‘High domestic debt stifles economic growth’

John Mangudya
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HARARE – The financing of a budget deficit predominantly through domestic debt, such as has been the case in Zimbabwe, leads to low economic growth rates, as well as subdued investment and entrepreneurial activities, Oswald Mungule, a policy analyst, has said.

Treasury says the country’s domestic debt has grown more than 3 000 percent since 2012 from $276 million to $9,5 billion. This makes the country’s domestic debt significantly larger than its external debt, which currently stands at $7,4 billion.

This comes as lines of credit into the country have been constricted since the mid-90s when Zimbabwe fell out with concessional lenders over arrears.

Mungule, who is a principal policy analyst at the National Economic Advisory Council in Lusaka, Zambia, said the financing gap should ideally be filled with a mix of domestic and foreign funds, but it should be skewed towards foreign funds.

“If domestic financing is larger than foreign financing, then private sector crowding out will arise…the implications of this will be low economic growth rates as well as low investments and entrepreneurial activities,” Mungule said while making a presentation at a Tax and Business Interface Week held by Tax Matrix last week.

“The financing gap has to be in the form of borrowing from a logical mixture of domestic and foreign financial market. This financing mix is what affects investments, employment, and economic growth,” he said.

Finance minister Mthuli Ncube blames the country’s unsustainable reliance on domestic credit on the country’s persistent budget deficit.

“At the centre of the country’s challenges, is the unsustainable high budget deficit. This challenge has had destabilising implications not only to the financial sector but to the rest of the economy,” Ncube said in his statement early last month.

The financing of the deficit was mainly through domestic borrowing with the use of instruments such as Treasury bills, overdraft and cash advances from the central bank and loans from the private sector.

“Such financing mechanisms are crowding out the private sector, hence constraining production. This also increased money supply in the economy translating into exchange rate misalignment and inflationary pressures now at 4,9 percent, as at August 2018,” the minister added.

Treasury says it will seek to finance government’s vital socio-economic development programmes by use of instruments that only ‘crowd in’ the private sector, including public-private partnerships or government guarantees to financial institutions.

Meanwhile, the central bank says future issuance of Treasury Bills will be through an auction system.

The apex bank says net credit to government from the banking system had expanded from $6,3 billion in December 2017 to $7,7 billion in June 2018.

“Developments in credit to government continued to reflect persistent budget deficits and the increased reliance by government on domestic sources of financing, through Treasury bill issuances, as well as bank loans and advances,” John Mangudya, reserve bank governor said in his mid-term monetary policy earlier this month. — The Financial Gazette