Zim should use its debt wisely

Victor Bhoroma

The Zimbabwean government has published a Financial Adjustments Bill of 2019, which seeks parliamentary condonation for unauthorised expenditure worth US$9,68 billion.

The expenditure was incurred from 2015 to 2018. The Bill coincides with the announcement by government that austerity reforms have ended and the focus will now be on productivity and growth. The declaration might signal a return to expansionary policies that saw domestic debt balloon from US$275,8 million in December 2012 to US$9,5 billion in August 2018.

Off-budget financing through issuance of Treasury Bills (TBs) and borrowing from the central bank have become the Treasury’s preferred routes for resource mobilisation.

Despite declaring a budget surplus and savings of ZW$1,4 billion (US$87,5 million at interbank rate) for the period January to August 2019, the Treasury has issued Treasury Bills (TBs) worth over ZW$642 million (US$40,1 million) in the last four months.

Treasury Bills stock is now estimated at be over ZW$8 billion (US$500 million), with the government negotiating with various buyers to roll over TBs worth ZW$2,2 billion (US$137,5 million) to 2020. The country also has a sovereign debt burden of US$8 billion, which is growing because of penalties and non-payment interest.

Zimbabwe’s debt position might not rank as the worst in terms of debt-to-gross domestic product (GDP) ratio. According to International Monetary Fund 2019 data, a host of First World countries top the charts on debt to GDP ratio with Japan at 238%, Italy 134% and the United States of America at 106%. Closer home, Mozambique has debts of over 124% of GDP while Angola has 91% and Egypt has 87%. The IMF points that global debt has grown to US$188 trillion, which amounts to 230% of the world economic output.

The biggest concern about Zimbabwe is on debt repayment record and the purpose of contracting debt in the first place as espoused by the concept of Good Debt versus Bad Debt. Good public debt leads to gross fixed capital formation and GDP growth while bad debt feeds unrestrained government consumption and recurring expenditure.

Gross fixed capital formation pertains to key infrastructure developments such as roads and communications network, rail, ports, hospitals, schools, financial infrastructure and real estate among other investments. There is a direct correlation between the country’s gross fixed capital formation and its GDP growth. This explains why First World countries such as Japan, Singapore, Italy, USA and Belgium have high debt-to-GDP ratios.

They use debt to boost economic growth and channel government expenditure to key infrastructure developments that create business opportunities for the local market and unlock private sector investment.

There is nothing significant that was achieved by Zimbabwe’s contracted domestic debt of US$9,5 billion or the US$9,7 billion unbudgeted expenditure that the government is seeking condonation for. The debt did not lead to any meaningful economic growth as real GDP growth only averaged 2,12% between 2015 and 2018.

Worse still, the economy is actually contracting in 2019. Money printing outpaced economic growth and created artificial aggregate demand because of unsustainable subsidies in agriculture and importation of various consumables.

Treasury needs to focus more on gross fixed capital formation than digging the consumption hole deeper through issuing TBs. It was expected that austerity reforms would cut the government consumption bill and restrict recurring expenditure to less than 50% of the budget.

It is a given that Zimbabwe will contract more domestic debt in the next two years, however, debt should be used wisely.The following can be priority areas for government expenditure:

Electricity generation projects

Zimbabwe’s grid generation capacity has over the years been impacted by persistent droughts, mismanagement of public funds and lack of investment in new projects. Climate change has adversely affected rainfall patterns, thereby rendering power generation from Kariba unreliable.

The current load-shedding schedules are sinking local production across all economic sectors. To curb this, the government needs to direct debt to the rehabilitation of old power plants such as Harare and Bulawayo while partnering the private sector to resuscitate large-scale renewable energy projects such as the parked Gwanda, Munyati and Insukamini projects which can add more than 300 megawatts to the grid from the sun.

It is hard to comprehend that only US$1 billion from the US$5 billion pumped into command agriculture since 2016 would have completed all the above power projects.

Now Zimbabwe is desperately begging its neighbours for power imports and using over US$13 million to complement dwindling generation capacity, even at the current 18 hour load-shedding schedules.

Roads and ports of entry

Zimbabwe’s road network needs investment, especially on rehabilitation and modernisation. The country’s major highways such as Beitbridge-Chirundu, Beitbridge to Victoria Falls and Masvingo to Mutare need to be widened, resurfaced and be dualised on busy sections. Similarly the country’s border posts such as Beitbridge, Chirundu, Plumtree, Forbes and Nyamapanda need urgent modernisation.

As entry points into Zimbabwe, border posts tell a picture about Zimbabwe. The bright side about debt contracted in such projects is that the projects are self-financing through revenues from toll fees, entry or access fees and other taxes levied by the government on the utilising of such infrastructure.
Modernising the country’s ports of entry will also help protect the local economy from the smuggling of commodities (both in and out) and curb tax revenues leakages.

Railway infrastructure

After all the hype about the Diaspora Infrastructure Development Group and the National Railways of Zimbabwe deal that would have modernised the country’s railway network as earlier communicated by the government, it is back to the drawing board, while the collapse of the deal may spill into the courts.

Zimbabwe’s rail network is dilapidated and this has added pressure to the country’s major highways as haulage trucks now ferry tonnes of bulk cement, grain, coal, heavy raw materials and other minerals on the tarmac for long distances instead of such cargo being transported by rail.

Fixing the country’s rail network is the most sustainable way of protecting the country’s road network. More importantly, rail is 60% cheaper than road transport for production purposes. Reducing transport costs for local producers will help lower the cost of doing business in the economy. Again, debt contracted in railway modernisation can be financed from service revenues.

Hospitals and sanitation

The country’s health infrastructure has all but collapsed. While donor funds are augmenting in the provision of basic healthcare, especially for the vulnerable in society, much is expected in terms of government investment in public health infrastructure.

Zimbabwe’s major hospitals need refurbishment and retooling with critical health technology such as dialysis machines, computed tomography (CT) scanners, optical testing, and radiotherapy and chemotherapy machinery. The country bleeds millions of dollars every year in paying for healthcare abroad for government officials while struggling private citizens bear the brunt of exorbitant fees from the private sector or overseas treatment if they can afford it.

The same can be said about the water and sanitation especially for Harare, Chitungwiza and Bulawayo that have seen unprecedented population growth in the past two decades.

Water is fast becoming a serious health hazard in most towns due to limited investment in dam construction, distribution infrastructure and water treatment projects. Cases of cholera and typhoid occur repeatedly every year.

To ensure sustainability in sanitation projects, the government should allow private players to partner local authorities in Public-Private Partnerships (PPPs) in water treatment or distribution projects that are self-financing while it focusses on funding parked dam projects in Harare and Bulawayo.

Since 2014, the government has simply been digging into domestic debt to satisfy its consumption appetite through unrestrained money printing (thereby fuelling inflation), while neglecting capital expenditure on key infrastructure projects. Debt may not be bad, after all, as long it is channeled towards gross fixed capital formation and self-financing projects in roads, rail, ports, energy generation and water distribution infrastructure projects.

As the austerity wheels come off due to some harsh realities in the economy, Treasury will need to use debt wisely to boost economic production.

Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or follow him on Twitter: @VictorBhoroma1.

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