Zimbabwe's odious debts
At a time when the country is grappling with COVID-19 and acute droughts, can debt cancellation save its economy?
Civil society organisations have called for an audit of Zimbabwe’s national debt, as inequality and poverty grasp the economy.
This comes at a time the World Bank projects further GDP contraction of 10% in 2020, up from 8.1% last year, with extreme poverty levels reaching almost 50% of the population
The extent of national debts to multilateral financial institutions can make or break a nation, and Zimbabwe’s USD 10 billion debt is no exception. Zimbabwe is presently ineligible to get loans from international financial institutions (IFIs) due to its high external debt.
Most of Zimbabwe’s economic sectors are in a comatose state, foreign currency shortages are the norm, while essential commodities are overpriced. Finance minister Mthuli Ncube says the country’s problems stem from loan repayment arrears, as well as budget and trade deficits. Due to low industrialization and limited formal economic activities, most citizens are involved in informal sector work.
The Covid-19 public inquiry is a historic chance to find out what really happened.
Debate and questions abound as to the legitimacy of inherited Rhodesian debts, how much the country owes Chinese lenders and what the borrowed money is being used for.
In a recent interview, Zimbabwe Chamber of Informal Economy Associations (ZCIEA) national President, Lorraine Sibanda, pointed out that the debt problem is quite complex as a number of factors feed in to its presence.
“Looking at the debt alone would not do justice to the matter at hand. We have problems of the absence of transparency, low systems of accountability and pervasive corruption. The nation must know how much exactly is owed and more importantly, how that money was used,” Sibanda said.
“As an association we certainly call for debt cancellation especially those that never benefited citizens, and hope that the effects of such a move trickle down to people in the informal sector in need of capital to boost their fledgling businesses".
The Zimbabwe Coalition on Debt and Development (ZIMCODD) recently argued that much of the country’s debt is illegitimate, including the part that was incurred by the colonial Rhodesian government, as well as debts that the post-independence government went on to incur that did not benefit ordinary citizens.
A historical snapshot
Zimbabwe inherited a USD 700 million debt in the aftermath of a bitter and protracted Rhodesian bush war. These loans had been used by then prime minister Ian Smith to bypass a UN embargo on weapons purchases in the 1970s. The arms were channeled towards crushing the nationalist liberation struggle.
After independence in 1980, the new prime minister Robert Mugabe gave in to pressure from the international community to take on this debt in return for promises of over USD 2 billion in grants for post- war reconstruction and development.
This debt grew through the 1980s due to a plethora of development loans, a terrible drought and other loans tied to buying military aircraft. By 1990, Zimbabwe opted for bailout loans from the IMF and World Bank in order to keep repaying the international debts.
These loans came on condition of liberalizing the economy, eliminating state subsidies and public expenditure cuts. The cutbacks marked the demise of essential social welfare service provision. Growth slowed, a trade deficit emerged, while widespread poverty and unemployment took a firm hold of the country.
In 1997, veterans of the war held a series of protests against then President Mugabe, pushing for pensions and grants. Mugabe relented to the political pressure and doled out ZW $50,000 each to over 50,000 war veterans. Total expenditure on these payouts constituted 3% of GDP at the time. November the 14th is colloquially known as Black Friday in Zimbabwe after the Zimbabwe dollar crashed 72% and the stock market tumbled by 46%. An unexpected national power blackout gave resonance to the words ‘Black Friday.’
Food riots broke out in 1998 and the following year, Mugabe decided to default on debt repayments to international creditors. He may have been seized with commitments relating to the DRC war entered into in 1999, which reportedly cost the country about USD 3 million a month.
Due to the government’s default on its payments more than a decade ago, hardly any financial institutions are interested in lending the country money, while penalties and interests continue to be charged on historical liabilities. The country’s total debt currently stands at USD 10 billion, but the original sum borrowed stood at USD 4 billion. The rising interest on the principal amount borrowed will divert fiscal revenue from expenditure in health, social services and infrastructure among other key sectors.
Creditors are owed billions… so what?
The debts that most African countries owe to Bretton Woods institutions and the Paris Club has long limited their capacity to get external development finance. This in turn defeats the idea of market liberalism and export diversification strongly advocated for by these international lenders.
