Prospects for improved debt management in Zimbabwe draft constitution

The on-going constitutional reform process in Zimbabwe, which was a key component of the 2008 Global Political Agreement (GPA), has opened up immense opportunities for the country to create a new framework for sound economic management. An area where this transformation is urgently needed – and would have an enormous impact – is public finance management, particularly the administration of public debt.

Dakarayi Matanga
Senior Policy Officer - Domestic Debt

African Forum and Network on Debt and Development (AFRODAD)
31 Atkinson Drive, Hillside
P.O. Box CY1517 Causeway
Harare, Zimbabwe
Tel. +263 4 778531/6 , +263 4 291 2 753
Fax. +263 4 747878
E

October 3rd, 2012

The on-going constitutional reform process in Zimbabwe, which was a key component of the 2008 Global Political Agreement (GPA), has opened up immense opportunities for the country to create a new framework for sound economic management. An area where this transformation is urgently needed – and would have an enormous impact – is public finance management, particularly the administration of public debt. An analysis of the public finance framework incorporated into the final draft constitution, using various benchmarks for sound debt management, shows that the proposed draft includes some important improvements in terms of enhanced accountability, transparency and inclusiveness in the loan contraction and debt management process. This will benefit Zimbabwean citizens, who ultimately owe the public debt and pay for it through their taxes as well as suffer the negative impacts in human development terms when it becomes unsustainable. However, there is still scope for improvement. (The paper can be downloaded below)

The role of constitutions, enabling legislation and institutions in economic governance

The role of constitutions in sound economic governance is indisputable. According to the Institute for Democracy and Electoral Assistance (IDEA), ‘contemporary constitutions serve multiple objectives, including functioning as a framework for the institutions and mechanisms that can promote economic growth, development and poverty reduction’. In their view, empirical evidence from around the world demonstrates the close association between constitution building and economic reform.

Indeed, constitutional norms govern a wide range of areas within the national economy, such as wealth sharing and distribution, fiscal management, implementation of economic rights and management of national debt amongst other things. These norms are realised through enabling acts by which legislative bodies grant the executives legitimacy to take certain actions. Therefore, it is clear that the quality of these laws and the constitutions governing them impact greatly onthe health of an economy. According to Uteem in Hedling (2011: III), people also look to constitutions to solve modern problems of the state and governance and so looking to constitutions to solve problems of poverty and inequality induced by indebtedness is a legitimate exercise.

The African Forum and Network on Debt and Development (AFRODAD) recently published a borrowing charter, which contains principles and guidelines on sovereign financial borrowing. Meanwhile, the Zimbabwe Coalition on Debt and Development (ZIMCODD) has analysed Zimbabwe’s legal framework for contracting and managing public loans and debt. Using their frameworks and perspectives, one is able to assess the quality of debt management in current enabling legislation, as well as in the final constitutional draft of the Select Committee of Parliament on the new Constitution (COPAC).

Zimbabwe’s external public debt

Zimbabwe’s power–sharing government has been seized with implementing various programmes targeted at economic recovery since it was sworn in back in February 2009. Currently, the government is focusing on the Medium Term Plan, which needs approximately US$9 billion in total investment to meet its growth and development targets between 2011-2015. Previously, there was the Short Term Economic Recovery Programme (STERP), whose total resource requirements were in excess of US$8 billion. While STERP was in force, the Finance Minister said that US$45 billion was needed to get the economy back to its peak 1996-97level. Meanwhile, the African Development Bank (AfDB) says Zimbabwe needs an estimated US$14 billion to rehabilitate and upgrade its infrastructure. For various reasons, the government of Zimbabwe (GoZ) does not have the capacity to generate adequate resources internally to activate these programmes, hence the need for external support in the short to medium term.

