THE Government has put in place a new debt management framework that will be used to evaluate its loan guarantees and on-lending in a transparent and objective process meant to guard against adverse impact of contingent liabilities on public finances.
The new Framework for Evaluating, Monitoring and Managing Guaranteed and On-lent Loans, comes as contingent liabilities such as called-up guarantees have contributed to the increase in Zimbabwe’s public debt in recent years.
According to the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI), as at end of 2019, about 12,6 percent of Zimbabwe’s external public debt was guaranteed and of this amount, 98 percent was in arrears arising from called-up guarantees and the materialisation of other contingent liabilities.
Government, as part of financing for development, offers guarantees and provide on lending loans to credit worthy borrowers.
Under the guarantee arrangement, a borrower is able to obtain a loan from the lender on condition that Government provides a guarantee that, in the event of default, the Government will take on the responsibility of repaying the loan.
In the case of on lending, the Government through the Ministry of Finance and Economic Development (MoFED), receives a loan from a lender or raises finance via a security issuance and then lends these funds to the borrower.
However, over the years, debt accumulation and guarantees were not being done by the book with Finance secretary George Guvamatanga, telling Parliament’s Public Accounts Committee (PAC) recently that there was need to establish the purpose and use of the debt accumulated or guaranteed by Government.
To manage the debt burden, MEFMI provided technical support in formulating the new Framework for Evaluating, Monitoring and Managing Guaranteed and On-lent Loans (Framework).
The new framework, which was released by the Zimbabwe Public Debt Management Office, a department under Treasury, will assist in spelling out all the relevant stages that require efficient and effective evaluation, monitoring and managing of guaranteed and on-lent loans.
The Framework also sets out the overall policy, legal and institutional framework within which debt will be incurred, used and managed. It also provides an evaluation methodology that involves a credit risk assessment and scoring for determination of relevant fees.
The credit scoring assessment takes into consideration financial and non-financial aspects as well as project-specific assessment.
Furthermore, the timelines for guarantee applications and responses, guarantee fees and other charges, monitoring arrangements as well as reporting and disclosure of guarantees and on-lent loans are catered for in the framework.
It is expected that the Public Debt Management Office (PDMO), will use the framework to support the effective management of guarantee and on-lending agreements as well as support the reduction in called-up guarantees and materialisation of contingent liabilities.
The Framework also useful to Public Entities, Municipalities, Local Authorities and other stakeholders intending to borrow, by providing full information on the processes and procedures for borrowing. — ebussinessweekly.co.zw