‘DEBT RATIO WILL BREACH CEILING’

MBABANE – Due to coronavirus, the country’s debt ratio is expected to rise to breach the recognised ceiling of 35 per cent, even without government having borrowed anything.

This is the feeling of Business Eswatini CEO Nathi Dlamini in response to the prevailing economic situation caused by the outbreak of the coronavirus pandemic. The ratio of the national debt is measured as a percentage of gross domestic product (GDP). This means that the lower the GDP to the country’s existing national debt, which currently stands at over 30 per cent of GDP, the higher the ratio.

Adjustments

“If government decided to go and borrow from the World Bank and the IMF to fund the disastrous effects of CoVID-19, which I think  will be compelled to do this time round, then one should expect a spike in our national debt ratios all of which will not look good.
“Government can easily find herself overly leveraged to the point that painful structural adjustments have to be implemented,” highlighted Dlamini.

When presenting his budget speech in February, Minister of Finance Neal Rijkenberg reported that as at end of December 2019, total debt stock stood at E19.2 billion, equivalent to 28.12 per cent of GDP. External debt was E7.1 billion, equivalent to 10.38 per cent of GDP. Domestic debt was E12.10 billion equivalent to 17.74 per cent of GDP.

According to the International Monetary Fund (IMF), allowing debt to grow too large can offset the positive impacts and lead to problems in the macro-economy, in particular depressing real GDP growth.

Improvement

With a debt-overhang, investors lower their expectations of returns in anticipation of higher taxes needed to repay the debt. They may also refrain from investing given the uncertainties about what portion of the debt will actually be serviced with the countries’ own resources.

Therefore,  new domestic and foreign investment is discouraged, which slows down capital-stock accumulation. Output may also be constrained through lower growth in total factor productivity. Governments may be less willing to undertake difficult and costly policy reforms as this may incur future debt and subsequently hinder technological improvement or the efficient use of resources given the lack of available finances.

In periods of high debt, policy makers tend to rely on robust economic growth to ensure debt sustainability. However, when GDP falls, it becomes difficult for governments to raise sufficient revenues to repay debt service obligations.
This publication, on Thursday, reported that Minister Rijkenberg had not ruled out the possibility of approaching the global lenders for financial assistance.
Dlamini, on other hand, stressed that some of the businesses were already ‘limping’ even before this plague arrived because of unsettled invoices by government.

“We are on record as Business Eswatini decrying the billions of Emalangeni owed by government to the private sector despite the former’s repeated promises to make good, but failing to do so, each and every time. I am talking about billions here which these companies have to carry in their books on behalf of government and at a massive interest expense to them. Some of these businesses have been carrying government for some two years already. The arrival of Covid-19 therefore seems to have come to finish off these businesses for good,” he noted.

Obligations

Dlamini said he was on a ZOOM meeting with his counterparts in the Southern African Development Community ( SADC) region and all of them, except Mauritius, were in the same boat  like Eswatini.
 “Their governments are without the fiscal firepower needed to subvent or subsidise businesses, especially those which had to shut down at the directive by government.

In fact it wouldn’t be excessively presumptuous of me to go as far as to say it’s an economic bloodbath out there. But then again I have to hasten to say that this sad state of affairs was and is not entirely unexpected given the ravages of this plague which have put paid to whatever semblance of hope we had at reviving what has, hitherto, been an ailing economy,” he said. Dlamini says government revenues will be, and are already, suffering immensely because if there’s no one buying anything from anybody, this means there’s zero value added tax (VAT) revenue going to government for her obligations.
“In fact, tax revenues will suffer for some time to come, which will force government into borrowing more, and more, and more.

Sentiment

“Government has promised to reopen the economy on April 15 (after lockdown). Whether or not this will be possible is anybody’s guess knowing what we know, and seeing what we have seen here and in other countries. It just may turn out that the three weeks partial lockdown was nothing more than an aspirational timeframe by a government that desperately yearns for things to get back to normalcy soon. I am of the same sentiment too, but we need to be guided by the facts on the ground,” Dlamini said.

Dlamini said hard decisions would have to be made.
“But for now, and until the storm passes away, we need to follow the prevention steps being issued daily by the Ministry of Health. Social distancing, washing of hands and staying-put are but a few of the things we can do and which, by the way, cost no money to do. We need to sanitise all public and open spaces frequently.

“All I know right now is that a new world is emerging out of this chaos and I can only imagine how it will look like once the storm is over,” he said.

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