Unfortunately, Zimbabwe already owes bilateral and multilateral creditors vast amounts, which are well beyond its capacity to repay. The external debt position is currently estimated at US$10.7 billion (or 111 percent of GDP) – with the equivalent of 59 percent of GDP being in arrears. The Ministry of Finance is working with its creditors to verify the actual amounts owed by Zimbabwe, so this figure could be adjusted. But the reality is that the country has been in default on its external obligations for the greater part of the last decade – and the bulk of the current debt is made up of interest and arrears. Creditors have insisted on the full repayment of outstanding arrears and the implementation of specific reforms before Zimbabwe can receive debt relief and additional aid.

This means that Zimbabwe’s unserviceable debt stands in the way not only of critical investments in infrastructure and social sectors but also of the country’s full economic recovery. To address this problem, the GoZ launched the Accelerated Clearance, Debt and Development Strategy in March 2012, which wasaimed at securing debt resolution that supports inclusive growth, job creation and poverty reduction.

However, despite these efforts to control the public debt, the GoZ has also started borrowing again at non-concessional terms for projects that some stakeholders deem to be of questionable national benefit. “Concessionality is the extent to which the terms of a loan or rescheduling are more favourable to the borrower (in terms of the total cost of debt-service over the long term) than a loan on which a commercial interest rate is charged.” In its report on Article IV consultations that ended on March 30 2011, the IMF raised concerns about the fact that the GoZ was now going into non-concessional borrowing, which the Fund says is not affordable and could complicate the future clearance of external arrears. According to the IMF,

“Recent borrowing and guaranteeing of non-concessional loans by the government has intensified debt distress. Zimbabwe is not likely to reach debt sustainability even taking into account increased receipts from the country’s mineral resources and assuming a significant strengthening of policies in line with staff.”

Similar concerns with this borrowing have also come from parliament. It is clear from reports that the legislature, which ratified these loans, was not involved in the negotiation process. Furthermore, MPs raised concerns with the terms of these loans, as well as with the use of parliament as a rubber stamping mechanism.

There is a growing consensus that while external causes, such as the lending policies of creditors, have contributed greatly to the debt crisis in many African countries, internal factors have been equally important. Studies have shown that these internal factors include poor debt policies, weak institutional and legal frameworks and the lack of accountability, transparency and inclusiveness of the institutions involved in the loan contraction process. In most countries, part of the policy and institutional framework for debt management is incorporated into the constitution – underlining the importance of the current process to amend Zimbabwe’s supreme law.

Debt management in current enabling legislation

Apart from the constitution, the legal framework governing external debts in Zimbabwe is defined by the Public Finance Management (PFM) Act (Chapter 22:19) hereafter ‘the Act’, which was promulgated in 2010. ZIMCODD (2009) cites various other acts linked to debt management, such as the Reserve Bank of Zimbabwe Act (Chapter 22:15), the International Bank Loans Assumptions Act (Chapter 22:08) andthe Former Administration (Liabilities) Act (Chapter 22:06), as well as recognising laws governing council, parastatal and private sector borrowing.However, the Act is the main legislation governing debt management.

Briefly, the purpose of the Act is to

‘…provide for the control and management of public resources and the protection and recovery thereof; to provide for the appointment, powers and duties of the Accountant-General and of his or her staff; to provide for the national budget; to provide for the preparation of financial statements; to provide for the regulation and control of public entities; to provide for the raising, administration and repayment of loans by the State and for the giving of guarantees in respect of certain loans; to provide for general treasury matters; to provide for the examination and audit of public accounts; to provide for matters pertaining to financial misconduct of public officials...’

The Act, which also repealed the State Loans and Guarantees Act (Chapter 22:13) and the Audit and Exchequer Act (Chapter 22:03), was introduced as a tool for improving the management of public finance.

According to ZIMCODD, section 52 of the Act on Borrowing Powers holds that ‘the President authorises the Minister to borrow for any purpose the President considers expedient with one limitation, being that borrowing within Zimbabwe can only be up to 30 % of the revenues of the general revenues of the country in the preceding financial year’.This maintains the previous legislative situation, which gave an excessive amount of discretion to only two offices – the Presidency and the Minister of Finance. Interestingly, section 53 on the purposes for which the minister may borrow money states in section (f) that the minister is authorised to borrow money for any other purpose approved by parliament through a special resolution, which appears to give the legislature additional discretion in relation to borrowing. The Act also gives the minister the power to give loan guarantees with the consent of the president.

