ASSESS TOF THE EFFECTIVENESS OF THE PUBLIC DEBT MANAGEMENT

STRATEGIES THAT HAVE BEEN ADOPTED IN ZIMBABWE FROM 1980 TO

DATE.
1.1 INTRODUCTION

Zimbabwe has been in debt distress since the year 2000, when the country first defaulted on
its external obligations to the International Financial Institutions (IFS). The defaults resulted
in the country being denied access to external financing by IFIs and other traditional
multilateral and bilateral creditors. Consequently, Zimbabwe has not been in a position to
access funding from traditional bilateral and multilateral creditors. The constrained access to
external finance partly contributed to a decline in economic activity witnessed between 2000
and 2008. The low growth trajectory during the crisis period affected the country’s debt
carrying capacity and its ability to service debt. Prior to the 2000 crisis, Zimbabwe had a
clean record of servicing its debt. Thus, it can be said that Zimbabwe’s debt problem was not
a result of imprudent borrowing, but merely reflects growth crisis, which compromised the
sources of debt servicing, as measured by exports and or government revenues. Realizing the
importance of clearing external payment arrears, the Zimbabwean authorities took bold steps
to re-engage with the international community, with the immediate objective of resolving
arrears with the IMF, the World Bank Group (WBG), and the AfDB. The plan involves
clearing the country’s external arrears to the three IFIs through a combination of the
country’s own resources, bridge financing from a regional financial institution, and a long-
term loan from a bilateral creditor. The strategy received support from creditors and
development partners during a meeting held in Lima, Peru in October 2015.

1.2 DEFINITION OF TERMS

Public Debt

Public debt, also known as public interest, government debt, national debt and sovereign
debt, is the total amount of debt owed at a point in time by a government or state to lenders.
Government debt can be owed to lenders within the country or owed to foreign lenders. At
independence in 1980, Zimbabwe inherited about US$700 million of debt from the
Rhodesian government, which mainly emanated from the United Nations sanction-busting
loans to the white regime to buy arms during the civil war (Jones, 2011).

Public Debt Management

Public debt management is the process of establishing and executing a strategy for managing
the government’s debt in order to raise the required amount of funding at the lowest possible
cost over the medium to long term, consistent with a prudent degree of risk. Debt
management may involve working with lenders to structure debts or helping manage
payments more effectively. Ideally, debt management activities should be guided by a formal
debt management strategy.

Public Debt Management Strategy

The debt management strategy is a rolling, medium-term plan outlining how the government
will meet the debt management objectives. A strategy helps the country to repay or otherwise
handle their arrears better.

1.3 STRATEGIES EMPLOYED

Domestic Debt Restructuring (2001-2008)

