Zimbabwe’s debt overhang is scaring investors from putting money into the country as they take a cue from multilateral financial institutions, a new report by a leading brokerage firm has said.
The country’s external debt, which stands at $10,7 billion and 111% of gross domestic product, has been described as unsustainable.
Zimbabwe’s arrears to the World Bank are $507 million, $140 million to the International Monetary Fund (IMF) and $409 million to the African Development Bank (AfDB).
In a research note, MMC Capital said the unresolved debt issue “is not only complicating the liquidity situation in Zimbabwe, but also depriving the economy of the full benefits of dollarisation”.
It said while inflation had come down in the post-dollarisation era to 4,02% in May, interest rates had remained high.
“The attitude of investors towards putting money in Zimbabwe given this huge debt overhang, is poor as they take a cue from the IMF and World Bank’s decisions to suspend credit lines to Zimbabwe on the back of this unresolved debt,” it said.
“This has translated in the economy being starved of liquidity, prompting those that are willing to lend to charge penal rates of between 8% and 20% per annum even though inflation is low.”
It said some of the implications of the huge debt have manifested themselves in the form of huge financing costs that were chewing into the incomes of most listed and unlisted companies, low capacity utilisation as a result of working capital constraints and failure to raise funds needed for retooling, high unemployment and high non performing loans for banks, among others.
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“The cumulative effect of these issues brought about by the unresolved debt has been that a huge risk premium has been attached on Zimbabwe, thereby further compounding the liquidity squeeze,” MMC said.
MMC said the most feasible way of tackling the huge debt was privatising loss-making parastatals to reduce their demands on the fiscus.
This creates the fiscal space that would be used to service the external debts.
Another low-hanging fruit would be that of expanding the government’s revenue base through formalisation of the informal sector.
This move would improve government revenue collections by not less than 50%, MMC said.
The principals in the inclusive government approved the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS) in March after months of haggling, as one faction of the inclusive government was arguing the country was too rich to be declared poor.
ZAADDS uses a combination of debt relief and resources pledging to clear the country’s debt. The debt clearance model was presented to the country’s creditors at a meeting organised by AfDB and also on the sidelines of the IMF-World Bank annual springs meetings.
