Zim still in debt distress likely to be worsened by Covid-19 impact

By Almot Maqolo

Quasi-government body, Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) says the country is still in debt distress which is likely to be worsened by the impact of Covid-19 pandemic.

Previously, the country was seeking talks with foreign creditors to clear decades of debt, warning that without more funds the cash-strapped government may not cope with the economic impact from coronavirus. The southern African nation has a huge and unsustainable external debt of about US$10.545 billion as at September 2019 of which about 60.35% of the debt is in arrears.

“The existence of arrears shows that the country is struggling to clear the debt and the cost of acquiring new debt becomes exorbitant due to poor credit ratings for the country,” said ZEPARU in its first quarter of 2020 report.

In 2019, Zimbabwe undertook additional loans through concessional borrowing for critical infrastructure projects and also commercial loans that are securitized by future mineral exports. These commercial loans were meant to support the local currency and facilitate the importation of essential goods. Also, former white farmers’ compensation estimated at US$2.4-10 billion is poised to further worsen Zimbabwe’s indebtedness.

At the moment, ZEPARU said, there is no progress on clearing longstanding external arrears despite very little debt payments which amounted to about US$1.1 billion between 2012 and 2019.

However, domestic debt fell sharply from US$9.363 billion in 2018 to ZWL$8.868 billion in December 2019 which translates to about US$528.69 million using the interbank rate of ZWL$16.7734: US$1 as at 31 December 2019.

ZEPARU said the reduction in domestic debt was due to debt repayments and loss of real value of the domestic debt owing to the loss of value of local currency. In real terms, domestic debt continues to decline due to a further depreciation of the Zimdollar to the current rate of US$1: ZWL$25 as of 26 March 2020. “This can affect the development of the domestic financial markets since at the moment long term debt is not attractive,” reads the report. The public and publicly guaranteed external debt to GDP ratio for 2019 was 47.6% and is expected to reach 51.5% in 2020.

“This debt position does not take into account the legacy debts incurred by the Reserve Bank of Zimbabwe through compensation of some stakeholders for losses incurred following the currency conversion estimated at about US$1.2 billion and farmers’ compensation.”

The public sector debt to GDP ratio including legacy debt and farmers’ compensation rose from 51.8% estimated in 2019 to a projection of 101.6% in 2020, that is beyond the 70% debt threshold as espoused in the Public Debt Management Act (chapter 22:21) and the Transitional Stabilisation Programme (October 2018 – December 2020). But, debt is poised to remain high and unsustainable even up to the year 2029 at 83.8% of GDP.

“Without taking into account legacy debt and farmers’ compensation, it appears as if the debt falls within the threshold and therefore the debt position is sustainable. The consolidation of debt statistics is therefore critical to ensure that the government publishes the correct debt position including legacy debts and farmers’ compensation,” ZEPARU stated.

“The current global pandemic on Covid-19 may further affect the country’ ability to clear the long overdue external debt arrears due to disruptions caused by the rolling lockdowns and import and export restrictions as countries try to fight the spread of the disease.” Zimbabwe’s struggling economy has further slumped due to the lockdown over the Coronavirus.

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