To deal with the disproportionately high domestic debt amounting to ZW$125 billion in
2000, the government restructured domestic debt so that at least 30% became medium to long
term while 70% was converted to TBs of 91 days, six months and one year maturities,
however, this failed to achieve the intended results. By 2007, short term domestic debt had
risen to 98.5% while only 1.5% was medium to long term debt. This prompted further
restructuring of 64.2% of the domestic debt to one year while 35.8% was restructured to three
years. On the other hand, there was no deliberate policy to repay external debt. The
government only proposed to use part of privatization proceeds to clear external arrears, to no
avail.
Sustainable and Holistic Debt Strategy, 2010
Following ten years of defaulting payments to the IFIs, external debt stood at US$6.9 billion
in 2010, of which 70% (US$4.8 billion) was in arrears. This further undermined the country’s
credit worthiness and compromised new funding options from the international financial
institutions. In order to arrest the continuous accumulation of external debt, the government
adopted the Sustainable and Holistic Debt Strategy. This was a hybrid model which involved
a combination of traditional debt resolution initiatives and creative leveraging of the
country’s natural resources for economic development.
Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy (ZAADS),
2012
In March 2012, the Government of Zimbabwe adopted the ZAADS whose key tenets
included the establishment and operationalization of the Zimbabwe Aid and Debt
Management Office which had been in existence since December 2010. This was followed by
the validation and reconciliation exercise of the external debt database. This however did not
look into circumstances under which the debt was accrued, terms thereof, status, costs, use of
the loan (whether it was used for intended purposes) and if objectives were met among other
things.22 ZAADS proposed three approaches towards re-engagement and arrears clearance
for IFIs, Paris Club and other creditors respectively:
Bridging Loans for Debt Repayment
Which implied acquisition of bridge loans from cooperating partners to fully clear the arrears
owed to multilateral institutions namely the IMF, World Bank [International Bank for
Reconstruction and Development (IBRD) and the International Development Association
(IDA)] and the African Development Bank (AfDB). The government was keen to clear the
arrears in order to pave way for new financing. However, this option had a risk of drawing
the country into a debt trap as the country only reschedule its debt by getting into new lines of
credit. This was likely to draw the country into a worse debt situation.
Applying the Naples Terms
For settlement of the debt and arrears due to the Paris Club, this entailed consolidation of
existing arrears, rescheduling of payments by about three years, and a 67% reduction in
repayment obligations and rescheduling of the balance over several years. To get this to
happen, the Paris
Club currently insists that a country meets IMF conditions and the IMF must certify that the
debt is not payable. Going through the Highly Indebted Poor Country Initiative (HIPC) would
require the same criterion, but lead to 90%-100% of the debt to the Paris Club being written-
off in the end.23 This option entails fulfilling IMF conditionalities which require structural
adjustments including privatisation of public entities, in which case the country will not have
the autonomy to implement its own policies.
Negotiating for Comparable Debt Relief
With Non-Paris Members and other commercial creditors. This was dependent on
negotiations with the individual creditors. ZAADS suggested that the terms will be
comparable to that of the Paris Club which presupposed the HIPC. ZAADS further proposed
that the country should mobilize new financing and leverage on Zimbabwe’s natural
resources in pursuit of (debt relief and) economic development. The government was
however not clear on the policy proposal regarding leveraging of mineral resources. The
country’s natural resources are under threat due to rampant corruption and opacity in the
sector. The government has even acknowledged the high levels of corruption which is blamed
for Zimbabwe’s macroeconomic decline. The failure to account for the US$15 billion from
Chiyadzwa diamond fields casts doubt on the country’s commitment to fight corruption and
ensure transparency and accountability in Zimbabwe’s natural resource sector. Mortgaging of
mineral resources to settle unproductive debts would mean disadvantaging both the current
and future generations.
Lima Strategy, 2015
The deteriorating macroeconomic environment, current account deficit and fiscal deficit and
the surging external debt triggered the government to come up with strategies for clearing
external debt arrears and the supportive economic reform agenda which was presented to and
adopted by the county’s creditors on the sidelines of the 2015 International Monetary Fund
and World Bank Annual Meetings in Lima. The Lima Strategy is premised on a non-HIPC
debt resolution strategy designed to clear external debt arrears amounting to US$1.8 billion
owed to the IMF, WBG and the AfDB as a first step towards seeking a debt treatment by the
Paris Club,24 after which the government would commence negotiations towards a resolution
with the Paris Club.

