The Sunday Mail
Dr Gift Mugano
The new political dispensation has created a supportive political environment that allows flexibility and pragmatism on the part of the Finance and Economic Planning Ministry.
Before November 24, 2017, Zimbabwe had limited scope to rein in unnecessary expenditure.
As a result, incessant expenditure remained unchecked, resulting in increased budget deficits, which, obviously, fed into an ever-growing national debt.
Statistics from the Reserve Bank of Zimbabwe show that as at March 31, 2017, 51 percent of bank assets were invested in Treasury Bills.
At the time, these investments financed RBZ and Government debts and budget deficits that totalled US$3,7 billion cumulatively.
Interestingly, because of continuous budget deficits, total domestic debt reached US$4,014 billion in September 2017 as noted by the Public Debt Management Office.
This was a treacherous trajectory which has now resulted in serious crowding out and a deeper liquidity crunch; creating disparities between money supply and availability of hard cash.
Domestic and external debt has topped US$13,12 billion, and this level of debt represents 78 percent of GDP with two key implications for Zimbabwe.
First, from a debt sustainability angle, it clearly rings alarm bells on the country’s ability to service national debt and raises the country risk premium.
What it means is Zimbabwe — between now and the medium-term — will attract foreign capital at a high cost.
Second, the 78 percent debt/GDP level is above the country’s own threshold.
Section 11(2) of the Public Debt Management Act (Chapter 22:21) stipulates that total outstanding public and publicly-guaranteed debt — as a ratio of GDP — should not exceed 70 percent at the end of a fiscal year.
It becomes a serious problem when Government fails to adhere to its own legal framework.
Ironically, that 70 percent debt/GDP threshold is far above the 60 percent Sadc threshold which Zimbabwe assented to by ratifying the Finance and Investment Protocol.
Like the Public Debt Management Act, Section 11(1) of the RBZ Act (Chapter 22:15) stipulates that Central Bank lending to the State should not exceed 20 percent of Government revenues of the preceding year.
However, notwithstanding the need to comply with the stipulated threshold in 2014 and 2015, RBZ-Government lending thresholds were surpassed in 2016, reaching 27 percent.
The ramification of Zimbabwe exceeding its own debt/GDP threshold; exceeding RBZ provision and setting the debt/GDP well above the Sadc threshold is that an impression that the country does not respect statutes will be created and this does not boost investor confidence.
The new political dispensation has created a supportive political environment that allows flexibility and pragmatism on the part of the Finance and Economic Planning Ministry.
The ministry has introduced expenditure-cutting measures that inter alia include striking 3 000 youth officers off the Civil Service payroll, early retirement packages, abolishing unnecessary foreign trips, reducing foreign missions, early retirement, cutting senior officials’ perks and overally restructuring the Civil Service in line with a leaner Cabinet.
With these measures and other production-enhancing strategies enunciated in the National Budget, Zimbabwe, for the first time since 2013, is expected to narrow fiscal deficits.
However, as Treasury works on bringing sanity to the financial arena, it is important to revisit the Public Debt Management Act’s 70 percent debt/GDP threshold and align it with Sadc’s 60 percent.
From a governance point of view, it reflects badly on the country if we appear not to respect treaties we are signatories to.
In fact, it dents our quest to lure investors.
The same must apply to the level of credit given to Government, and this should be at a rate not exceeding 20 percent of its previous budget.
Dr Gift Mugano is an economist and Registrar of Zimbabwe Ezekiel Guti University. He wrote this article for The Sunday Mail