In ZIMCODD’s view, the ideal situation is for the loans or guarantees to be limited by specific sustainability ratios (e.g. against total debt or debt service) and for them to be implemented with reference to another body that is empowered to make an objective determination and bar the loan if needs be, such as the parliamentary Public Accounts Committee (PAC). This would ensure that parliament has an influence on negotiating the terms of the loans. At the moment, parliament’s role appears to be merely that of ratifying what has already been negotiated and signed by the executive. In addition, ZIMCODD feels that the possible purposes for borrowing are too wide-ranging, while the consultation framework around loan contractions is limited by the exclusion of both beneficiaries and a specialised commission.

Based on its analysis, ZIMCODD asserted that the Act ‘ended up providing little advantage over the Bill where loan contraction and debt management are concerned’. Indeed, this deficiency seems to be echoed by the GoZ, which in its current debt strategy, states that the ‘PFM Act...does not adequately provide for the contraction and management of external debt’. However, ZIMCODD does acknowledge that in general public finance terms, the Act introduced positive changes, mainly by ensuring that there ismore provision of information to parliament through regular reporting.

Debt management in COPAC’s draft constitution

According to IDEA (2011), ‘each constitution contains a set of principles that explain its purpose and normative foundation and guide the understanding of the constitution as a whole’.These principles embrace certain standards in an ‘obligatory’ or ‘aspirational’ sense and shed light on the political, economic and social context in which the constitution was drafted. Therefore, existing challenges with indebtedness have no doubt influenced the section on Principles of Public Finance, where clause 17.1 (a) of the COPAC draft states that there must be transparency and accountability in financial matters. Clause (c) in the same section states that the burdens and benefits of the use of resources and public borrowing must be shared equitably between present and future generations. This essential reference to the principle of sustainable development is glaringly absent from the Lancaster House independence constitution. AFRODAD's charter emphasises in section 6.1 the right of citizens to exercise their right to sustainable development even in the process of loan contraction and debt management – and the principles in the final Zimbabwean draft clearly resonate with this.

Section 17.3 (1. a–c) of COPAC’s draft governs limits on state borrowings, public debt and state guarantees, which will be achieved through an Act of Parliament. AFRODAD's charter includes a guideline (2.3) that recommends the creation of ‘laws, regulations and policies which stipulate the limits of external public debt borrowing. This must include sovereign guarantees for private borrowing and should be linked to the country’s debt ratios and GDP/exports’. The AFRODAD charter is much clearer in this area than COPAC’s draft – outlining both the considerations that borrowing limits must be based on as well as including publicly-guaranteed private sector debt, which is also important to monitor and control in terms of the overall debt situation. An explicit constitutional provision calling for legislative limits on borrowings was not provided for in the Lancaster House constitution – so the new draft is definitely a step in the right direction. However, the COPAC draft could – and should – be strengthened by adopting constitutionally-guaranteed limits on borrowing that are based on specific criteria.

Clause 17.3 (2) of the COPAC draft stipulates that all loan agreements negotiated by, or on behalf of, the government, including loan agreements with international financial institutions, must be approved by the National Assembly before they areimplemented. This resonates with guideline 1.4 of the charter, which recommends the adoption of legislative measures that ensure borrowing and debt management receive parliamentary approval. However, it is important to highlight guideline 2.4 in AFRODAD’s charter, which recommends that

‘The legislative arm of government…should approve loans before contracts are signed so as to ensure that the loan contraction process is done within the established guidelines and laws, and can be serviced within the National Budget. Parliaments represent the citizens who bear the burden of repayment.’

This provision is stronger than COPAC’s version because it clearly states that the powers of parliament take force before borrower and creditor put pen to paper, not merely to ratify what has been agreed already prior to implementation. In the COPAC version, parliament’s involvement comes before implementation – providing an opportunity for the executive to negotiate and sign contracts in advance of legislative approval. The language in the final constitution should be closer to the AFRODAD charter to bolster the position of parliament.

