By Zvikomborero Sibanda
Many developing countries experience increased and frequent macroeconomic volatilities due to a plethora of endogenous and exogenous factors inter alia political instability leading to civil wars; populist economic policies; import dependency; vulnerability to natural disasters driven by climatic changes; strong structural rigidities like price distortions, weak institutions, and high corruption; and unsustainable public borrowing. It is the latter that has emerged as one of the biggest challenges that are stifling economic growth in Zimbabwe. Recently, Treasury released public debt statistics and this column analyses the sustainability of reported debt stock.
Zimbabwe Total Debt Profile
The latest 2022 Annual Public Debt Bulletin (APDB) released by the Public Debt Management Office (PDMO) shows that Zimbabwe’s public debt continues to balloon unsustainably. Statistics indicate that total Public and Publicly Guaranteed (PPG) debt surged 2.4% between September 2022 (US$17.6 billion) and December 2022 (US$18.03 billion). In annual terms, it increased by 4.8% from US$17.2 billion reported as of the end of December 2021. Of the 2022 total PPG debt, external debt constitutes 71.2% (US$12.8 billion) while domestic debt constitutes the balance of 28.8% (US$5.2 billion).
External PPG Debt
Zimbabwe owes about US$12.8 billion externally. Of this total, 45.9% (US$5.89 billion) is bilateral debt comprising Paris Club debt (US$3.76 billion) & non-Paris Club debt (US$2.13 billion); 33.1% (US$4.24 billion) of external PPG debt is external debt contracted by the RBZ while about 21% (US$2.7 billion) is debt owed to multilateral creditors as follows: World Bank (US$1.55 billion), African Development Bank (US$0.69 billion), European Investment Bank (US$0.4 billion), and Others (US$0.064 billion). A large chunk of external debt is interest arrears (IRA), principal arrears (PRA), and penalties (PEN) as shown in the figure below.
Nature & Scale of External PPG Debt (US$ billions)
For instance, of the combined bilateral and multilateral external PPG debt totaling US$8.59 billion, about 77.6% (US$6.67 billion) are arrears of principal and interest including penalties disaggregated as follows: IRA (24.9%), PRA (42.8%), and penalties (32.3%). In 2022, disbursements received from external loan arrangements amounted to US$194.3 million, up 441.2% from US$35.9 million disbursed in 2021. Also, the nation managed to make only about US$63.97 million toward debt servicing in entire 2022 with 20% of this total being token payments. A token payment is a small payment made to acknowledge a debt or an agreement.
Domestic PPG Debt
Domestically, Zimbabwe owes US$5.2 billion. Of this amount, 67.3% (US$3.5 billion) is unsettled compensation to FFOs as per the 2020 Global Compensation Deed, 28.9% (US$1.5 billion) is blocked funds, 3.6% (US$0.19 billion) is treasury bills & bonds, and 0.2% (US$0.012 billion) are arrears to service providers. The massive increase (44%) in total domestic PPG debt between September 2022 (US$3.6 billion) and December 2022 (US$5.2 billion) is attributable to the reclassification of blocked funds as domestic debt following the assumption of these from the RBZ by the Treasury.
Treasury also concluded a USD-denominated domestic loan with a private company (Platinum Investment Managers (PIM) Nominees) to the tune of US$360.5 million for road construction and rehabilitation. The Treasury issued TBs totaling ZWL83.36 billion for budget financing in 2022 with 55% issued through private placements while 45% were issued through auction system. More so, Treasury managed to pay all maturing TBs & Bonds totaling ZWL36.47 billion comprised of principal (ZWL31.34 billion) and interest (ZWL5.10 billion). However, as of the end of 2022, about ZWL129 billion TBs & Bonds were outstanding, with a total interest bill of ZWL52 billion.
Debt Sustainability
Generally, countries borrow to smoothen their spending paths, that is, raise money to finance economic growth and development. However, nations must maintain sustainable debt levels to avoid jeopardizing the stability of the economy. Public debt is considered to be sustainable if the government can meet all its current and future obligations without exceptional financial assistance or going into default. The debt-carrying capacity depends on various factors including, inter alia, quality of public institutions, debt management capacity & policies, and macroeconomic fundamentals.
