Debt Overhang

Debt overhangs also apply to sovereign governments. In these cases, the term refers to a situation in which the debt of a nation exceeds its future capacity to repay it. This can occur from an output gap or economic underemployment, repeatedly plugged by the creation of additional credit. A debt overhang can lead to stagnant growth and a degradation of living standards from reduced funds to spending in critical areas such as healthcare, education, and infrastructure.^[2]

Key points

• Debt overhang refers to a debt burden so large that an entity cannot take on additional debt to finance future projects.
• The burden is so large that all earnings pay off existing debt rather than fund new investment projects, making the potential for defaulting higher.
• Debt overhangs can lead to underinvestment, which stunts growth, making recovery even more difficult.

Zimbabwe Debt Overhang Challenge

Zimbabwe’s current sovereign debt is regarded unsustainable estimated at $66,8 billion as of June 2019. External debt is estimated at US$8,1 billion (about $59 billion) and 72 percent of that is in accumulated arrears as of November 2019. On the other hand, domestic debt ballooned at a fast pace from zero in 2011 to current levels of $8,8 billion, representing around 13 percent of the total debt. Analysts have argued this is a sign of limited access to external financing, putting pressure on Government as options for borrowing remain narrow. It is under this backdrop that the African Forum and Network on Debt Development (AFRODAD) in conjunction with the Zimbabwe Coalition on Debt and Development (ZIMCODD) convened the Zimbabwe Multi-Stakeholder Public Debt Conference on enhancing public resources transparency and accountability.^[3]

At this Zimbabwe multi-stakeholder debt conference organised by the African Forum and Network on Debt and Development (Afrodad) and the Zimbabwe Coalition on Debt and Development (Zimcodd) revealed that some of the economic issues the country is grappling with stem from a debt overhang.

As at November 2019 Zimbabwe was currently in debt distress with public and publicly guaranteed debt at unsustainable levels of 97% of GDP against the statutory provision of 70% at a time there is also vagueness and conflicting views on the current state of Zimbabwe’s public debt. According to the 2019 Budget Statement, Zimbabwe’s total public debt stood at US$17,69 billion as at the end of September 2018, while the 2019 Budget Statement stated that external debt was valued at US$7,7 billion and domestic debt was US$9,6 billion. Of the county’s debt, only 25% represents the principal amount while 75% is an accumulation of arrears and interest owing to Zimbabwe’s reluctance to settle its external debts in the past two decades.

External debts are owed to multilateral institutions such as the World Bank, African Development Bank and the European Investment Bank (US$2,6 billion) and bilateral creditors (US$4,7 billion). A total of US$5,9 billion, more than 70% of the external debt, consisted of arrears and penalties for non-payment. Despite having promised borrowers a comprehensive debt plan since 2018, government was yet to present the document.

A study of recent budget statements reveals that the government issued Government Bonds in the form of TBs (Treasury Bills) to fund various government commitments including paying debts assumed from the Reserve Bank of Zimbabwe (RBZ) in 2015 and funding broke public enterprises such as NRZ (National Railways of Zimbabwe), POSB (People’s Own Savings Bank), etc the fancy term used for the latter is called Recapitalisation.^[4]

The accumulation of external payment arrears resulted in the IMF declaring the country ineligible for the general resources account of the financial institution’s financing window with traditional multilateral and bilateral creditors following suit.

Zimbabwe's Country Risk Profile

Zimbabwe’s country risk profile in 2014 costed banks an additional five percentage points to the cost of capital at a time when the country couldn't tap into international funds due to a $9 billion debt overhang. The late former Bankers Association of Zimbabwe president Mr Sam Malaba said the cost of money is a key component to the problems that are discouraging business in the country. Mr Malaba said the loan to deposit ratio of 70-80 percent is too high for banks which are struggling to run huge costs of brining in cash. Non-Performing Loans (NPLs) are rising as banks continue to roll over the loans. The BAZ chief said between $400-$600 million is held up in NPLs.

He emphasised the importance of dealing with the debt overhang and engaging the Bretton Woods institutions to restructure the debt. “We can’t run away from the International Monetary Fund, the World Bank and the African Development Bank, we won’t survive. Even China will tell you to deal with the multinationals,” said Mr Malaba.^[5]

References