Zimbabwe is in debt distress and this could provide the biggest challenge on efforts to recover the economy from the abyss of collapse. Finance and Economic Development Minister Professor Mthuli Ncube presented a ZWL$421.6 billion 2021 National Budget on Thursday, and once again it leaves more questions than answers.
According to the budget statement, the country’s external debt is estimated at US$8.2 billion, as at end September 2020 which is an increase by US$106 million from the end 2019 amount of US$8.09 billion and was mainly on account of penalties and interest arrears.
“Of the total external debt, 17% is owed by public entities through guarantees,” Minister Ncube said.
Government through its National Development Strategy 1 (NDS1) launched last week said worsening the country’s debt position was the rapid accumulation of external arrears.
“There is high risk of moral hazard, with many public entities approaching government for debt assumption,” the NDS1 says.
According to the budget statement, total Public and Publicly Guaranteed (PPG) debt is estimated at 78.7% of GDP by end of 2020 and the debt stock is marginally above the SADC recommended threshold of 60% of GDP and the Public Debt Act threshold of 70% of GDP.
Minister Ncube further highlighted that domestic debt as at 30 September 2020 was ZWL$12.5 billion, which is 1.2% of GDP and 1.8% of the total public debt.
While domestic debt has been stable, and seemingly more sustainable to service, external debt is highly unsustainable given the current shortages in forex to service the obligations. Two-thirds of this debt are arrears and with the economy coming from a two-year dip, it is unlikely to see any repayment in 2021.
The domestic economy, which, in 2018-20 was confronted with climatic, macroeconomic and the current Covid-19 shocks, is projected to contract by – 4.5% in 2020 as per the Ministers projections. However, other independent projections like Equity Axis foresee a worse downturn at about -10% in 2020.
For any future financing from IFIs, requires the authorities to clear the arrears first which is unlikely in the near time. It is worthy to note that, Zimbabwe’s debt management legal framework is rated quite strongly by development partners such as the World Bank and the Macroeconomic and Financial Management Institute as one that meets minimum standards for debt management. But, the government has been failing to comply with the law.
The ballooning external debt could prove the major setback in the government’s efforts to revive the ailing economy. While stability has been noticed over the recent months on exchange rate and inflation trends, there are high fears that the stability is highly unsustainable.
If the Zimbabwe dollar further depreciates value, and budget deficit persists in addition to the rapid accumulation of external arrears, toxic as that combination is, the country will by no means manage to safely carry the debt.
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