Debt reduction strategy key to economic rebound

10 Aug, 2018 - 00:08 0 Views
Debt reduction strategy key to economic rebound

eBusiness Weekly

Zimbabwe’s public debt burden, composed of both domestic and international debt remains a key risk factor to economic revival going forward. The new elected Government, (hopefully the election dispute will be resolved soon) has its work cut out for it with respect to addressing the country’s critical debt problem, which has dented the confidence of international investors in the past. With a clear roadmap for debt and arrears clearance however, Zimbabwe’s debts can easily and efficiently be managed and confidence in the economy restored.

As at 30 March 2018, total public debt (domestic and external) was estimated at as much as 86 percent of Gross Domestic Product, a sharp increase from 70,6 percent of GDP at the end of December 2017.

Such a high public debt to GDP ratio is considered a debt distress situation, which negatively affects the country’s capacity to unlock external resources for infrastructure and social development expenditure.

The comfort factor is that under the new dispensation, President Emmerson Mnangagwa, has reaffirmed his strong commitment to political, economic, social and structural reforms, which also include a deliberate emphasis on a re-engagement programme with the international community as well as multilateral lenders.

The success of the re-engagement effort depends largely on the country’s plans for external debt arrears clearance as well as the subsequent management of new debt, which will be critical for financing Zimbabwe’s aggressive growth targets.

As it stands the country’s sizeable public debt burden together with accumulated arrears are significantly limiting the fiscal policy options available to the Government.

As at December 2017, total public and publicly-guaranteed external debt was recorded at $7,7 billion or 43 percent of GDP, of which $5,5 billion represented accumulated late payments.

Domestic debt had also increased by 15percent of GDP to $7,1 billion at the end of 2017 up from just $4 billion at the end of 2016.

This public sector debt position makes it very difficult for Zimbabwe to participate in international capital markets and also makes the country extremely vulnerable to fiscal shocks, which cannot be absorbed within the country’s relatively small domestic capital market.

It is for this reason that financing of the perennial fiscal deficits, primarily via the printing of RTGS dollars, an expansionary strategy, has rekindled incipient inflationary pressures, leading to a surge in demand for foreign currency.

It is, however, comforting that Government has adopted a strategy to clear these external arrears and normalise relations with Zimbabwe’s external creditors, whilst at the same time aiming to reduce the budget deficits by moving towards a more sustainable fiscal management framework.

These efforts to re-engage and normalise relations with external creditors as well as the wider international community are being intensified.

Zimbabwe, therefore, remains in debt distress, and according to the IMF’s Debt Sustainability Analysis (DSA) for July 2017, this situation continues to constrain the country’s ability to attract investment and access fresh capital.

International Financial Institutions (IFIs), including the African Development Bank Group, have been leading Zimbabwe’s re-engagement with creditors since the first Friends of Zimbabwe High Level Debt Forum, which was held in Tunisia in 2012, whilst a staggered arrears clearance strategy was initiated in October 2016 in an attempt to clear arrears to the IMF.

The country’s external arrears and domestic fiscal arrears challenges have invariably affected the performance of banks.

For a number of years now since the turn of 2014, in addition to borrowing from the commercial banking sector, the Government has also borrowed directly from the Reserve Bank of Zimbabwe (RBZ) on quite a large scale.

Because of the limited access to international capital markets, Zimbabwe’s fiscal deficit is largely financed domestically and sit on the balance sheets of local banks, representing a large asset class.

The banks therefore have appeared to be very profitable because income has been boosted significantly by the large interest rate spreads and as well as secondary trading in Government treasury securities (T-Bills).

Most of these Bills have been issued by Government as payment for various Government services and end up as assets held to maturity by banks.

However, in spite of domestic currency cash shortages (notes and coin specie for transactions) and foreign currency (nostro) liquidity constraints, the banking sector has remained relatively stable, with virtually all banks having adequate capitalisation, improved earnings and asset quality and adequate clearance liquidity cover.

The percentage of Non-Performing Loans (NPL) has declined from a peak of 20,5 percent in 2014 to just 7,1 percent as at the end of 2017, owing to strengthened credit risk management practices, the successful handover of toxic assets to the Zimbabwe Asset Management Company, as well as the impact of reduced appetite to lend by banks.

In conclusion, tackling Zimbabwe’s debt crisis is a very critical step in the economic revival of the country.

The debt crisis has clearly caused many visible problems, which include the suspension of many essential projects in the agriculture, infrastructure development and social sectors on the back of suspension of balance-of-payments support by the International Financial Institutions (IFIs).

The key elements of the debt clearance strategy plan that has been pursued by the government include the setting up of the Zimbabwe Aid and Debt Management Office whose mandate was to undertake the validation and reconciliation of the country’s external debt data-base. This exercise has been completed and what is now required is an action plan.

Some of the measures Government is taking include:

The active re-engagements with creditors and the international community for the removal of sanctions on the country; the renegotiation of the terms that have been set for arrears clearance

Seeking new funding on one hand and exploring possible avenues for debt relief from current creditors on the other hand and Considering the leveraging of the country’s natural resources.

Using internal revenue collections has also proved difficult due to fiscal space constraints and the debt restructuring model that have been pursued by other countries, such as the traditional Paris Club debt rescheduling approach and the Highly Indebted Poor Country (HIPC) initiative have not received much favour from the Government.

The other option, which is levering mineral wealth, is premised on the understanding that Zimbabwe has abundant mineral resources such as platinum, gold and diamonds which can be used for a structured sovereign debt management programme.

A debt-clearing strategy  that is based on this model has one major advantage in that, once a country clears its debts via this route, it becomes free from conditionalities that are normally set by the Bretton Woods Institutions and other IFIs.

The disadvantages of the minerals based model, however, include difficulties associated with getting agreement on the valuations of mineral reserves and other arguments related to the suboptimal mortgaging of natural resources.

One sticky point is that the resources need very high levels of investment capital today, for them to be exploited, which capital is also held back by the fact that the country has an arrears problem that has contributed to perceptions about the poor investment climate which makes it difficult to attract capital and to leverage those resources. Countries such as Angola successfully used this strategy.

In 2007, Angola succeeded in paying off its $2,3 billion debt to the Paris Club lenders within one-and-half years, all without assistance, and this was on the back of oil which is fortunately easier to securitise than other minerals.

The resource-based model is rather difficult because valuation of commodity mineral resource deposits can be a very complicated affair and agreeing on valuations with potential financiers could prove very difficult.

Such valuations can take significant amounts of time and financial resources, a luxury Zimbabwe can ill-afford.

Recent examples are the failed negotiations between Zimbabwe Mining  Development Corporation and China’s Norinco, where agreement could not be reached on the $3 billion that was being offered for the Selous platinum reserves.

On one hand, Government felt that reserves were worth between US$24 billion and US$40 billion, whilst on the other hand the Chinese investors stuck with their $3billion offer.

A second clear example was the contentious Essar-Ziscosteel deal, where disagreements arose over the valuation of the iron ore reserves. The impasse created ultimately jeopardised the consummation of the Essar deal.

The writer is an economist and the views expressed in this article are his personal opinion and should in no way present views of any organizations that the writer is associated with.

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