Zambia’s relationship with the International Monetary Fund (IMF) has been in the international media once again. According to reports, the latter was last week re-affirming its earlier position that it is unwilling to assist Zambia with a soft loan which would go hand in hand with the country undertaking an economic program to put her financial situation in order. The sticky point is that the Zambian government wants to maintain its high appetite for borrowing.
The IMF thinks the government must drastically scale down borrowing because the country is at risk of debt distress. So for now, the two sides can’t agree.
In September 2017, the IMF and the World Bank undertook a debt sustainability analysis on Zambia. The analysis report (“the report”) showed that Zambia’s debt has been rising excessively since 2011, when the PF took over Government. At end-2016, outstanding public and publicly guaranteed (PPG) external debt stood at nearly US$8 billion compared to US $1.9 billion at end 2011.
The report also revealed that publicly guaranteed debt (for ZESCO and ZAMTEL) stood at US$771 million, almost six times the amount at end-2012.
Beyond stating that the debt has grown bigger, the report also made the following other observations which add to the complications of the country’s indebtedness:
(a) The composition of public debt has shifted towards external non-concessional debt like the Eurobonds. At the time of the previous debt crisis during the 1990s, most of Zambia’s debt was owed to multilateral institutions like the IMF, the World Bank, the African Development Bank and others whose terms were largely concessional. Accordingly, the share of the concessional debt has reduced from about 60 percent in 2011 to 20.5 percent in 2016, while that of non-concessional (private banks/investors) has risen to almost 50 percent. This basically means that the cost of servicing the debt has increased. In short, Government is paying more interest per one US dollar of external debt it owes now than was the case before.
(b) The pace at which the PF Government has contracted debt has increased considerably. This means the repayment and servicing of these debt are heaped together over a similar range of time. The difficulty this brings about is similar to the case when parents must struggle to pay for several school children whose age differences are very small as opposed to those who are more widely dispersed in age.
According to the IMF estimates, Zambia’s total public debt (external and domestic) in 2017 stood at 55.8% of GDP. At an exchange rate of K9.3 per US Dollar, this translates to US $14.61 billion dollars compared to US $2.32 billion in 2011 when the PF came into power.
This means that within a space of 5 years, the PF Government has borrowed the equivalent of US $12.29 billion. It means that on average, the PF Government has been borrowing US $2.46 billion per annum. At this pace of borrowing, and if it continues, it means that Zambia will have a total debt of US $24.46 billion by 2021, when the PF’s term of office comes to an end. Indeed, if one takes into account all projects that the government has committed to undertake using borrowed funds, then the level of debt for Zambia will be around this figure.
This level of debt will imply an economic catastrophe for Zambia. This is why the IMF and local independent economists are calling on the government to scale down on borrowing. This is why the IMF are refusing to assist Zambia unless the government demonstrates credible commitment to slowing down on borrowing.
Let me present these facts from another perspective. In 2011 when the PF Government took office, Government used 17% of domestic revenues to service its debt. By 2014, this ratio had increased to 25% and by 2017, it increased further to 29%. If the government does not scale back on new loans, the percentage of revenue allocated to debt servicing could even reach 40 percent over the next six years.
Let me illustrate this point by using the 2018 Budget, which was approved in December last year. In the 2018 Budget, total domestic revenues are projected at K49.09 billion. Of this amount, the Government has allocated K14.23 billion for debt service; K22.92 billion for Salaries and wages for civil servants and K7.25 billion as grants to grant aided institutions such as ZRA, most of which is for paying salaries. In total therefore, K44.92 billion (out of K49 billion) of domestic revenues will go towards debt services, salaries for civil servants and grants to grant aided institutions.
This means that only K4.17 billion is available in the 2018 Budget for all the other expenditures including education, health, social protection as well as the day to day running of the Government and the much talked about infrastructure development, etc. Clearly, it means the Government will not be able to undertake these other government operations just outlined unless it continues to borrow. The country will be in a debt trap where, although heavily indebted, government will feel it imperative to continue to borrow to avoid a complete shut-down.
