18 July 2014

Zimbabwe: When in a Hole Stop Digging


Although there is general consensus that an economy sinking in unsustainable debt must desist from borrowing, this is a point that unfortunately needs to be driven home hard to President Robert Mugabe's government.

Only this week the International Monetary Fund (IMF) rang alarm bells after Zimbabwe contracted new non-concessional loans to the tune of US$300 million.

This was despite an agreement that government would put a US$330 million ceiling on non-concessional external debt under the IMF's supervised economic reform plan, the Staff Monitored Programme (SMP).

The SMP is an informal agreement between country authorities and the fund's staff to monitor the implementation of the authorities' economic programme to help the country out of the woods.

Zimbabwe owes the IMF US$125 million, AfDB (US$655 million inclusive of arrears) and US$1,4 billion to the World Bank. It also owes Paris Club members US$3 billion and non-Paris Club (US$692 million).

Zimbabwe's debt overhang is among key factors inhibiting the country's attempts to secure fresh, desperately-needed foreign funding at a time it is suffocating under a severe liquidity crunch.

Ironically this comes after Finance minister Patrick Chinamasa announced recently the country would set up a debt management office to govern debt, lending and guarantees, local council debt and public enterprise debt.

While many had commended Chinamasa for setting up the office, hopefully as a signal government had resolved to deal with the country's precarious debt situation, contrary government actions betray lack of commitment.

What Mugabe's government is doing with non-concessional borrowing with regards to the country's debt overhang is akin to a company that has a high gearing ratio and sinking into debt accruing expensive short-term debt, at a time it is also toying with the idea of rescheduling existing debt.

Zimbabwe, like any such company, runs the risk of not being taken seriously by any would-be investor and will end up worse off.

Against such a background, many believe the debt office is a sheer waste of time as Zimbabwe requires a shift in both policy and mindset to deal with its debilitating debt situation, pointing to the latest lack of financial discipline on the part of government as a case in point.

Government should instead revive the productive sector and create capacity to repay its debt, instead of the current token payments.

Unsurprisingly, the plan to set up a debt office has in some quarters been seen as a desperate attempt to deepen relations with the IMF under the SMP and a futile effort to hoodwink the fund into believing they are singing from the same book with regards to the debt situation. Zimbabwe is currently in discussions with its creditors on how to resolve the country's US$9,9 billion domestic and external debt.

Analysts say you cannot talk of managing debt when you are continuously immersing yourself in the debt you purport to be desperately seeking to break free from. The warning should be obvious: When in a hole, stop digging!


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