ZIM'S LIQUIDITY SITUATION: THE IMPACT OF DEBT:
In my previous instalment of this column, which appeared in The Sunday Mail of March 13 2016, I gave an account of the different sources and uses of liquidity in Zimbabwe. I also explained the demand and supply constraints of liquidity in the country befo
THESE measures include controls on the banks’ foreign account (NOSTRO) balances and cash withdrawal limits from banks. I also did an analysis of how these policies would work under today’s constraining conditions and indicated that I will proffer some advice on what I consider to be the best ways to manage the country’s liquidity situation. Before I do that I would want to introduce another important aspect to Zimbabwe’s liquidity situation, which is the focus of this instalment. This issue is about debt at both Government and the private sector levels.
Debt has become a major issue of concern for policy makers and the generality of Zimbabweans alike.
The country is currently burdened by debt,which if not properly managed will continue to take toll on the future generations. As at September 30 2015, Zimbabwe’s public and publicly guaranteed debt inclusive of arrears stood at $8,368 billion of which $1,29 billion was domestic debt, whilst $7,078 billion was external debt. The makeup of this debt is as shown below.
At $8,368 billion the total Government debt was about 68 percent of GDP. The bulk of this amount is legacy debt that was contracted prior to dollarisation in 2008. This explains why 67 percent of Government debt was in arrears with about 80 percent of the foreign debt as at September 30 2015 overdue.
Public domestic debt largely relates to issuance of Treasury Bills (TBs) to assume RBZ debt under the Reserve Bank Debt Assump- tion Act passed into law in August 2015. The RBZ contracted debt amounting to $1,35 billion in respect of quasi fiscal activities it undertook prior December 31 2008.
This debt is split into external and domestic debt of $587 million and $763 million respectively. Quasi fiscal activities relate to those expenditures that ordinarily fall under the purview of line ministries but were undertaken by RBZ.
During the said period, the RBZ rolled out a number of facilities in support of quasi fiscal activities, ostensibly to save the economy from total collapse at the height of economic decay. These include the Basic Commodity Supply Side Intervention Facility (BACOSSI), Productive Sector Facility (PSF), Operation Maguta, Agriculture Sector Productivity Enhancement Facility (ASPEF) and Parastatal and Local Authorities Reorientation Programme (PLARP) among others.
These facilities were partly funded from funds confiscated from depositors’ foreign currency accounts at different banks by the RBZ. An analysis of the performance of these facilities largely reveals rampant abuse by the beneficiaries, resulting in minimal value creation in the economy.
In fulfilment of the 2015 Lima agreement, the Government of Zimbabwe (GoZ) is supposed to clear its arrears of $1,8 billion to International Financial institutions (IFIs) namely World Bank ($1,1bn), African Development Bank ($601m) and the IMF ($111m) by 30 June 2016 to pave way for the advancement of new debt on better terms.
Government should come out clear on how these arrears will be cleared within the agreed timelines. Given its tight financial position there is general market fear that the Government may lay its hands on depositor’s funds as before. We have got now is that IMF arrears are proposed to be paid from drawings on the IMF Special Drawing Rights, World Bank arrears will be refinanced from extension of loans from friendly nations whilst ADB is going to provide a grant to Zimbabwe to able the latter to clear its arrears. Because these are all foreign sources, the impact of arrear repayment is minimum.
Clearly the clearance of IFIs arrears will have a significant impact on the country’s liquidity position as these IFIs will have to immediately advance the country new loans on better and more affordable terms.
This will also set the stage for negotiations with to the bilateral creditors as the country’s risk profile is reassessed. Consequently, the country may start receiving better lines of credit at public and private sector level, which will improve the liquidity conditions in Zimbabwe.
In assessing the impact of debt on the country’s liquidity situation we take a view on its contribution towards value creation. Debt that is applied towards productive uses would result in value creation and therefore increased flow of money in the economy.
However, in cases where debt is applied towards unproductive or consumptive uses its repayment will place a burden on the future generation who will have to bear the brunt of higher taxes and reduced supply of public goods.
