DEBT-RIDDEN Zimbabwe, struggling to extricate itself from a huge external debt overhang, will rely on 90% of its domestic resources over the next three years to finance capital expenditure and social spending, a new report has shown.
BERNARD MPOFU
Zimbabwe is currently in debt distress, and the accumulation of external debt arrears has worsened the country’s inability to access funding from external traditional sources and the international financial markets.
With limited budgetary support, Zimbabwe has been depending on domestic resources such as taxes, but critics say this has resulted in multiple layers of statutory obligations and high costs of running a business.
According to the country’s Medium-Term Debt Management Strategy (MTDS) seen by The NewsHawks, the southern African nation remains ineligible to access concessional funding due to slow progress in normalising relations with multilateral lenders and the Paris Club.
This MTDS is a framework developed by the Zimbabwe Public Debt Management Office (ZPDMO) to guide the government’s borrowing operations and public debt management policy decisions, with the objective of ensuring debt sustainability in the long term.
The framework guides the government in pursuing the desired structure of its public debt portfolio, which reflects cost and risk trade-off preferences.
The MTDS sets out the government’s debt management strategy over the period 2022-2025, with respect to the existing stock of public debt and the financing of the fiscal deficits.
“Given the country’s limited access to external financing, during the period 2022-2025, Government will focus on mobilising resources for budget deficit financing mainly from the domestic financial and capital markets, while ensuring that refinancing risks on the public debt portfolio are kept minimal,” the report reads.
“In this regard, the MTDS will be underpinned by a financing mix of 90 percent financing from the domestic financial and capital markets and 10 percent from external debt sources. The main focus of this strategy is the development and deepening of the domestic financial and capital markets, through the introduction of medium to long term bonds, with a view to minimizing the public debt portfolio’s exposure to refinancing risk. To this end, the domestic financing is composed of 40 percent Treasury Bills and 60 percent Treasury Bonds (2-year, 5- year and 10-year). The development and deepening of these markets will also include bond issuances, which will be listed on the Victoria Falls Securities Exchange (VFEX).”
The MTDS has been formulated at a time the global economy is reeling from the devastating effects of the Covid-19 pandemic and geopolitical tensions in Eastern Europe.
“Resultantly, the fiscal position of most countries, including Zimbabwe, has worsened as a result of tax revenue shortfalls, the expenditure and supply shocks brought about by the Ukraine-Russia conflict,” the report reads.
“In the case of Zimbabwe, these developments have exacerbated Government’s already huge financing needs, as the Government is committed to adequately fund projects and programmes to mitigate the effects of these shocks.”
The MTDS (2022-2025) is the second debt management strategy for Zimbabwe, succeeding the MTDS (2017–2021).
The main thrust of the previous MTDS was, according to the report, to maximise external concessional funding, through the engagement and re-engagement with international financial institutions, while seeking to borrow from the domestic market, through medium to long term debt securities.
The establishment of an auction system for issuance of domestic government securities was also one of the key objectives.
“Progress achieved under the first MTDS has been moderate, partly due to the lack of progress in the clearance of external debt arrears to both the International Financial Institutions and bilateral creditors,” the report reads.
“Nonetheless, there has been renewed commitment to clear the longstanding debt arrears, through the Arrears Clearance, Debt Relief and Restructuring Strategy (ACDRRS), launched in April 2022. On the domestic front, Government re-introduced the Auction System for the issuance of Treasury Bills, which has provided the mechanism for price discovery of Government securities, through a yield curve.”
Official figures show that the total Public and Publicly Guaranteed (PPG) debt as at end December 2021 amounted to US$17.2 billion, comprising of external debt of US$13.4 billion (77.9%) and domestic debt of US$3.8 billion (22.1%).
This total public debt stock includes blocked funds amounting to US$3.533 billion and an obligation of US$3.5 billion for the compensation of dispossessed white farmers.
Zimbabwe’s official PPG external debt stock is estimated at US$13.4 billion as at end December 2021. Of this amount, US$5.6 billion is owed to bilateral creditors, US$2.7 billion to multilateral creditors, US$111 million to creditors under the 2015 RBZ Debt Assumption Act and US$4.9 billion is external debt on RBZ’s balance sheet.
Of the total bilateral external debt, US$3.9 billion is owed to the Paris Club bilateral creditors, and US$1.8 billion being owed to the non-Paris Club bilateral creditors.
For the multilateral external debt, US$1.5 billion is owed to the World Bank Group, US$711 million to the African Development Bank Group and US$358 to the European Investment Bank.
The remaining US$66 million, the report shows, is owed to other various multilateral creditors, which include the Arab Bank for Economic Development in Africa (BADEA) and the International Fund for Agricultural Development (IFAD), among others.
RBZ balance sheet external debt of US$4.9 billion comprises US$3.5 billion blocked funds, US$1.2 billion Afreximbank debt, US$26 million from foreign banks and US$155 million from other commercial creditors, which include Frontera Capital VBV (Netherlands), Germcorp (UK) and Trade and Development Bank (TDB).
“While Government has committed to accelerate the implementation of the Arrears Clearance, Debt Relief and Restructuring Strategy (ACDRRS), the MTDS will largely focus on domestic financing, including the development and deepening of the domestic debt market, through introduction of medium to long-term debt securities, with a view to mitigate exposures of the debt portfolio to refinancing risk,” the report reads.