Zimbabwe PPG Debt Indicators
Zimbabwe’s total PPG debt constitutes about 99.6% of 2022 GDP thereby contravening the provisions of both the Public Debt Management (PDM) Act requiring a debt-to-GDP threshold of 70% and SADC’s macroeconomic convergence target of 60%. This debt-to-GDP threshold also far exceeds the National Development Strategy 1 (NDS1) target of 61.5%.
A debt-to-GDP ratio shows a country’s capacity to repay its debts. As such, Zimbabwe’s high ratio indicates that public debt is growing faster than national income thus the nation has a very low capacity to meet all of its financial obligations when they fall due.
As such, the country is indeed trapped in debt distress as arrears and penalties continue to mount. Statistics show these constituting about 52.1% of external PPG debt or 78% of combined bilateral and multilateral creditors estimated at US$8.59 billion.
The ballooning debt is a great cause for concern especially under the current context of rising global interest rates as major central banks are engaging in financial tightening to clamp elevated global price inflation. It is worrisome to note that 71.2% of total PPG debt is external debt which is denominated in global hard currencies: US dollar (64%), Euro (22%), Chinese yuan (6%), Japanese yen (4), and British Pound sterling (3%).
With a too-volatile local currency that has lost more than 80% of its value against the USD in the first half of 2023, the external debt profile shows that Zimbabwe is highly susceptible to exchange rate risks, that is, it requires more ZWLs to service external debts. Hence, more resources will have to be provided for in the National Budget, the resources which would otherwise be used to provide crucial public services like education and healthcare as well as rehabilitating crumbling economic & social infrastructure, particularly in rural underserved and marginalized communities.
Also, the maturity profile of outstanding domestic PPG debt is vexatious. The latest statistics show that about 90% of Treasury Bills & Bonds mature in less than two (2) years, indicating that Treasury is facing a high refinancing risk.
Debt refinancing risk refers to the possibility that a borrower will not be able to replace existing debt with new debt at a critical point. Factors that are beyond Treasury’s control such as rising interest rates and a shrinking credit market will likely constrain its ability to refinance maturing TBs.
Furthermore, international reserves as measured by months of import cover are declining, from 2.7 months in 2021 to a paltry 1.1 months in 2022 (see Table above). Import Cover (IC) measures the number of months of imports that can be covered with foreign exchange reserves available with the central bank.
Ideally, an IC of about six (6) to ten (10) months is essential for the stability of a currency. It is an important indicator of a nation’s external trade stability and its ability to meet import obligations. So, Zimbabwe’s low IC illuminates her potential high vulnerability in managing import requirements or external shocks.
The incessant growth of external debt is bothersome as the country has now a low reserves-to-external debt ratio. This ratio shows how many dollars Zimbabwe has in reserves for every dollar of debt owed to external creditors. A huge external debt is problematic because it directly damages capital inflow and often leads to a vicious debt cycle – the cycle of continuous borrowing, accumulating payment burden, and eventual default.
Defaults can cause a borrowing country to lose market access and suffer higher borrowing costs, in addition to harming growth and investment. This is exactly the case faced by Zimbabwe and has raised caution among her prospective lenders like IMF and AfDB who are now unwilling to extend concessionary lines of credit.
Consequently, the nation is now resorting to resource-backed loans (RBLs). These are loans provided to the government where repayment is either made directly in natural resources such as minerals or repayment is guaranteed by a resource-related income stream. For instance, in 2022 Treasury revealed that Zimbabwe borrowed US$200 million from China in 2006 which loan was secured by 26 million ounces of platinum reserves in Selous.
These RBLs are exerting dire developmental impacts as they are fuelling unsustainable resource extraction leading to environmental degradation, air & water pollution, forced displacements, and farmer-miner & human-wildlife conflicts. They are also largely accrued in secrecy thereby sidelining Parliament and increasing the chances of corruption.
The debt cycle is also greatly affecting the government’s flexibility to react to adverse or unforeseen contingencies. This is happening at a time the world is experiencing seismic shifts in climatic conditions as natural disasters like El-Nino-induced droughts, floods, and cyclones are becoming more frequent.
These are having a huge toll on the Global South (developing) countries. As such, the ballooning debt is constraining Zimbabwe’s capability to invest in climate change mitigation and adaptation initiatives to cushion vulnerable groups & communities and improve economic resilience.
Zvikomborero Sibanda is an economic analyst and an astute researcher. He writes in his personal capacity. He can be contacted via email:
bravosibanda@gmail.com
Twitter: @bravon96
