A NEW report by the United Nations Department of Economic and Social Affairs has named Zimbabwe as one of the poor countries that have sunk into debt distress exposing millions to extreme poverty.
Zimbabwe’s debt-to-gross-domestic-product ratio has spiked to 100% over the last few years, and experts warn that the trend will be maintained as the southern African nation battles to clear arrears with international financial institutions.
The country’s total debt stock has soared to US$18 billion as of December 2022 from US$17.2 billion reported in the prior comparative period as the distressed economy struggles to extricate itself from the debt albatross.
With no budgetary support from traditional lenders such as international financial institutions such as the World Bank due to non-payment of arrears, Zimbabwe has been mainly relying on grants, bilateral loans and domestic resources to finance its key capital projects.
After several failed attempts to settle arrears with international financial institutions such as the World Bank and the African Development Bank (AfDB), which enjoy preferred creditor status, Zimbabwe, which has been struggling to access long-term concessional funding, adopted a new strategy which is led by AfDB.
The UN report, titled World Economic Situation and Prospects 2024, projects Africa’s growth to remain modest, edging up from an estimated 3.3% in 2023 to 3.5% in 2024 as the region is buffeted by the global economic slowdown and tighter monetary and fiscal conditions.
The UN says debt sustainability risks will continue to undermine growth prospects. The impacts of the climate crisis are a growing challenge for key sectors such as agriculture and tourism.
Geopolitical instability will continue to adversely impact several sub-regions in Africa, notably the Sahel and North Africa, the multilateral body says.
“As at 31 August 2023, about half of the countries covered by the IMF/World Bank Debt Sustainability Framework for low-income countries were assessed as being at high risk of debt distress or in debt distress — an increase of about 70 per cent from the 2015 level,” the report says.
“In total, 36 developing economies — home to about a quarter of the world’s population living in extreme poverty — are plagued by severe debt problems and high borrowing costs. Among these economies, 11 are LLDCs, with Lao People’s Democratic Republic, Malawi, Zambia and Zimbabwe classified as being in debt distress by the IMF and the World Bank.”
The UN report further shows that as many developing countries face increasing debt sustainability risks, they will be forced to adopt fiscal consolidation measures and cut spending on social programmes, which will have the greatest impact on vulnerable population groups such as women and children.
Central banks worldwide are expected to continue facing a delicate balancing act and difficult trade-offs in 2024 as they strive to manage inflation, revive growth, and ensure financial stability.
“Developing country central banks will need to use a broad range of tools — including capital flow management, macro-prudential policies, and exchange rate management — to minimise the adverse spill-over effects of monetary tightening by developed economies,” the report says.
“Precautionary and pre-emptive deployment of these policies could create a buffer and increase flexibility in monetary policy responses to prioritise growth and employment over financial stability. Developing countries need to strengthen their technical and institutional capacities — focusing on priorities such as timely economic and financial data collection and strengthened supervisory capabilities – to prepare themselves for policy implementation.”
The UN also highlighted that fiscal space is shrinking amid higher interest rates and tighter liquidity.
“Governments around the world have also relied on fiscal policy to confront higher food prices and food insecurity risks resulting from the war in Ukraine,” the UN says.
“Sharp increases in interest rates since the first quarter of 2022 and tighter liquidity conditions have adversely affected fiscal balances, renewing concerns about fiscal deficits and debt sustainability. Fiscal space remains very limited, especially in developing countries; for many of these countries the lack of fiscal space presents special risks, as it restricts their capacity to invest in sustainable development and respond to new shocks.”