analysisBy Butler Tambo
As the country commemorates 37 years of independence, one realises the 1980 merry-making euphoria is long gone as the nation’s sovereignty is under threat courtesy of its debt overhang.
National Defence College … The government got a US$100 million loan from China to build the military academy.
With the Lima arrangement, which sought to pay back US$1,8 billion in debt arrears out of a total of US$10 billion owed to multilateral and bilateral institutions in order to unlock fresh funding now dead in the water, one seeks to uncover the source of the country’s humongous debt burden and its impact on the economy and welfare of Zimbabwe’s citizens.
Origins of Zim debt
Towards the end of the 1970s, as Rhodesian Ian Smith faced the prospect of losing the civil war, he resorted to heavy borrowing to fund the Defence. Military spending rose from 20% in 1975/76 to almost 50% in 1978/79 of the national budget.
Loans were given despite the fact the United Nations Security Council had comprehensive mandatory economic sanctions against Rhodesia since 1968. At Independence in 1980, Zimbabwe inherited US$700 million of debt from the Rhodesian government.
During the 1980s the World Bank agreed loans for projects in Zimbabwe of more than US$500 million. Interest rates on some of these projects were in excess of 10%.
For most of the 1980s-1990s Zimbabwe was still categorised a middle income country by the World Bank, and so the country tended to be lent money from the higher-interest International Bank for Reconstruction and Development (IBRD) rather than the lower-interest International Development Association (IDA), which lends to most impoverished countries.
The largest World Bank loan in the 1980s was US$105 million disbursed to develop the Hwange Thermal Power Station. A further US$250 million was provided by the European Investment Bank, UK government’s CDC, private loans from British and Italian companies who would supply parts for the plant.
On completion, the power plant produced less electricity than expected; 37% below the World Bank prediction in 1987.
During the construction of the power plant, the Zimbabwean dollar heavily devalued against the US dollar. This meant in Zimbabwean dollar terms the power plant cost 65% more than estimated. The debt burden created by Hwange power station was far greater than any economic benefit.
Furthermore, a major condition of the World Bank loan was to increase electricity prices so that the Zesa would use bills to pay 30% of debt repayments. In fact, electricity prices ended up 7% higher than demanded.
However, because of the devaluation, and despite electricity price increases, electricity bills were only generating 18% of the revenue needed to repay foreign loans by 1989; the remainder had to come from central government.
Furthermore, a donors’ conference in March 1981 had promised US$2,2 billion for Zimbabwe’s reconstruction and development, but by 1984 only 20% of the amount had been disbursed. The government borrowed more to meet the shortfalls with private banks disbursing US$1 billion from1982-1984.
With these loans bearing relatively high interest rates, they became increasingly difficult to repay. In the mid-1980s, Standard Bank and Barclays Bank were among the private lenders which gave the government new loans to meet payments on older debts.
Social spending and its impact
Following the expansion of education provision after independence, the number of primary schools increased by 88,7% from 2 401 in 1979 to 4 530 in 1990.
During the same period, enrolments in primary schools increased by 242,1%, from 619 586 to 2 119 881. The number of secondary schools increased by 754,2%, from 177 in 1979 to 1 512 in 1990, with the enrolments rising by 915,9% from 66 215 to 672 656 during the same period.
The heavy investment was premised on the assumption that the economy would grow by 8% GDP from 1982-1985. However a negative GDP in 1982-1983 of -2% was recorded and the budget deficit rose from 7,7% of GDP in 1981/82 to 10% in 1982/83. Debt service ratio stood at 30% by 1983, a 300% increase in the three years from the 1980 levels.
Interestingly, industrialised countries like Malaysia with a robust economy were spending 1% of their GDP on higher education and 7% on other education, but Zimbabwe with an ailing economy spent 1% of her GDP on higher education and 10,9% on elementary education.
As funding for education was rising, government was also heavily investing in free health care that it could ill afford as seen by the fact that the share of health expenditure during the 1980s was maintained at over 5% of national budget.
From 1980 to 1988, health expenditure rose by 94% in real terms and 48% in real per capita terms.
Correspondingly, throughout the 1980s poverty fell. But by the end of the decade debt repayments equaled 25% of Zimbabwe’s exports, and 25% of government revenue.
