Is Public Debt Good or Bad for Zim?
By Learnmore Nyamudzanga
Debt is a sum of money that is due or owed.
Like individuals or businesses, a country may owe money to domestic or foreign lenders.
Debt is a topical issue; some see it as good while others see it as bad.
It’s the same with economists, Keynesian views on public debt are mostly optimistic, debt is seen as moral, productive and beneficial.
On the other hand, classical views of public debt are mostly pessimistic, and others believe that public borrowing is invariably unnecessary, devastating to prosperity, and even morally unjust.
Now we come to the Zimbabwean situation, is public debt good or bad?
I had the opportunity to attend the Zimbabwe Multi-Party Debt Conference September 22-24, 2021, which was helpful in writing this article.
The conference was organized by the African Forum and Network on Debt and Development (Afrodad) in collaboration with the Zimbabwe Coalition on Debt and Development (Zimcodd) to discuss public finance management and development issues in Zimbabwe .
It is clear from the conference that the nation is struggling to repay its debts and it has been in this situation since 2000, when the country first defaulted on its external obligations.
Faced with this debt challenge, the country has resorted to token payments to creditors, which amount to $ 17.04 million in the first quarter of 2021.
Before the Covid-19 pandemic, the country’s stock of external debt was already in slowing growth territory.
The Covid-19 further exacerbated the precarious situation causing the economy to contract, drying up revenue coffers, but additional spending was needed to fight the pandemic.
The country’s debt swelled (by 1429%) from US $ 0.7 billion in debt inherited from the Rhodesian government in 1980 to an estimated total public and government guaranteed debt (PPG) of 10.7 billion US dollars at the end of December 2020 (72.6% of gross domestic product). ).
This includes an external debt of $ 10.5 billion and a domestic debt of $ 20.91 billion.
So what are some of the challenges and impacts associated with unsustainable debt?
Over-indebtedness is normally associated with significant risks of slowing economic growth and deteriorating living conditions.
The poor and vulnerable who need health care, education and social security the most bear the brunt of economic decline.
Over-indebtedness typically involves cutting back on key social sector and infrastructure spending in order to avoid debt service default.
This increases taxes, which places a greater burden on the cost of living for citizens and can be passed on to future generations who will bear the burden of compulsory taxes.
Debt reduces the state’s ability to meet and fulfill its constitutional obligations with respect to economic and social rights with financial implications.
Cuts in social spending compromise the quality of human capital, and cuts in infrastructure spending reduce prospects for industrial development, industrialization and economic transformation.
Zimbabwe has limited access to multilateral debt relief initiatives and external loans (received special drawing rights of US $ 961 million equivalent to 9% of its external debt or a quarter of its budget in US dollars ), it incurs higher borrowing costs which reduce economic growth and investment.
All of this exacerbates poverty and inequalities in all sectors of the economy.
Why would a nation borrow?
A nation like Zimbabwe can borrow for:
l Structural purposes: to finance development expenditure such as the construction of roads and power stations.
l Market development objectives: create financial instruments that facilitate both primary and secondary trade in financial markets.
l Cyclical objective: stimulate the economy during a downturn.
The government can also use borrowing to bridge the temporary gap between revenue and expenditure.
l Political objectives: increase spending before an election. These funds are normally used for unproductive purposes to please the electorate before the elections.
Is Debt Good or Bad?
Debt is good if it has a low rate of interest, used for productive purposes and if the amounts can be repaid.
Debt is bad if a country only borrows for development without mobilizing national resources, if repayments are made at the expense of social spending (such as education, health and social protection), if the debt comes from from shark creditors (high interest debt), if it is borrowed for consumption, if the amounts are high that a nation cannot repay.
Debt is also bad if it does not respect the constitution and other legal frameworks for debt and public finance management.
It’s also bad if the process isn’t done transparently.
What’s the matter with Zimbabwe’s debt?
The debt is unsustainable, part of the money has been used for non-productive consumption, it includes odious debts, more than 70% of the debt is in arrears. In addition, total debt is above the SADC recommended threshold of 60% of GDP, the Public Debt Management Act (PDMA) threshold of 70% of GDP and, in most cases, overdraft. RBZ has greatly exceeded the 20% limit of the RBZ Act. .
Debt limits were exceeded without permission from Parliament, violating Article 300 of Zimbabwe’s constitution.
In addition, the debt is also made up of debts assumed by private and public companies despite citizen protest.
Our debt was compounded by a US $ 1.35 billion RBZ debt takeover, a US $ 495 million debt takeover from Ziscosteel and the Zimbabwe Asset Management Company (Zamco) acquired US $ 997 million in loans. non-productive.
This will negatively affect the country’s indebtedness, credit rating and public confidence.
In addition, the 2017 and 2018 public debt audits revealed a few anomalies.
Some also claim that the official debt statistics are an understatement of the true size of the debt, they do not include the US $ 3.5 billion compensation payments to white commercial farmers as well as opaque bank-backed loans. resources, to name a few. This is a huge debt burden that often weighs on the government and increases the tax burden on citizens.
How are some of the loans used by the government?
According to the Parliament’s budget office, some of the loans received were used to expand the Robert Gabriel International Airport (2018), the NetOne mobile network extension project, the modernization of the Bulawayo thermal power plant project and the Bulawayo thermal power plant project. Deka pumping station.
In 2019 and 2020, some of the loans were used to finance inputs for the 2019/20 farming season, the purchase of prepaid smart meters, the resupply of the Hwange 1-6 power plant and an intervention operation by emergency to fight against Covid-19.
The government must respect the legal provisions in terms of constitution, debt management and public finance management.
These include the principles of public financial management, not exceeding debt limits such as the public debt law threshold of 70% of GDP and the RBZ law overdraft limit of 20% (S .300, 119 CoZ; S 11, 52-61, 298 of PFMA, S.11 of the RBZ law, etc.).
All loans which exceed the above limits must be approved by parliament as stipulated by article 300 of the constitution of Zimbabwe.
There is also a need to improve transparency and accountability on issues related to debt and public financial management.
Citizen protest must be taken into account when assuming the debts of private and public companies and special attention must be paid to the impact of such decisions on the country’s indebtedness, credit rating, confidence and public confidence.
It is also necessary to conduct an inclusive and comprehensive total debt audit, in order to identify and eliminate illegal / odious debt.
This should be followed by debt restructuring, cancellations and a sustainable debt management framework and payment plan.
Regarding asset-backed loans, as discussed in my article titled What Do We Know About Asset-Backed Loans (RBLs)?
The government should: borrow transparently, budget lending, invest productively, make borrowing competitive, adhere to prudent borrowing limits, avoid as much as possible using resource rights as collateral , involve experts in negotiations and citizens, parliament and civil society organizations should demand transparency.
- Nyamudzanga is a freelance economist, tax consultant, member of the Zimbabwe Economic Society (ZES) and master’s degree in tax policy and tax administration. E-mail: email@example.com.
* These weekly articles are coordinated by Lovemore Kadenge, ZES and former president of the Institute of Chartered Secretaries & Administrators in Zimbabwe, now known as the Chartered Governance and Accountancy Institute in Zimbabwe (CGI Zimbabwe) – firstname.lastname@example.org or mobile +263 772 382 852.