By Obrian Ndhlovu and Sydney K. Chishimba
The IMF just concluded their 2019 country consultation with Zambia, which the team leader has described as being frank and collaborative. Indeed frank talk does not break any friendship. In IMF’s words, large fiscal deficits and rising debt service have resulted in domestic expenditure arrears and taking a toll on economic growth. Increasing government arrears and delayed salaries are now becoming normal for some public institutions. Government is not finding it easy to service all sectors because the debt service has now become a big burden. In 2019, government is spending more than 27 percent of the budget on debt servicing compared to just over 6 percent in 2007. In the end, the country’s growth is further expected to slow from 3.7 percent in 2018 to 2.3 percent in 2019. The question one may ask is, how did we get here?
In this article, we look at the historical aspect of the country’s debt and perhaps we might gain an idea of how we got here as an economy. We pay attention to external debt, that is, money borrowed from outside the republic. This is because Zambia had benefited from the famous highly indebted poor countries (HIPC) and multilateral debt relief (MDR) initiatives which left the country almost debt free in mid 2000s. Thus, the central government through the Ministry of Finance decides when, where and how much to borrow as well as the terms of the loans. Parliament only guides by setting the upper bounds of these loans in accordance with the loans and guarantees (authorisation) act. Since 1998, the limit has been at K20 billion new currency having been set by SI 53 of 1998 after authorisation by Parliament. And the government has been borrowing within this limit for about 15 years since 1998.
However, the first Euro Bond of 2012 was quite a big addition at $750 million. It almost hit the ceiling and there was no much room for continued borrowing. The government then turned to the ceiling. In November 2013, the Minister of Finance Hon AB Chikwanda raised a motion to ask parliament to raise the limit from K20 billion to K35 billion, a 75 percent increase. The Minister pointed to the revised national development plan which had prioritised development of infrastructure in transport, energy and agriculture sectors as the justification to raise external loans. Government needed to borrow to finance ambitious plans in these sectors. The Minister gave an assurance that the Debt Sustainability Analysis (DSA), conducted the previous year, indicated that a maximum of K35 billion in external loans would not push Zambia’s debt to unsustainable levels. The World Bank and IMF participated in the DSA and surely endorsed the findings.
With the ceiling now adjusted and more room created, Zambia saw the second Euro bond in the tune of US$1 billion in 2014. External debt was again hitting the ceiling, a ceiling set in only about 2 years. A new proposal to push the ceiling up is birthed. On 25th June, 2015, government proposes to raise the ceiling from K35 billion to K60 billion, representing a more than 70 percent adjustment. In about a month, the country was making headlines, having successfully issued a third Euro bond in the tune of US$1.25 billion. In sum, government had contracted US$3 billion in a space of three years. At this point, the debt issue had started to raise some dust. Notable commentators had started raising alarm on the debt levels. In addition, the kwacha sharply depreciated, causing in increase in external debt. In his debate in Parliament on 25th February 2016, the Minister of Finance indicated that external debt position was K72.68 billion, in breach of the K60 billion limit. This represented about 38 percent of GDP.
Therefore, Government proposed to raise the ceiling from K60 billion to K160 billion, a 166 percent increase. This was a third adjustment in three years and barely 8 months from the previous adjustment. The sole purpose of the adjustments in the threshold was to meet government ambitious plans to fund expensive infrastructure development which led to the change in the structure of the external debt.
In the figure below, we show how public debt has been growing and the adjustments to the debt ceiling. Data on public debt is sourced from annual public debt reports available up to 2012. Latter years come from the budget speech reported mostly for end of third quarter. The vertical lines show approximate points of ceiling (thick horizontal lines) adjustments.
Public debates were also gathering momentum. Proponents of debt acquisition often relied on global comparisons without paying much attention to country specifics. In extreme cases, other took debt acquisition as an indication of the country’s great potential. The Economics Association of Zambia stood quite strong and pacified fears of a debt crises. The position of EAZ was criticised by prominent members Felix Masiye and Bona Chitah who stressed that crises do not always come with a clear forewarning. The ‘pessimist’ on the other hand raised alarm on the sustainability of the debt. By 2017, there were strong indications that the country is drifting into a debt distress. The full WB/IMF DSA rates Zambia at high risk of debt distress. Former BoZ governor, Caleb Fundanga also hinted that the country’s debt had reached crisis levels. The government has acknowledged this and opening up to discussing the debt and its implications.
The consequence of heightened debt is clearly showing on government spending. Salary delays especially for government aided institutions have become usual. Government arrears are also piling up to the detriment of government contractors. A lot of projects have stalled and the extent of the ripple effect is immeasurable. The figure below shows government planned expenditure on selected lines as percentage of total budget. The vertical lines show points of Eurobonds acquisition.
Notice how external debt servicing has been growing. From as small as 2 percent in 2007 to about 17 percent in 2019. Government is spending more on debt (27%) than it is spending on education and health combined (25%). Economic growth is also expected to slow down even further.
So how did we get to this situation and how much forewarning was there? Clearly, the signs were not those of the expected coming of the son of man. Instead, the signs were only visible to those that decided to see them. And for those that decided not to see them, well, the signs were clearly not visible. This is history now and will not help change anything. Nonetheless, we always need to look at it in order to draw some lessons on how to tackle the problem and avoiding it in the future.
Some lessons worth taking note:
The Statutory debt ceiling was not effective in limiting Debt acquisition.
The essence of having the loans and guarantees act is to put safeguards on the acquisition of public debt. It allows government to borrow limitedly or seek the authority of the people’s representatives. Unfortunately, the representatives have been gracious in granting that permission or it might be that our law is weak to deter amendments within short periods like what have been witnessed.
The WB and IMF are not good in giving early warning.
The world bank and IMF have the technical and institutional capacity for a more rigorous analysis and early warning mechanism on debt. This is why the debate on the sustainability of the debt or lack of it got credence from the positions of the two institutions. At the same time, the two institutions have a reputation and collaboration they seek to protect. Therefore, they are too smart to be the first to bark at a looming crisis.
Further, government did not create an economic balance on the expenditure of commercial loans contracted in the last 7 years to increase international competitiveness. The competitiveness should be in sectors that increase exports in short to medium term to generate more foreign currency. This would have created room to service the loans without depleting our foreign reserves.
To conclude, we reiterate that this historical discussion is useful in reminding us how we have arrived in the situation we are in and, at the same time, in informing us what things need to change in handling of debt issues as a nation.
 Diggers News