Zimbabwe’s multiple economic challenges are rooted in a relationship of deep mistrust between the government and citizens and between government and critical third parties, including other countries in the international community, creditors and potential investors. Resolving the country’s challenges demands a restoration of trust.
This article explains the paucity of trust through a critical examination of the institution of credit. It explains how credit is a form of money, whose availability or absence can determine the direction of an economy.
It also explains how failure to access credit has impeded growth and examine why Zimbabwe got into this miserable position. Finally, because this is not just a description of a problem or merely criticism of the government, it will offer suggestions to overcome the credit crunch.
Credit as a form of money
An examination of credit is a useful way of explaining and appreciating Zimbabwe’s current predicament. Credit could be regarded as one of humanity’s greatest inventions. Over the past few centuries, the availability of credit has powered business, industrial and economic growth in advanced nations. Countries that have industrialised in the last century have also benefited greatly from credit.
Credit is, in fact, a special type of money, although this is not always obvious to most people. Its significance is articulated by Yuval Noah Harari in his book Sapiens: A Brief History of Humankind. “Credit enables us to build the present at the expense of the future,” he writes.
What this means is that credit is built on a belief that the future will be better than the present. You have to trust the future. This, Harari adds, allows one to “build things in the present using future income”. In other words, credit is an instrument that allows one to bring forward and enjoy the fruits of future earnings in the present.
This becomes clearer with examples that are familiar to most people. First, the mortgage loan is a type of credit that is advanced by a bank to a person who wants to buy a home. Few people have the vast amounts required to buy a house for cash at any given time.
But they can promise to pay someone who has it to give them credit using their future income. If a bank is satisfied that the person has potential to pay back, it will give him the credit to pay for the house in return for repayment of the capital plus interest.
In such a case, credit would have worked for everyone: the bank would have given the individual credit to have a home now while it makes a profit through interest charges. A person does not have to wait forever before he can buy or build a home.
The bank is only prepared to do this because it has trust in the future — namely, that the individual has a bright future and will pay back the loan plus interest. Without credit, the individual would be able to have a home of his own.
Likewise, a bank can lend money to a business start-up in the belief that the business will succeed and repay the loan and interest. In both cases, the bank would have extended a form of money called credit. It is based on trust — in the individual, the business and the future.
In both cases, the individual would not have been able to buy a home or start a business simply because they would not have had the money. The availability of credit from the bank meant they were able to “build things in the present using future income” — that is, to buy their home and start their business using money they would earn in future.
This is not an esoteric discussion. Many young Zimbabweans who have great business ideas will testify that they can’t get their projects off the ground because they don’t have money and banks are not prepared to offer them credit.
The proliferation of the informal economy without access to credit reveals the credit challenge in the economy. It is hard to expand business without resources, and this is where credit usually fills a gap, assisting start-ups and young businesses.
This type of money called credit is also important to companies and nation-states. The primary way by which a company raises capital for its business is by selling shares to shareholders. However, a company may also approach a bank to borrow money. These loans — of money or equipment — are a form of credit. The citizens are “shareholders” of a State.
Traditionally, the State raises money from citizens through taxation. Zimbabweans pay many different types of taxes: income tax, corporate tax, capital gains tax real estate transactions, Aids levy to address the pandemic, tobacco levy, tax on airtime, tollgate fees, and the recently raised tax on electronic money transfers.
The State also raises money through licence fees, for example, mobile network operators pay a licence fee, retailers of alcoholic beverages pay a liquor licence. However, like companies, states also rely on credit in order to finance their activities.
However, in addition, the State and its entities rely on credit. They also sell instruments called Treasury Bills (TBs) whereby they get cash from buyers with a promise to pay after a certain agreed period. Once it has sold a TB, the State is now a debtor to the holder of the TB. A TB, which is also a form of credit advanced by the buyer, is considered a safe instrument because it is backed by a government.
As in the case of individuals, companies and states get money in the form of credit if lenders can trust that they will be able to pay it back together with interest. Lenders take the risk that a company may go into liquidation or a state might fail to pay. The corollary of credit is that it becomes a debt obligation to whoever receives it.
