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Floating a diaspora bond: Should Zim continue borowing?

Unsustainable debt is depleting national reserves

The Minister of Finance and Economic Development (MoFED), Prof. Mthuli Ncube, revealed late last year that the Government of Zimbabwe is considering setting up a Diaspora Bond (DB) to attract increased investment in the country. A Diaspora Bond (DB) is a bond issued by a country to its expatriates particularly those in wealthy countries to tap into their accumulated savings. It is generally considered a viable alternative to borrowing from international financial institutions (IFIs), bilateral partners, or capital markets. The proposed DB is expected to carry an interest rate of 9% per annum. Latest revelations also indicate that the DB will be structured such that rather than letting the diaspora send money monthly to their relatives back home, it is the DB’s interest yield that will be used specifically for that purpose.

The cash-strapped Zimbabwean government seeks to tap into its expats who have fled the country in droves searching for greener pastures due to severe tightening of the domestic economy which is trapping the majority into the extremes of poverty. According to the latest Zimbabwe National Statistics Agency’s (ZimStat) 2022 census results, about 85% of the 908 913 Zimbabwean migrants are living in South Africa, about 47 928 are in Botswana, and about 23 166 are living in the United Kingdom (UK) with the balance scattered across the rest of the world. Independent estimates, however, show that over three million Zimbabweans are living abroad and the numbers continue to balloon. For instance, the statistics released by the UK government indicated a 424% year-on-year jump in Zimbabweans granted UK skilled work visas in 2022. This gives a clear picture of the extent of the brain drain being suffered by Zimbabwe due to a persistently faltering economy and its consequences on human capital base, economic development, and innovation.

Although a DB gives the diaspora a fair chance to contribute to the economic growth and development of their country, a review of the status quo clearly shows that Zimbabwean authorities are out of touch with the lived realities of poor citizens who are being choked by burgeoning public debt. The 2022 Public Debt Statement presented to Parliament by Prof Ncube in line with Section 300(4)(b) of the Constitution and the Public Debt Management Act [Cap 22:21] Section 36(3) show Zimbabwe’s total Public and Publicly Guaranteed (PPG) debt including RBZ debt at ZWL$10.97 trillion (US$17.6 billion) as at end September 2022. This represents a 477% jump in ZWL terms (2,3% USD terms) from ZWL1,9 trillion (US$17,2 billion) recorded as of December 2021.

The PPG debt is now unsustainable as evidenced by rising external arrears now standing at US$6,41 billion (48,6% of external debt stock). To show the gravity of debt unsustainability, a granular analysis of the 2022 budget shows that the Treasury had spent more funds on debt servicing than it had earmarked for social welfare. This happens at a time an estimated 7,9 million, about half of the total population  were estimated to be wallowing in extreme poverty in 2022 amid massive ZWL depreciation, chronic inflation, and high unemployment. Now, instead of focusing on intensifying domestic resource mobilisation to arrest debt distress, the government is forging ahead to pile more debt which disproportionately benefits the few elites who have unlimited access to the corridors of power.

In my view, Zimbabwe’s overreliance on borrowing is perpetrating intergenerational inequities and constraining the countercyclical effects of fiscal policies. Also, the unsustainable debt has heightened prevailing market interest, tax, and inflation rates thereby constraining household budgets as well as affecting the regional competitiveness of domestic manufacturing firms. For example, the statistics released in the 2023 Budget Strategy Paper show manufactured exports on a downward trend from about 40% enjoyed in 1993 to less than 10% in 2021. The continued exportation of raw primary commodities has exposed the nation to frequent and severe global fluctuations. As a result, the decline in value addition and beneficiation has reduced Zimbabwe into a perennial net importer struggling with high unemployment and income disparities.

Unsustainable debt is depleting national reserves thus inhibiting the nation’s ability to respond to unforeseen contingencies caused by climate change like El-Nino-induced droughts, floods, and disease outbreaks. Last but not least, resorting to collateralised borrowing due to limited access to concessionary loans from IFIs is fuelling unsustainable resource extraction across the country.

This is leading to immense environmental degradation, and pollution of air and water sources, as well as causing forced displacements of locals from their ancestral lands without compensation.

Apart from the negative impacts of public debt on the economy and citizens, I opine that there is limited data for the Treasury to have a complete mapping of the diaspora given that most of them have fled political polarisation and are still being denied their constitutional right to vote.

There is also a huge public confidence deficit being depicted through the prevailing toxic political climate, weak institutional capacity, elevated public corruption, impunity, and lack of effective oversight.

Furthermore, if one is to undertake an objective evaluation of Zimbabwe’s sovereign credit and assign a debt rating, they would find it to be too risky (junk bond) as highlighted briefly hereunder:

Institutional assessment

Without comprehensive reforms, existing institutions are not able to deliver sound public finances as well as effective and predictable policies. Also, these institutions are not transparent and accountable as they have a high perceived level of corruption. Statistical offices like the debt office are not fully independent.

Economic assessment

Zimbabwe has a low income per capita and increased informality which generally means a shallow tax base to guarantee loan repayment. The overall economy is too concentrated thus being vulnerable to higher volatility in growth which in turn may adversely affect the government’s balance sheet.

Fiscal assessment

Typically, the government should be fiscally flexible with a declining government debt to GDP ratio and a lower interest expense to total expenditure ratio to show strong creditworthiness. However, the opposite is true for Zimbabwe.

Monetary assessment

The Reserve Bank of Zimbabwe (RBZ) is not operationally independent as the government influences its monetary policy.

As such, the monetary policy is not highly credible as shown by a track record of high and unstable inflation since the attainment of independence in 1980.

From the foregoing, it is my view that the government should abolish reliance on borrowing and resort to increased domestic resource mobilisation as the nation is endowed with many mineral resources on global demand.

As for already unsustainable debt, it is high time for authorities upheld constitutionalism to reduce unending fiscal condonations.  There is also a need to undertake an independent debt audit to ascertain exact legitimate debt stock and cultivate a culture of regular debt audits.

A clear debt management strategy is needed so that public financing needs and payment obligations are met at the lowest possible cost and consistent with a prudent degree of risk.

In addition, authorities should strengthen oversight mechanisms informing debt and public finance management processes on loan contraction, uses, and repayments.

To sustain exchange rate and price stability, there is a need to boost market confidence through consistent policy making, responsible fiscal spending, credible and transparent central banking, and swift implementation of structural reforms.

Structural reforms are measures that change the fabric of the economy — the institutional and regulatory framework — to make labour markets adaptive, boost competition, curb corruption and illicit transactions, encourage innovation, and improve the quality of public taxation systems, among others.

Sibanda is an economic analyst and researcher.He writes in his personal capacity. — brasibanda@gmail.com or Twitter: @bravon96

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