‘Future debt contraction should be tied to repayment capacity’

THE Government should ensure that future debt contraction is tied to repayment capacity and enhances the productive sector, currently hamstrung by an array of complex challenges, experts have said.

This comes as the external debt burden has been identified as one of the major problems choking the performance of the local industry, as businesses find it difficult to access adequate funding from local banks to meet needs such as retooling.

While the country is exploring economic turnaround strategies to achieve an upper middle-income economy by 2030, and battling to recover from the adverse impacts of the Covid-19 pandemic on businesses, the road to recovery is expected to be difficult.

Such efforts are, however, being slowed by the country’s unsustainable debt overhang, which has made the country uncompetitive and unattractive to international money lenders.

Over 50 percent of the country’s external debt is in arrears and at about US$14 billion (84,7 percent of gross domestic product) by September 2022, which breaches the International Monetary Fund’s recommended threshold of 60 percent of GDP for emerging economies.

President Mnangagwa has since enlisted African Development Bank (AfDB) president Dr Akinumwi Adesina and former Mozambican president Joachim Chissano to champion Zimbabwe’s arrears clearance and debt resolution framework.

It is against this background that economist Dr Cornelius Dube called on relevant authorities to carefully assess the pros and cons of future debt arrangements and ensure they help boost the productive sectors.

This, Dr Dube said, will help the country avoid past mistakes where external loans were contracted, but it was not clear how the debts benefitted the economy in general, yet they placed a burden on the fiscus and taxpayers.

“As a country, how we utilise our debt to create additional capacity to produce is very critical,” he said at the recently held fifth annual Zimbabwe Debt Conference hosted by the African Forum and Network on Debt and Development (AFRODAD).

“The first thing is we all accept and agree that the capacity does not exist to repay.

“But we need to ensure that future debt creation helps build repayment capacity,” he said.

While Dr Dube acknowledged debt was also good in boosting productive sectors, he emphasised that some loans may not be necessary for an economy looking at rebuilding itself.

He also highlighted the need to borrow for productive and expansion purposes, as well as practise fiscal responsibility.

In line with this, debt, therefore, he said, should create its own repayment capacity, a situation which bankers have also concurred with.

AFRODAD executive director Jason Braganza also warned African countries, Zimbabwe included, to be cautious when contracting loans from international lenders as some of them were not necessary and beneficial, subjecting the country to indebtedness and poverty.

Zimbabwe has since independence contracted several loans that have only added a strain on the Government as there was not much value accrued from them, or the creation of more revenue to service those debts.

“If we trace some of the loans we got, you will see we could do without some of them, but put ourselves in trouble,” he said.

For example, in 1983, the Government reportedly took a US$7 million loan for a tree planting project for firewood, although there was no demand for such an initiative from farmers who got wood from indigenous trees.

In partnership with the development bank KfW of Germany, US$10 million worth of loans were issued by the World Bank to support small-scale farmers in the country.

Another US$30 million was disbursed between 1996 and 2000 to provide credit for small businesses in the country, but debt obligations were later taken over by the Government.

“Debt should create capacity to repay,” said Dr Dube.

“However, if farmers struggled to repay, all the costs fell on the Zimbabwean Government,” he added.

Civil society has also highlighted the nexus between industry performance and good debt management.

At independence, Zimbabwe inherited a US$700 million debt from the Rhodesian government, which has created a strain on the fiscus and economy. High debt service obligations, fiscal deficits, stunted growth and constrained access to new external financing in the 1990s culminated in a net outflow of resources that saw the country record its first default by 2000 and later being isolated from the international financial system under the Zimbabwe Democracy and Economic Recovery Act (ZIDERA).