In reality, the only way Zimbabwe could keep paying was to receive new loans to pay old debts. Just as the Economic Structural Adjustment Programme (Esap) was beginning, Zimbabwe was hit by its most serious drought since 1967. Maize production fell 25% in 1990-91 and a further 33% in 1991-92. Absurdly, the Grain Marketing Board was still obliged to export 0,6 million tonnes of maize in 1990-91 in order to meet adjustment targets for exports.
Meanwhile, 1,9 million tonnes of maize had to be imported to cover the food deficit, mainly on commercial terms rather than with any aid assistance. If the 0,6 million had not been exported, it would have saved US$200 million in foreign exchange.
Impact of debt repayment and Esap
In reality, economic growth fell from averaging 4,5% in the 1980s to 2,9% from 1991-97.
Following the liberalisation of the economy, inflation shot up across the country. Food prices increased the most; 14-fold from 1990-1999. There was a nine-fold increase in the price of healthcare, six-fold increase in energy and five-fold increase in clothing.
Imports grew faster than exports, changing an annual trade surplus from 1985-1990 to a trade deficit. Unemployment increased from around 22-30% to 35-50% and the proportion of people living below the poverty line increased from 40% in 1990 to 75% by 1999. The increase in unemployment, poverty and inequality was reflected in worsening social outcomes. With cuts in government spending part of Esap, social protection spending was limited. Social spending became more dependent on external aid, which also fell short of expectations.
Following the introduction and increase in user fees for healthcare in the early 1990s, there were declines in outpatient attendance. Real per capita expenditure on healthcare fell by 40% from 1990-1994. The number of women dying in childbirth increased from 390 to 670 per 100 000 live births from 1990-2000. The number of children dying before their fifth birthday increased from 81 to 116 per 1 000 from 1990-1999.
In the 1990s, Zimbabwe still continued to pay US$600 million a year in debt repayments shooting to US$1 billion in 1998, a gigantic 15% of national income.
2000s debt and debt default
As the economy imploded under huge debts, in 1993 and 1995 there were “bread riots” in Harare against rising prices. Civil servants went on strike in 1996 and private sector workers followed suit in 1997.
In 2000, the rapidly increasing size of Zimbabwe’s debt led the government to default. On November 14 1997, commonly referred to as “Black Friday”, there was a sudden 40% drop in the value of the Zimbabwe dollar.
From 1998, the military intervened in the war in the Democratic Republic of Congo, costing the government US$360 million a year. The government had announced unbudgeted pensions for 50 000 war veterans as well.
Since 1980, Zimbabwe had been lent US$7,7 billion, but repaid US$11,4 billion. The Export Credits Guarantee Department (ECGD) says Zimbabwe owes it £190 million (US$235 million).
At least £90 million of this plus interest arrears originated between 2000 and 2004. For example, as of June 2011, Zimbabwe owed the UK government £20,9 million for loans to buy 1 500 British Land Rovers and parts to be used by the Zimbabwean Republic Police.
Since 2000, Zimbabwe has paid the International Monetary Fund US$410 million. This has tended to consist of a few million dollars a year, but in 2005 Zimbabwe made a one-off payment of US$165 million. In 2016 it paid the arrears it owed to the IMF to the tune of US$110 million, but this gesture of good faith has not unlocked any fresh funding.
With its atrocious repayment record, Zimbabwe was left with no options but to turn to its liberation sponsor China for help after 2000. One of the most contentious loans is the agreement on a 640 million yuan (US$100 million) loan agreed in 2011 to build the National Defence College in Harare.
Devaluation of the US dollar against the yuan means the relative size of the loan for the Zimbabwean economy has already increased. The interest rate on this loan has been reported to be between 2-5%, an amount the government can ill afford.
Other loans have included US$25 million for agricultural equipment and tools, tied to no less than 50% being supplied by Chinese companies. China has emulated the past practice of Western governments of giving export credits by backing bank loans to Zimbabwe to buy Chinese exports. In 2006, Zimbabwe received US$200 million to buy Chinese fertilisers and agricultural equipment and most of these loans have still not been paid.
It therefore means Zimbabwe has to come up with a plausible plan for debt repayment beyond the Lima plan if it is to attract new loans, get meaningful foreign direct investment inflows and resuscitate its ailing industries for economic prosperity for the majority of its suffering citizens.
Tambo is a policy analyst who works for the Centre for Public Engagement.