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[1]. 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[2] rates Zambia at high risk of debt distress. Former BoZ governor, Caleb Fundanga[3] 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.
[1] Diggers News
[2]IMF
[3]Lusakatimes
Clear recklessness.
Principle no 5. Don’t misconstrue a positive outlook for a country in terms of grades as a motivation to enter into debt.
Although no country out there has lived without borrowing, wanting to go in Government with a view to borrowing in order to develop is is an entirely wrong motive. You might end up auctioning you country.
Principe no. 6 Don’t ever humiliate your country with the HIPC term again.
It promotes laziness. Your country is endowed with too much natural resources. Tapping into these resources prudently and turn the fortunes of the land around. Stop living and leading as victims. Be assertive.
Unfortunately three quarters of Zambians are too DULL to understand the implications…. but soon and very soon its going to hit them VERY hard. It will make the Kaunda era look like a walk in the PARK
Well balanced article by Obrian Ndhlovu and Sydney K. Chishimba.
Keep it up
Sheer recklessness and utter stupidity we told them…that it’s not them paying off these debts with fooolish Sonta songs!!
Principle no. 1 You can’t spend what you don’t have.
I hate a life of borrowing. Borrowing is like a cancer. If you’re as strong as I am, then you hit the borrowing break point, bam! You want to borrow always. Money borrowed seem like free money. You soon forget that you are eating or using that very money in advance. In essence spending what you actually don’t have. But on what?
Principle no. 2 If the urge of borrowing overcomes you, don’t borrow for consumption.
If the money borrowed is solely for viable investment, why not? As you break principle no 1, you know that as you invest , return on that investment is sound. You plan, project and strategize. You know you gotta payback, so eyes on the ball.
Principle no. 3 If during your borrowing, you had a plan for that money, stick with it.
The moment you drift from original plan, you ard actually digging your own grave of failure. The idea of having impulse need for unplanned projects can derail your vision. This is not health. You end up with numerous projects that have no value to the original plan of borrowing. This is characterised by politically motivated borrowing.
Principle no 4. Zambia is dead without revenue generating assets.
How dare you think you can borrow without moneys from your mines, sound and practical agricultural sector, educated human capital and a positive outlook of a country?
Principle no 5. Don’t misconstrue a positive outlook for a country in terms of grades as a motivation to enter into debt.
Although no country out there has lived without borrowing, wanting to go in Government with a view to borrowing in order to develop is is an entirely wrong motive. You might end up auctioning you country.
Principe no. 6 Don’t ever humiliate your country with the HIPC term again.
It promotes laziness. Your country is endowed with too much natural resources. Tapping into these resources prudently and turn the fortunes of the land around. Stop living and leading as victims. Be assertive.
Principle no. Last
Develop a plan for Debt servicing. If those projects born out of the debt or loan you acquired could actually be ideally the ones liquidating the debt, wadya nkunku iwe. You’re a genius. You can do alot of borrowing and raise those borrowing thresholds. But if yours is to continuously squeeze Zambians belts through taxes so that you can recover money for debt servicing, man! That is an extremely dangerous undertaking. Stop borrowing because that is a wrong footing.
You have been dancing and sontaring all along , now you want to come up with points we have been telling you all along ?
You have been dancing and sontaring all along , now you want to come up with points we have been telling you all along ?
We told you sooooo….
You ain’t seen nothing yet….
Ba Thorn, why are you retelling stuff we have been singing about to you PF dimwits all these years? Who exactly are you telling right now?
It is a sad state of affairs and very sad for Zambia to be in the position where it is. Proud, not to listen to the citizens is what has drove Zambia to this position of more debt.
Unfortunately three quarters of Zambians are too DULL to understand the implications…. but soon and very soon its going to hit them VERY hard. It will make the Kaunda era look like a walk in the PARK
This is what the Chanda boys were telling us when we advised on too much borrowing……
The brenhurst foundation is an imperialist organisation that is sponsored HH to discredit Zambia in order for Anglo America and the openhimers to steal Zambia’s minerals….they are jealous of PF relationship with China and don’t want us to borrow money to develop.
The imf and world bank now do bidding for HH in discrediting Zambia’s plan to develop …….
@ Spaka The brenhurst foundation and the openhimers can never be trusted by well meaning Zambians.
Chief…..
They way things are going for Zambia , you will wish the brenhurst foundation and the openhighmers adopted you …
When those uneconomic roads start crumbling , then you will realise you been ridden along…
You ain’t felt or seen nothing yet …..
Spaka, you are so dull.
