Debt overhang chokes industry

Enacy Mapakame-Business Reporter

LOCAL industry says outstanding public debt is choking its performance as businesses are finding it difficult to access adequate long term funding from local banks to meet industry needs such as retooling.

This comes as Government is seized with economic turnaround strategies as espoused in the National Development Strategy (NDS1) as well as efforts to recover from the adverse impacts of the Covid-19 pandemic on businesses.

Captains of industry and economic analysts say such efforts were however being slowed by the debt overhang, which makes the country uncompetitive to international money lenders.

Confederation of Zimbabwe Industries (CZI) chief economist Cornelious Dube said while debt was good as a way of funding industry’s needs, the sector had suffered due to lack of access to international funding for retooling, importation of raw materials as well as for other operational needs.

He highlighted that there was a glaring link between industry performance and good debt management.

“As long as the indebtedness of a country affects the enablers of industry’s productivity such as technology and infrastructure, then industry performance will be affected,” he said at the third annual multi stakeholder debt conference hosted by African Forum and Network on Debt and Development (AFRODAD) in conjunction with the Zimbabwe Coalition on Debt and Development (ZIMCODD) held in the capital last week.

“Between 1980 and 1998, the Government spent about a quarter of total revenue on debt servicing. Industry performed very well,”

“But when the Government reduced debt servicing and the total debt started ballooning, manufacturing also went down. 

“Debt chokes industry performance especially when the Government cannot get funding from international money lenders, currently we cannot finance our requirements as industry because we cannot get cheap loans due to the debt burden,” he said.

At Independence, Zimbabwe inherited a US$700 million debt from the Rhodesian government.

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 which saw the country recording its first default by 2000 and later being isolated from the international financial system under ZIDERA.

The slow and negative growth following limited access to funding saw the country record a debt to GDP ratio of over 100 percent in 2005 and 2006 although that has reduced to 72 percent, but still above the SADC recommended 70 percent and the NDS1 target.

In the same decades, local industry has battled antiquated machinery, erratic utilities supplies, limited foreign currency as well as low capacity utilisation.

Dr Prosper Chitambara from the Labour and Economic Development Research Institute of Zimbabwe (LEDRIZ) said most key economic indicators started heading southwards after year 2000 when arrears started accumulating.

It would be difficult to unlock fresh funding as long as there are arrears, Dr Chitambara said.

However, the Government has made efforts towards enhancing local industry productivity and fast-track economic growth while offsetting the effects of Covid-19, for instance the $18 billion stimulus package.

By the close of this year, industry capacity utilisation is expected to grow to around 61 percent from 47 percent last year. 

While this is a notable improvement, Mr Dube however said this was not enough and more needed to be done to bring it to 100 percent.

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

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

“And when a project is funded, it is important that the same productive project be able to pay back the loan.

“Our credit rating has declined, which means it is now difficult for Zimbabwean businesses to access funding including banks. As banks, it then becomes difficult for us to fund meaningful projects for industry.

“Much of our loans are currently in the short to medium term against the market demand which currently has an appetite for long term financing,” said Bankers Association of Zimbabwe (BAZ) chief executive officer Fanwell Mutogo.

It was however agreed there was nothing wrong with debt as long as it was being utilised properly.

Said Mr Dube: “If borrowing is done to expand the enabling infrastructure for industry operations, then it is good. If we are borrowing to enhance the standards of living, then debt is good.”