in higher volatility and further lower economic growth,” noted the anti-corruption watchdog.

Afrodad said that while Zimbabwe’s debt management legal framework is very clear and highly rated by development partners, such as the World Bank, the major issue has been on government’s failure to comply with the law.

“For example, with regards to observing the borrowing limits for government’s borrowing were not fixed by the National Assembly resolution. The other issue is the failure by the Ministry of Finance to present to Parliament a report on loans raised and guarantees issued by the state and a comprehensive report on public debt,” Afrodad said.

The accumulation of external payment arrears resulted in the IMF declaring the country ineligible for the general resources account of the financial institution’s financing window with traditional multilateral and bilateral creditors following suit.

World Bank senior economist Stella Ilieva however revealed that there was not much progress regarding the settling of the World Bank debt although various stakeholders were involved in the negotiations.

IMF resident representative Patrick Imam said without attempting to clear the arrears, Zimbabwe risked being a pariah state. However, despite all the drawbacks and the hindrances, Afrodad said Zimbabwe still has options at its disposal such as fiscal discipline, regular debt audits, adherence to legal debt management provisions and implementation of punitive and deterrent measures, among others.

Meanwhile, at a luncheon with editors in the capital on Wednesday, head of Zimbabwe Public Debt Management Office. In the Minstry of Finance and Economic Development Andrew Bvumbe admitted that the country was in debt distress, which is he pointed out was the reason why no new resources were coming in.

He, however, indicated that the reform process, which the country was undergoing, was to ensure it qualifies for debt relief and debt restructuring. Bvumbe painted a picture of a country willing to reform.

“I think it’s critical that, going forward, we have to address the debt arrears. There are no two ways. We have to clear the arrears and we have to normalise relations with all our creditors. The issue we have right now is we have arrears with three multilaterals, they were four. Those four, as you are aware, are the preferred creditors so you cannot clear any bilateral or other multilaterals without clearing those four.

We are done with IMF and the issue we are working with now is to clear the arrears with the Breton Woods institutions and the African Development Bank,” he said

“But before we do that we have the SMP (Staff-Monitored Programme), the reform agenda monitored via the TSP (Transitional Stabilisation Programme) is our gateway to the arrears clearance. There is no way we can clear arrears without a track record of implementing sound economic policies. Hence you will see the focus on TSP reform agenda, and the commitment the SMP in terms of us sticking to our target quantitative and structural benchmarks so that we can be seen there as serious reformers and we walk the talk.”

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