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.

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Keywords

Public debt management, Debt cost, Risk