Many things have been said about the potential 10 Billion dollar loan from the Chinese. This is apparently the boost that the Zimbabwean economy needs. Those in favour of the loan seem to be using an economic instrument to prove a political point. The politics is that Zimbabwe still has international friends who can help and the economics is that this loan will kick start the economy and spur economic growth. Can throwing 10 Billion dollars at the Zimbabwean economy be the antidote?
Zimbabwe currently has an external debt of 10 Billion dollars and the country intends to double the external debt to a staggering 20 Billion dollars by borrowing from the Chinese. Can this loan be repaid, what is the impact of external debt on the economy and is leveraging of the country’s resources the solution?
There have been many academic debates on the impact of external debt on low income economies. The Debt vs GDP ratio is used as an indicator of a country’s ability to repay external debt. In 2013, the South Africa’s Debt Vs Gross Domestic Product was 46%, Zambia’s was 34% and UKs was 90%. The most reliable figure for Zimbabwe based on 2011 figure was a Debt Vs GDP of 150%. Doubling the external debt would bring this ratio to over 200%. So we want to get debt levels that are significantly more than those of countries whose economies are performing better than us. Can this be good for us?
With a debt ratio above 200%, it might be difficult for the country to repay the loans. With all factors pointing to the fact that Zimbabwe will not be able to repay the loan, why then would the Chinese be willing give such a loan. The only answer lies in the fact that we are giving them the mineral resources as security. So they know that the country will never be able to repay the loan and are simply buying the vast mineral resources for a song. Would you blame them? Future generations of Zimbabweans are the biggest losers as they will have to dance to Chinese tunes. They will have to feed from the palms of the Chinese simply because we decided to buy ice cream with their education fund.
The priority for mineral rich African countries should be to invest the natural resource revenue in the people. The priority for Zimbabwe should be to reinvest mineral revenue in the people of Zimbabwe and not in repayment of Chinese loans.
The debt is excessive and will strangle the country. High debt means high repayments, altering the nature of public spending. The high external debt repayments mean that there will be reduced funds for public investments and infrastructure development. As opposed to building more hospitals, we will have a Chinese debt noose over our heads.
Because of the cash flow problems facing the country, there is a real danger that there a significant part of the loan will be used to fund operating expenditure such as salaries. The problem is that using long term debt instruments to finance short term consumptive expenditure will inevitably lead to the default as operating expenditure will not create new revenue streams which can be used to repay the debt.
How did the government come up with a figure of 10 Billion Dollars. Is there a plan for this money or its going to be used to pay salaries? With the high levels of corruption in the public sector, will the money used effectively? These and other questions make many Zimbabweans uneasy about the loan.
It has to be noted that external debt contributes positively to growth up to a point, and from that point negative effects set in. Throwing 10 Billion dollars at the Zimbabwean economy will not necessarily get the economy kicking. There has to be detailed planning about what the money will be used for, sustainable debt repayments and setting debt limits based on a sound understanding of the country’s growth trajectory.
Zimeconomy 