adminKudzanai Gerede
When Zimbabwe presented its debt clearance strategy last October in Lima, Peru, there was renewed optimism on the country’s commitment to relieve itself of this huge burden that had stalled credit inflows far too long following the endorsement of the blueprint by international financiers that suggested clearance of the debt by end of first quarter this year.
The strategies if executed will form the foundation on which the country can once again access concessionary borrowing to spur development.
Whilst savaging a route to navigate past the external debt trap which has accumulated over the past decade has widely been perceived as a colossal leap on the country’s economic recovery trajectory, at least for now, analysts are wary of perhaps a more discreet nemesis brewing on the domestic front; a surging domestic debt.
The domestic debt might be seen as minute to what government owes multilateral creditors, but its implications can be dire especially considering a contracted economy, tight liquidity and weak productivity levels as a result of unavailability of capital in the country.
The external debt is currently hovering around US$10 billion, which translates to just above two thirds of the country’s Gross Domestic Product whilst the domestic debt is around US$1,4 billion.
With government failing to secure fresh credit lines owing to a massive debt overhang, domestic borrowing has been the sole option at hand.
However the impulse on domestic borrowing in recent years is a cause for concern as government cannot raise sufficient funds to cater for its budget.
According to the 2015 Zimbabwe Economic Policy Analysis and Research Unit (ZIPARU) Economic Barometer report, domestic credit has grown by more than 15 percent and was mainly driven by high government borrowing.
Despite private sector still commanding the vast of loans and advances analysts have warned of the over reliance towards borrowing from local banks by government in an environment where interests rates are exorbitant, low productivity levels and liquidity shortages.
Presenting the 2016 National Budget late last year, Finance and Economic Development Minister Patrick Chinamasa highlighted that due to poor revenue inflows that saw government expecting US$3,85 billion from its conventional business to meet the US$4 billion budget, the US$150 million deficit is expected to be realised from domestic borrowing.
“It’s unpalatable for domestic credit to continue in this trend.
“If government begins to get most of the money on the market it crowds out private sector which is the most critical pillar in any modern economy,” warned Mr Vince Museve, an economic and political analyst.
“There is what we call the crowd-out-effect, where government goes in the credit market and crowd out private sector and it’s not productive because the money seldom goes to job creation or infrastructure development and that is the reason the economy is shrinking,” he added.
Recently the Ministry of Finance and Economic Development revised downward growth rate targets to 1,4 percent as a result of plunging productivity in the economy.
The emergence of the informal sector has seen government revue collections dropping as a result of complexities arising from taxing the informal sector.
The crumbling inflows from VAT, corporate and income tax owing to company closures and weak productivity levels has left a huge void for fiscal authorities to address mitigation of low revenue inflows to meet budgetary requirements.
“Most of government borrowing is to meet recurrent expenditure taking into cognisance its huge wage bill, so resources are being swept from the private sector through TBs (Treasury Bills) and are not used to run production instead paying running costs and that limits money that can be available to boost the economy,” he added.
Analysts have hinted that it is more precarious to rely much on domestic borrowing in the long run for the country especially in the Zimbabwean context were the currency in question is foreign and has been strengthening since last year.
However some are of the view that issuing government bonds might be a better option to take although critics are of the view that it would have been even more appropriate had the country been using a local currency to avoid the US dollar volatility.
The government has issued treasury bonds in recent years as a way of raising funds to meet its costs but this has left many economic pundits wary of the move given the country’s realities.
Government bonds through treasury bills are debt securities by a government to support its spending often issued in the country’s domestic currency in order to control exchange rates in the event that the bonds are mature since they have a long term span and normally have realistic interest rates.
Whereas Treasury Bills are generally viewed as free risk investment for private sector, the US dollar currency adopted by the country leaves government with little capacity to repay its domestic debt.
In other countries Government bonds have been used successfully to raise funds to meet budgetary shortfalls.
The US Federal Reserve for instance, issue Treasury Bills to large corporate and when they mature the Federal Reserve can always print more money to cater for the TBs debts although giving caution to the amount of notes it prints to avoid inflation.
“Thinking about having a local currency can help address the liquidity challenges that the country is facing especially if gold backed.
“This can give the Central Bank flexibility in mitigating cash shortages and also making sufficient money to meet budgetary needs taking into cognisance that the local budget of US$4 billion is not as huge to sustain,” said Mr Raymond Chipendo, an economic analyst.
With productive sectors struggling for sustainability as evident in the country’s low exports, foreign currency will continue to be elusive as there is little to attract inflow.
There is however greater need for government to resuscitate its state enterprise and Parastatals with the vision access profits from these enterprises to increase its cash revenues.
Recently Minister Walter Chidhakwa in his capacity as acting Minister of Finance and Economic Development said there was need to restructure some of the state enterprise to suit the modern economy so as to regain their relevance.
If the restructuring exercise of critical state enterprises such as CSC, GMB, Air Zimbabwe, COTTCO, and NRZ was done to promote efficiency and productivity, government can reap massive revenue to carter for its budgetary needs.
At their peak during the early 1990s, state enterprises and Parastatals contributed over 30 percent of total government income and can become critical in both capacitating government to repaying its domestic debt and avert reliance on future domestic borrowing.
Online Reporter