This is exactly the situation in Zimbabwe today. Being a consumptive economy, the bulk of Zimbabwe’s debt went into consumption. Zimbabwe consumes more than 80 percent of its GDP and prior dollarisation this insatiable quest to consume was accommodated through budget deficits. These deficits were largely funded through borrowings and printing of money.
Due to the inordinate consumption levels not supported by production, there was huge dependence on imports. The resultant trade deficits were mainly funded from foreign debt, which explains the high level of foreign debt in Zimbabwe.
Like I indicated in my prior instalment of this article, debt repayment is a leakage from the flow of liquidity in a country. Foreign debt has more impact on liquidity than domestic debt because it involves movement of money outside the economy. Because about 68 percent of Zimbabwean debt is foreign, the consequences of its repayment on the country’s liquidity position maybe more pronounced.
However, as indicated earlier on there is scope of rescheduling or restructuring of the country’s foreign debt in the event that the Lima agreement is concluded well. That’s why a number of policy makers are pinning their hopes on the successful conclusion of the Lima agreement as an answer to the country’s liquidity situation.
Domestic debt is a problem to the extent of its funding, which may result in higher taxes like what we see in Zimbabwe today. Zimbabwe’s debt is not backed by production and its repayment is like filling a hole that was created when the money was initially borrowed.
Others are of the view that by issuing TBs in respect of domestic debt, the Government has actually created artificial money which is largely blamed for the worsening the country’s liquidity problems. The Government may have to continue staggering payments to its creditors including wages as pressure on cashflows increase due to repayment of interest on TBs and principal on their maturities. It may also have to continue with tax set off arrangements with some of its creditors.
ZIMRA may also have to intensify its tax collection efforts given the shrinking tax base. However, in some cases ZIMRA has been blamed for killing the goose that lay the eggs. Being the biggest borrower in the market Government is also crowding out the private sector thus limiting the flow of liquidity.
The issue of debt in Zimbabwe extends beyond Government. The private sector, which comprise of households and corporates is also highly indebted. When the country’s savings were wiped away by dollarisation in 2008 a number of companies resorted to debt to recapitalize their businesses.
However, a number of businesses are not doing well to justify the high cost of borrowing weighed by the effects of deindustrialisation, lack of competitiveness and dilapidated infrastructure among other challenges. This resulted in a significant growth of underperforming loans which peaked at 20,45 percent in June 2014 prompting the RBZ to form Zimbabwe Asset Management Company (ZAMCO) to deal with these Non Performing Loans (NPLs).
Non Performing loans tie liquidity in a number of ways. In the event of a debtor making losses any loan advances will go towards filling the hole created by the losses mainly repayment of creditors instead of creating value for the company.
In Zimbabwe because of high dependence on imports repayment of creditors will result in significant loss of liquidity to foreign suppliers. Secondly banks are naturally reluctant to lend when the level of NPL is high. This impacts on credit creation and the flow of liquidity in the economy.
Like in the case of Government and firms, the households in Zimbabwe are highly indebted. The performance of household debt will be severely constrained by the sluggish economy. It is assumed that more than 10,000 employees lost their jobs from July 17 2015 to date, following the infamous Supreme Court ruling in favour of termination of employment by three months’ notice.
This has resulted in loss of means and therefore inability of the affected parties to honour their debts which also affected the circulation of liquidity. Banks have also slowed down lending to this risk sector.
Debt become increasingly difficult to deal with when faced with deflation. Deflation results in increase in the real debts levels making it increasingly difficult to service let alone pay these debts. Zimbabwe is currently in a deflationary scenario with deflation of 2,47 percent having been recorded as at December 31 2015. The difficult operating position and high debt levels have prompted some market analysts to advocate for the return of the Zimbabwe dollar or adoption of the rand, both suggestions I have problems with.
These subjects will form part of my future discussions.
Persistence Gwanyanya is an Economist, Banker and a member of the Zimbabwe Economics Society. He writes in his personal capacity. For feedback you can use my email address percygwa@gmail.com or WhatsApp me on +263 773 030 691.