Here are the risks and costs to the economy and country
By Kalima Nkonde
President Lungu lashed out at all critics of excessive government borrowing and vowed to continue borrowing during his recent visit to Garden compound on tour of cholera affected areas.
“When we borrow, we do not borrow to eat but to improve people’s living standards, so those who say we can’t borrow, get out!” President Lungu exclaimed rather undiplomatically.
The statement got most experts and analysts by surprise in that it sent the wrong signals to the financial markets whose expectation is that Zambia was on the road to slowing down on its borrowing in the light of the IMF suspension of talks on the $1.3 billion bailout due to excessive borrowing.
This article is meant to contribute to the debate by trying to put the President’s statement in context and to explain in simple terms, but in some detail, the consequences of excessive domestic and foreign borrowing. The adverse effects of excessive debt has been done in a piecemeal fashion, with most Zambians, especially the young people ,who will be mostly affected, not understanding the potential harmful effects that debt will have on their lives.
One hopes that for once, Zambians can look at this important issue in a non partisan fashion. The issues of borrowing and corruption, should unite Zambians as their effects do not choose whether one belongs to the ruling Party or the Opposition or they are Independent. All Zambians suffer the consequences apart from those in power and the elite aligned to the ruling party who normally are the greatest beneficiaries of the status quo. There is overwhelming empirical evidence in academic economic circles that excessive borrowing and corruption go hand and in hand.
Zambia’s estimated public debt
There is so much debate about what the actual public debt of Zambia amounts to. However, we all now know that it is very high in the light of the recent IMF disclosure that Zambia is the most highly indebted nation in Sub Sahara Africa. This means our public debt is higher than bigger economies like Nigeria, South Africa, Kenya and Angola all in the name of development but no country ever developed on borrowings.
The borrowing binge has been driven by the unprecedented increase in the debt ceiling by the PF government of 800% in external borrowing from K20 billion in 2011 to K160 billion in 2017 and an increase from K13 billion in domestic borrowing in 2011 to K30billion in 2017 which is an increase of 131%.
According to the 2018 budget, Zambia’s public debt is $12.45 billion, which is about 60% of GDP of $20.9billion.This government figure is, however, disputed by most analysts. There are some analysts who estimate that Zambia’s external debt is about $17 billion(the figure the Finance Minister mentioned in one of the speeches to parliament, before correcting himself to $7.2 billion ), whereas the domestic debt is said to be around $6 billion making the total public debt to be $23. This is a rise of $19.5 billion or 557% from the $3.5 billion in 2011 when the PF administration took over.
The IMF’s estimate of Zambia’s GDP for 2017 is $20.9billion and if indeed our total debt is about $23billion, then our Debt/ GDP ratio is 110% which is way above the internationally accepted combined domestic and foreign Debt/GDP ratio, which is 65% (40% foreign and 25% domestic). The government ought to urgently come out with credible debt figures otherwise the speculation will continue.
Who was President Lungu telling to get out?
The people who President Lungu must have been telling to get out are: former finance Minister Alexander Chikwanda, Bank of Zambia governor Dr. Denny Kalyalya, Finance minister Felix Mutati, Zambia Institute for policy Analysis and Research(ZIPAR), the International Monetary fund (IMF) and many more experts who understand how the economy works. These are the ones who have commented and cautioned about the country’s level of indebtedness. President Lungu somehow appears to know better than them.
The following are the comments from the various parties and experts that have criticized the Zambian government for excessive borrowing:
“The outstanding public and publicly guaranteed debt rose sharply from 36 percent of GDP at end-2014 to 60 percent at end-2016, driven largely by external borrowing and the impact of exchange rate depreciation. Directors expressed concern at the pace at which public debt, especially external debt, has increased and now put Zambia at high risk of debt distress,” IMF Head office’s press statement after suspending the $1.3 billion bail out talks with Zambia.
“The pace Zambia is taking in repaying its external debts is quiet low and puts authority in pressure for the need to more borrowing in order to pay off other debts which may eventually lead to more incurred debts” , Said IMF Resident Representative to Zambia, Alfredo Baldini when addressing ZIPAR conference on Debt.
“That’s one area that we really need to put a hand on so that it doesn’t overheat the economy, If that happens then all these interest rates we’re talking about will go up very significantly,” Bank Of Zambia Governor, Denny Kalyalya commenting on surging borrowing costs of Zambia in an interview in Washington.
“We must focus on finishing ongoing projects before we embark on new ones. And we must reduce our appetite to contract debt. We must also look at other innovative ways of raising finance,” Finance Minister, Felix Mutati addressing Parliament in October, 2017.
“The IMF has expressed worries about Zambia’s debt profile, those concerns are not far-fetched but anyway, somehow our debt profile is high and going in future, going forward we should be a bit more prudent especially those loans which are not for projects which are single sourced, where there is no tender and so on and so we have to be careful and I think government is doing just that,” Former Finance Minister Alexander Chikwanda as quoted by News Diggers, a Zambian on line publication.
