The Jesuit Centre for Theological Reflection (JCTR) says the proposed strategy to refinance the two Eurobonds of US$750 million and US$1 billion by way of borrowing from International Capital markets as they mature in 2022 and 2024 will worsen the country’s indebtedness.
In a statement released to the media, the JCTR says borrowing from the International Capital markets is not an effective mechanisms to reduce Zambia’s debt stock.
Below is the full statement
The Ministry of Finance on 5th May 2015 launched the Zambia Debt Sustainability Analysis Report. Among the issues that were raised during the launch was the information that Zambia’s external debt was estimated to be US$4.8 billion. It is a given fact that Zambia has more assets than its liabilities. It is also a given fact that currently and in the short term Zambia’s debt is sustainable as a share of the Nation’s Gross Domestic Product (GDP).
The debt-to-GDP ratio has increased drastically from 19 percent in 2011 to 30 percent as of September 2014. However, what is of concern is that in the medium – long term Zambia’s public debt as a share to our domestic revenues will not be sustainable. Therefore, the ratio of external debt servicing to revenues is projected to spike in 2022 and 2024. Zambia will be under severe debt stress if no adequate contingency plans are made to thwart eurobond loan bulk repayments as they mature in 2022 for the US$750 million and 2024 for the US $1 billion. Therefore there is need to prepare adequately for these shocks which are looming in the year 2022 and 2024. We therefore contest the Ministry of Finance’s assurances that Zambia’s public debt is sustainable in the medium and long term. We are also very disturbed that government has applied itself to strategize on how to repay the two eurobonds given the short proximity maturation period and intervals of the two bonds. We are further perturbed that the proposed strategy to refinance the two bonds as they mature in 2022 and 2024 by way of borrowing from International Capital markets is not an effective mechanism to reduce Zambia’s debt stock but rather will worsen the nation’s indebtedness.
Besides the risks of a new debt crisis ,Zambia is also opening itself to threats from ‘‘vulture funds“. With the knowledge of hindsight, we need not remind the Ministry that Zambia was a victim of vulture funds in 2007 when predatory hedge funds sought US$ 55 million through the High Court in London, after buying a debt of just US$ 3.2 million that Zambia originally owed to Romania for buying farming equipment during the 1970s. Zambia was ordered to pay US$15.4 million. Recently Argentina was a battlefield for the future of sovereign debt management. After a chaotic economic and financial crisis in 2001, the Southern American country restructured its unsustainable debts, in a way accepted by 93 percent of bondholders. However, 7 percent rejected the deal and then the vultures moved in. They bought up cheap debt and sued Argentina in the United States courts. After a series of appeals the vulture funds won.
With public debt revolving around US$7 billion both domestic and external, this would require austerity packages in due course if no sound appropriate debt management mechanisms are implemented. We prayer as the Jesuit Centre for Theological Reflection is that Zambia must thwart the “too-little–too-late syndrome“and deal with the rising debt problem in a sound, adequate and logical manner. This means careful evidence based advanced planning. It is evident that to address rising debt Zambia has no choice but to modernize its tax system.
In Conclusion, as a matter of policy interest we call for the strengthening of the legislative framework governing debt contraction so that there is parliamentary oversight. Debt is contracted on behalf of citizens hence the need for the people’s representatives namely parliamentarians to perform an oversight role. Further, there is need to prepare adequate contingency debt management plans to address the maturation of the two Eurobonds.