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Minister Chinamasa

Finance and Economic Development Minister Patrick Chinamasa has criticised investors who use borrowed funds to finance investments in Zimbabwe.“Some investors coming into this country are not real investors. Real investors bring equity into the country.  “The investors we are seeing come into the country then borrowing from outside — and that is debt to the country,” said Minister Chinamasa last week.

In terms of some key national projects, the Government has acted as guarantor to a number of the loans that some foreign investors have borrowed from abroad, which means these loans inflate the national debt. It is estimated that around 70 percent of Zimbabwean debt is foreign.

“Now, these loans, at what rate are they coming? I went to some investment firm, I will not mention it, where I was being told that the loan was at 18 percent (interest rate) and this was a loan from Europe (I know Europe has low interest rates). Those are some of the issues that I think we need to examine to see whether we are getting value for money. An accountant would be better placed to know the proper gearing ratio of a company, that is, debt-to-equity,” he said.

Gearing basically helps to measure a company’s financial leverage and shows the extent to which its operations are funded by lenders as opposed to shareholders. Economists contend that a low-geared company with a ratio of, say, 10 percent can be able to pay off debt several times over and is considered to be low-risk, while firms with higher ratios (above 50 percent for instance) are considered riskier bets insofar as even a short period of reduced profits or a sudden increase in interest rates could result in loan default.

“If it is all debt I do not think it is a very good state of affairs, there is need for that balance between equity and debt. Now when our investments are all debt it gives us cause for concern in the future.” — BH24.