Use of Domestic Resources

Adopting a strong stance on Domestic Resource Mobilization (DRM) is a key option to
derive maximum benefit for the country not only to pay off the national debt without further
borrowing but also creating fiscal space for economic development. The Lima Strategy,
however, was only limited to the use of government’s Special Drawing Rights (SDR) to clear
the US$110 million payment arrears owed to the IMF. The government had already
transferred part of its SDR holdings kept by the IMF to clear the US$107.9 million debt
arrears which were owed to the IMF dating back to 2001. The government did not look at the
opportunity cost of offsetting debt with SDR. That diversion of national resources to clear the
arrears does not address the debt question. The country still has an obligation to repay other
debts, finance public service delivery and replenishing the SDR. SDR and other national
resources should instead be used to transform the lives of Zimbabweans whose social and
economic rights have been undermined for nearly two decades. The citizens have high
expectations of the country’s mineral resources which contribute over 68% of national export
receipts. As the country explores options for settling the national debt, the use of mineral
resources on debt repayments should not be an option either. ZIMCODD strongly
discourages either exploitation of resources for debt repayment or mortgaging of mineral
resources for future debts to avoid worsening the natural resource curse.
Use of a Bridging Loan
The government proposed the use of the bridge loan facility that was already arranged with
debt advisors, the African Export-Import Bank (Afrexim Bank), to clear the outstanding
arrears to AfDB of US$585 million and African Development Fund (ADF) holdings of
US$16 million by December 2015. There is however no information on progress made in
pursuit of this strategy, but the AfDB loan is still outstanding. At a time when the country is
considered high risk and rendered ineligible to access funding from IFIs, the option for
bridging finance only signified a shift from one creditor, African Development Bank (AfDB),
to another (Afrexim Bank) at higher interest rates while escaping the penalties. Apart from
opening other lines of credit, the strategy does not provide any safeguards to ensure that the
government will be able to repay the Afrexim Bank loan.
Use of Medium to Long Term Loan Facility
The government further proposed the use of the bridging loan facility to the tune of US$1.1
billion to clear external payment arrears to the World Bank Group consisting of International
Bank for Reconstruction and Development (IBRD) (US$896 million) and International
Development Association (IDA) (US$218 million) by the first quarter of 2016. The loan
facility was supposed to be for a period of 10 to 15 years at an interest rate of 5-10% per
annum and to be paid as a bullet payment.25 The strategy was simply a shift of the debt
burden from the previous and current generation to the future generation. This debt which is
coming to cover another debt does not have the potential to create capital which can only be
financed by the future generation through compulsory tax payments. It would be a disservice
for the government to adopt a debt repayment plan that undermines the principle of
intergenerational equity. Worse still, the medium to long term loans are payable as a lump
sum payment for the entirety of a loan amount paid at maturity (bullet payment). This
strategy is not convincing and is primarily a stopgap measure whose implications will be felt
at maturity of the medium to long term loan.
The Lima strategy was, however not implemented effectively due to non-conclusive
negotiations on settling outstanding arrears. The government vowed to pursue the Lima
agreement which expired in November 2018.

Beyond the Lima Strategy, 2018

The Bali Arrears Clearance Strategy agreed to in October 2018 prioritized the US$2.4 billion
owed to the creditors of choice as follows: US$680 million to the AfDB, US$1.4 billion to
the World Bank and US$308 million to the European Investment Bank. The Minister of
Finance and Economic Development indicated that the arrears will be cleared within 12
months. In the context of austerity, this will even limit further the fiscal space for social
development. Unsustainable debt in Zimbabwe deprives the country of resources that
normally should be invested in the development of the national economy. The budget is
completely imbalanced and social spending is ridiculously low compared to amounts spent on
debt repayment.

The lack of social spending implies that the state is in breach of Sections 75-77 of the
Constitution of Zimbabwe which guarantees the right to education, health, food and water,
respectively. Considering that the government allocated US$20 million towards the Basic
Education Assistance Module (BEAM), each one or the 416 000 vulnerable and orphaned
learners is entitled to US$48 per year. This amount is far less than the school fees and levies
for one term. This is more so in a country with 76% of rural households deemed to be poor
and 23% of which live in extreme poverty.

1.3 CONCLUSION

The ability to clear debt arrears is expected to open avenues for concessionary funding for
expansion of public investment in order to rehabilitate and expand infrastructure (road, rail,
air, energy, water, and housing) and improve health, education and other social services in
Zimbabwe. Furthermore, the ushering in of the new political and economic dispensation
implies that Zimbabwe is likely to face a new external borrowing landscape characterized by
new lenders, in a more volatile and uncertain financial environment. As such, the need for
strenghening the current institutional framework for borrowing to manage public debt
prudently and avoid a recurrence of debt distress episodes, while adequately financing future
growth cannot be over-emphasized
REFFERENCES

AFRODAD, (2017). West Africa Regional Debt Profile. Retrieved from

http://www.afrodad.org/index.php/ center-of-excellence/policy-briefs?download=31:west-
africa-debt-profile-october

Chanakira NMK (1990). The impact of Domestic Public debt on money supply in Zimbabwe
Submission made in fulfilment of M.Sc. (Hons) Economics dissertation UZ.

