Zimbabwe: Debt Accumulation a Huge Blow to Sustainability - WB

Zimbabwe needs to develop domestic financial markets necessary to attract local and foreign capital inflows as debt accumulation is threatening the sustainability of public debt.

This is mainly driven by the fact that an increasing share is owed to private creditors and denominated in foreign currency.

Zimbabwe is also among those countries (the bottom tercile countries) which are struggling to secure the foreign currency it needs to finance its foreign obligations, as production is failing to meet the required forex levels.

According to the World Bank's Africa Pulse Launch Report, bottom tercile countries are those that display the largest real GDP per capita (with group averages of US$2 272 in 1995 and US$3 533 in 2015.)

Zimbabwe debt rose 33,3% to US$18 billion, from US$13,5 billion as at December 2017, split in half between domestic and international creditors.

Zimbabwe owes the World Bank $1,3 billion, AfDB (US$680 million) and US$308 million to the European Investment Bank.

In the report, the World Bank states that while developing domestic financial markets is necessary, creating local currency bond markets would also help in diversifying the composition of debt and managing currency risks.

"Debt accumulation is threatening the sustainability of public debt, as an increasing share is owed to private creditors and denominated in foreign currency. Developing domestic financial markets is necessary to attract domestic and financial investors to bring in more capital inflows. Creating local currency bond markets would help in diversifying the composition of debt and managing currency risks. So far, all the countries in the region show a dismal record on institutional quality, therefore, it is important to strengthen domestic institutions not only to support robust macroeconomic policy frameworks but also to foster domestic and foreign investment," said WB.

The bottom tercile consists of 19 countries: Angola, Burundi, Botswana, the Republic of Congo, the Comoros, Gabon, Equatorial Guinea, Liberia, Lesotho, Mauritania, Malawi, Namibia, Nigeria, Sierra Leone, Eswatini, Chad, South Africa, Zambia, and Zimbabwe.

According to the World Bank, the fastest growing countries in the region still relied heavily on agriculture -- a low-productivity sector that requires technological modernisation to boost its productivity.

Therefore, resource misallocation in agriculture would explain lower aggregate productivity in the region.

"Institutional quality is weak in all the country groups, especially in the areas of political stability, government effectiveness, and the rule of law -- particularly among the worst performers. Finally, the bottom tercile countries display the largest real GDP per capita (with group averages of US$2 272 in 1995 and US$3 533 in 2015). The stability in the Solow-Swan model predicts that poor and rich countries will converge toward their steady state (Barro and Sala-i-Martin 1995). Failing to converge to the income levels of the world economy would leave sub-Saharan African countries behind and stuck in poverty or middle-income traps, indicating that policies have failed to boost productivity,"' the World Bank noted.

Zimbabwe has been focussing on clearing its foreign obligations in order to position itself for new credit lines and international financial support.

Finance minister Mthuli Ncube last year announced a cocktail of austerity measures to contain the government's unrestrained expenditure outlays and resultant fiscal deficit seen surging towards US$2,9 billion this year-end.

The move was designed to extricate the country from a worsening fiscal crisis and enable it to clear its external debts.

He also had crucial meetings in Bali, Indonesia, with co-operating partners and international financial institutions who emphasised the need to consistently implement the measures as outlined in the Transnational Stabilisation Programme (TSP).

However, the minister is struggling to implement most of the reforms in the TSP as they hinge on politics, economic environment and the country's capacity to clear its debts and arrears.

Meanwhile, World Bank Africa region chief economist Albert Zeufack on Monday told journalists in a video press conference that while debt was a major problem, inflation was also a big elephant in the room with Zimbabwe being no exception.

Zeufack said inflation is an indication of a deteriorating economy, adding that the monetary policy statements in those countries with double-digit inflation should be used to contain it.

Zimbabwe's year-on-year inflation was at 59,39% as at the end of March.

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