Public debt chokes economy

HARARE - Zimbabwe's economy will soon explode if government does not come up with an immediate solution to expunge its growing national debt, analysts have warned.

The southern African country’s public debt has ballooned to $16,9 billion — 96,79 percent of gross domestic product (GDP) — due to government’s high expenditure that saw domestic debt jumping from $275,8 million in 2012 to $9,5 billion this year.

Africa Economic Development Strategies executive director Gift Mugano said while the government’s new debt strategy was a step in the right direction, it was important for Harare to live within its means and not continue on the dangerous path of spending what it doesn’t have.

“In my view after having looked at our situation, if we don’t getbail… or fresh injection of capital we are heading for a sudden crash!

But I don’t foresee anyone giving us a bailout considering our high debt to GDP ratio that exceeds forecasts and thresholds levels,” he said.

The debt-to-GDP ratio gives an indication of how likely the country can pay off its debt.

Investors usually don’t become concerned until the debt-to-GDP ratio reaches a critical level.

According to the World Bank, a country’s debt-to-GDP ratio is considered to have reached a tipping point when it reaches 77 percent.

When it appears the debt is approaching a critical level, investors usually start demanding a higher interest rate.

They want more return for the higher risk. As interest rates rise, it becomes more expensive for a country to refinance its existing debt.

In time, more income has to go toward debt repayment, and less toward government services.

Zimbabwe has struggled to access international credit since defaulting on its debts to global lenders two decades ago and running up arrears of over $7,4 billion.

The Parliament Budget Office recently warned that Zimbabwe’s sovereign debt could grow by 8,69 percent to a record high of $20 billion by year-end, stoked by continuous public borrowings to finance persistent budget deficits through Treasury Bills (TBs) and central bank overdrafts.

The parliamentary unit noted that the country’s sovereign debt was primarily driven by government’s deficit financing activities, which have seen an expanded issuance of TBs, coupled with unfunded electronic transfers under Treasury’s overdraft facility with the Reserve Bank of Zimbabwe.

While Finance minister Mthuli Ncube has promised to clear debts and cut government expenditure by introducing austerity measures, analysts are still skeptical given the country’s past history where significant over-expenditure led to ballooning government debt, with substantial arrears still owed to the African Development Bank (AfDB) and the World Bank.

“While it is not surprising that the misspending has endured throughout the first half of the year, one was hopeful that this new administration would stay true to the expenditure management targets, as set under the 2018 national budget, and try to reverse the ruinous deficits that the government has been running.

“The current levels of government misspending in the context of high debt levels are simply unsustainable. The wheels are likely to come off at some point if the government continues down this path,” said Jee-A Van Der Linde, an analyst with NKC Economics.

The Zimbabwe Coalition on Debt and Development (Zimcodd) concurred with Van Der Linde and said the current economic trend can largely be attributed to lack of fiscal transparency and mismanagement of public resources.

The effect of the national debt stock on the livelihood of citizens is often understated. The government has turned to local funding for its operations resulting in an overdraft with the Reserve Bank of Zimbabwe of $1,2 billion and the issuance of Treasury Bills worth over $2 billion to get funding from local banks.

“Local banks in turn have channelled their deposits back into treasury bills. This has heavily curtailed the ability of depositors to withdraw their money in the form of cash; hence the long queues that now exist outside the banks. The damage on small to medium enterprises, rural small scale farmers, vendors and sole traders is crippling,” the organisation said.

Zimcodd noted that comprehensive and rigorous legislative measures must be considered to reduce the continued fiscal leakages, budget deficits and unsustainable debt amidst rampant illicit financial flows and poor social services delivery.

The nation is endowed with abundant valuable natural resources particularly in the form of mineral wealth, arable land and attractive tourist destinations which have not translated into improved standard of living for the majority of the citizens both in rural and urban areas,” the institution added.

Former Finance minister Tendai Biti said it was imperative for the government to prioritise the economy and reduce its high expenditure by slashing its huge wage bill and implement some economic reforms.

“We have to decapitate Zanu PF’s insatiable appetite for goodies. We have to devalue their appetite for champagne, for nice expensive perfumes and holidays, because it is costing the economy,” he said.

The MDC Alliance principal government should also deal with corruption in parastatals where millions of dollars are being lost annually.

“Focus should not on sources of revenue but curtailing expenditure,” he added.

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