Zimbabwe stutters under external, domestic debt weight





While it is clear Zimbabwe has had little success in its interventions to resolve an unsustainable US$13,3 billion external sovereign debt, a further worrying reality is the apparent lack of a viable strategy to expunge the equally malignant domestic public debt.

Analysts said the Treasury was as much obligated to come up with a more solid plan to expunge the domestic debt, which constitutes a weighty 22 percent of Zimbabwe’s total sovereign debt, as it weighed on domestic investment and the viability of local firms.

The Treasury has attempted to shortcut its way to dealing with the domestic debt, to be expunged through Treasury Bills and Bonds, but what is clear and worrying is the short-term nature of domestic securities, with more than 65 percent maturing in 2022, raising a high risk of financing challenges.

Although Finance and Economic Development Minister Mthuli Ncube, has tried to calm the nerves of investors by insisting the national budget will remain below 3 percent through 2025, observers believe the impact of global inflation, Covid-19, slower economic growth and climate change issues raise formidable constraints to the fiscus.

The Southern African country is saddled with an unsuitable debt of just over US$17 billion, the bulk of it external and already in arrears owed to multilateral institutions, mainly the World Bank, African Development Bank, Paris Club members and bilateral partners.

The stock of domestic debt as of end of December 2021 increased to $412,9 billion, from $16,7 billion (roughly US$7 billion) at the end of December 2020 — 14  percent share of Gross Domestic Product, in 2021, compared with 1,4 percent in 2020. This increase is due to the inclusion of compensation to Former Farm Owners in domestic debt data.

Treasury said compensation of former farm owners is included in domestic debt as these farmers were Zimbabwe residents at the time of the acquisition of farms. It said debt is classified by the residence of the holder or creditor, whereas debt from foreign resident creditors is classified as external, while debt from domestic resident creditors is classified as domestic.

Total public and publicly guaranteed (PPG) external debt stock as of the end of December 2021 stood at US$13,35 billion, of which 42 percent is owed to bilateral creditors, 20 percent to multilateral creditors and 37 percent is RBZ external debt (including blocked funds).

Arrears on external debt, which amounted to US$6,6 billion (49 percent of total external debt), remain a major protracted challenge to restoring debt sustainability and to the economy, resulting in the lack of access to official external financing, Treasury said in its 2022 Annual Debt Bulletin.

Currently, Zimbabwe has been blacklisted by major international lenders, including the IMF, where it cleared its liabilities in 2016 but remains barred from accessing new credit due to the pari passu rule, which compels the equal treatment of all multilateral lenders.

Poor economic policies over nearly two decades, with late former President Robert Mugabe in charge of the Government, allowed the economy to shrink nearly 50 percent, making it difficult for the country to meet its external obligations.

Crippling western sanctions, motivated by Zimbabwe’s decision to redistribute farms formerly owned by minority white former commercial farmers to the landless majority, have left the country in an even worse situation regarding its ability to pay its creditors.

Zimbabwe pursued various avenues in an effort to clear its debt and arrears, including the Lima Plan, which was approved and adopted by its creditors but made little progress. Without access to external finance, the country has struggled to sustainably grow its economy.

Observers say Zimbabwe needs a holistic plan for both foreign and domestic debt in order to place the economy on a sustainable path to development. As things stand, Harare has focused entirely on foreign debt, and without success.

While the Treasury has made frantic efforts to resolve external public debt, with little success, the Zimbabwe National Chamber of Commerce said a debt resolution strategy was equally important and urgent for domestic debt.

“Debt is debt, when dealing with debt you cannot have urgency on domestic debt only or on external debt only. You have to deal with the whole date holistically because if you owe someone, domestically or internationally, the impact is almost similar.

“So, I do not think there is need to look at it separately to say because once you ignore domestic debt to deal with the external debt for example it means that you are constraining domestic investment.

“When we talk about resolving debt, it is not necessary to separate domestic from external debt. What you can do is possibly work hard to make sure domestic debt on its own does not grow as fast as external debt, because you can avoid domestic debt.

“This is because domestic debt has a lot to do with profligacy or spending beyond our means, but external debt, obviously, your IMF, World Bank; you need funding to support the balance of payment, industry, and so on, but it has to be moderated of course,” he said.

Zimbabwe Coalition on Debt and Development head of programmes, John Maketo, said there equally was an urgent need to address the country’s domestic debt position given domestic debt had the negative impact of crowding out private players in the capital market.

“Private players cannot compete with the government in terms of borrowing,” he said, adding that unsustainable domestic debt had a negative impact of slowing down industrial growth by denying suppliers what they are owed by the State.

“It means their operational capacity is reduced because when the Government is borrowing, it is not only borrowing from financial institutions, it is also borrowing from service providers and delayed payments have an effect on service delivery,” Mateko said.

He said to address challenges emanating from unsustainable debt, there was need to work on interventions that restore the competitiveness of State-owned enterprises, which are also heavily indebted.

Maketo some of the poorly performing state-owned entities and parastatals, which have depended on assistance from the Treasury, including through handouts and guarantees for debt, should be privatised, save for the ones providing critical services.

“Secondly, we need to have a level of transparency and accountability in terms of who owes who, because if you look at some of the domestic debt, you are looking at debt assumed from parastatals; you are looking at blocked funds.

“What needs to be done is also to develop a clear roadmap on our macro-economic framework to ensure that companies; private sector players and all economic players can predict tomorrow and plan accordingly and we can go back to competitiveness,” Maketo said. – Business Week




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