The Sunday News
Dr Bongani Ngwenya
Preamble:
A HIGH public debt overhang still constrains and raises the cost of capital for investment in Zimbabwe. Successfully addressing the arrears to multilateral and bilateral partners, that is, IMF, the World Bank Group and the African Development Bank would enable relations with external creditors or International Financial Institutions (IFIs) to be normalised. This would strengthen investor confidence and increase private financial flows into the Zimbabwe economy, as well as allow partners to fully support Zimbabwe’s socio-economic development to help protect the poor and other vulnerable members of the society.
Quoting from the National Budget Statement for 2016, Finance Minister Patrick Chinamasa said: “Government has made progress with regards to solutions to clear its external debt arrears to both multilateral and bilateral creditors, as a prerequisite for the country to access new financing in order to meaningfully contribute towards the attainment of accelerated, inclusive and sustained economic growth and poverty eradication. Following the adoption of our Strategy to clear external debt arrears by our creditors on the sidelines of the 2015 International Monetary Fund/World Bank Annual Meetings in Lima, the thrust of the 2016 Budget is to further consolidate the platform to unlock fresh capital injections into the economy, hence, the Theme of this Budget”.
“The Strategy is anchored on the clearance of external debt arrears to the three IFIs, namely the IMF, the World Bank Group and the African Development Bank, as a first step towards seeking debt treatment by the Paris Club and bilateral creditors in the context of a strong economic reform programme. The resolution of external debt arrears to IFIs is to be achieved through a combination of the following strategies that Government has put in place: Use of domestic resources to clear US$111 million arrears to the IMF; Arrangement of Bridge finance with regional and international banks to clear US$601 million African Development Bank debt arrears; and use of a medium to long-term loan facility to clear US$1,1 billion arrears to the World Bank Group. It is envisaged that the settlement of external payment arrears by Government to the tune of US$1,8 billion owed to multilateral creditors, would be completed in the first half of 2016”.
External debt has continued to outgrow exports as shown by the external debt to export ratio which increased from 168 percent in 2000 to 380 percent in 2009 declining to 225 percent in 2013 and 200 percent by 2014, through 2015.
The high external debt to export ratio is of great concern because of its negative effects on investment and savings.
The high ratio points to potential debt servicing problems, because most of the cash required to service foreign debt largely comes from export earnings. The high debt-to-exports ratio also points to the fact that Zimbabwe’s debt is unsustainable.
External debt arrears clearing is important to Zimbabwe’s medium-term growth outlook or trajectory, before thinking long term.
Statistics from the Zimstats indicates that the total public and publicly guaranteed external debt was estimated to be US$7,1 billion (51 percent of GDP) as at September 2015, with external arrears occupying a large share at US$5,6 billion (79 percent of total external debt). The public debt burden has had a deleterious impact on the cost of capital and the economy. It has limited Zimbabwe’s access to financing for development and raised the cost of accessing international capital markets to the private sector. The Ministry of Finance and Government at large have recognised that clearing the arrears would allow for a resumption of longer term and concessional development financing both for investment and for buffering the impact of current shocks on the poor and most vulnerable.
To this end the Government has presented a strategy to clear Zimbabwe’s arrears to multilateral institutions in 2016 using own resources and loans, at a meeting with its international creditors during the 2015 annual World Bank — IMF meetings, as highlighted above. If successful, this strategy will go a long way to lifting Zimbabwe’s medium-term growth outlook.
Deflation and Debt in Public Financing
In a previous instalment of this column I referred to deflation as the latent evil and depressor of economic growth.
Persistent deflation has been a headwind to growth and has exacerbated the fiscal situation by steadily reducing nominal GDP in Zimbabwe. Empirical evidence shows that deflation affects public finances mostly through increases in public debt ratios, reflecting a worsening in interest rate-growth differentials. On average, a mild rate of deflation increases public debt ratios by almost two percent of GDP a year, this impact being larger during recessionary deflations. With falling oil and commodity prices, inflation has been declining in advanced economies and is running significantly below targets, raising concerns over the risk of deflation.
Fear of deflation is generally premised on the belief that it is associated with recession, reflecting developments that can culminate in a combination of deflation and economic contraction and trigger debt deflation (the increase in the real value of nominal debt caused by a falling general price level) — the reason why Zimbabwe has to rid itself of debt before a debt deflation looms.
This experience has helped shape the belief that deflation is deeply perilous and should be avoided as much as possible — even the Reserve Bank Governor Dr John Mangudya alluded to this in his recent monetary policy statement. Understanding the consequences of deflation on fiscal aggregates is a key question for policymakers. The focus of this article is to emphasise how deflation may buffet already-strained public finances and further complicate fiscal policy and public debt ratio. Specifically, what is the effect of deflation on fiscal aggregates? Deflation is clearly associated with mechanical increases in debt-to-GDP ratios. At the same time, a number of nominal flow variables — such as revenue and nominal GDP but also, to a smaller extent, expenditure — tend to decrease mechanically.
In conclusion, the management of deflation in the Zimbabwean economy, has to be done concurrently with debt arrears clearing, that is, before the situation deteriorates into a debt deflation — the increase in the real value of nominal debt caused by a falling general price level. I reiterate what I said that deflation is a latent evil and depressor of economic growth.
Dr Bongani Ngwenya is a Bulawayo-based Economist and Senior lecturer at Solusi University’s Post Graduate School of Business.mailto:[email protected].
