Debt clearance key to economic growth
GOVERNMENT should clear its foreign and domestic debts if it is to receive funding for its budget and achieve a projected economic growth rate of 2,7 percent, analysts and industry players have said.
Captains of industry and economists who spoke during a post budget breakfast meeting last week said negotiations for funding could only be fruitful if the country repaid its outstanding debts.
They also said creating an environment and policies that attract foreign investors was critical to economic growth projections outlined in the 2016 National Budget.
Zimbabwe’s debt situation remains an impediment to economic development, they said.
The country is in debt distress, with large external payment arrears, against the background of limited fiscal space.
As at August 31, 2015 total public debt was said to comprise an external debt of US$7,3 billion and domestic debt of US$1,3 billion. The stock of accumulated arrears accounted for 81 percent of the total external debt.
BancABC chief economist, James Wade, said the country risked missing its revenue target if it failed to achieve set economic growth forecasts. That growth was also likely to be affected by an absence of lines of credit, he said.
“Yes, we need positive growth but we need to clear our arrears to match with regional growth. As we speak the domestic debt is US$1,3 billion, about nine percent of the country’s Gross Domestic Product. With government taking over Zisco’s debts, its means this figure will grow,” he said.
Finance Minister Patrick Chinamasa last Thursday said government would assume Zisco Steel’s debt amounting to over US$450 million in order to free its balance sheet and make it attractive to potential investors.
Zisco owes various creditors who include KFW of Germany which is owed US$187 million and Sinosure of China is owed US$59 million. According to the Reserve Bank of Zimbabwe, the country’s external debt has continued to outgrow exports, with the external debt to export ratio increasing from 168 percent in 2000 to 380 percent in 2009. The figure declined to 225 percent in 2013 and 200 percent last year.
“High external debt to export ratio is of great concern because of its negative effects on investment and savings. About 30 percent of Zimbabwe’s exports are going to China. If the country responds to unfavourable global markets, this can negatively affect us,” Wade said.
Agribank chief economist, Joseph Mverechena, said the country’s debt overhang had downgraded the country’s credit rating, constraining access to concessional financing and to international capital markets
Chinamasa said showing commitment to clear the country’s debts especially with the International Monetary Fund and World Bank had reduced the country’s credit risk. He said it was not possible anywhere in the world to continue receiving money from a debtor whom you would have failed to repay at agreed dates.
“As we clear the arrears, they must give us money to finance our economy. We need to build our economic capacity to repay our debts,” said Chinamasa.
The 2016 national budget reiterated government’s commitment to clear the US$1,8 billion debt arrears it promised to pay to its multilateral creditors in Lima, Peru, recently. This means resources have to be set aside to extinguish that debt.
“We have made commitments to clear debts by April next year. If we go the extra mile to clear the arrears, it will be a new ball game entirely because that will put us in line for a country financing programme. Acceptance of our arrears clearance strategy has improved our standing. Our risk premium is already being looked at in better terms,” he said
The high public debt burden has been further exacerbated by the structural weaknesses inherent in the Zimbabwean economy such as lack of diversified export base and declining terms of trade and competitiveness, which make it difficult for the country to adjust to changing world demand for tradable goods and changing production patterns.
These structural weaknesses have constrained the country’s ability to generate high and sustainable growth that is necessary to mitigate and even forestall needless debts and their attendant problems.
With no budgetary support from multilateral institutions due to a growing sovereign debt, government has had to rely on internal revenues and limited financiers.
Public infrastructure has been run down and requires immediate resuscitation, the local healthcare sector is under supplied with drugs, electricity generation continues to decline while supply of water is not consistent.
Industrialist and Dairibord Holdings group chief executive officer, Anthony Mandiwanza, said government needed to “urgently clearly spell out” the indigenisation policy.
The policy is understood by foreign investors to be an extension of the land reform programme under which government expropriated white-owned farms without paying compensation.
The current high debt burden has increased expected future taxes on the private sector and lowers private investment. In addition, debt overhang can worsen economic performance by changing the quality of investment when quick-yielding projects are preferred to higher value long-term projects.
Another consequence of high public debt is the crowding-out effect.
High debt service payments put great pressure on budgets, leading to rising fiscal deficits in highly indebted countries. Servicing of external debt also crowds out domestic investment.
ZNCC chief executive officer, Chris Mugaga, told the Financial Gazette that Chinamasa was facing a herculean task. He said it was important for him to avoid trying to “square the circle”.
“Everything about coming up with the 2016 national budget was a challenge. First he has to rise to a higher bar of honesty and tell the nation that the national budget will certainly not make a difference. The budget should mainly focus on addressing the policy environment not trying to allocate unavailable resources,” he said.
For many years virtually all government ministries have failed to receive their allocated budgets due to increasing fiscal pressures.
“Actual outturn in terms of economic performance has proven that 2015 was a worse year than 2014 and 2016 will be much worse. Chinamasa will face challenges of having to be answerable to a populist culture of party politics whilst telling the industry the true economic story. For instance he cannot afford to give bonuses to the civil servants but his party will not afford such as risk in the face of growing disaffection in the rank and file of government worker,” Mugaga said.
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