Solutions to Zimbabwe debt, fiscal deficits

THE Labour and Economic Development Research Institute of Zimbabwe (Ledriz) has crafted a cocktail of measures which could be a solution to Zimbabwe's debt problems, fiscal deficits, stunted growth and constrained access to new external financing.

The country is battling a total external debt, including Reserve Bank of Zimbabwe (RBZ) external guaranteed debt, of US$10,5 billion, representing 71,2 % of gross domestic product (GDP) as of December 31, 2020.

The continued accumulation of arrears and disbursements from the active portfolios recorded in 2020 saw external debt to multilateral creditors at US$2,68 billion, of which US$1,53 billion is owed to the World Bank, US$729 million to African Development Bank (AfDB), US$356 million to the European Investment Bank and US$68 million to other lenders.

As the arrears skyrocket, Ledriz said there were various options but all hinged on government guaranteeing full disclosure of relevant information regarding loan agreements, debt repayments, debt management and outcomes of public debt audits.

Ledriz senior researcher and economist Prosper Chitambara on Wednesday told a Zimbabwe annual multi-stakeholder debt conference organised by the African Forum on Debt and Development, that the country could consider debt rescheduling, swaps, refinancing and bet buybacks, among other possible solutions.

Debt rescheduling results in stabilisation of external payment arrears and improvement of the country's credit rating, he added.

Chitambara said debt rescheduling affords a country an opportunity to find lasting solutions to domestic and other external problems.

"However, debt rescheduling merely defers payment obligations, without permanently resolving the country's external debt problems. The debt may be rescheduled at higher premiums. There is also the debt swap or conversion option where the debt alters the original valuation or nature of a debt instrument for example, converting a straight loan into an equity investment or into an infrastructural investment.

"Successful completion of the conversion programme will enhance the credit rating of Zimbabwe and enable it to attract new capital. It will reduce the country's external debt obligations and, consequently, the debt service burden without necessarily having to use the country's scarce foreign exchange resources," he said.

Under this arrangement, Chitambara said a foreign organisation such as Debt Advisory International (DAI) would acquire a hard currency sovereign debt at a discount and use the local currency to purchase domestic assets or to invest in developmental projects.

Chitambara also pushed for debt refinancing saying the country would be able to extinguish expensive short-term debt and borrow for longer periods, at favorable terms and conditions.

Debt refinancing is mainly used to reduce the cost of borrowing, improve maturity structure of the debt or to alter its currency composition while it also reduces the cost of borrowing, particularly if the terms of the new loan are softer.

The options, Chitambara said, would bring temporary relief on foreign obligations, as it merely postpones debt service, without permanently resolving external debt problems.

While debt restructuring is one of the most viable options available, Chitambara said for Zimbabwe, the option required express consent of the country's external creditors.

This may be difficult for Zimbabwe, since it has already accumulated external payment arrears.

Zimbabwe has over the years failed to attract fresh lines of credit as the arrears keep accumulating.

"We recommend a comprehensive debt audit which can be done by Parliament and CSOs. There should also be a debt management framework which encompasses a multi-stakeholder approach in designing realistic and implementable strategies.

"Policy consistency and coordination in policy pronouncements; Treasury should table a charter of fiscal responsibilities, as is the case in Uganda, institute and ensure independence of institutions, for example RBZ.

"The country can borrow on concessional terms in the medium-to-long term and only borrow on commercial terms for financing productive sectors which yield high returns," he said.

The 2021 midterm fiscal policy review statement showed that debt service payments amounting to US$17,04 million were made towards token payments (US$1,6 million), other multilateral creditors (US$ 4,11 million) and bilateral Non-Paris Club (US$11,33 million).

Quarterly token payments to the Multilateral Development Banks (MDBs) are disaggregated as the World Bank (US$1 million), the African Development Bank (US$500 000) and the European Investment Bank (US$100 000).