Chikuta, F. (2011). An Investigation Of The Effectiveness Of Domestic Debt Sustainability

Analysis Methodologies.

Retrieved from http://mefmi.org/mefmifellows/wp-content/uploads/2016/10/AN-

INVESTIGATION-OF-THE-EFFECTIVENESS-OF-DOMESTIC-DEBT-
SUSTAINABILITY-ANALYSIS-METHODOLOGIES_Frank- Chikuta_2012.pdf

Chikova, R. (2013). The External Debt Management Problem: The Case of Zimbabwe (2000
– 2012). Retrieved from
http://ir.uz.ac.zw/xmlui/bitstream/handle/10646/1143/dissertation%20for%20rangarirai
%20chikova%20 MPA%202013.pdf?sequence=1

Constitution of Zimbabwe Amendment (No. 20) Act, 2013

Eurostat Statistics. (2018). Structure of government debt. Retrieved from

http://ec.europa.eu/eurostat/ statistics-explained/index.php/Structure_of_government_debt

IMF. (2017). Staff Report For The 2017 Article IV Consultation – Debt Sustainability
Analysis. Retrieved from https://www.imf.org/external/pubs/ft/dsa/pdf/2017/dsacr17196.pdf
IMF. (2018). The Debt Sustainability Framework For Low-Income Countries. Retrieved from
https://www.imf. org/external/pubs/ft/dsa/lic.htm

IMF Fact Sheet, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative
Jones, T. (2011). Uncovering Zimbabwe’s Debt: The case for a democratic solution to the
unjust debt burden. Retrieved from https://eurodad.org/files/pdf/4733-uncovering-zimbabwe-
rsquo-s-debt-the-case-for-a-democratic-solution-to-the-unjust-debt-burden.pdf
Makochekanwa, A., Chigumira, G. & Nyamadzawo, J. (2010).Zimbabwe Economic Policy
Analysis and Research Unit (ZEPARU) Paper. Feasibility and Rationale for Establishing a
Debt Management Office in Zimbabwe. Retrieved from
http://ir.uz.ac.zw/bitstream/handle/10646/2746/Makochekanwa_Feasibility_%20 and_
%20Rationale_%20for_%20Establishing_%20a_%20Debt_%20Management_%20Office_
%20in_%20 Zimbabwe.pdf?sequence=1&isAllowed=y

Mbawu, C &Nkala, P. (2018).Journal of Economic and Sustainable Development. A Critical

Review of the Implementation Challenges of the Zimbabwe Accelerated Arrears Clearance
Debt and Development Strategy (ZAADDS). Retrieved from
https://www.iiste.org/Journals/index.php/JEDS/article/ viewFile/42425/43692

Mustapha, S. &Prizzon, A. (2015).Debt Sustainability and Debt Management in Developing

Countries. Overseas Development Institute. Economic and Private Sector Professional
Evidence and Applied Knowledge Services. Retrieved from
https://assets.publishing.service.gov.uk/
media/57a0897eed915d622c00023f/EPS_PEAKS_Topic_Guide_Debt_Sustainability_and_D
ebt_ Management_in_Developing_Countries.pdf24
Public Debt Management Act [Chapter 22:21], 2015

Public Finance Management Act [Chapter 22:19], 2009

RESERVE BANK OF ZIMBABWE ACT [Chapter 22:15]

The Insider.(2018). Zimbabwe national debt now US$18.4 billion. Retrieved from
https://www.insiderzim. com/zimbabwe-national-debt-now-18-4-billion/

United Nations.(2017). Global context for achieving the 2030 Agenda for Sustainable
Development International financial flows and external debt. Development Issues No. 10.
Retrieved from https://www. un.org/development/desa/dpad/wp-
content/uploads/sites/45/publication/dsp_policy_10.pdf

WorldBank.(2017). International Debt Statistics. Retrieved from

http://datatopics.worldbank.org/debt/ids/ country/sdn

ZIMCODD, Position Paper on Zimbabwe Accelerated Arrears Clearance, Debt and

Development Strategy (ZAADDS), 2012

ZIMCODD, First Quarter Debt Fact Sheet, 2018