Thread by @Wamagaisa

Government Guarantees

1. First, the positive is that Finance Minister @MthuliNcube has published this government guarantee as required by the Constitution. It’s something that he wasn’t doing until he was taken to court. It’s a good thing that he is now trying to comply.

2. The law requires publication of government loans and guarantees to ensure transparency in the management of public funds. It was terribly disconcerting that the government was refusing to comply with the Constitution. Still, these are baby steps. More needs to be done.

3. A guarantee is what accountants call a contingent liability. If X guarantees repayment of a debt owed by B & B fails to repay, X will be called upon to pay up the debt. X is taking a risk. In this case, the government guaranteed a debt owed by Mbano Hotels to CBZ Bank.

4. Ordinarily there’s nothing wrong with a government being a guarantor. It helps companies to secure financing from lenders. But the government will be taking a risk with public funds. It’s effectively a form of public financing since government pays when the debtor default.

5. This facility can be abused, where guarantees are given to Politically Exposed Persons (PEPs) who deliberately default on the loans knowing that the government will pay. The PEP will effectively have siphoned public funds via a disguised guarantee agreement.

6. The question here is who is behind Mbano Hotels the beneficiary of the guarantee? The identity of beneficial owners matters because corporate vehicles can easily be used as fronts by PEPs. These beneficial owners must be disclosed for transparency.

7. S. 300(3) of the Constitution requires “terms” of the guarantee to be published. The summary published in the gazette is vague & inadequate. It doesn’t have the terms of the guarantee, not even the recourse that the government might have if called upon to repay.

8. The information in the gazette only tells us that the government is required to pay the debt if Mbano defaults. But this is obvious & generic information. As it is, the government just ticked a box without any meaningful compliance as required by s.300(3).

9. The loan that the government is guaranteeing is very small & raises questions. Mbano is borrowing less than USD130,000 from a local bank, CBZ. Does this mean a hotel business doesn’t have properties that could have been used as security for the loan?

10. Some may recall that CBZ was the biggest beneficiary of the ZAMCO scheme, whereby the government bought non-performing loans from banks. Debtors were not repaying loans. The taxpayer took the bill. Government & ZAMCO refused to disclose beneficiaries of that debt takeover.

11. Now, a critical eye might be forgiven for seeing a debt takeover ex ante (before the event). Mbano will simply default, knowing the government (read taxpayer) will foot the bill. It will be just another ZAMCO in different complexion. That’s why it’s vital to have full details

12. To conclude, it’s good that the government is trying to comply with the Constitution but it’s worse when it creates a facade. Disclosure of terms should be in full. It’s a public debt so there is no secrecy. Taxpayers who are saddled with this debt have a right to know.