By Persistence Gwanyanya
We emerged from the year of learning, “Gore rezvidzidzo”, more enlightened than before. For those who have had the opportunity to learn, let your candles of knowledge light the minds and souls of those who missed this opportunity. Knowledge shared is wealth created for all of us.
Otherwise “gore rezvidzidzo” will go down the lane of history as a missed opportunity to create a more enlightened and vibrant population prepared to implement necessary structural and economic reforms in Zimbabwe.
With debt to GDP ratio of more than 77 percent, Zimbabwe is one of the highly indebted countries in Southern Africa. High debt levels largely reflect the structure of its economy, being a consumptive economy.
More than 80 percent of the country’s annual budget go towards current expenditures mainly payment of wages. Given low industrial activity in Zimbabwe, high consumption rates means huge dependence of imports.
This has seen the country accumulating BOP deficit in excess of $15 billion since 2009, which was mainly funded from short term debt as national savings were destructed by dollarisation. If Zimbabwe continues borrowing at the current rate it risks falling into a debt trap.
A country falls into a debt trap when GDP growth is no longer enough to service its annual interest rate. Once a country falls into this situation it is difficult to get out without considering unpopular options such as the Highly Indebted Poor Country (HIPC) status. A country in a debt trap will not grow as increases in GDP are consumed into interest repayment, leaving little room to increase investment.
Zimbabwe should negotiate with its creditors to restructure or reschedule its debt, which currently stands at $8,37billion. The recent negotiations with IMF, World Bank and African Development Bank (ADB) on the sidelines of the Lima conference is therefore seen as a good initiative, which may unlock new borrowings with favourable terms and interest rates.
I must stress that any new borrowing should go towards productive and not consumptive uses.
I understand the Government is under pressure to pay wages at the moment, but my advice is that borrowing to pay wages is an unviable option. Debt option will only delay the problem but has deeper long run ramifications. Government should instead expedite the measures to rationalise the public service sector as spelt out in the 2016 National Budget Statement.
These measures include freezing of certain posts, reduction or removal of a number of allowances, expediting the civil service cleanup exercise by reducing redundancies and removing duplicated tasks among others.
By implementing these measures, Government is expected to unlock savings of $17,2million per month and $170,4million per year, which is about 5 percent of the country’s annual wage bill. These measures should be complemented by increasing efficiency in revenue collection, tackling corruption head-on, increasing transparency and reducing revenue leakages.
My feeling is that Government is losing a lot of revenue through corruption and other illicit activities, and thus bold actions should be taken to deal with these economic vices. If above measures fail to generate enough financial resources, then the civil service should content with some delays in wage payments for now.
On the other hand the Government should work hard to put the economy back on track and set the stage for quick recovery. For both parties the essence is to sacrifice current consumption or benefits for more consumption in the future.
The same advice apply to the private sector, both corporates and households. The private sector in Zimbabwe is over borrowed. Like the case of the public sector the private sector debt is a legacy issue, which predates the dollarisation era.
Faced with hyperinflation situation, it made more economic sense for companies to borrow rather than save. Dollarisation wiped away the country’s savings and to recapitalize their businesses, most companies resorted to debt.
Due to liquidity challenges the cost of borrowing was high and not matched with the productivity levels. As a result most companies were unable and are still unable to pay back their debts. This is reflected by the huge Non Performing Loan book, which reached peak of more than 16 percent in 2015.
In the new environment the economy is going to be tough both at global and national level such that reliance on past business models will not work. Business should foster productivity and price their products based on productivity, not need.
The same goes for labour. This means cost plus pricing is dead, and productivity based pricing is the new baby in town. Faced with deflation borrowing for payment of recurrent expenditures is highly discouraged.
Most business need to recapitalise and retool from sources other than borrowing. Otherwise we will continue to witness corporate distress and more foreclosures. In most cases it is the households who bear the brunt of Government and business debt problems.
Most employees have been going without pay for a long time and a number of them have resorted to money lenders and microfinance houses to finance their daily expenses. It is hard to believe that given the low wages in Zimbabwe and the generally high propensity to consume, the households can afford the exorbitant interest rates by these lenders.
The household sector is over borrowed and a look at the distribution of loans as at June 30, 2015 bears testimony to this fact. Out of the total loans of $5 billion, household borrowings accounted for 25,65percent.
Adding this to the unrecorded borrowings from money lenders it is clear that Zimbabwe is over borrowed. Surely there is a problem brewing and will one day burst. Like in the scenario I have given on Government, most of individuals are in debt trap and may find it very difficult to get out of. Otherwise they will have to lose their properties and other belongings to pay back their debts, better if they do so sooner rather than later.
I know there are some who believe that debt will provide the necessary impetus to stimulate the economy but my take is that can only happen if the country has the productive capacity to respond to this stimulus.
This is not the case at the moment. Debt will aggravate the country’s economic woes, and has serious psychological problems which kills our creativity, innovation and imagination. In fact it is one of the biggest cause of death in highly indebted countries
*Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economics Society. He writes in his personal capacity and this article does not represent the views of his employer