Debt the albatross around Zim’s neck

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was largely underpinned by runaway inflation, which officially peaked at 231 million percent in July 2008 — although an unpublished report in December 2008 estimated that it had risen to 3,2 quintillion percent.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.

If 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.

Deprose Muchena is the Deputy Director of the Open Society Initiative for Southern Africa (OSISA). He is a graduate of the University of Zimbabwe, holds BA Hons and MA degrees with specialization in economic history and economics, and Diploma in Business Leadership (DBL) from the Zimbabwe Institute of Management.