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Country reels from financial chaos Zim foreign debt scales over US$20bn in violation of law

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ZIMBABWE’S foreign debt has exceeded US$20 billion in a brazen breach of the law, which limits the threshold of public and publicly-guaranteed debt to a maximum of 70% of gross domestic product (GDP).

BRIDGET MANANAVIRE

The country’s GDP is US$18 billion by conservative estimates. Officially, the GDP is US$25.8 billion.

Even measuring by Finance Mthuli Ncube’s rebased official GDP figure of US$25.8, the country remains in violation of the law in relation to the national external debt profile.

Fiscal authorities have previously breached the law with regards the overdraft on Reserve Bank of Zimbabwe (RBZ), which should be limited at 20%, but previously scaled 60%.

To address the external debt limit violation, Ncube rebased the economy from around US$15 billion to US$25.8 billion.

Zimbabwe continues to sink into debt amid economic turmoil.

Government has been opaque with its finances. It has been condemned for failing to go through Parliament on its borrowings as stipulated in the Public Debt Management Act. It has also failed to give a transparent and verified figure on the external debt.

In his mid-term budget review in July, Ncube admitted that the external debt was now above 71%, although his figure of US$10.5 billion foreign debt was understated as excluded the Chinese loans and external funding for several government projects.

Section 11 of the Public Debt Management Act  on borrowing powers and limits reads: “In any financial year by way of loans shall not exceed the limit fixed by National Assembly, which limit the minister may propose to the National Assembly for approval by resolution or by means of a provision in a Finance Bill: Provided that the limit fixed in terms of this subsection and section 300(I) of the constitution may not result in the total outstanding public and publicly-guaranteed debt as a ratio of the gross domestic product at current market prices exceeding 70 per cent at the end of any fiscal year, unless the minister obtains a resolution of the National Assembly to do so under one or more of the following conditions- (a) occurrence of natural disasters or other emergencies requiring exceptional expenditure; or (b) where a large investment project in the public sector is deemed by Cabinet to be timely and prudent or (c) in case of a general economic slow-down requiring fiscal and monetary stimulus”.

Ncube in his 2021 mid-term review said the external debt was at US$8.4 billion owed to multilateral creditors and bilateral creditors, but it does not end there.

It excludes the RBZ debt, the Chinese loans, money owed to dispossessed white farmers, money owed to private institutions, parastatal debt as well as debt from other deals.

According to the RBZ monthly economic review for 2021, the RBZ foreign debt stood at US$4.7 billion.

Ncube said in his budget review the central bank and the Public Debt Management Office in the Ministry of Finance are finalising putting in place a Blocked Funds Bill for the settlement by government of around US$2.8 billion foreign exchange liabilities contracted by Zimbabwean entities prior to the change of currency in February 2019.

This gets the external debt to US$15.9 billion before adding the Chinese debt and others.

Former Finance minister and lawyer Tendai Biti said the government is able to get away with breaching the law on debt as there were no strong accountability systems.

“We do not have strong civil society, we do not have strong Parliament, even if they breach, they would end up being above the law,” Biti said.

“All debt is theft on the future, because future generations have to pay that debt. In the case of
Zimbabwe, all debt is a tax on our development, we are under-developed because of unsustainable debt, too many resources are going to pay debt, debt which is consumptive, which has been opaque and debt which has been corrupt.

“About 90% of the debt contracted by this government between 2014 and now has not been approved by Parliament. Meaning all that debt is illegal. If you read the report by the Public Accounts Committee on the RBZ, they borrowed to buy non-performing loans through Zamco, over US$1.5 billion. They borrowed to lend money to the government, the government overdraft, about three borrowings. They are also paying the legacy debt after converting the currency in 2019 after the introduction of Statutory Instrument 33 of 2019.”

Public debt stock 

Zimbabwe has 476 public and publicly-guaranteed (PPG) loans, as well as over 500 debt securities which are active and currently running.

As at end December 2020, total PPG external debt, including RBZ external guaranteed debt, amounted to US$10.5 billion, representing 71.2% of GDP.

Excluding the RBZ external debt of US$2.1 billion, total external public debt stood at US$8.4 billion, which is an increase of 4.1% from the total public external debt stock of US$8.094 billion in 2019.

The increase in the total PPG external debt is as a result of the continued accumulation of arrears, as well as the disbursements from the active portfolios recorded in the year under review.

PPG external debt owed to the multilateral creditors amounted to US$2.68 billion, of which US$1.53 billion is owed to the World Bank Group, US$729 million to the African Development Bank, US$356 million to the European Investment Bank, and US$68 million to other multilateral creditors.

On the other hand, bilateral PPG external debt amounted to US$5.75 billion, with US$3.79 billion owed to Paris Club bilateral creditors mainly comprising Germany (US$1.02 billion), France (US$724 million), Japan (US$435 million), UK (US$416 million) and USA (US$285 million).

The Non-Paris Club creditors are owed US$1.67 billion, which comprise mainly China (US$1.57 billion) and India (US$70 million).

RBZ guaranteed external debt 

RBZ external debt stood at US$2.1 billion as at end December 2020. This mainly consists of guaranteed facilities for the importation of strategic commodities and raw materials which were done on behalf of government.

This external debt stock excludes non-guaranteed facilities and blocked funds. Since Treasury assumed the RBZ debt in 2015, government is closely monitoring RBZ debt to ascertain the fiscal risks emanating from contingent liabilities in the form of called up guarantees.