Worse effects of such debts are lower national income, lower national savings and diminished tax revenue. Through commitment to reforms, currently being demanded of Zimbabwe, the government would be compelled to spend most collected revenue on servicing national debts. The problem lies in that the country remains in arrears without a solid repayment plan.
“Beyond the need for a credible path for clearing external arrears, consideration of any future request for an IMF financing arrangement would require Zimbabwe to be ready to implement strong macroeconomic policies and structural reforms to restore fiscal and debt sustainability,” said an IMF Spokesperson in an exclusive interview.
“We can lend only if debt is considered sustainable; in those cases where debt is not sustainable, debt restructuring will be needed by all major creditors, including private sector claims,” the IMF said.
Zimbabwe is one of the few African countries whose debt pile has prompted the IMF to forego lending to it, even amidst the COVID-19 pandemic. This is despite the country having cleared its outstanding debt position of USD 107.9 million with the IMF as of October 2016.
The IMF points to technicalities in regard to this position.
“Zimbabwe has been a member of the IMF in good standing since it repaid arrears outstanding in late 2016. However, Zimbabwe has external arrears to multilateral development institutions (World Bank, AfDB and EIB). As a general rule the IMF is prevented from lending to any member country that has arrears to other international financial institutions,” the IMF said.
Of Afreximbank and displaced commercial farmers…
The government this year increased its debt by an additional USD 3.5 billion after committing to pay compensation to mostly white commercial farmers displaced by the fast track land reform program in the early 2000s.
Under this arrangement, termed the Global Compensation Agreement, the country will have to borrow these funds through issuing a long term debt instrument, of 3 years’ maturity on international capital markets. Although aimed at settling historical obligations, this commitment will further hamper government’s ability to repay debts, seek out new credit lines or smoothly negotiate debt rescheduling with creditors.
In July 2015, in another case of debt owed by government, the International Centre for Settlement of Investment Disputes, a World Bank affiliate, awarded the Bernhard von Pezold family the return of their property in the east of the country and full payment of legal costs and interest by the state. The government also had the option to pay the family USD 195 million in damages. Government sought to annul the award the same year and in 2018, but lost both cases. The award is yet to paid.
Of further concern to international creditors is the fact that the pan African multilateral financier Afreximbank continues to dole out loans to Zimbabwe. The bank has continually bailed out Zimbabwe over the years. In March 2019, the bank assisted the country with a USD 15 million donation to support relief efforts after a devastating cyclone hit the east of the country. In July this year, Afreximbank granted the country a USD 250 million loan. It is not yet known what this money will be used for.
World Bank President David Malpass blames such financial institutions for unsustainable debt piles of recipient nations by lending them ‘too much money.’ This position is justified especially where most of the borrowed monies do not directly benefit citizens and at the end of it all, the debt burden is passed on to those citizens.
Time for cancellation?
The Zimbabwean government is currently implementing a transitional stabilization plan (TSP) which is anchored on the IMF’s Article IV consultations and technical assistance. Minister Ncube claims the TSP has met most indicators with the fiscal and current account deficits having been eradicated. The issuance of treasury bills is supposedly now on budget while the public sector wage bill is now below 50% of total government revenues from 92% in 2017.
These austerity measures have come at a great cost to citizens. Civil servants are now earning salaries below the poverty line, with medical doctors embarking on industrial action and teachers reporting incapacitation to return to work. The Zimbabwe Coalition on Debt and Development (ZIMCODD) recently called for the country’s debt cancellation and warned that failure to do so would push more people into extreme poverty.
ZIMCODD notes that the country really needs cancellation at a time when it is grappling with the effects of COVID-19, acute droughts, pervasive corruption, poor governance and the high debt overhang.
The Asian tiger economies have proven that export led growth could pull them out of poverty in less than 50 years. The tiger economies include Singapore, South Korea, Taiwan and Hong Kong. Over the course of years of serious industrialization, coupled with setting up advanced financial and trading centers, the Asian tigers kept budget deficits within financial limits. These measures led to stable macro economies.
Hong Kong, Singapore and Taiwan never had foreign debt during this boom.
Perhaps, with debt cancellation, these booming economies’ growth models could work for countries now stuck in mounting debts.
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