“This debt accumulation has grown at a fast rate from under 20 percent in 2010 to the current 47 percent and this is worrisome”, Zambia Institute for Policy Analysis and Research (ZIPAR) Executive Director Dr. Pamela Kabaso, speaking at the ZIPAR Debt Management Conference.
The risks and costs of excessive debt
Borrowing whether at household, company and national level is important but it is the extent to which one borrows in relation to their income and ability to repay the loan that is crucial. No responsible Chief Executive Officer whether at company or national level goes on a borrowing binge without looking at the potential risks and taking measures to mitigate against such risks. The question is: does President Lungu understand the potential risks? It is hoped that this article will assist him as it is written by a layman and a non economist.
Zambia has excessively borrowed since 2012. We have been down this debt trap road before, but this time, the consequences may be worse as we have borrowed heavily from the international private capital market. The following are the potential costs and risks to the economy and the country of excessive debt:
1. The country’s financial risk as measured by the Debt/ GDP ratio will continue rising making Zambia to be considered as a risky country to lend to because the probability of not being paid back will be considered to be high by lenders .The country’s ability to borrow (debt capacity) will be reduced.
2. The government’s increased and continued domestic borrowing will continue to negatively affect the private sector in that there will be little money left in the banking system for investment and working capital. Also, banks will prefer to lend to government and will demand high interest rates to lend to private sector. In the 2018 budget alone, government plans to borrow an additional K11.2 billion($1.2billion).Consequently, there will be little increased economic activity in private sector and unemployment will continue to be high especially among the youth which is a potential time bomb. Government ‘s excessive borrowing is actually killing jobs and not creating them.
3. The debt rating agencies like Standard and Poor, Fitch and Moody’s will downgrade Zambia’s credit worthiness due to the high default risk resulting in the Eurobond servicing costs to go up and future lenders demanding higher interest rates in order to lend to Zambia.
4. Zambia is currently spending about 22% of its domestic revenue on servicing loans. In view of President Lungu’s stance to continue borrowing, this percentage will continue to increase meaning that more money will be needed to service loans rather than social services like health, education, farmers’ subsidies, social cash transfers and even less will be available to maintain the infrastructure that is being built.
5. The Zambian kwacha may depreciate – lose value- as there will no savings to built up reserves as more money will go to pay loans. In addition, foreign investors inflows will reduce as Zambia will not be an attractive investment destination as highly indebted countries with high fiscal deficits are not attractive to investors. The depreciation of kwacha will result in high cost of living as Zambia is dependent on imports. The country’s inflation may go up as it is greatly influenced by the kwacha exchange rate.
6. There will be continued scarcity of liquidity (shortage of cash to households and businesses) in the economy as the government will spend the bulk of its revenue servicing debts will fail to pay its suppliers and contractors. Civil servants may start getting their salaries late.
7. Borrowing whether local or foreign require kwacha to be raised from Zambians for repayment. In terns of foreign borrowings, the principal debt and interest repayment can easily balloon by mere adverse exchange rate change movement. In 2011, the dollar exchange rate was K4.86 to a dollar and in January,2018 it is about K10 which is a 105% depreciation of the kwacha. The implication is that foreign debt can increase in kwacha terms and can even double. This means excessive borrowing will lead to more kwacha required to be raised and higher taxes and levies will inevitably be imposed on Zambians.
8. In the light of the current economic projections of the GDP growth rates, the continued excessive foreign borrowing by Zambia puts it at risk of sovereign default. This refers to failure by a Government to pay its debts and consequently making it more difficult and expensive to borrow further. In such an eventuality, Zambia may be forced to seek funds from the International Monetary Fund (IMF) as a last resort. This time around, it will not be only for balance of payments support, but for Sovereign Debt Restructuring like Greece did in 2010. The Fund will impose punitive conditions such as reduction in corruption, imposition of austerity measures as well as tax raising measures.
9. Zambia will fall back in a debt trap where it will start to borrow in order to pay other debts and go back to being classified as a Poor Highly Indebted Nation like in the 1980s and 1990s. Zambia will be dancing to the tune of creditors like in the past – just as Greece is doing.
10. The combined consequences of the above risks would be a threat to the country’s peace and stability as it happened under Dr. Kenneth Kaunda’s regime in 1990 and the Arab spring recently.
In a nutshell, the continued excessive borrowing by government may result in the kwacha depreciating, increased unemployment, higher taxes, high interest rates, high cost of living, increased risk of sovereign debt default and slower economic growth. Zambia’s excessive borrowing is a ticking time bomb. In the short term, it all looks all rosy and critics can be told to get out but sooner or later, say in 2 to 5 years’ time, the chickens will come home to roost if no serious and bold risk mitigating measures are taken now by heeding experts’ advice. The recent commendable improvements in the economy in 2016/17 in terms of stable exchange rates, low inflation rates, downward trend in interest rates, improved investor confidence and consequential inflows in foreign investments through participation in government bonds and treasury bills etc will sooner or later evaporate. Zambia’s excessive borrowing and the related corruption may well turn out to be President Lungu, the PF administration and the Zambian economy’s Achilles heel.