However, clause 17.3 (2) of the COPAC draft does relate well with guideline 3.3 of the AFRODAD charter on parliamentary oversight, and guideline 5.1 on ownership and accountability. Guideline 5.1 not only refers to the critical role of MPs in fostering citizen ownership and accountability, but also recognises the role of civic groups as watchdogs which enhance public finance ownership and accountability.

Another important advance in the COPAC draft is related to providing the public with information about loans and debts, which is incorporated into clause 17.3 (4), which states that

‘Within ninety days after a loan agreement or Government guarantee has been approved by the National Assembly under subsection (3), the Speaker must cause its terms to be published in the Gazette.’

This part of the proposed draft falls in line with guideline 5.4 of AFRODAD’s charter on the public disclosure of information, which states that

‘Government legislation on Public Finance and Accountability must clearly stipulate that information on the use of borrowed funds must be made available to the public especially civic groups that are interested in monitoring government loans and grants. The loan contract must be available to the public and transmitted to various stakeholders using appropriate and locally-accessible means of communication. This could be via Members of Parliament, announcements through websites, national press, radio and/or television’.

Public disclosure on loans ex post facto is also strengthened in the COPAC draft in clause 17.3 (5). It states that the Minister responsible for finance must report to Parliament on the performance of loans raised and guaranteed by the State at least twice a year, at the same time as the estimates of revenue and expenditure are laid before them. The Lancaster House constitution is totally silent about the need for explicit disclosure on the use of borrowed funds.

Meanwhile, section 17.6 (4) of the COPAC draft charges all debtcharges to the Consolidated Revenue Fund (CRF). This is the same asSection 104 (3) of the current constitution, which – like the proposed COPAC draft – defines debt charges as including ‘interest, sinking fund charges, the repayment or amortisation of debt and all expenditure in connection with the raising of loans on the security of the [CRF] and the service and redemption of debt created’.

As with any constitutional drafting process, it was always unlikely that the COPAC draft would incorporate every single best practice but, generally speaking, sections in the final draft referring to loan contraction and debt management are largely consistent with recommendations in AFRODAD’s charter. Most importantly, the COPAC draft is quite detailed in terms of debt management issues as opposed to the current constitution – the much-amended Lancaster House document – which is threadbare in this key regard. As ZIMCODD rightfully observes the Lancaster constitution ‘only barely touches the issue of debt management and does not even mention the issue of loan contraction’.

However, this doesnot mean that there are no areas of improvement in the COPAC draft. The draft could be strengthened by clearly stating that parliament must approve new loans prior to the signing of contracts to give them more meaningful input in the negotiation process and avoid rubber stamping. The time needed for parliament to consider the terms of loans could also be specified in the same way as deadlines for reporting and usage are. The COPAC draft could also provide a clear description of the structure – a standing committee – that is necessary to guarantee a prior role for parliament in negotiating loans. It is also clear that amore explicit recognition of civic groups as watchdogs, which enhance public finance ownership and accountability, should be included.

Conclusion

It is clear that the current Zimbabwean constitution is vague and unclear on principles and roles in relation to loan contraction and debt management. The COPAC draft is definitely an improvement because it deals in a more detailed way with debt management, including direct reference to the principle of generational justice of the debt, borrowing limits, gazetting of loan terms and criteria within ninety days of parliamentary approval, and systematic public statement of the levels of indebtedness

But there is still room for the final constitution to be even more closely aligned to the AFRODAD guidelines, which would help to prevent Zimbabwe from facing a similar debt crisis in the future since there would be even greater clarity around the process and more transparency and accountability.

It is critical that the citizens of Zimbabwe use the final stages in the constitution-making process – such as the 2nd National Stakeholders conference – to try and ensure that the final constitution is as clear and progressive as possible. And this includes the specific aspects governing public finance management. Zimbabweans end up paying for the national debt so they must take this opportunity to ensure that they have as much control over, and information about, future loan contractions and debt repayments as possible – and there is no better way to do that than by entrenching these principles in the new constitution, which will be the new supreme law of the land.

 

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