daniel chigunwe
Economy Uncensored with Tapiwanashe Mangwiro
Zimbabwe’s economic landscape is increasingly dominated by a mounting public debt burden, with the total Public and Publicly Guaranteed (PPG) debt reaching a staggering US$21 billion by the end of December 2023.
This figure represents a nominal debt-to-GDP ratio of 96,7 percent, underscoring the severity of the debt crisis.
A detailed breakdown reveals that the external debt stands at 59,5 percent of GDP, while domestic debt accounts for 37,2 percent. Notably, the debt composition indicates that 61,6 percent of the debt is owed to external creditors, with the remaining 38,4 percent to domestic creditors.
Given that 94,3 percent of the domestic debt is denominated in US dollars, Zimbabwe faces a significant foreign exchange risk, exposing 97,8 percent of its total debt portfolio to currency fluctuations.
This scenario poses considerable challenges for economic stability and growth, necessitating a closer examination of the underlying causes and potential solutions.
Understanding the debt dynamics
A high debt-to-GDP ratio can have profound implications for an economy, particularly in the context of a developing country like Zimbabwe.
The ratio serves as a critical indicator of the country’s debt sustainability and its ability to meet its debt obligations without resorting to excessive borrowing or compromising economic growth.
When the ratio approaches or exceeds 100 percent, as is nearly the case in Zimbabwe, it signals that the country owes almost as much as it produces in a year.
This situation is often unsustainable and can lead to a debt spiral, where the country must continually borrow more to service its existing debt.
A high debt-to-GDP ratio is undesirable for a country, as a higher ratio indicates a higher risk of default.
In a study conducted by the World Bank, a ratio that exceeds 77 percent for an extended period of time may result in an adverse impact on economic growth.
It was indicated that each additional percentage point of debt above that level reduced annual real growth by 1,7 percent. For reference, the US’s debt-to-GDP ratio was 105,40 percent in 2017. Therefore, when the ratio is high (>80 percent), a country is likely to exhibit a slowdown in economic growth.
The debt-to-GDP ratio is commonly misunderstood, as many think that a ratio exceeding 100 percent indicates a bankrupt or insolvent country.
Implications of a high debt to GDP ratio
A sustainable debt-to-GDP ratio is crucial for long-term economic stability. When the ratio is too high, as in Zimbabwe’s case, it indicates a potential inability to service debt obligations without resorting to further borrowing.
This can create a cycle of increasing debt burdens and interest payments, diverting funds away from productive investments in infrastructure, education, and healthcare all vital for sustained economic growth. In our case, we decided to abandon repaying debt for a very long time.
High debt levels can erode investor confidence, leading to higher borrowing costs for the Government.
As lenders perceive higher risk associated with lending to heavily indebted countries, they demand higher interest rates to compensate for that risk.
Elevated interest rates not only increase the cost of servicing debt but also crowd out private sector borrowing, thereby stifling private investment and economic expansion.
A lower debt-to-GDP ratio allows governments more fiscal space to undertake public investments and stimulate economic activity during downturns.
Countries with manageable debt levels can implement countercyclical fiscal policies, such as infrastructure projects or social welfare programmes, to support economic growth without exacerbating debt vulnerabilities.
External debt: A double-edged sword
External debt, constituting 59,5 percent of GDP, poses a particular challenge for Zimbabwe. The reliance on external borrowing exposes the country to international market volatility, currency risk, and the vagaries of global financial markets.
As much of this debt is likely denominated in foreign currencies, primarily the US dollar, any depreciation of the Zimbabwean dollar against these currencies can significantly increase the debt burden in local currency terms. This foreign exchange risk is exacerbated by the fact that a substantial.
Domestic debt: A growing concern
While external debt often garners more attention, domestic debt is equally important. At 37.2 percent of GDP, Zimbabwe’s domestic debt represents a significant portion of the total debt burden.
Although borrowing domestically can be less risky in terms of exchange rate exposure, it comes with its own set of challenges. High levels of domestic debt can crowd out private investment, as the Government competes with the private sector for limited financial resources.
This crowding-out effect can stifle economic growth, as businesses face higher borrowing costs and reduced access to capital.
Furthermore, the reliance on domestic borrowing can lead to an unsustainable fiscal situation, where the Government becomes overly dependent on short-term debt instruments to finance its operations.
This dependence can create a vicious cycle of refinancing, where the Government must continually roll over its debt, often at higher interest rates, leading to an ever-increasing debt burden.
Conclusion
In conclusion, while debt can be a useful tool for financing development and addressing short-term economic challenges, excessive debt burdens, as seen in Zimbabwe, pose significant risks to economic stability and growth.
Managing the debt-to-GDP ratio effectively requires balancing investment in productive sectors with prudent fiscal policies that prioritise debt sustainability. Addressing these challenges will be essential for Zimbabwe to navigate its current economic landscape and foster sustainable, inclusive growth in the years ahead.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
Bongani Ndlovu