In my view, the Government has no option but to look to the outside world for a bailout, hand in hand with an economic program to restore order in the way Zambia should be borrowing. The beginning point of this bailout is obviously the IMF. The IMF bail-out is important not just for the money it will bring. It is also important because the money comes with several conditions, the most important of which in this instance is that the government refrains from rapidly pushing the country into deeper debt.
Not unexpected, some will see the insistence by the IMF on reduced borrowing as the usual perceived interference by IMF in national affairs. This cannot be sensible criticism because the IMF will merely be advising the government to behave sensibly as we all ought to be telling our government.
Equally important, the coming of the IMF will signal good or prudent economic management on the side of the Government. This will in turn induce some confidence in investors so that they bring into the country the much needed Foreign Direct Investment (FDI).
The absence of an IMF program and the reason given for that namely, poor financial management practices by the government raises serious concerns in the minds of investors. Who wants to take their investments to a country that is said to be on the brink of being bankrupt? Who wants to keep his or her money in such a country?
Zambia also needs to be mindful of the portfolio investors in the country. These are non-Zambian residents who buy our Treasury bills, bonds and shares. By so doing, they make cash available to our government. They are an important source of financing for our Treasury. When they continue to show interest in Zambia, it does not become an imperative for the government to pay off the Treasury bills and bonds that mature because what matures is paid for by same investors buying a new bond. There is little cash outlay demand on the government.
However, should the portfolio investors lose their trust in Zambia then holders of bills and bonds that mature will not be interested in keeping their money in Zambia. They will rather wish to repatriate their money out of Zambia by buying foreign currency. Not only will this bring about a cash crunch for the government but it will also cause the value of the Kwacha to fall against foreign currencies.
The announcement by the IMF that there is no program with Zambia unless the government scales down on borrowing has obviously caused doubts among investors on Zambia’s future economic prospects.
Two serious problems may emerge. Firstly, non-resident investors in our Treasury paper may decide to reduce their investments in Zambia and this will lead to the problem highlighted above of government cash crunch and instability in the exchange rate. This may cause a return of high inflation also.
The second problem is what has already been observed and reported in the media. Some foreigners who invested in the Eurobonds that Zambia issued have reacted to the IMF statement by selling off the bonds.
They are doing so because there is concern that in the absence of an IMF program economic conditions in Zambia may deteriorate and the country will fail to repay the Euro bonds. Any market where there are more sellers than buyers will result in the drop in the price for the items being sold; in this case the Treasury bonds. When the prices of the bonds drop, the return (yield) on the bonds will rise because less money is being invested for the same promised coupon rate.
Another way of seeing it is that when your ability to repay debt is in question, lenders will only accept to assist you if they charge higher interest rates to compensate for the risk of default.
The rise in the yield of Zambian bonds is important for 2022 when the first batch of Euro bonds matures and is due for re-payment. It is highly unlikely that the government will have the money to re-pay the bonds. So the likely option then in 2022 is to issue fresh bonds and use the proceeds to pay off the holders of the original bonds. In other words if A owes B then A can approach C to borrow money to pay A. This is what they term rolling over the debt.
But rolling a debt over is not automatic. In order for A to approach C for a loan in order to pay B, C must equally be satisfied that there is a very good chance of being repaid.
If there is doubt C will refuse to lend or will lend only at very exorbitant interest rate. In other words, it is important for the government to create conditions now that will make it possible for it to be able to roll over the Eurobonds maturing in 2022. By remaining adamant about reckless borrowing in the face of the deteriorating financial position of Zambia, the PF government is risking the economic future of our country in a very profound way.
As UPND, our advice to the PF Government is that it should not tread on dangerous grounds for the sake of political expedience. The government should henceforth stop reckless borrowing as if there is no tomorrow.
To the Zambian people especially the informed ones, this debt challenge is no longer a PF Government problem. It’s a Zambian problem and needs a Zambian solution. Everyone must step in and stop the government, which has already caused enough damage, from leading us in the ditch.
Hon Situmbeko Musokotwane
UPND CHAIRMAN-ECONOMIC AND FINANCE