MEFMI Supports Zimbabwe Develop Framework for Managing Guarantees

Contingent liabilities have increasingly become one of the largest sources of fiscal risks in most developing countries. Their materialisation often leads to increased public debt which exert pressure on a government’s budget by increasing debt service obligations. This may, in turn, lead to a reallocation of resources from capital projects and social expenditures towards debt service. For Zimbabwe, contingent liabilities such as called-up guarantees have contributed to the increase in the country’s public debt in recent years. As at end of 2019, about 12.6 percent of Zimbabwe’s external public debt was guaranteed. Of this amount, 98 percent was in arrears arising from called-up guarantees and the materialisation of other contingent liabilities.

Recognising the adverse impact of contingent liabilities on public finances, the Zimbabwe Public Debt Management Office (PDMO) requested MEFMI for technical assistance on developing a framework for managing guarantees and on-lending operations. In response, MEFMI conducted a virtual mission from 31 August to 11 September 2020. The objective of the mission was threefold: (a) design a framework for managing guarantees and on-lending agreements; (b) review the existing legal framework for managing guarantees and on-lending; and (c) train officials on credit risk assessment of guarantees and on-lending beneficiaries, focusing on the credit score card tool.

The main output of the mission was a framework for managing guarantee and on-lending agreements. The framework comprises guarantee and on-lending process, and the institutional responsibilities for authorizing, assessing, monitoring and reporting guarantees. The framework also provides for guarantee application process and information requirements, basic checks and credit scoring assessment. 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 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 mission team comprised Dr. Sanga Sangarabalan (an Independent Consultant) and Ms. Josephine Tito of the MEFMI Secretariat. The team held meetings and worked with 17 officials from the PDMO and the Accountant General’s Office.

Prepared by Josephine Tito

Reviewed by Tiviniton Makuve, Cacius Chuma, Sayed Timuno, Noel Mahombera, Gladys Jadagu