The RBZ accrued legacy debts during the United States Dollar and Zimbabwean dollar exchange rate parity era, estimated at US$2.9 billion. These are pending validation and reconciliation.

Following the policy announcement in the 2021 Monetary Policy Statement on the resolution of blocked funds and foreign exchange legacy debts, Treasury is working on the debt assumption procedures guided by the provisions of the Public Debt Management Act (Chapter 22:21). The procedures include validation and reconciliation process, cabinet and parliament approval for the Debt Assumption Bill.

The legacy debts resolution framework will be designed to ensure that it is not inflationary and the settlement plan will use long-term instruments taking into account fiscal capacity and debt sustainability. Applications for qualification under the Legacy Debts Framework were closed in August 2020.

External debt service 

In 2020, due to the Covid-19 pandemic, government faced challenges in making external debt service payments, hence no token payments were made to the three International Financial Institutions namely; the World Bank Group, African Development Bank and European Investment Bank (EIB).

Total debt service payments for 2020 amounted to US$20.39 million. The payments were made to creditors with active portfolios.

Debt service payments were made to the International Fund for Agricultural Development (US$2.2 million), OPEC Fund for International Development (US$0.92 million), Arab Bank for Economic Development in Africa (US$0.17 million) and China-Exim Bank (US$17.1 million).

External loans disbursements during 2020 amounted to US$189.5 million. These were from OFID and China Exim Bank. The disbursements for 2020 represented a 216 per cent increase from the US$59.96 million recorded in 2019.

This increase is mainly attributed to the ongoing projects particularly the Hwange 7 and 8 Thermal Power Station Expansion and the rehabilitation of the Robert Gabriel Mugabe International Airport projects funded by the China Exim Bank.

In 2020, government signed two external concessional loan agreements amounting to US$320 million, for the refurbishment of Hwange 1-6 Thermal Power Station and for the procurement of Personal Protective Equipment (PPE) and laboratory equipment towards Covid-19 pandemic.

External debt arrears remain a major challenge to Zimbabwe’s economy, making up over US$6.6 billion (62%) of total external debt.

Almost all external debt owed to MDBs is now in arrears: World Bank Group, US$1.3 billion (88%), African Development Bank, US$699 million (95%) and European Investment Bank, US$339 million (95%).

Only a small proportion of the debt owed to most creditors is yet to mature reflected as Debt Outstanding and Disbursed.

Zimbabwe is in debt distress mainly due to the continued accumulation of external debt arrears.

2020 budget financing

While Treasury continues to rely on the domestic financial and capital markets to meet the financing requirements of the budget, Treasury managed to contain issuance of domestic debt throughout 2020.

Treasury raised a total of ZW$7.85 billion through the issuance of Treasury Bills. These Treasury Bills were issued through the auction system and private placements. Restructuring of existing debt instruments was also used as a refinancing tool during 2020.

Due to the Covid-19 induced lockdown, Treasury resorted to private placements and raised funding amounting to ZWL$3.95 billion, while ZWL$485 million was raised through the auction system.

ZWL$3.4 billion worth of Treasury securities were restructured.

Of the ZW$7.85 billion raised through Treasury Bills issuances, ZW$4.03 billion was for health related Covid-19 pandemic expenditures, while ZW$3.4 billion was for restructuring existing debt, which was converted into Treasury Bills.

Furthermore, ZW$327 million was issued to mobilise resources for grain importation and ZW$8.95 million was for cashflow management, including maturing Treasury Bills.

This resulted in the stock of domestic debt increasing to ZW$16.7 billion as at 31 December 2020.

Additional loans, more debt

In November 2019, former Chinese deputy ambassador Zhao Baogang said Zimbabwe owed about US$2.1 billion in loans financed by a Chinese institution in 2018.

Among projects funded by China are the US$1.5 billion Hwange Thermal Power Station expansion and the US$153 million Robert Gabriel Mugabe International Airport refurbishment.

The Chinese are also funding the US$500 million Kariba South expansion project and other dam projects.

This year, the African Export-Import Bank (Afreximbank) ratified a US$70 million loan to finance the facelift of the Beitbridge border post while a group of African banks also signed a US$194 million debt facility to rehabilitate the Beitbridge border post.

In July 2020, the government signed an agreement worth US$3.5 billion to compensate dispossessed white farmers.
This gets the debts to over US$21 billion.

There is also money owed by parastatals including telecoms operator NetOne, which has received US$285 million in government-guaranteed loans from China for network expansion since 2016.

TelOne is also sitting on letters of demand worth US$22 million from foreign suppliers, according to recent reports.

Biti said debt figures provided by Treasury were wrong and fictitious and prepared by people obsessed with trying to create an image that they are doing well and that the economy is doing well.

“They are concerned with form and not substance. They have excluded totally the Reserve Bank debt, which in the past few years has grown by over 5 000%. They have borrowed huge amounts of money from the Afrexim Bank. They have borrowed huge amounts of money from Trafigura, then they are borrowing money right now to sustain the foreign exchange auction system,” he said.

“They are busy securitising the country’s gold reserves, and that is part of the reason they sold Fidelity. You have got a series of parastatal debts that have been assumed by these people, you’re talking Air Zimbabwe, Industrial Development Corporation, Agribank, and this money is legacy debt. There is also money that government is owing to private actors such as Kuda Tagwirei, Trafigura and to suppliers of inputs, including fertiliser.”

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