The secret of making debts magically disappear (Part 2)

By Dale Dore | Click here for Part 1 |

The Finance Minister (Patrick Chinamasa) hardly mentioned our domestic debt position. Most of our $1.3b domestic debt, he said, was in treasury bills (i.e. government bonds) that were issued to cover the Reserve Bank debt.

So, the questions many Zimbabweans are asking are: How can the government take on the debts of state enterprises, as well as buy companies, when it cannot even pay the arrears in debts that it owes to all our creditors?

Has the government properly accounted for all its debts, or has it employed “alternative and innovative financing arrangements”? Remember: the last time text-book economics was thrown out the window, the Reserve Bank of Zimbabwe’s secretive ‘quasi-fiscal activities’ had, by 2008, destroyed both our economy and our currency.

One of the main problems with budget statements is that they are steeped in obfuscating economic jargon. The intention is to make terrible ideas sound like brilliant finance. The Finance Minister has, for example, “created a special purpose vehicle to warehouse non-performing loans to clean the balance sheets of distressed companies.”

What he means by ‘non-performing loans’ is just bad debts that companies have accumulated due to mismanagement and corruption by government-appointed cronies.

A ‘special purpose vehicle’ is not a flashy car, but yet another state-owned company called the Zimbabwe Asset Management Company (ZAMCO). And ‘warehouse’ simply means to store or hide the bad debts. In plain English, ZAMCO is a state-owned company where the government hides bad debts accumulated by its mismanaged state enterprises.

And what does it mean to clean the balance sheets of distressed companies? A distressed company is usually a state enterprise – or one linked to the ruling party – that has been so badly fleeced and mismanaged, that it is insolvent.

In other words, its debts exceed the value of its assets. But if the company’s debts are taken over by ZAMCO, its balance sheet is ‘cleaned’ of liabilities, which means it can start borrowing against its assets again.

This is, of course, a bonanza for party-sponsored directors and managers. They not only keep their ill-gotten gains that caused the debt in the first place, but they can start the process all over again – borrowing to pay themselves obscene salaries and benefits, while plunging the company back into debt.

A good example is Air Zimbabwe. The government spent $200m propping up the national airline and clearing its debts before 2008. But soon afterwards, Air Zimbabwe’s corrupt managers conjured up an insurance scam to fleece the ailing airline of $10m.

Then, through sheer mismanagement, they allowed the airline to gradually accumulate $300m in new debt. So, no surprise: the company is insolvent again, and not worth a cent.

But now that Air Zimbabwe is looking for a new ‘strategic partner’, it needs to clean its balance sheet of debt again. So what is Transport Minister Mpofu’s magical solution to make the debt disappear? It’s very simple. ‘Warehouse’ the debt in ZAMCO. And, just to make certain that creditors can’t get their hands on Air Zimbabwe’s assets, the President has granted the airline immunity from having its assets attached.

Another example is Hwange Colliery. The government acquired $80m of the company’s debt by converting it into government equity and channelling it through ZAMCO. It then guaranteed $33m in loans to the company for equipment and trucks. The result?

Hwange’s coal production plunged by nearly 40 percent in just one year, from 6.3m tonnes in 2014 to 3.9m tonnes in 2015. But this is hardly surprising when a commercial company cuts its price to make its coal ‘affordable’ to party supporters under the guise of social responsibility.

The Governor of the Reserve Bank, Dr Mangudya, has tried to put lipstick on this financial frog by claiming that ZAMCO will only take over bad debts that are secured by recoverable assets. But that wouldn’t make any sense. Why would these companies transfer their recoverable debts to ZAMCO and leave themselves with irrecoverable debts?

That, after all, would defeat the purpose of cleaning their balance sheets. The clear intention of the government is for ZAMCO to acquire all the debts of Hwange Colliery, along with other non-viable state-managed companies: Cottco, RioZim, Cairns Food, Border Timbers, Astro Motors, and the Cold Storage Company.

According to the Finance Minister’s statement, ZAMCO had already purchased $256m worth of bad debts. We understand that this includes $100m of bank debts and the Infrastructural Bank of Zimbabwe’s $32m debt. But this is only the start. Also queuing up to transfer their debt into ZAMCO is Air Zimbabwe with its $300m debt, TelOne’s $330m debt, and Premier Services Medical Aid Society’s debt of $144m.

Within no time ZAMCO debts will inexorably rise to over one billion dollars, with no end in sight. What we are staring at is another Reserve Bank of Zimbabwe debt balloon, where the ruling party’s elite lives the high life, then passes their bad debts on to us, the taxpayers. Then, to add insult to injury, the government will refuse to name the culprits.

But using ZAMCO is not the only way to make debts magically disappear. The government has learned to play a clever “out of sight – out of mind” trick with debts. This requires the player – the government or party – to just pretend that the debt simply does not exist.

It is particularly effective when the Constitution and the law are ignored – even when you are reminded of it. The Danes were the first to remind the Finance Minister that the government must compensate displaced commercial farmers. More recently, Mr Chinamasa received a reminder from EU Ambassador Philippe Van Damme.

The Ambassador quoted chapter and verse of the Constitution, which clearly stipulates that fair compensation must be paid within a reasonable time for all farm improvements that have been compulsorily acquired by the state. For any avoidance of doubt, so does the Land Acquisition Act. So apparently does the government’s own Debt Arrears Clearance Strategy that the Finance Minister presented in Lima in October.

So the big question is this: Where does this domestic debt for compensation feature on the government’s balance sheet and budget? This debt, conservatively estimated at $10b, is not even mentioned in the Minister’s budget statement.

The Minister does however wax lyrical about the need for bilateral investment promotion and protection agreements (BIPPAs). These, he said, would demonstrate Zimbabwe’s firm commitment to provide a secure environment and build investor confidence. The main problem with these assurances, however, is that deeds speak louder than words.

Despite 11 displaced Dutch farmers being awarded compensation of $9,2m in an international court in 2009, the government has still not paid them.

This debt has now risen to over $25m. But these claims represent only 11 out of 110 BIPPAs farms that were seized. So the total cost of paying all farmers covered by BIPPAs will, at the very minimum, be about $125m. So the question for the Finance Minister is this: Where is this debt reflected in your budget or balance sheet?

Taking into account all the bad debts that government and its state enterprises owe, plus the amount that government owes to farmers, a conservative estimate of our true total debt position is closer to $20b: 8bn to external creditors, and 12b to domestic creditors.

This is more than double the figure quoted by Mr Chinamasa. Transform Zimbabwe very much hopes that Zimbabwe’s international creditors will not be bluffed by a capricious government, and insist on a full audit of its debt. It’s time to dust off the thumb-screws and get serious.

Dale Doré is a former Oxford scholar and agricultural economist with a special interest in the economics of land tenure systems and the structural transformation of the economy.