These debtors might struggle to pay it back especially where they would have accumulated excessive debt. This is the downside of credit — where states find themselves in a debt trap — whatever they earn goes to repay debts and they are left with little for actual development and social needs of their citizens.
This is a serious problem where corrupt dictators and their associates accumulated loans from which they looted. Some of the credit might be loans to finance apparatus of repression — such as buying police and military equipment which is used to suppress citizens’ rights.
This results in what is known as “odious debt” which scholars and activists argue should not be carried by taxpayers. Take for example money spent on the Democratic Republic of Congo war 20 years ago. There was no material benefit to Zimbabwe, but citizens have to shoulder the burden.
In a letter to the International Monetary Fund (IMF) in 1999, the then Finance minister Herbert Murerwa confirmed that Zimbabwe was paying $1,3 million per month for the war in 1998, which rose to $3 million per month in 1999.
“The outlays borne directly by Zimbabwe’s budget were limited to US$1,3 million per month in 1998, or 0,4% of GDP [gross domestic product] at an annual rate.
“Because of the deployment of additional troops, outlays for the DRC campaign will rise to US$3 million per month in 1999, or 0,6% of GDP,” he wrote.
Critics believe these were very conservative estimates. In any event, why should citizens be expected to shoulder the costs of that war and loans taken to finance it or replace equipment after the costly war?
A number of developing countries have in recent decades found themselves in serious debt-traps — locked in situations where they owe huge amounts of money which they have no capacity to repay.
In some cases, lenders have had to write off debts owed by these highly indebted countries. Zambia, for example, was one of the countries under the World Bank’s Highly Indebted Poor Countries scheme, where they declared that they were poor and unable to repay the arrears they owed and they were forgiven.
When the debate arose over whether Zimbabwe should go the same route during the government of national unity period — 2009 to 2013, pride was among the factors that stood in the way. The Robert Mugabe regime was not prepared to accept the label of being a “poor country”. It seemed like an admission that its marquee policy — the fast-track land reform programme had failed.
Unfortunately, while they bring some relief, debt-write offs create a moral hazard because once forgiven, debtors have an incentive to accumulate more debt, expecting more forgiveness. Just over a decade after it got debt-relief, Zambia has accumulated huge debts, mostly to China and is in another debt-trap.
Countries that find themselves in a debt-trap might end up losing their assets. Sri Lanka lost a port to China after failing to pay a long-standing debt. In Zambia, citizens are concerned that key assets like its energy utility might end up in Chinese hands on account of debt default.
It is possible in some cases, where trust is low, to still get credit. But this is likely to be very expensive and on punitive terms. In such cases, lenders will usually give small, short-term and high interest loans. This probably explains why Zimbabwe has been getting only small lines of credit from different institutions. These are some of the most recent credit lines:
June 2018, $100 million was advanced by CDC a British firm, through Standard Chartered Bank
October 2018, $250 million from Gemcorp, a British firm.
Afrexim Bank advanced £150 million in 2018
Afrigrain gave a $100 million line of credit in 2018
Ecobank provided $100 million in 2018,
IDC of South Africa lent $30 million in 2018
AfDB advanced $25 million to CABS, a local financial institution (Source 2018 Reserve Bank of Zimbabwe statement October 2018 ).
It is clear from this list that some sympathetic creditors are devising creative ways to advance credit to a delinquent debtor. For example, the AfDB advanced some credit to Zimbabwe although it is already owed arrears. A close look at the transaction shows that the credit was advanced not to the Zimbabwean government directly, but to CABS, a private entity.
Also, CDC advanced its $100 million facility not directly to the Zimbabwean government, but to the private sector through Standard Chartered Bank. In both cases, the lenders extended credit to institutions that can be trusted.
However, since there is no full disclosure, we don’t know the actual terms of all these lines of credit. We don’t know the rates of interest or the general terms of repayment. They could turn out to be extremely high and punitive. This is unfair on citizens who must eventually carry this debt. It is also unconstitutional because the Constitution requires that such loans or guarantees be published in the Government Gazette (section 300).
