Zimbabwe debt undermines growth

via Zim debt undermines growth | The Financial Gazette – Zimbabwe News by Paul Nyakazeya 27 Feb 2014

ZIMBABWE’S foreign and domestic debt will continue to undermine the country’s creditworthiness and compromise its ability to secure new funding, analysts have warned.Much of the borrowing has been for consumption rather than production, implying the debt is not being used to grow the economy, they said.

Economists said while debt remained crucial to development, it was the manner in which it was used that was of concern. The appetite for debt has been increasing in Zimbabwe due to lack of balance of payment support from bilateral and multilateral institutions as well as dwindling tax revenues due to company closure and high unemployment.

Economist David Mupamhadzi said: “Without debt, the country cannot go anywhere but it is how we use the money we borrow that would determine our economic revival and debt levels in future.” He said much of the country’s debt was going towards consumption, with little going towards projects that would result in employment creation such as power generation, road construction and other development projects.

Zimbabwe’s foreign debt is currently at US$6 billion. It will result in higher taxes if the country’s major sectors of the economy do not start performing, analysts warned.
Economist Brains Muchemwa said it was important to consider the ability of government to generate future revenue to offset the current debt stock. “The ability of the Zimbabwean government to service its debt is a function of the vibrancy of its revenue model, implying therefore that the economy must keep growing, broadening the tax base whilst a rational civil service reform needs to be implemented to conserve cash and improve the debt servicing,” Muchemwa said.

He said disposal and commercialisation of loss-making parastatals needs to be prioritised, and equally, the tightly regulated industries such as telecommunications needed to be further liberalised so that government generates more revenue from taxation. Zimbabwe was divided over former finance minister Tendai Biti’s proposal to put Zimbabwe in the Highly Indebted Poor Countries (HIPC) category.

Biti had said Zimbabwe had four debt and arrears clearance options which included mortgaging mineral resources to clear the growing debt, servicing through internal revenue inflows, Paris Club debt-rescheduling and the HIPC option for consideration by cabinet. Biti had proposed that Zimbabwe should adopt HIPC status because it had advantages which could reduce the country’s debt burden by 90 percent after full delivery of debt relief.

Some analysts said in theory, the initiative provided an opportunity for a country like Zimbabwe to re-channel the funds initially earmarked for debt repayment into capacity enhancing investments that serve as poverty-reduction programmes.  However, the reality of the HIPC initiative was said to be more of a Faustian bargain, in which future debt relief comes at a price of complying with several years of International Monetary Fund (IMF) and World Bank programmes with a patchy record of success in Africa.

While diligently pursuing World Bank and IMF-led reforms, African countries have often seen an increase in the poverty gap and the weakening of social services. Opponents highlight African countries in more desperate circumstances for the middle and lower classes despite such initiatives. Interest payments on foreign and domestic debt has for years remained over 50 percent of the total debt, a situation bank economists said was evident that government was broke and had no other source of income other than the domestic market.

This suggests that the solvency of government was already seriously compromised with the current interest rates, and technically government finances will not be better with even a one percent rise in interest rates. Analysts said the debt stock was likely to rise further on increased borrowing by government to finance the import of wheat and maize this year.

Government was also likely to borrow more funds to finance other recurrent expenditure like civil service salaries. Government has been forced to rely on domestic borrowings since its tax revenue base has dwindled because of company closures which have led to retrenchments. This means that government in real terms is collecting less money through corporate and income tax. The fact that Zimbabwe has no access to international capital has only made the situation worse.

Zimbabwe’s external debt has continued to grow mainly as a consequence of new payment arrears and interest and penalty charges on existing payment arrears.
While critics agreed that Zimbabwe required substantial financial support to turn its ailing economy around, civic society groups suggested the decision to seek HIPC status could be costly to the country in the long-term.

Zimbabwe’s debt levels were unsustainable, they said, but getting on the HIPC path could make it worse. The HIPC process is said to be arduous and involves a range of sometimes controversial policy demands by international creditors. With the aim of stimulating economic growth, governments in the face of tight financial and monetary constraints, resort to various fundraising measures, including the issuing of local/foreign currency-denominated bonds, and loans from multilateral institution, other countries and from private financial institutions.

The global trend toward financial liberalisation has led to diversified financing measures for developing countries. However, the redemption and interest repayments have not always taken place on schedule.  As a result of endogenous problems such as the vulnerable tax base, or exogenous shocks such as falling prices for foreign-currency earning products, natural disasters and currency and financial crisis , which the governments cannot control by themselves, countries often face solvency problems and go into default or debt crisis.