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Sunday, April 18, 2021

Understanding Zimbabwe’s emerging domestic debt challenge – Post COVID-19


Domestic debt is defined as the “that debt the public sector (central government, local or provincial governments, state-owned enterprises and agencies whose borrowing is guaranteed by the central government) incurs through borrowing in its currency from residents and corporates of its country”(World Bank)  However, in some cases foreign investors can also invest in domestic debt instruments of the government; in which case the government’s obligations, therefore, are to foreigners, but in its own currency.

Reasons for domestic debt borrowing

There are so many reasons why governments borrow domestically. Below are some of the reasons:

  1. To finance the budget deficit when the government is not able to meet its expenditure commitments using domestically raised revenue and externally sourced grants and borrowing;
  2. Contracted for monetary policy implementation purposes through open market operations; and
  3. To promote the development and deepening of domestic financial markets.

How Domestic Debt is Acquired

The following are some of the ways and means (Instruments) governments use when borrowing domestically

  1. Issuance of government security papers e.g. treasury bills and bonds.
  2. Overdrafts or advances from the central bank.
  3. Payment arrears – outstanding payments to suppliers and parastatals for goods and services, and pension payments.
  4. Debt arising from privatizations – when government takes over the outstanding obligations of public enterprises that have been or are being privatized, normally referred to as debt assumption.
  5. Contingent Liabilities – obligations arising from government guarantees for borrowings and liabilities of regional and local governments, public and private sector enterprises
  6. Central bank bills and notes – issued for monetary policy purposes

Zimbabwe domestic debt portfolio

Zimbabwe’s total public and publicly guaranteed (PPG) debt at end 2019 was US$11,091 million, representing 54% of GDP compared to US$17,880 million registered in 2018 (Table 1). The sharp decrease in the stock of total debt denominated in USD terms is explained by the revaluation of domestic debt following the adoption of a new local currency called the RTGS dollar. The new currency and the subsequent depreciation led to a significant decline in domestic debt from US$8,398 million (37% of GDP) in 2018 to US$535 million (3% of GDP) in 2019.  Consequently, PPG external debt constituted 95 percent of total public debt in 2019 while domestic debt was 5 percent compared to 41 percent and 37 percent in 2018, respectively. Figure 2 shows the composition of public debt over the past decade[1].

Table 1: Zimbabwe’s Total Public Publicly Guaranteed Debt (USD Million)

Public Publicly Guaranteed Debt 17,88011,091
External Debt (Inc. RBZ and External arrears)9,48210,556
Domestic Debt (Inc. Domestic arrears)8,398535

Source: Ministry of Finance and Economic Development

Figure 2: Trends in Public Debt: 2009 to 2019

Source: Ministry of Finance and Economic Development

Before 2019, domestic debt was denominated in USD because of the 1:1 exchange rate peg between the USD and the Bond.  In 2019, domestic debt declined in USD terms because of the adoption of a market determined exchange rate and the depreciation of the Zimbabwe dollar[2].  Table 2 shows the composition of public domestic debt.

Table 2: Composition of Public Domestic Debt (USD million)

 Total 2018Total 2019
Domestic Debt8,398               535
Treasury Bills and Bonds          8,213               530
     Budget Financing             933                72
     Government Debt          3,071              131
     RBZ Assumed Debt             292                11
     Capitalisation of SOEs             149                  8
     ZAMCO                –                  64
     RBZ Capitalisation             110                  6
     Restructured debt                –                238
     RBZ (Not Issued with TBs)               28                   –  
     Overdraft Facility          2,934                   –  
     Loans (Central Bank)             696                   –  
Domestic Arrears             185                   6

Source: Ministry of Finance and Economic Development

Treasury continued to issue domestic debt instruments to meet budget financing needs. Current Treasury policy is to limit the issuance of domestic debt securities by targeting a balanced budget. In order to promote domestic market development, improve transparency and increase competition, the Government introduced an auction system for issuance of treasure bills in July 2019.

The Zimbabwean government has over the years taken over the obligations of guaranteed entities/individual beneficiaries in various agriculture support programmes. Since 2005 the government has launched various supportive programmes to boost agricultural production, which included (i) Agricultural Sector Enhancement Productivity Facility (ASPEF) worth more than US$114 million, (ii) Operation Maguta with over US$41 million and (iii) Local Authorities Reorientation Programme (PLARP) where local governments accessed at least ZW$1 trillion under the Parastatals. Other programmes followed in 2007 and 2008, such as the Mechanization Programme for mechanising agriculture production and improve crop yield per hectare and the Basic Commodities Supply Side Intervention (BACCOSSI) to alleviate the acute shortages of goods in supermarkets through giving households food hampers, respectively. However, most of these programmes invested millions of dollars but failed on implementation and government took over the debts.

COVID-19 support scheme

Under the ZWL$18 billion Economic Recovery and Stimulus Package adopted by government – government guarantees are amounting to ZWL$ 2.5 billion and ZWL$500 million is being availed to support the manufacturing and tourism sectors, respectively, may continue worsen Zimbabwe’s public debt in the event that the Government assumes such obligations in the case of default.  Currently there is no framework for managing contingent liabilities[3].

There are different perspectives on the growth effects of public domestic debt in any given economy. These include the positives and the negatives.


  1. Issuing of domestic debt can help the government achieve its funding and growth objectives in the presence of a stable macroeconomic environment, political certainty and a developed financial system.
  2. Moderate levels of noninflationary domestic debt as a share of GDP and bank deposits can exert a positive overall impact on economic growth (Abbas &Christensen, 2007).
  3. There is an optimal level of domestic debt that is promotive of growth, once that is exceeded it then becomes detrimental to growth (Domestic Debt/GDP: -15-20% IMF/WB thresholds).
  4. the growth contribution of domestic debt is higher if the debt is marketable, bears positive real interest rates and is held outside the banking system.


  1. The burden of domestic debt can slow down the economy
  2. As compared to external debt which can be sourced at low & cheap concessionary rates, domestic debt is generally expensive in nature
  3. In most cases its servicing can account for a large proportion of government revenue which can diminish the scope for public spending on desirable items such as health, education and infrastructure.
  4. Excessive domestic debt servicing can also “crowd out public sector investment on infrastructure and other socio-economic development projects”
  5. Excessive domestic debt can also be inflationary
  6. If the government finances its deficit by borrowing too much from the central bank-through money creation- it can stoke up inflation-negatively affect the welfare of citizens
  7. If not properly managed, domestic debt levels can be built to levels where they become unsustainable, there precipitating an economic crisis


The above possible negative impacts of domestic debt necessitate the critical need for promoting domestic debt sustainability to ensure, the compatibility of domestic debt and the achievement of the national development goals.

Given that the govern is funding Economic Recovery and Stimulus Package through domestic borrowing and on lending to private sector and fund unproductive social programmes, there is nneed to ensure that domestic borrowings are used for productive purposes that can generate resources commensurate with the servicing obligations, given the expensive nature of domestic debt.

There is need for government to put in place a framework for managing contingent liabilities; strengthen the oversight role of the Parliament on domestic debt acquisition, and ensure that domestic debt issues are anchored on constitutional provisions.

Tirivangani Mutazu is a Senior Policy Analyst at AFRODAD responsible for Debt Management

[1] AFRODAD – 2020 Zimbabwe Annual Debt Report

[2] AFRODAD – 2020 Zimbabwe Annual Debt Report

[3] AFRODAD – 2020 Zimbabwe Annual Debt Report

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