The “shareholders” — citizens of Zimbabwe — deserve to know the terms upon which the government is taking credit on their behalf. The framers of the Constitution were conscious of this need for transparency and openness, hence the inclusion of section 300.
Where creditors are willing to advance credit but have low levels of trust, they may also demand extra security. So an individual or company might be asked to put forward a piece of land as security for a loan. If it’s a country, it might be asked to put forward an asset such as a mining claim or a port, as security for the loan.
The lender would then take over such an asset if the individual, company or the State defaults on the loan. Many people have lost their homes when they have failed to meet their loan repayments. The global financial crisis in 2007 was prompted by the collapse of the housing market in the US, when homeowners failed to repay their loans.
In the case of Zimbabwe, citizens deserve to know if their government is using any State assets as security for credit that it is getting from various parties. We might wake up one day to find that the bulk of strategic assets have been mortgaged to other countries and commercial lenders.
Delinquency and the pari passu rule
For an individual, company or country to be trusted by those who give credit, it must demonstrate a history of reliability in repaying loans. In other words, it must show that it can repay the credit that would have been advanced to it by lenders.
There are watchdogs, called credit-rating agencies, which track the behaviour of individuals, companies and states. Those who don’t pay debts — called delinquents — have a low credit rating and struggle to get credit. This is because they cannot be trusted.
In the case of Zimbabwe, the trust deficit is large and it started a long time ago. The country first defaulted on its loans to the IMF and other international creditors in 1999. It has arrears to the World Bank, the African Development Bank and the Paris Club, which consists of Western lenders.
These defaults on the credit facilities happened before the MDC was formed. Our credit profile was in tatters before the current opposition was born. International creditors had already lost their faith in us, simply because we were not paying our debts.
These defaults affected Zimbabwe’s credit-rating. As the BBC reported on the default in May 2001: “A default on the IMF loans would be another serious blow for Zimbabwe’s credit rating and make it very difficult to secure loans, adding to the country’s economic difficulties.”
In order to get credit from these institutions, the country must first pay back what it owes them. As a general rule, their rules won’t allow them to lend without arrears clearance.
But there is an important rule which makes it very onerous. It is called the pari passu rule. It means all creditors must be given equal treatment in the repayment of arrears. In practice, this means all creditors are ranked equally and none should be given preferential treatment.
This is a big hurdle that Zimbabwe faces, because as it stands, unless there is some concession, all creditors must be paid at the same time. There is no option to start with smaller debts unless the pari passu rule is waived.
Finding a godfather
One option is for the country to find a “godfather” to act as a sponsor in negotiations with creditors. This godfather will have to be prepared to risk their reputation and resources on us. They would have to make an offer that the creditors cannot refuse.
They can offer a bridging loan, which will be used to settle arrears with creditors. This package might also include write-offs of part of the debts. This will unlock bigger credit lines from the creditors. This is the route that Myanmar took five years ago. Their godfather in that case was Japan.
However, it is important to note that this support did not just fall on Myanmar from nowhere. The country was emerging from a long-term military dictatorship and there was much goodwill and hope in the future. In other words, the credit extended by Japan and creditors was because they all began to believe in Myanmar’s future.
Unfortunately, Zimbabwe appears to have squandered its chance after a farcical election which has been heavily criticised by the European observers. The goodwill that was evident after the removal of Mugabe last year is fast evaporating.
Can the Mnangagwa administration conjure up some magic and charm a sponsor to become a godfather? The regime has to demonstrate serious appetite and commitment to political reforms and restoration of the legitimacy-deficit which has once again been exposed by the EU observers’ report.
Ignoring or lampooning it as Zimbabwe’s State media is doing only serves to increase the wedge between Zimbabwe and the international community and that is not in the country’s best interests. This is a time for mature engagement, not the tantrums that we are seeing in State media. The country needs more allies, not enemies.
