Emerging from a debt trap in a crisis-ridden country: lessons from Zimbabwe

Is Zimbabwe's experience symptomatic of a structural adjustment programme (SAP) or is simply a result of 'local' mismanagement? This paper attempts to show that, while the last of these reasons predominates, there are lessons to be drawn by a wider audience. Paper reviews the origins of the debt problem in Zimbabwe, and considers whether Zimbabwean debt is sustainable. It uses a computable general equilibrium (CGE) model to generate alternative short to medium term scenarios to simulate the quantitative impact of these debt responses on economic performance.<B>Conclusions:</B>the single most important proximate cause of public debt is macroeconomic instabilitya severe recession appears unavoidable if the debt situation is to be brought under some reasonable control without the help of donors. Although the task to be accomplished is very daunting, the country has approached the point at which it has to tolerate this effortthe government is aware of the measures needed to bring the budget process under control: proper construction of budget targets, adherence to agreed budget allocations, reduced domestic borrowing. In the past high budget deficits have been due to the failure of various ministries to remain within the authorised expenditure ceilings. But the debt service burden also adds a large non-discretionary element to expenditures. Short-term measures are necessary to reduce this burdenexperience has shown that the capacity to implement the above measures is limited. Therefore, mechanisms to assist the Government in sticking to its budget proposals will be requiredin the absence of donor support (the most likely scenario), there are two realistic options open for Zimbabwe to tackle the debt problem: austerity and export promotionalthough there appears to be an impenetrable stand-off between donors and government, there is need to obtain a workable consensus on the way forward. The donor financing route may appear less politically feasible to the government, but the alternative of trying to ignore the economic imperatives is likely to have far more adverse political spin-offs in the next three to five yearsan important reason for attracting donor support would be the boost that this would give to investor confidence, making the future appear more certain. This route also raises the possibility of swapping domestic debt for foreign. With credible government policies, this would lead to higher growth and lower inflation. These conditions are prerequisites for sustainable debt[Adapted from the author]