Debt-to-GDP ratio to exceed 100%

Mthuli Ncube

THE Zimbabwe Economic Policy Analysis and Research Unit (Zeparu) says the country’s debt to gross domestic product (GDP) ratio will balloon to 101,6% by year end due to legacy debt, farmers’ compensation and COVID-19.


On May 4, 2020, government announced an $18 billion COVID-19 economic recovery stimulus package to deal with the effects of the global pandemic. But, since this was not budgeted for, it is likely to increase public debt as the government mobilises resources to fund the stimulus as it has no access to international credit lines.

This comes at a time government is already in high debt distress with external debt estimated at nearly US$11 billion and $8,868 billion domestically as at December 2019.

“The public and publicly guaranteed external debt to GDP ratio for 2019 was 47,6% and is projected to increase to 51,5% in 2020 (International Monetary Fund, 2020). This debt position does not take into account the legacy debts incurred by the Reserve Bank of Zimbabwe through compensation of some stakeholders for losses incurred following the currency conversion estimated at about US$1,2 billion and farmers’ compensation,” said Zeparu in its new May 2020 economic barometer.

“The public sector debt to GDP ratio including legacy debt and farmers’ compensation jumps from about 51,8% estimated for 2019 to a projection of about 101,6% in 2020, which is beyond the 70% debt threshold as espoused in the Public Debt Management Act (chapter 22:21) and the Transitional Stabilisation Programme (October 2018 – December 2020).”

Zeparu added: “The debt is projected to remain high and unsustainable even up to the year 2029 at 83,8% of GDP. Without taking into account legacy debt and farmers’ compensation, it appears as if the debt falls within the threshold and, therefore, the debt position is sustainable”.

Zeparu said the consolidation of debt statistics is, therefore, critical to ensure that the government publishes the correct debt position including legacy debts and farmers’ compensation.

“The current global pandemic COVID-19 may further affect the country’ ability to clear the long overdue external debt arrears due to disruptions caused by the rolling lockdowns and import and export restrictions as countries try to fight the spread of the disease,” Zeparu said.

Government is expected to fund its debt by “printing money”, issuance of Treasury Bills or increasing the central bank overdraft facility which are the main ways it has used in the past.

However, American financial and economic literacy website, Investopedia, warns against this for countries that do not control their own monetary policy such is the case locally as government controls have caused the markets to run amok.

“Economists, who adhere to modern monetary theory (MMT) argue that sovereign nations capable of printing their own money cannot ever go bankrupt, because they can simply produce more fiat currency to service debts. However, this rule does not apply to countries that do not control their own monetary policies,” Investopedia said.

Government hopes by fixing the exchange rate at the current US$1:$25, this may allow for cheaper borrowing. But, as the Zimdollar continues its freefall which has already forced the government to bring back the greenback, the benefits of a fixed exchange rate may not be realised.

Zeparu recommended resuscitating the economy and promoting production which could alleviate the government’s debt requirement.

One recommendation was for the government to further increase foreign currency retention thresholds for tobacco farmers and gold miners, who work in Zimbabwe’s two biggest foreign currency producing sectors.

“Gold and platinum demand is expected to increase amid COVID-19-induced risk hence the need to boost production.

Gold is considered as a safe haven whereas investment in precious metals like platinum is more lucrative due to the increase in the global risk,” Zeparu said.

“The COVID-19 pandemic-induced difficulties in accessing imports implying that methods and mechanisms for import substitution should be the topical issue for manufacturers.”

Zeparu added that the post-COVID 19 tourism recovery strategy should address a number of issues including destination accessibility among others if tourism is to recover and become a key economic driver.