Credit for productive use
When companies borrow, they do so in order to finance activities that will generate more production and revenue which helps to grow the company’s business and avails resources to repay the loan.
It would be imprudent for a company to borrow in order to finance non-productive activities. That is borrowing for consumption and it’s unsustainable because it accumulates debt without generating income to finance repayment.
Similar logic applies to states. It makes no sense for a state to borrow in order to pay wages or buy vehicles for political leaders. It also makes no sense to finance grand projects which are generating losses.
Credit is best taken in order to finance capital projects and activities that can generate income in future. With more production and growth, there will be revenue which can be used to repay the debt.
Unfortunately, this is not what’s happening with the small credit lines that we are getting.
We are not borrowing to finance capital projects or productive activities. The credit lines are largely for consumption. We are using them to import fuel, grain, electricity, packaging, etc. This is because we do not have foreign currency but we have a huge import bill.
This means we are borrowing and accumulating debt (on top of existing arrears) but we are not doing anything to generate income to finance repayment of the loans. In short, our government is closing a hole on one end, while simultaneously opening another one at the other end.
Reducing the import bill
Our problem is that we consume more than we produce. This is compounded by the fact that we are importing a lot of these goods. Sometimes, this is out of necessity — because we don’t produce the goods or simply because our tongues have developed an insatiable taste for foreign goods.
We are importing things like newsprint, milk, cheese, eggs, chicken and other food products simply because local production cannot meet demand or people prefer foreign products.
We must face the facts: we have the land, but we are not producing enough to feed ourselves. Land is being under-utilised. Out of pride, some don’t want to admit that our agricultural productivity is still not good enough. They think it’s a slur on the land reform programme. It is not. There are too many elites holding on to land which they aren’t utilising.
Some have multiple farms and there is simply no urgency or will to resolve this national scandal.
The fact that our people are depending on food aid is often blamed on drought conditions, but like the embarrassing cholera outbreak, it is a governance problem.
Countries with poorer land and climatic conditions, such as Israel produce a surplus and export these products. They have the technology and they are making maximum use of what they have. We have to make better use of the land.
Our import bill, and demand for foreign currency would be significantly reduced if we produced enough food for the nation. Foreign currency resources currently used to import food would be allocated to other productive sectors.
In other cases, our government simply spends recklessly. There was no need to use scarce foreign currency to purchase vehicles for chiefs. Government says it has suspended buying vehicles for ministers and MPs, but it’s merely a suspension. In other words, they will get their cars at some point in the near future.
One suggestion is for ministers and MPs to make use of pool vehicles from CMED, the State-owned entity. There are bigger priorities. Party regalia for elections and other materials were manufactured and printed in China.
Scarce foreign currency could have been saved and local jobs could have been created if those products had been made locally.
When Rhodesia was placed under sanctions, the State devised creative ways to cushion against the damage. One of them and a source of industrial growth was import substitution. Zimbabwean students of human and economic geography in the 1980s and 1990s will remember studying the phenomenon of import substitution because it accounted for a number of big state enterprises in the country.
“There is little doubt that the driving force since 1965 has been import replacement; industrialists having responded energetically to the opportunities offered by import control which had been forced on the economy by sanctions,” wrote Professor Sadie in 1969, in his article Economic Growth Through Industrialisation published in the Rhodesian Journal of Economics.
The purpose of import substitution was to cope with local demand which rose with the deficit in imports. It therefore reduced dependence on imports. The new Zimbabwean state inherited the import-substitution industries.
However, due to various factors, chief among them corruption and mismanagement, most of these industries went bust. Ziscosteel, the steel giant, is one of many examples. We can still draw lessons from our past and help reduce the import bill. Whatever credit we get ought to be invested in such industries.
Those who are giving us lines of credit to fund consumption may think that they are helping us but they are also keeping us in a debt trap. They are giving us fish, instead of helping us with fishing equipment. The latter would make us more self-sufficient. Credit lines to finance consumption are like foreign aid with high interest rates.
