Simulation analysis of alternative strategies for public debt issuance in Zimbabwe: Is there a trade-off?

Abstract

This paper presents a simulation of alternative strategies for public debt issuance in Zimbabwe. The analysis is undertaken with a view to find a strategy that minimises the cost and risk of public debt under different scenarios of interest and exchange rate developments. The premise is that increases in debt service charges due to risky allocation of public debt can substantially change public debt dynamics. The risky allocation can derive from an excessive exposure of the government to exchange rate, interest rate and commodity price shocks. The results show a trade-off between a debt strategy that largely depends on more external concessional borrowing and a debt strategy aimed at increasing the share of domestic debt in the public debt portfolio for market development purposes. While the strategy that maximises recourse to external concessional borrowing was found to be desirable from a cost perspective, it proved to be less desirable from a risk perspective after taking into consideration the exchange rate effect. Moreover the conditions attached by international financial institutions and other official creditors to accessing concessional loans makes the strategy less desirable. The results, therefore, underscore the need for authorities to ensure a neat balance between external and domestic debt borrowing to ensure long-term public debt sustainability.

Keywords: Public debt management; Debt cost; Risk