Debt: The albatross around Zim’s neck
http://www.theindependent.co.zw/
Thursday, 04 August 2011 17:36
By Deprose Muchena
IT IS common cause that the Government of National Unity (GNU) has presided
over a dramatic economic turnaround, which has seen the country claw its way
back from the brink of total economic collapse. It is also widely
acknowledged that there are serious obstacles in the way of a sustainable
economic recovery. However, it is not universally known that one of the most
serious constraints — indeed it is an almighty albatross around the country’s
neck — is Zimbabwe’s massive debt burden.
To appreciate the full scale of the economic crisis, it is important to note
that Zimbabwe faced a myriad of socio-economic and governance challenges
prior to the inauguration of the GNU. The economy had cumulatively declined
by 54,8% from 1999 to 2008, resulting in one of the longest recessions in
the history of any country. Prolonged international isolation since the
launch of the fast track land reform programme in 2000 resulted in no
meaningful engagement with the international community and development
partners.
Widespread poverty and gross inequality unleashed a damaging assault on
social stability. Social indicators fell dramatically, while incomes
plummeted across the labour market as more and more companies closed.
Unemployment and underemployment soared across all social classes; mass
informalisation of the economy took root. Social mobility and equal
opportunities had become alien concepts for most people.
Other key characteristics of Zimbabwe’s macroeconomic crisis included
foreign currency shortages, de-industrialisation, deteriorating
infrastructure, low capacity utilisation, food and fuel shortages and a
constrained supply of basic utilities such as electricity and water, among
others. Industrial capacity utilisation plummeted demonstrating the severity
of the economic collapse and the extent to which the manufacturing sector —
the second most dynamic sector of the economy after agriculture — had
surrendered its potency and promise.
The economic meltdown was largely underpinned by runaway inflation, which
officially peaked at 231 million percent in July 2008 — although an
unpublished report in December 2008 estimated that it had risen to 3,2
quintillion percent.
While populists were clamouring for the continued existence of the Zimbabwe
dollar, the move immediately eliminated the notorious parallel market for
goods, cash and services. It slashed inflation from millions of percent to
single digits. The multi-currency regime boosted business confidence,
generated an atmosphere of predictability and soon companies began to
increase their activity and profits.
Significant progress has definitely been made under the auspices of the GNU,
at least in terms of stabilising the economy and meeting basic needs,
particularly in health and education.
For this, the economic and social ministries need to be commended. However,
these gains are slowly being reversed by the lack of sustainable economic
development and the absence of an effective recovery strategy for the
economy. Indeed, the economy is suffering from a structural malaise.
Despite registering economic growth in the last two years, this growth has
not translated into better human development indices or much needed jobs.
Zimbabwe is experiencing a kind of zero sum growth trajectory — with a
nominal growth in GDP without any corresponding jobs or opportunities
created.
Therefore, the economic “recovery” remains very fragile, particularly as it
is dependent on a stable political situation. And because it is being
weighed down by an enormous burden — billions of US dollars of debt.
Zimbabwe’s sovereign debt overhang has not improved since the signing of the
GNU — and it is unlikely to improve in the near future as the country
battles to finance its economic recovery and social development.
The exact debt stock is debatable as official reports vary. However,
Zimbabwe currently faces a debt overhang conservatively estimated at US$6,9
billion — including US$5,2 billion in external debt. Of the publicly
guaranteed debt, US$3,2 billion is in arrears — including US$1,3 billion
owed to multilateral creditors (International Monetary Fund, World Bank and
other institutions), US$1,6 billion to bilateral creditors (Paris Club and
other individual countries) and US$200 million to credit suppliers .
With the 2009 Short Term Emergency Recovery Plan having identified a
resource gap of around US$8,3 billion for economic recovery, the greatest
challenge for the government is its ability — or lack thereof — to mobilise
financial resources to fund projects identified as critical for recovery. I
f the government needs to find US$8,3 billion for its recovery programme on
top of its debt obligations, then Zimbabwe somehow has to find US$15 billion
in the short term. Overall, following the cumulative economic contraction
between 1998 and 2008, the country needs US$45 billion over the next 10
years to regain the Gross Domestic Product (GDP) levels of 1997.
