TOPIC: ZAMBIA’S DEBT
Should we worry?
Public Discussion Report
3rd April, 2014
Intercontinental Hotel
Time: 18-20hrs
Lusaka
1.0 Introduction
The Economics Association of Zambia held a public meeting to discuss Zambia’s debt, on
Thursday evening, 3rd of April at the Intercontinental Hotel in Lusaka. The meeting was
attended by 152 people drawn from EAZ members, business, academia and civil society.
The Government through Ministry of Finance representative could not make it due to illness.
The main speaker was Mr. Shebo Nalishebo, a research fellow at the Zambia Policy Analysis
and Research and a member of EAZ. He concentrated on domestic debt and presented a
paper, entitled “The rising public domestic debt: Should we worry?” The discussants were
Mr Tobias Rasmussen, International Monetary Fund (IMF) country representative and Mr
Kabinga Musonda, a Programmes Officer at Jesuit Centre for Theological Reflections. The
two discussants looked at the effects of domestic and external debt and shed light on general
considerations when dealing with public debt. Mr Grevazio Zulu, a renowned journalist from
Zambia National Broadcasting Services moderated the discussion. The paper and power point
presentations are available separately.
The following is a summary of the meeting based on the main themes of the presentations
and discussions from the floor.
2.0 Issues discussed
2.1 Debt and the changing face of debt
Debt was generally defined as the total financial obligations of public sector to both residents
(domestic) and non-residents (external). In Zambia, domestic debt includes both the central
and local government, as well as public enterprises debt. It comprises of marketable, nonmarketable securities (such as treasury bills (TBs)), government bonds and other public
liabilities including pension arrears, awards and compensation. These take up 49%, 47% and
4% of the total domestic debt respectively. In Zambia, the fiscal framework is anchored on
increasing domestic resource mobilisation in addition to enhanced capital expenditure for
financing social and economic infrastructure.
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The recent past has seen the face of domestic debt changing from 7 billion dollars pre HIPC
period to 1 billion dollars post HIPC and is now about 3.5 billion dollars. The trend of
external debt dominating domestic debt during the pre- HIPC has also changed. Of late, the
two have been competing. The past two years have seen domestic debt increasing from 1.5%
of Gross Domestic Product (GDP) in 2012 to 2.5% of GDP in 2013 with government TBs
being offered a lot more that government bonds. In 2013 alone, commercial banks held more
than 50% of such TBs (implying that less money was available for lending to private sector
investments) while the role of Bank of Zambia in the TB market has been declining over the
years. With the continued appetite to borrow, it is expected that public spending will exceed
revenues by 6.6 % of GDP in 2014. This follows the raising of the domestic debt ceiling from
K200m to about K13.1 billion. The manner in which this ceiling was raised again leaves
questions about how we are managing domestic debt including looking at issues of
sustainability.
It is generally acceptable that if the real interest rate (r) on debt is greater than the real growth
rate (g) of the economy, then the debt to GDP ratio increases and debt becomes unsustainable
in the long run( sustainable levels are within 20-25% of GDP).. Government need to
consider all these parameters (i.e. r and g) as they formulate and implement debt contracting
strategies as outcomes are very sensitive to such.
The meeting was also invited to look at the general trends of debt in the sub Saharan region
which showed that most countries’ debt has been falling as a result of debt relief.
2.3 Pros and cons of debt
2.3.1 Pros
The meeting was invited to consider the arguments for and against borrowing. Some of the
supporting arguments for borrowing were that current data show that Zambia’s debt was at
16.1% of GDP in 2013 within the acceptable Debt-to-GDP ratio of 20-25%. In addition, the
increase in current price GDP after benchmarking and rebasing is said to reduce the
debt/GDP ratio for 2013 to 13.9%. Other arguments were that, borrowing reflects the good
health of the economy especially that government has not been upsetting the sustainable
levels and this maybe said to be a clear indication of enough resources in the economy to go
round. Furthermore, it was suggested that there is a weak link between debt and high interest
rates and besides this, banks find it less risky to hold government securities compared with
lending to the unpredictable business environment especially when dealing with SMEs.
One of the interesting arguments for borrowing was the tax morals of Zambian citizens. The
meeting was reminded that majority in the informal sector earn more money and are less
willing to voluntarily remit tax to government and yet demand for better roads, schools and
hospitals.
2.3.2 Cons
The argument against borrowing were that borrowing crowds out private sector investments
especially for a country such as ours with limited financial markets and most firms being in
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the SME category. The biggest challenge with the SMEs is that they have little access to
international finance. Another argument against domestic debt was the adverse implication it
has on the fiscal and debt sustainability. Just in 2013 alone, interest payments (K1.8 billion)
were almost four times that of external debt (K361million). This led to significantly
absorbing government revenues hence crowding out the pro-poor and growth-enhancing
spending. It was noted that the interest payment in 2013 was higher than the approved K1.5
billion budget estimates for the Ministry of Community Development, Mother and Child
Health for the same year.
