Simulation Analysis of Alternative Strategies for Public Debt Issuance in Zimbabwe: Is there a Trade-off?

Working paper 580
Nebson Mupunga and Pierre Le Roux
Publication date: 
February, 2016

This paper discusses the simulation analysis of alternative public debt 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 alternative scenarios of interest and exchange rate developments. The analysis is based on the premise 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. The results 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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