IN 2020, a year in which the Africa’s GDP growth prospects were stifled by the pandemic due to depressed travel and restricted international trade, sub-Saharan Africa (SSA) is mired in a debt crisis that threatens the stability of its member economies.
Zimbabwe’s astronomical debt is proving to be an enormous hurdle against the government’s efforts to recover the economy from its present economic quagmire. The country’s external debt is estimated at circa US$8,2 billion (US$100,3 million), as at end of September 2020 while domestic debt stood at ZW$12,5 billion (US153 million), which is 1,2% of GDP and 1,8% of the total public debt. The government is expected to contract ZW$30 billion (US$367 million) in debt to finance the budget deficit emanating from its ZW$421,6 billion (US$5,16 billion) expenditure ceiling set for the 2021 fiscal year.
Zambia is on the verge of becoming the first African country to default on its sovereign debt since the coronavirus pandemic. SSA countries have issued bonds in Europe over the years, amassing debt that is set to mature at a time of rising financial burden amid implications of Covid-19. Consequently, we expect a wave of debt defaults. Zimbabwe has not been participating in this bond market due to its legacy debt challenges and low credit rating.
The IMF in its SSA Regional Economic Outlook forecasts that new gross government debt will rise from 50,4% of GDP in 2019 to 56,6% of GDP in 2020. However, stats show that this escalates to 60,4% when you exclude Nigeria and South Africa, SSA’s two largest economies.
According to the RBZ, Zimbabwe’s debt to the World Bank is northwards of US$1,5 billion, 86% of which is in arrears. Treasury records show that the country has only paid token amounts to the World Bank between 2019 and 2020, an indicator of lack of resources. The recent National Development Strategy 1 (NDS1) envisages a debt-to-GDP ratio of 61,6% by 2025 from the current 78,7%. This debt stock is marginally above the Public Debt Act threshold of 70% and way above the Sadc threshold of 60%.
Minister of Finance and Economic Development Prof Mthuli Ncube’s 2021 national budget shows no amount set aside toward foreign obligations indicating the lack of a clear-cut strategy on addressing external debts except:
“External debt arrear clearance and debt relief to restore sustainability will be considered in line with progress made with Government’s engagement and reengagement with the international community.”
Notably, the NDS1 economic blueprint vaguely shows intentions of managing future debt acquisition and keeping foreign obligations at sustainable levels thus: “Debt Management over the NDS1 period will be guided by a Medium-Term Debt Strategy and the Debt Sustainability Analysis indicators,” the details of which are expected to be unveiled soon.
This debt overhang facing the country stifles economic recovery and growth. Developing countries lack deep financial markets due to the high prevalence of financial repression. As such, there is a great need for external sources of finance like Foreign Direct Investment (FDI) and loans to complement domestic resources. Zimbabwe’s situation is complicated as the country cannot access cheap loans from International Finance Institutions (IFIs) as it defaulted on its obligations decades ago. Also, FDI inflows are in the doldrums as the country has weak institutions, is under economic sanctions, and is plagued by an unstable political system — sending a negative image to investors.
Given the above, the country has resorted to domestic borrowing to finance its development programmes. However, excessive domestic borrowing crowds-out private investment as government competes for funds with businesses. Private sector-led growth is key for any economy as it is more efficient in the distribution of resources. Also, it is reported that government mortgages its minerals to access loans from countries like China.
The onus is on the government to devise a clear strategy for payment of its debt to access fresh lending from bilateral and multilateral creditors, bearing in mind, no country is purely self-sufficient- even the USA borrows to finance its programmes. Vital to the matrix, is the maintenance of a sustainable level of debt.
Mabunda is an analyst and TV anchor at Equity Axis, a leading financial research firm in Zimbabwe. — email@example.com.