Globally speaking, many developing countries are caught in a vicious cycle
like Zimbabwe. The problems of under-funded social sectors such as education
and over-indebtedness are mutually reinforcing.
As governments struggle to meet unsustainable debt obligations, they are
forced to redirect scarce resources that could otherwise be used to achieve
the objectives of the Education for All campaign or the Millennium
Development Goals (MDGs). In many countries, debt servicing accounts for a
larger portion of the national wealth than the portion invested in
education — and this is clearly contributing to the fact that many
countries, including Zimbabwe, are not on course to achieve the MDGs by
2015.
The first step is for Zimbabweans — and the international community — to
publicly acknowledge the size of the debt problem and how it is acting as a
serious drag on the economic ship of state. While civil society
organisations in Zimbabwe have highlighted the issue, some elements of the
GNU continue to deny the shocking reality of Zimbabwe’s indebtedness.
In particular, there has been fierce opposition to declaring Zimbabwe a
highly indebted poor country, despite the fact that it is exactly that. But
the issue is not about whether to declare Zimbabwe a highly indebted poor
country or not. Zimbabwe has already been declared a crisis country, a
fragile state, a failed state, and a low-income country under stress among
others. These declarations do not resolve anything. Specific policy,
legislative and economic governance measures are needed.
While there have been some legislative changes, such as the Public Finance
Management Act, these have not been enough to remove the debt albatross. A
host of reforms are urgently needed, including the creation of a strong and
well-supported treasury; the establishment of a robust parliamentary
oversight mechanism with a greater role for the portfolio committees
responsible for national accounts, budget and revenue generation; and the
construction of a developmental democratic state that prioritises good
economic governance. Together these reforms will allow the government to
design and implement a sustainable debt management and relief strategy.
Given Zimbabwe’s levels of socio-economic distress, activists and civil
society organisations also maintain that the repayment of external debt
should not be given any priority until a proper national debt audit has been
carried out, which will show whether any of the debt is odious and
illegitimate. Side by side with this, there is a strong view that neither
debt cancellation (which is desirable) nor new loans (which are necessary)
should be extended until loan contraction and debt management legislation
and processes are thoroughly reviewed — so it is imperative that the debt
audit is carried out now.
There is also an urgent need to pinpoint any odious debt and then cancel it
either because the creditors provided loans in the full knowledge that the
money would not be used in the legitimate national interest or simply
because they are un-payable. The Doctrine of Odious Debts, although now more
than 70 years old, helps to bring clarity to today’s complicated Third World
debt situation, where innocent citizens end up paying while corrupt and
negligent borrowers and lenders get away scot-free.
While the global South makes compelling moral arguments to cancel its
foreign debts, it also possesses an indisputable legal case because the
overwhelming majority of these debts are odious in law. “If a despotic power
incurs a debt not for the needs or in the interest of the state, but to
strengthen its despotic regime, to repress the population that fights
against it, etc, this debt is odious for the population of all the state.”
Finally, there is need for an imaginative and sustainable debt clearance
strategy, which combines re-negotiating repayments — including the
rescheduling of some debts and a moratorium on others — to enable the
accumulation of resources to repay legitimate debts, as well as systemic
policy and legislative reform to support the new debt management framework.
Once these actions are taken, Zimbabwe may not need to become part of the
highly indebted poor country initiative in its classic form — especially as
evidence from Zambia, Mozambique, Tanzania and Uganda among others, does not
provide a favourable picture of the impact of highly indebted poor country
status on debt relief.
The debt burden is the biggest albatross around Zimbabwe’s neck. It stands
in the way of Zimbabwe’s economic recovery and long-term economic
development. Its resolution requires domestic leadership and political will
to reform policy, legislation and practice. In addition, the international
community needs to be creative and supportive — realising that economic
stabilisation is still in its nascent stages, recovery is still
characterised by “jobless growth” and key social sectors are still
recovering from a decade-long malaise. The un-payable debt needs to be
cancelled, thereby offering Zimbabwe a fresh start and brighter prospects
under new economic governance rules.