By Masimba Manyanya
ZIMBABWE’S public debt remains a topical policy dialogue issue. Just as Zimbabwe’s fast growing debt outpaces economic growth, life gets miserable for Zimbabweans, in particular the vulnerable social sectors. The asymmetry between the country’s abundant resources on the one hand, and debt and poverty on the other hand, brings to the fore an interesting issue for policy dialogues; what exactly is the public debt? Is debt good, or bad?
Debt represents opportunities
In simple terms debt is an amount of money borrowed by one party from another, on the condition that it is repaid at a future date, usually with interest.
Money is borrowed when available (personal/organisational/domestic) resourcesare inadequate to finance emergent or existing needs. Money is often borrowed to meet immediate, or emerging short term needs, because it is felt it will be more convenient to repay it at a future date, even with interest.
For individuals, large corporations and governments, debt represents a capacity to raise large sums of money often within a short space of time, for investment into assets or programmes that can generate a good return, or profit.
But a distinction can be drawn between a good debt and a bad debt; a good debt being when borrowed money can be invested into assets that yields a bigger return than the cost of the debt. And a bad debt is the case where borrowed money yields a return that is lower than the cost of the debt.
For private entities, it is relatively easy to estimate the profitability of investment of borrowed funds, as this normally boils down to financial values.
But the situation is different for government because the economic benefit tends to cover considerations that are also social in nature. In estimating costs and benefits of public sector projects, it will be necessary to look beyond financial returns as benefitsare usually social, as in the case of a rural bridge, or a rural water supply system.
Universally, Governments depend on taxes for their resources. Government debt represents an important opportunity to raise large sums of money, additional to taxes. Debt becomes a key advantage as it allows government to do more things than it otherwise could on the basis of limited tax revenues.
The Government of Zimbabwe recognises the value of debt in economic management. Section 11 (Borrowing Powers) of the Public Debt Management Act (PDMA) empowers the Minister of Finance and Economic Development with“the authority to borrow money on behalf of Government by concluding loan agreements, issuing Government Securities, or entering into suppliers credit agreements and to issue Government Guarantees, in Zimbabwe and in both local and foreign currencies”.
The PDMA further outlines the objectives of debt management as “to ensure that Government’s financing needs and payment obligations are met at the lowest possible cost, over the medium to long term, with a prudent level of risk, and to promote the development of the domestic debt market”.
The capacity to borrow is essential for developing countries primarily because of their small tax bases, resulting from inefficient revenue collection, weak budget financing mechanisms, public corruption and weak monetary and banking systems.Reflecting a general trend in Africa, Zimbabwe’s tax to GDP ratio is low, at less than 15% and also in decline.
Debt and macroeconomic stabilisation
Debt also serves important macro-economic stabilisation functions. This is when it enables the government to adjust its spending levels in such a way that it impacts on broader macro-economic variables such as prices, interest rates, and exchange rates. Thus for instance when the economy is in a downturn,the government can borrow and spend more money to expand aggregate demand and give a boost to the economy. Through its debt programmes government can mop up excess liquidity, it can attract and draw in savings into the banking system, meaning funds can be mobilised for private investment.
Following the economic upswings and downswings, money borrowed by government through its debt instruments during an economic downturn can then be repaid when the economy picks up.
At this stage, when economic growth has picked up to appreciable levels, it will not be necessary for government to maintain when the country may find it convenient or even preferable to cut down its spending below the amount available through taxation. Thus debt allows government flexibility in fiscal policy. If there was no opportunity for government debt, there would be no way to stimulate the economy during recession.
For all categories of borrower, where issues of character and integritycome under scrutiny, individuals, corporate entities and government, debt is one basic standard to assess creditworthiness. Historically, credit ratings are debt measurements used to assess the development of a country and the integrity of its policy processes.
Failing to make debt repayments on time affects ones credit rating, which directly affects future chances of securing loans. When an individual or organisation or government has a weak credit rating they find themselves in social, or political isolation; a dangerous precedent in the world of development finance.
When does debt become bad?
Zimbabwe’s experience with debt management mirrors that of many African countries. This includes pervasive tendencies to increase faster than the economy,and the crowding out of important social spending. Zimbabwe Government’s total public and publicly guaranteed (PPG) debt to GDP ratio was 88,9% in 2020, and this figure is expected to worsen in 2021 due to the economic impact of the Covid-19 pandemic.
The big question that remains is why Zimbabwe’s debt continued to mushroom, when the country has the resource potential to drive its economy to levels that surpass other countries in Africa? Why specifically should Zimbabwe, with all its vast mineral deposits, its land, and forestry resources, compete with the worst performers (Human Development Index score (2019) of 0.571— ranking at 150 out of 189 countries. And the Gender Inequality Index score of 0,527, ranked at 129 out of 162 countries in 2019).
The response to these questions starts with the key observation, as noted earlier that there is nothing wrong with debt per se. The important fact is that debt createsvaluable opportunities for development, as it is one avenue for mobilising large sums of money in the short term, for crucial investment.
The challenge rather, is with debt practices; alternatively the way in which debt is managed. Debt is fraught with many risks, and these are financial, social as well as political. This then calls for wisdom when making decisions about the public debt.
Debt management is principally an issue of economic governance. It is about laws, regulations, and institutions that facilitate and support policy development, fostering a framework of transparency, accountability and effectiveness in the way debt is managed. Without such institutions:
- There is lack of transparency when loans are contracted supposedly in the public interest;
- There is failure to repay loans as per agreed schedules when loans were contracted;
- There is failure of citizen accountability systems in debt management, which further aggravates illicit financial outflows and corruption;
- Debt distorts resource allocation systems which results in failure of prioritisation of private and public investments;
- Rate of debt accumulation tends to surpass the rate of economic growth, or wealth creation;
- Debt management is underpinned by repayment mechanisms that entrench regressive taxation, which widens income inequalities and aggravates poverty;
- Debt crowds out important public spending in the social investment sectors such as health and education;
- Debt leads to the collapse of local food production, widespread hunger and diseases;
- Debt undermines fiscal and macroeconomic stability, and opportunities for private investment, infrastructure development, and growth;and
- Debt (particularly foreign debt) endangers a nation’s political legitimacy and future heritage as national assets are mortgaged in the contraction of loans.
Manyanya is an economist. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries & Administrators in Zimbabwe. — firstname.lastname@example.org and mobile:+263 772 382 852.