The Sunday Mail
Vision 2030
Allen Choruma
Zimbabwe is currently hamstrung by debt to an extent that if a robust debt-management strategy, buttressed by fiscal discipline, is not adopted to manage both the foreign and domestic debt, this may affect our pursuit of Vision 2030.
Transparency and accountability is required to ensure that the country not only maintains sustainable debt levels, but the debt is contracted for the public good.
There is also need to ensure that Government does not borrow beyond its means or outside the legal parameters.
Debate on the national debt is common in Zimbabwe.
However, it is important to look at the legal framework, quantum of public debt (domestic and foreign), why governments borrow, including implications of borrowing on the national economy.
It is also important to examine the pros and cons of public debt, the role of Parliament in national debt control and management, and the need to put in place a robust and transparent framework for the national debt strategy.
Legal Framework
The legal framework that governs national debt is outlined in the following legal instruments:
- The Constitution of Zimbabwe (Amendment No.20).
- Public Debt Management Act: 22:21.
- Public Finance Management Act: 22:19.
- The Reserve Bank Act: 22:15.
Borrowing Limits
Government does not have a blank cheque when it comes to borrowing.
There are procedures and statutory limits to be followed.
The Public Debt Management Act provides for the management of public debt.
Once debt is assumed, it has to be managed in accordance with provisions of the Public Finance Management Act.
Section 300 of the Constitution prescribes limits to State borrowing as stipulated by Acts of Parliament.
In other words, the Constitution, as the supreme law of the land, gives Parliament, and not Government, powers to set out limits and conditions for public debt through legislation.
Neither the President nor the Minister of Finance can set thresholds or limits for national debt, as Parliament has the duty to do so.
The Public Debt Management Act, under Section 11 (2), provides that public debt may not exceed 70 percent of gross domestic product (GDP) at current market prices at the end of any fiscal year.
Government can only exceed the limit after a resolution is passed by Parliament, which, however, can be granted under special conditions such as occurrence of natural disasters and other emergencies.
Rebasing of Economy
The rebasing (revaluation) of the economy during the last quarter of 2018 has implications on statutory limits on national debt and sustainable debt ratios.
Finance and Economic Development Minister Professor Mthuli Ncube felt the local economy was understated since there was burgeoning activity in the informal sector.
Before the rebasing, the GDP stood at US$16,6 billion.
This means the US$17,7 billion national debt — outlined in the 2019 National Budget — accounted for 106 percent of GDP.
This was clearly in excess of the statutory borrowing limit of 70 percent of GDP.
However, considering that the GDP was rebased to US$20,5 billion, the national debt will therefore account for 86,1 percent of GDP, which is 14,2 percent outside the 70 percent statutory limit.
Rebasing the economy naturally impacts on the public debt-to-GDP ratios.
Debt Burden
According to the 2019 National Budget, the country’s total debt presently stands at US$17,7 billion, which is split into US$9,6 billion domestic debt (54 percent) and US$7,7 billion foreign debt (46 percent).
Some economists, however, believe the figure could be inaccurate as it does not include debts owned by parastatals and other public entities.
Government has since assumed debts from the Reserve Bank of Zimbabwe, the Zimbabwe Asset Management Company (Zamco) and State-owned enterprises such as Air Zimbabwe, Ziscosteel, among others.
It will also soon take over TelOne’s US$383 million debt.
Overall, the debt, therefore, has to be audited.
Domestic Debt
Presently, the national debt stands at US$9,6 billion and was accrued through financing civil servants’ salaries — which consumed 92 of revenues in 2018 — public infrastructure projects, social services and so on.
Since most of the debt, acquired through issuance of Treasury Bills (TBs) and the RBZ overdraft, was used to finance recurrent expenditure, few resources were channelled towards infrastructure projects and social services.
Budget deficits create a vicious circle through which Treasury borrows to finance the budget deficit.
By the end of 2018, the fiscal deficit was forecast to widen to US$2,8 billion, or 11,7 percent of GDP.
Statistics from the 2019 Budget show that by the end of last year, TBs and the RBZ overdraft had soared to US$1,3 billion and US$2,5 billion, respectively, which is a reflection of fiscal indiscipline.
When Government overborrows from the market, it crowds out the private sector, which ordinarily drives economic development.
Foreign Debt
Further, the US$7,7 billion foreign debt represents 46 percent of the total national debt.
The debt is made up of bilateral creditors (Paris Club) US$4,7 billion, multilateral creditors (World Bank, AfDB) US$2,6 billion and others US$72 million.
The RBZ has assumed foreign debts amounting to US$343 million.
According to the a report titled “Zimbabwe Strategies for Clearing External Debt Arrears and Supportive Economic Reform Measures” that was presented by RBZ Governor Dr John Mangudya in Lima, Peru, on October 8 2015, Zimbabwe’s foreign debt at the time stood at US$10,8 billion, of which US$5,6 billion was in arrears.
Since foreign debt is denominated in foreign currency, it is serviced from export proceeds.
Again this puts a strain on the country’s limited foreign currency resources, which are needed to import critical raw materials and stabilise the exchange rate.
Why Borrow?
Most importantly, Government’s borrowings are governed by the Public Debt Management Act.
Section 12 of this his Act allows Government to borrow for the following purposes:
- To finance priority infrastructure projects;
- To maintain credit balance in Treasury;
- To provide loans to local authorities;
- To hour obligations under Government guarantees;
- To refinance outstanding debt;
- To mitigate effects caused by climate change and natural disasters;
- To replenish its reserves;
- To meet requests from central bank to support monetary policy objectives; and
- To fulfil any purposes as directed by Parliament.
All proceeds from borrowings go into the Consolidated Revenue Fund (CRF).
The CRF is administered by Treasury under the legal framework of the Public Finance Management Act.
Borrowings, therefore, should be within statutory limits.
Debt levels should also be sustainable, which means Government should have the capacity to service debts without defaulting.
In addition to transparency, some, if not most, of the resources raised through debts should be used to financial capital projects and productive sectors of the economy.
To be continued next week
Allen Choruma can be contacted on e mail: [email protected]
