Tuesday, June 2, 2009

Zimbabwe - Domestic Debt Soars to US$59 billion – RBZ

Thursday, 28 May 2009 17:47

ZIMBABWE’S domestic debt hit US$59 billion on February 26, figures from the Reserve Bank revealed yesterday. The huge domestic debt, which will result in high future taxes if the country’s major sectors of the economy do not start performing against a background of inadequate foreign aid, opened the year at US$56,9 billion.

The debt was sparked by huge interest payments which account for US$42,7 billion of the total debt.

According to the Reserve Bank, the amount outstanding for government stocks at February 26 was US$669 million, while interest paid for the amount amounted to US$3 billion.

The new debt levels mean that with an estimated population of 13 million, every citizen owes US$4 538 to local banks and financial institutions. The average monthly salary in Zimbabwe is US$200.

Statistics from the Consumer Council of Zimbabwe also show that an urban family of six in April required US$427,11 monthly from the previous month’s figure of US$396,22.

Analysts said government had failed to clear the debt which has been ballooning because of the Reserve Bank’s advances to the former, largely for the March 29 general elections and June 27 presidential election runoff last year, agricultural mechanisation programmes and food imports.

The surge in domestic debt was a result of high interest rates on the market which were in line with the inflation rate, which by December last year was estimated to be above 100 billion percent.

The mismatch between fiscal revenues and expenditures also opened a significant funding gap resulting in government utilising the overdraft window at the Reserve Bank, while at the same time borrowing from the domestic market.

The debt has been ballooning because of government’s continued reliance on borrowing from the local market. Zimbabwe had no access to international capital markets because of a lending embargo imposed by the United States.

Following the dollarisation of the economy government is now relying more on foreign aid and lines of credit from international financial institutions.

The Reserve Bank’s advances to government have over the past five years accounted for about 80% of total debt, a situation bank economists say was evidence that government was broke and had no other source of revenue other than the domestic market.

Figures from the Reserve Bank show that the solvency of government was already seriously compromised with the current interest rates, and technically government finances will not be better off with even a 1% rise in interest rates.

The increasing government debt stock which government is failing to clear is raising fresh fears of renewed turbulence in an economy which is showing signs of improving.

Government was also forced to rely on domestic borrowings because its revenue base had dwindled because of company closures which have led to retrenchments. This means that in real terms, the government was collecting less revenue through corporate and income tax.

“The figure has a huge bearing on the returns that investors will be getting from the money market. The money market is bound to continue issuing investors with negative returns in the short-term to minimise the harmful effects of the huge interest cost component on the debt figure,” an economist with a commercial bank told businessdigest.

Meanwhile the Reserve Bank said money supply (M3) which can be used as a yard stick to measure inflation rose was at 363,6 billion percent in December last year.

The Reserve Bank said contributing to the rise in money supply was increases to private sector which was 630 billion percent, credit to public enterprises 32,2 billion percent and domestic credit 521,1 billion percent.