Taxing the masses
Since access to credit is severely limited, the government’s options to meet demand have been constrained. In the past, kings would raid and loot neighbouring territories or they would simply resort to the oldest trick in the book and raise taxes.
Raids and pillaging other State agencies is no longer tolerated in the modern world. So the government has had to resort to taxation. That’s why it announced an increase in tax on electronic money transfers, now more commonly used than before on account of cash shortages.
The tax has been five cents per transaction since 2003. The government has raised it to two cents per dollar for every transaction at or above $10. There is a maximum cap of $10 000 which applies to all transactions above $500 000.
This tax increase could raise at least $2 billion for the government. But it has caused a huge outcry and panic in the markets. Coupled with the panic arising from the currency fluctuations and inconsistent statements, it has seen businesses increase their prices or close ostensibly for “renovations” or “stock-taking”. The reality of the closures and price increases is that the local market has lost confidence in the government and its policies.
While the institution of credit has been a key driver of economic growth over the past couple of centuries — driving the industrial, financial and technological revolutions – its abuse has also been a source of devastation. This is evidenced by the crash in the US housing market in 2007.
Lenders had become reckless and greedy — creating credit based on a false trust in the future. It resulted in a credit crunch — when all of a sudden it became difficult to access credit from banks and other lenders. It led to the Global Economic Crisis, the effects of which are still felt to this day.
With limited credit, economic growth slowed down significantly. To ease the credit squeeze and promote liquidity, governments poured trillions of dollars into economies. Failing banks which were exposed to risky credit needed rescue. Public funds were diverted to bail out the banks.
Austerity measures meant cuts in social services spending, leaving vulnerable groups more exposed. This is why this form of money is fragile and needs to be carefully watched. Too much of it without careful management can lead to disaster.
Still, however, credit is money that every person, company or state that is concerned with growth and development needs. Zimbabwe’s problem at the moment is that it is unable to access large, long-term, low interest credit.
Yet this is precisely what it needs in order to grow the economy. Cuts to government spending will help, as will tax revenues. But ultimately, there is need to access the credit markets.
What must be done?
The biggest impediment is a lack of trust in Zimbabwe’s future. This is a result of lack of trust in the government on account of historical performance and its legitimacy.
As we have seen, credit is in essence future money that is used in the present. But if no one trusts the future of Zimbabwe, it is hard to earn credit. These are some recommendations on what we can do:
A stable democratic order which commands legitimacy. There must be genuine and full-scale political reforms to attract a sponsor
Find a sponsor to help with bridging loans to settle arrears and open large, long term, low interest lines of credit
A debt-settlement plan to repay creditors
Strive to reduce the import bill through re-building import substitution industries
Take credit not merely for consumption, but for productive, revenue-generating projects
Reform the land and agricultural policy to make sure we produce more on the land productivity must come before pride
Live within our means. We should never take credit to meet perks of office. In these crisis conditions, ministers and MPs should use pool cars from CMED and parastatals.
Upgrade from exporting raw minerals and agricultural produce to processed products
The fact that we are in a crisis must not lead us into forgetting that we must have long-term planning. We have been in fire-fighting mode for far too long. But experience has taught us that the end of one fire has not stopped a new one flaring up.
This is because our solutions have been of a short-term nature. We have a cash shortage and we introduce bond notes. We have a liquidity challenge and we simply print more bond notes or increase real time gross settlement balances.
We run out of money and we raise taxes. We have a currency challenge and we borrow to maintain a false rate which is not supported by market forces. We lose our currency and we dollarise. We run out of food and we take short-term loans to import.
None of these are long-term solutions. We have been in fire-fighting mode since 1999 when we defaulted on our loans to international lenders. While it is necessary to fight the current fire, we must also focus on the bigger picture and on long-term plans.
The recent stabilisation plan is a standard one that is used in most economies in distress. The critical issue of will on the part of government.
We have been here before, as this letter from the Zimbabwe government to the IMF in 1999 shows — nothing that is being said today has not been said and promised before by the Zimbabwean government. It simply hasn’t lived up to its words and that is the great tragedy.