Economy Uncensored by Tapiwanashe Mangwiro
The country is on a drive to expunge its debt and be able to attract fresh capital inflows and multilateral loans in order to drive economic growth using less expensive money.
In order to achieve this, government has put African Development Bank president, Dr Akinwumi Adesina and former Mozambique President, Joaquim Chissano on the driving seat of negotiations to expunge the debt.
According to Treasury, total external debt, excluding Reserve Bank of Zimbabwe debt and blocked funds, is estimated at US$8,3 billion, including US$5,7 billion of bilateral debt which is 69 percent of the amount, US$2,6 billion of multilateral debt which is 31 percent of the amount.
Of the said debt, interest and penalties represent 76 percent or US$6,3 billion of the said amount.
The two ‘Champions of debt resolution’ as they have come to be known, were in the country for another round of meeting and have not been holding back on what needs to be done.
Dr Adesina in his speech earlier in the week was pregnant with a lot of things (mostly not financial) that government needs to look at holistically and strategically in order to deal with this debt and I will quote;
“The issues are not just economic or financial. They also involve governance, rule of law, human rights, freedom of speech, political level playing field, electoral reforms that will assure free and fair elections; as well as fairness, equity and justice for the commercial farmers and other businesses who were dispossessed of their lands, for which there is a clear need for restitution and compensation.
“The government has taken the decision to eliminate multiple exchange rates, …, end the quasi-fiscal activities of the Reserve Bank of Zimbabwe. It has also taken decisions to end subsidies and reform state-owned enterprises,” Dr. Adesina said.
I will not talk much about the subjective (governance) parts of the speech where there is a need for a third party to certify that the targets have been met, but will dwell much on what we can control the outcome of.
Reform State-Owned Enterprises
The country is still stuck with inefficient and badly run state-owned enterprises (SOEs) five years later after vowing to reform them and concluding contracts with transactional advisers.
In 2018, government adopted the SOEs reform agenda, which entailed various options including liquidation, full or partial privatisation, transformation of some of the entities to assume regulatory roles, merging and de-merging, as well as departmentalisation into line ministries. However, nothing has been concluded since.
Our parastatals are in need of reforms as they are currently a major financial risk as many of them are facing operational and financial risk. The SOEs have been perennially making losses and in some instances negative equity.
In the IMF Article IV of April 2022, it was reviewed that SOEs accumulated losses of about 5 percent of GDP between 2011 and 2018 and the central government has supported these failing institutions through various ways to the tune of 11 percent of GDP.
We really need to expedite the restructuring or the reform of our parastatals in order to really address these risks and concerns that are arising as a result of losses being made and other issues such as their governance.
Compensation of land reform victims
In 2020, Treasury agreed to pay US$3,5 billion in compensation to local white farmers whose land was taken by the government to resettle black families, while foreign white farmers were allowed to apply to get seized land back.
However, former farmers turned down an initial deal to receive payment within 10 years via treasury bills, prompting Dr. Adesina to say his bank is devising leveraged instruments to repay the compensation fee.
Leveraged loans are speculative grade bank loans which came to the fore in the early 2000s and are frequently sold to other banks and institutional investors. They are senior secured meaning repaid between three to eight years, unlike high yield junk bonds, and as result are less vulnerable to a fall in a company’s credit rating.
Additionally, leveraged loans are floating rate instruments and thus are void of risk from interest rate experienced when holding a fixed rate high yield junk bond. In effect, volatility is less with leveraged loans than with junk bonds.
Through the syndicated loan market, lower rated firms are able to access the much needed credit and this is exactly what the AfDB is hoping to achieve with their instruments.
But the question arises, ‘Who trusts Zimbabwe to repay them?’
However, with the instrument most likely accruing interest it means the country will have just spread its debt over the 10-year period they initially offered farmers but at a cost. What might be the solution is to put resources as potential collateral to the leveraged loans and that is reducing our foreign currency receipts as a nation.
Expunge multiple exchange rates
In its Article IV report, the IMF called for a tighter monetary policy and the abolition of non-market and multiple exchange rates. Interestingly a year later, Dr. Adesina is calling for the same thing and the hope around the country is that he will be heard.
The country is operating with three notable exchange rates namely, foreign currency auction exchange rate, bank rate and the unofficial parallel market rate.
Government is insisting on a foreign currency auction rate because it is helping them allocate funds across sectors of the economy, however, business and individuals are adamant that the unofficial rate is the true rate of the currency.
This will be tough to implement as the authorities do not want to accept that the auction rate which was supposed to be the rate setter of the week has failed and a new mechanism, which is more market oriented, is needed to deal with multiple rates.
Besides the tough governance issues that were raised by the change champions, the financial side of things are not looking well too.
Financial suggestions are not that hard, but some have been stalled because of lack of finances and this seems to be an issue that will take years to resolve. Some do not necessarily need money but are tough to implement in a country trying to prop up its local currency to the extent of doing anything and everything to save it.
In short, the country is still miles away from achieving the goal of the debt resolution targets, but it certainly needs to start taking action and do its part now.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.