Friday 2 August 2019


FINANCE minister Mthuli Ncube yesterday unwittingly confirmed government committed a grand US$7 billion fiscal heist — by design or accident — when it banned without warning the multi-currency system and resuscitated the Zimdollar as the sole legal tender in June.

While individuals and companies were undeniably robbed of their incomes and value due to the currency volatility and reform, starting with the liberalisation of the exchange rate in February after insisting the bond note was equal to the United States dollar and then specifically through the return of the Zimdollar in June, Ncube inadvertently admitted effectively government mugged its domestic creditors of about US$7 billion. 

The smoking gun is in debt figures contained in his budget review statement delivered in parliament yesterday.

“Zimbabwe’s total debt stock is estimated at ZWL$66,8 billion as at the end of June,” Ncube told parliament. “As at the end of June 2019, external public and publicly guaranteed debt position is estimated at US$8 billion (ZWL$58,1 billion, of which almost US$5,9 billion (ZWL$42,7 billion) is accumulated arrears.

“Multilateral institutions are owed a total of US$2,5 billion (ZWL$18,5 billion), of which the World Bank is owed US$1,5 billion (ZWL$10,6 billion), African Development Bank US$702 million (ZWL$5,1 billion), European Investment Bank US$309 million (ZWL$2,2 billion) and other multilaterals US$74 million (ZWL$535 million).

“Total bilateral debt amounted to US$5,5 billion (ZWL$39,6 billion), with Paris Club creditors accounting for US$3,5 billion (ZWL$25,1 billion) and non-Paris Club US$1,6 billion (ZWL$11,3 billion).”

When Ncube presented his 2019 national budget in November last year, he said the country’s domestic debt stood at US$9,6 billion, while the total debt was US$17,6 billion. This meant external debt was US$8 billion — which it remains as now.

The dramatic change, though, has been on the domestic debt. From US$9,6 billion, it is now a mere ZWL$8,8 billion (US$880 million).

“Consequently, adherence to sound fiscal and monetary policy reforms allowed containment of domestic debt stock which stood at ZWL$8,8 billion as at end June 2019, down from ZWL$9,5 billion as at December 31, 2018,” Ncube said.
Scrutinising Ncube’s figures reveals a US$7 billion heist.

However, first of all there are mistakes which must be highlighted. The main one is that the domestic debt was reported as US$9,6 billion in November last year, not ZWL$9,5 billion. It was in US dollar terms, hence the US$17,6 billion total public debt stock, with external debt standing at US$8 billion.

It is thus incorrect to report that “domestic debt stock stood at ZWL$8,8 billion as at end June 2019, down from ZWL$9,5 billion as at December 31, 2018”.

The heist is hidden in the new total public debt figure of ZWL$66,8 billion. If the national debt was US$17,6 billion at the end of last year and all along until June, how did it end up as ZWL$66,8 billion (effectively US$6,68 billion which is even lower than the external debt alone at US$8 billion)?

Calculations show that when Ncube said the US$8 billion external debt as at the end of June was equal to ZWL$58,1 billion, it implied that the ruling average exchange of US$1: ZWL$7,2 was applied in government fiscal review and supplementary budget calculations.

Having done that, Ncube and his team then simply converted the US$8,8 billion domestic debt — after it had dropped from US$9,6 billion or US$9,5 billion following an intervention through a series of fiscal measures — to ZWL$8,8 billion.

This was then followed by a simple calculation of multiplying the external debt of US$8 billion by the 7,2 average exchange rate and then adding the converted ZWL$8,8 billion domestic debt to roughly end up with ZWL$66,8 billion as the total public debt stock.

In the process, government avoided paying US$7 billion in domestic obligations to local creditors — which is practically robbery as what happened in 2008 — by technically moving away from US$8,8 billion to ZWL$8,8 billion using the currency regime change and resultant exchange rate soon after June 24. The multicurrency system was suddenly banned on June 24. So after outlawing the multicurrency as legal tender, local lenders to government were prejudiced as much as US$7 billion.

Government abandoned its policy of 1:1 parity between the US dollar and the RTGS dollar on February 20 and then banned the multicurrency regime on June 24. Through this arbitrary action, banks and other lenders have lost as much as US$7 billion in real terms. However, when individuals and companies are factored in, the figure sharply rises to multi-billions in prejudice.

Instead of getting both the principal and interest on their investment, financial institutions will get to retain only 10% of the original value. This means a value loss of more than 90% if interest on the paper is taken into account.

For instance, an investor who invested US$1 million at a rate of 5% over five years would have got interest of US$250 000. Hypothetically such an investment would have had a future value of US$1,25 million when the principal is added to interest. Actually, such an investor would receive US$125 000 if he/she had bought the paper from the Zimbabwean government.

The decision has far-reaching consequences given that investors elsewhere generally believe that sovereign debt is a safe or risk-free investment.

When the paper was sold to market players, Zimbabwe was in a state of deflation, hence did not have an inflation premium ascribed to the instruments and zero default risk.

Additionally, this has also prejudiced the banking public who had saved with local financial institutions. Banks act as financial intermediaries between depositors, investors, borrowers and the public.

Ncube’s inadvertent admission of the grand heist came as London Stock Exchange-listed Cambria Africa won a court case against local company Breastplate Services (trading as Nemchem International) over the payment of outstanding share obligations in US dollars in line with a legal agreement signed by the two companies.

The judgement is likely to be used as a legal precedent going forward for individuals and corporates who have payment disputes dating back to the multicurrency system era signed in similar or related circumstances.

While government has managed to evade its obligations through currency reform, it has failed to beat inflation.

Hence, Ncube presented a ZW$10,8 billion supplementary budget, with the money going to recurrent expenditure (ZW$5,8 billion); employment costs (ZW$1,5 billion); goods and services (ZW$3,7 billion) and interest payments (ZW$160 million), among others.

He has revised the budget for various ministries, with the Agriculture ministry getting the largest vote. He then allocated agriculture ZW$4,382 billion up from an initial vote of ZW$989 million in the 2019 budget.

The other money from the supplementary budget goes into grain imports, paying civil servants, social service delivery, infrastructure and utilities, constitutional requirements, governance and structural reforms and government operations. Zimbabwe Independent


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