Opinion: Will debt cancellation solve poverty and inequality?

Due to unsustainable levels of debt, Zimbabwe, like many other African countries, has adopted presumptive tax structures.

Africa’s debt levels have increasingly crippled development over the years with some countries, including Zimbabwe, prioritising debt servicing obligations over socio-economic development with limited resources.

As such, dialogues on debt cancellation and restructuring have taken centre stage with countries such as Ghana, Chad, Ethiopia, and Zambia  setting the pace for the much needed debt relief on the continent.

Lessons from this restructuring wave will benefit Zimbabwe particularly in the context within which debt restructuring has to be applied for, policy requirements for optimal debt relief and feasible and sustainable development after debt relief.

With the African continent undergoing a polycrisis, as a consequence of high debt levels, Covid-19 and climate change, complying with debt servicing obligations has proved more deleterious to economic development, environmental and social contexts, and in some cases already aggravated political conditions.

Zimbabwe’s current economic growth and productive capacity proves the Debt-led-Growth Hypothesis to be true as the marginal contribution of debt acquired over the years has been continually negative to the point of plunging the country into debt distress and causing increased inequality, poverty and other debt vulnerabilities.

The country being one of the 23 African countries in debt distress or at high risk justifies why the region’s sovereigns and CSOs are deepening calls for debt cancellation and restructuring.

An analysis of the histories, structural drivers and impacts of the debt crisis shows that the nature of debt of many low-income countries are viewed as unsustainable, founded on colonial heirloom of oppression, and accompanied by neoliberal policy reforms that exacerbate inequality.

Faced with debt restructuring options, that is, debt forgiveness, debt rescheduling, debt swap, and debt assumptions, Zimbabwe’s unsustainable debt requires more effectual debt relief options such as complete debt cancellation, taking into account an unsuccessful yield of restructuring strategies such as the Lima Plan. Zimbabwe was not part of the 31 African countries that received debt relief under the HIPC programme as well as the Debt Service Suspension Initiative (DSSI), G20 Common Framework and IMF Special Drawing Rights had limited impact, and as such the country has not realised freed resources.

Currently, the debt-to-GDP ratio sits at 93% with China being the major creditor.

Principles of debt relief applied by non-Paris Club and commercial creditors are different and ultimately prioritise creditor interest over social protection.

As such, ideologies around debt relief from most loans do not carry known traditional benefits and therefore impact is impaired.

China announced its cancellation of zero-interest loans  last year amid controversial accusations of debt-trap-diplomacy, however, in essence, forgiveness of zero-interest and non-commercial loans, relieves negligent obligations for a country such as Zimbabwe whose debt comprises interest and non-concessional loans. There is therefore a need to analyse the impact of cancellation and restructuring debt on tenets of development.

Efficient, progressive tax systems

Due to unsustainable levels of debt, Zimbabwe, like many other African countries, has adopted presumptive tax structures heavily embedded on an optimal revenue extraction tax structure design rather than tax morale, capacity and compliance dimensions.

As such, revenues collected from individual and indirect taxes account for over 54% of total tax collectives. This regressive taxation system has exacerbated inequalities and poverty due to reduction in sources rather than gains.

Against the Theory of Optimal Taxation, Zimbabwe’s current tax structure interferes with market participation thus minimising preferred behaviour while simultaneously compromising economic and social welfare of the market.

Fiscal vulnerability and tax-smoothing strategies in the country’s ZIM Asset blueprint  did not include development and implementation of efficient and progressive tax systems and the fight against inequality from a taxation standpoint.

For instance, the country has since increased VAT to 15% which affects the poor most while meeting fiscal budget needs. Zimbabwe’s arrears clearance strategy and sustainable debt options should pursue policies that promote development of human capital, productivity, and tax morale in the economy.

Debt policies, finance management

Having inherited a sizable loan of USD700 million from the Rhodesian government, the country at birth in 1980 was already burdened by arduous debt which cannot be traced to have benefited critical sectors of the economy.

This led to the impact of debt affecting the country from its independence and placing service obligations on the country while impact of the debt had no positive effect on the economy hence continuing the colonial legacy of oppression.

Resultantly, as part of debt restructuring processes, there is a need to audit the inherited debt, its burden and impact, as well as beneficiaries. This will allow accountability of accrued debt and associated interest.

Other fiscal weaknesses Zimbabwe is facing includes a lack of the debt policy/tool kit, failure to comply with public finance laws, irregular debt data reporting, and limited non-debt flows to meet budgetary requirements.

Strengthening and adhering to debt strategy ideologies will improve accountability and transparency of loan contractions, public finance management and sustainable debt levels and economic development models .

Social safety nets

Zimbabwe launched austerity measures under the Transitional Stabilisation Programme  (TSP) 2018-2020 which was aimed at reducing its fiscal deficit but at the expense of providing social safety nets and abiding by guiding principles of human rights.

The public sector stands as the country’s main employer and measures such as cutting the wage bill have sent already poor citizens into extreme poverty.

Also, increase in regressive taxes such as the IMTT further diminishes disposable income where the poor are affected the most and inequality is exacerbated.

According to the World Bank’s  Zimbabwe's Poverty Assessment Report, amid the negative impact of high indebtedness on Human Rights, social safety nets policies need prioritisation.

These include improving agricultural productivity while boosting resilience to climate shocks in the sector, increasing the pace of urbanisation and structural transformation, and additional fiscal commitment towards social assistance programs as highlighted in the National Social Protection Policy Framework. The 2023 National Budget allocated  ZWL3.9 trillion towards gender sensitive programs and projects across all sectors.

Any debt restructuring policies that include cutting on social services will subsequently invalidate the impact of the gender responsive budget thus reverse national gender equality efforts.

An analysis of the country’s arrears clearance and debt options notes that after any debt relief, Zimbabwe is likely to experience positive socio-economic growth given that debt relief is accompanied by developing stronger socio-economic policies and institutions, reduction of vulnerabilities to macro shocks, as well as responsible and transparent debt contraction and public finance management.

Debt Cancellation and Restructuring options possess tranquillising effects on economic instability.

However, mere reduction in debt servicing obligations does not guarantee success in fighting inequality and poverty. Stringent and human rights-based debt policies and arrears clearance strategies; together with sustainable austerity measures, transparent public finance management and ample non debt flows; will propel the rate of debt impact recovery and development.

  • Jaravaza is a policy analyst and writes in her personal capacity. These weekly New Horizon articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — [email protected] or mobile: +263 772 382 852.


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