Last week Finance and Economic Development Minister Mthuli Ncube gazetted details of the loans that the Government, through the Reserve Bank of Zimbabwe has been accumulating from the African Export–Import Bank (Afreximbank) since 2017.
In gazetting the total amount and terms of the debt, Minister Ncube was fulfilling a High Court ruling that compelled him to do so.
The ruling was handed down in December last year by Justice Happias Zhou after Harare North legislator Allan Norman Markham and the Community Water Alliance Trust took Ncube, the Reserve Bank of Zimbabwe (RBZ) and Afreximbank to court in September 2019.
“The first respondent (Ncube) shall publish in an Extraordinary Government Gazette the terms and conditions of all the loans and guarantees concluded by the Government of Zimbabwe with or in favour of the third respondent (Afreximbank) or any other third party international financiers from January to the date of this judgment by January 30, 2021,” reads part of the ruling dated December 1, 2020.
“The 1st respondent’s failure to publish the terms of any of the loans and guarantees concluded by the Government of Zimbabwe and or in favour of the 3rd respondent or any other 3rd party International financiers from January 2017 to date, within sixty (60) days of their conclusion, is declared to be a violation of Section 300 (3) if the Constitution of Zimbabwe and Section 18 (2) of the Public Debt Management Act.”
This is after the Government had signed several loan and guarantee agreements with Afreximbank without disclosing the terms and conditions to Parliament as demanded by section 300 (3) of the Constitution.
While failure to disclose details of such a significant loan is a problem on its own, it is not the focus of this article.
The cost of the loans and the reason why they are at such levels is what we would want to focus on.
The cost of the three loans, totalling US$1.4 billion is upward of 10 percent per annum including fees and other charges. Such high interest payments are an albatross to any economic growth. Worst case scenario and likely outcome is that the country could end up defaulting, adding to arrears it is already struggling to settle. The country had a debt burden upward of US$8,2 billion, as at end September 2020. The bulk of this debt is in arrears and also excludes debts of approximately US$5 billion sitting at the central bank.
However, Zimbabwe has no choice than to accept such onerous terms. Defaulting on debts always end up in increased risk premiums.
While nations across the world borrow, Zimbabwe is in a worse off position with little to show for its debt burden. The southern African country has not been disciplined in its debt accumulation and also in servicing its debts.
Zimbabwe borrowed more than it should have and could afford. It borrowed at the wrong times and in most cases for consumption and unsustainable and unnecessary subsidies.
In addition to excessive borrowing, Zimbabwe has been a bad debtor.
Arrears remain a major component of the external debt, at US$6,34 billion, constituting 77 percent of external debt.
As a result, Zimbabwe has failed to access debt when it needed it the most and at a time the world is generously extending loans. Some countries are even getting their debts restructured or forgiven. But not Zimbabwe.
Across the world, governments, companies and households raised US$24 trillion last year to offset the Covid-19 pandemic’s economic toll, bringing the global debt total to an all-time high of US$281 trillion by the end of 2020, or more than 355 percent of global GDP, according to the Institute of International Finance (IIF).
In turn Zimbabwe only got US$1,3 billion according to the 2021 Monetary Policy Statement released by the central bank yesterday.
More than half of that amount went into agriculture, mainly on account of offshore tobacco financing facilities. The construction sector got US$293 million while the financial sector got US$220 million. The rest were insignificant amounts extended to other sectors.
There is no doubt Zimbabwe needed more given the economic downturn for the last two years.
Even before Covid-19, Zimbabwe had fallen too far behind in terms of infrastructure development and need borrowed capital to help bridge the gap. Unfortunately, global lenders have closed their doors on the country and the few that still have them open, such as the Afreximbank, make us pay through the nose.
Failure to access debt in a recession, almost inevitably make the recession worse and Zimbabwe can attest to that.
Despite claims that the country’s budget deficit is minimal at $30 billion of the $421,6 budgeted expenditure, the country, just like other nations, would have been better served with access to external lines of credit.
Across the world, governments with big budget deficits are set to increase debt by another US$10 trillion as political social pressures make it hard to curb spending, pushing this group’s debt load past $92 trillion by end-2021, the IIF estimates.
While Zimbabwe plans to cover the budget deficit by issuing Treasury Bills, the plan crowds out the private sector and curtails growth.
Some of the spending pressures can also not be paid away by issuing Treasury Bills, and at some point the Government might be forced to print. Printing however has its own detrimental consequences.
It’s a road travelled before and found to be unpleasant.
Zimbabwe obviously cannot go it alone and the only way forward is to resolve its debt crisis.