Government has formulated a framework for evaluating, monitoring and managing publicly guaranteed and on-lent loans as they contribute to significant debt accumulation in the event of default by the primary borrowers.
The basic tenets of the framework, according to an annual Treasury bulletin on total public debt released recently, include eligibility criteria, standards of transparency, credit risk evaluation and scoring.
Additionally, the new debt management system covers risk sharing, guarantee charging and on-lending fees and performance monitoring.
“The framework outlines the policy, legal, institutional and operational structure within which guaranteed and on-lent loans will be contracted, evaluated, monitored and managed,” the bulletin reads.
Notably, in line with the Public Debt Management Act, the Minister of Finance and Economic Development, Professor Mthuli Ncube, has powers to issue out guarantees subject to advice and recommendations from the External and Domestic Debt Management Committee (EDDC).
Zimbabwe now has an effective debt management strategy, executed in terms of the Public Debt Management Act whose pillars entail structure of and public debt office and procedures for contracting debt.
The Public Debt Management Act sets parameters for borrowing powers, limits and purposes. Public and publicly guaranteed (PPG) debt mostly benefits State-owned enterprises (SoEs) and State institutions (e.g. universities) in need of funding.
Some of the entities that have benefited from loans under the public and publicly guaranteed debt approach are Civil Aviation, Zimbabwe Electricity Transmission and Distribution Company (ZETDC), ZESA, Agribank, Zimbabwe Consolidated Diamond Company, TelOne and Zamco.
While the Treasury did not give figures for total PPG debt relating to State enterprises as at December 2019, it is a fact that PPG can form a significant element of the total national debt to which the State is a key part.
For instance, in 2019, the Government guaranteed a ZETDC loan of US$110,4 million from Afreximbank for clearing accumulated debt on imported electricity and procurement of prepaid smart metres (US$30,9 million).
During the same period, ZETDC serviced its debts for electricity imports from Eskom and Hydroelectric de Cahora Bassa (HCB) Mozambique amounting to US$87,6 million.
Domestic guarantees amounting to US$18,3 million and $157,8 million were issued in the 2019 financial year. Most of the guarantees were issued to finance inputs for the 2019/20 farming season.
On-lent facilities to public entities from 2017 to 2019 amounted to US$266,5 million, as at December 2019, which the Government guaranteed because lenders feel more secure lending to the State than public firms.
Total external public and publicly guaranteed (PPG) amounted to US$8,09 billion, 84 percent of GDP, as at the end of December 2019, while total domestic PPG debt ended the year at US$530 million.
The external debt arrears accounts for 74 percent (US$5,97 billion) of Zimbabwe’s total and outstanding external public and publicly guaranteed debt.
Global lenders are owed US$2,6 billion, of which the World Bank accounts for US$1,5 billion, African Development Bank US$705 million, European Investment Bank US$330 million and other foreign financiers US$66 million. Total bilateral external debt amounted to US$5,48 billion (68 percent of the total PPG external debt), of which the Paris Club creditors accounted for US$3,39 billion, and non-Paris Club creditors, US$1,58 billion.
Failure by Zimbabwe to service these longstanding debts, though, after some economic challenges at the turn of the century, is blamed for blocking fresh concessional loans from global and other external lenders.
While it is an unenviable thing to get trapped in significant debt, for countries, Zimbabwe included, it is a rarity if not an impossibility to avoid debt in order to finance key development initiatives or some emergencies.
In fact, there is currently raging debate about whether borrowing is bad at all, provided the resources are put to good use for the benefit of the majority; especially if it relates to driving economic growth and job creation.
The biggest question that then comes to mind is; “Can one pay back and on time when they get the loan, and at what terms should the funding be available?”
Like any country in the world that has national aspirations and development goals and get affected by unforeseen exigencies, Zimbabwe had to borrow in order to fund a number of key initiatives, including fuel, food, drugs, equipment, infrastructure and machinery.
The country has developed an effective strategy to deal with its debt position, including clearing arrears.
According to the latest annual debt bulletin, to attain sustainability, the Government is accelerating its engagement and re-engagement process with the international community.
“Government is also being prudent with its public debt management policy by focusing on concessional borrowing and limiting non-concessional borrowing to economically viable projects,” the Treasury said.
Such intervention is critical if taken from the perspective that total public and publicly guaranteed (PPG) debt to GDP ratio remaining above the stipulated level of 70 percent in the Public Debt Management Act.