2.4 Is borrowing necessary?
The question was raised, Should we borrow? What is the rationale? This was against the
backdrop that Zambia’s debt is rising, both the domestic and external. Some of the views
coming from the presentations were that despite government having strategic interest for the
nation (given the large investment needs and the big budget deficits), there is need to exercise
caution when borrowing to avoid overburdening future generations with the various loan
agreements. It was noted that Zambia has a young population that may bear the impact of
providing fiscal space (e.g. moratorium by government for 2014) for debt service in the
future.
Borrowing that is used to finance investments that have a rate of return greater than the
interest rate is a net positive for the economy and was said to be necessary. However this
demands that the government actually undertakes good project selection; rate of return
analysis and investment management. The more a country borrows, the more vulnerable it
becomes as the scope to finance larger deficits during economic slowdowns reduces. Other
issues that were raised in determining the necessity and sustainability of debt were real
interest rates that a country eventually has to pay and the real growth rate of the economy.
2.6 Should we be worried?
The general agreement was that yes, we should worry. The following are the main reasons;
a)
While the level of domestic and external debt is not yet excessive, it has been
increasing rapidly because of the large government deficit. Unless action is taken
to sharply reduce the deficit, there is a high risk of debt once again rising to
unsustainable levels;
b)
Since Zambia is now a middle-income country, and since the international climate
has changed since the days of the HIPC initiative, there is very little chance that,
in the event of another debt crisis, Zambia would receive any debt relief;
c)
Borrowing can be used effectively to finance viable investments, but it is far from
clear that public expenditure in Zambia is financing high return projects at the
margin;
d)
Lack of a clear monitoring mechanism to check how much we are borrowing and
repaying. We get a glimpse of this from the 2012 Auditor General’s report
revelation of a US$123 million debt not serviced. The report also says “it is
difficult to ascertain whether there is an effective monitoring and management of
bonds by MoF”)
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e)
f)
g)
h)
i)
j)
k)
l)
m)
Certain loan conditions are not favourable to the Zambian economy. For example
in 2010, a US$55 million loan contracted from India for the Itezhi -Tezhi power
project dictated that 85% of the materials and equipment be bought from India.
Fiscal indiscipline as evidenced by the overall budget deficit of K7.3 billion in
2013 against the target of K5.4 billion representing 6.7% of GDP above the 4.3%
ceiling of GDP for the year.
It is very likely that essential sectors of the economy will be at the mercy of
servicing the loans. A study carried out by JCTR on Responsible Borrowing
shows that US$290 million was spent per year servicing the debt between 2003
and 2005. As a result this may make social sectors become vulnerable due to cuts
in funding.
Presence of a huge informal sector that does not remit tax voluntarily and hence
puts pressure on government to borrow to meet various demands
Delays in procurement of key equipment & services, reported mismanagement of
funds (e.g. the case of Zambia Railways) imply that the capacity to generate more
revenues needed to service the debt is reduced.
The locals (especially in construction) do not have the capacity to carry out some
of the infrastructure development projects embarked on by the government. As a
result, foreign companies end up with these projects and are not mandated to keep
their money within the local economy, yet it is the locals that finance the debt
through taxation.
Cap 366, the loans and guarantees Act gives so much power to the Minister of
Finance to borrow money with limited consultations with various stakeholders.
Without a change in policies, debt is likely to rise in net present value from 30%
of GDP in 2013 to over 50% by 2018 especially that debt financing is
predominantly on recurrent expenditures. This view is shared by the International
Monetary Fund.
Last but not the least, the recent reclassification of Zambia as a lower middle
income implies that we are now borrowing at commercial rates and we may not
enjoy another debt relief such as HIPC. This coupled with the unstable
performance of the kwacha against major foreign currencies makes debt service
payments more costly.
2.7 Debt governance concerns and recommendations
The meeting raised the following recommendations which also have a bearing on policy.
Though Zambia’s debt is still within the sustainable levels, there is need to
1. Have clear objectives as to why the country is borrowing, both domestically and
internationally. Questions such as the rate of return on projects financed through
borrowing should be answered prudently. The government should also balance the
consideration of longer-term development needs with fiscal space.
2. Develop a debt policy framework to guide contraction of debt.
3. There is need to have parliamentary oversight over debt contraction. Currently the
minister of Finance has too much power. The meeting suggested that at least a two
thirds majority to endorse the debt contracting process.
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4. Enhance the capacity of the debt management unit at ministry of Finance so that they
provide informed guidance to the government.
5. Increase the tax base and improve the tax administration to boost government
revenues to reduce unnecessary debt.
6. There is need to institute policies which help develop the domestic debt market to
cater for more innovative instruments and facilitate secondary market trading
7. Last but not the least, we have to grow the economy and avoid debt distress.
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