If you are so clever how come you can not survive without donner funds and have the highest levels of unemployed despite spending $17 billion ???
@You are the one dull my friend.blind loyalty wont help when the country is sinking economically.
What is missing in this article and many similar ones that have dealt with matters going through parliament of Zambia is this elephant in the room: Zambia is a virtual ONE-PARTY DICTATORSHIP suffering the consequences of the incompetent majority. When you vote with emotions and along intangible allegiances like regionalism you end up endorsing things that are gonna end up eating you like debt. There is virtually not enough numbers of independent thinkers in today’s parliament to mobilize dissenting views. It’s all in favor say aayii and boom the debt burden that many of us who survived the Kaundanomics are now having to face. Enjoy the results. You ain’t seen nothin’ yet!
Sata should be blamed for this nonsense. President Lungu should just own up for his predecessors mistakes and bullish ideals. Zambia can overcome this by applying major austerity measures. Reduce government expenditure by stopping all unnecessary foreign trips, except by the president or economic technocrats, traveling to Japan, Sweden or other normal nations.
Lungu worsened things because he is dull.
@Nzelu
Austerity and PF methods are diametrically opposed items. Look right now the NDF thing is foisting upon us the dreaded deputy ministers who were removed for being a drain on the coffers. So my brother or sister, with all your good intentions you are talking to people who have made up their minds and you are trying to confuse them with facts. They don’care a dime!
Ba nzelu muliye nzelu, austerity measures can only be applied by well groomed individuals not the ECL,s of this world who do not listen to the people.
How on earth would they
– Purchase a gulfstream 650 the Lamborghini of the skies and ignore the cries of the people to recinde the decision.
– Buy 42 fired trucks valued at $10 million for $42 million and jail those that protest such recklessness.
– Quote and approve the ndola Lusaka mediocre highway for $1.4 billion and lable those that raise alarm as enemies of progress.
The list goes on and on I end hear.
God bless our Great leader for he does not know what he is doing.
#BOWMANLUSAMBOFORRUNNINGMATE2021
#BOWMANLUSAMBOFORPRESIDENT2026
In other words we were ok until PF came to power.
pf borrowed to fund mostly roads. But Roads don’t produce goods (thst is commodities that you need). That is to say investment in roads construction don’t produce permanent jobs. In other words the huge investment in roads yield literally no returns to pay back the debt with.
Absolutely, that exercise was pure corruption on PFs part. It was much easier for them to give each other contracts to build useless roads
@ $1 million/ km than build manufacturing plants
Roads don’t produce good!!! My foot! I have also head others who say shopping malls is not development. My friends, surfice to say development is multifaceted.
Thank you Mr Lungu and thank Mr PF for killing us for your greed you fuc*ed up the country, for this we are very thankful
The only solution in Zambia is to reduce the presidential authority its nowonder we are still not developed one man should not hold so much power in america trump failed to build his wall becuase he does not posses power like a Zambian president how do we allow an individual to appoint the chief justice and many other positions this only ensures that they work for that individual not the people.Zambia has an administrative crisis this has been the major reason why we are still poor let the people or parliament make appointments of key positions like Chief Justice ,Supreme Court Judges , ANC excutive team , FIC director , Inspector Genral of Police e.t.c and you will see how fast this country will develop.A clear picture of administrative crisis is our council and how we manage our taxes…
Been here before.
Its probably something or nothing.
Let’s roll.
(Continued ……….)taxes its impossible to build anything tangible from our own taxes for the greater part we need to borrow to build. If all monetary transactions passed through parliament (except those that pose a security risk to the country) the government could not have over borrowed , only pirioties projects would have been set & completed and they will not be inflating the cost of the projects .In conclusion i have noted that the above is what will set Zambia on path of true development not the cosmetic kind we are experiencing today its nowonder government bought a $65 million plane with additional feature many estimated would cost around $400 million while at the same time a chinese man was opening a $25 million manganese mine in Muchinga Province lack of piriorities moreover…
There are many countries with debt to GDP ratio of over 300% and doing just fine coz they service it. Fact is debt grows as a country develops unless a country has a very tiny population. Until GRZ defaults (which can only happen if economy does not grow for a long time), this debt gloom is for those who specialise in negativity and darkness. For the first time, a child in Zambia is guaranteed a school place until Grade 9 even when they fail Grade 7. The potential for GDP growth from this Human Capital Development is so immense especially for rural economies with 70% of population. It’s myopic to carp about taxes. Very few Zambians pay income tax, let any tax. Tax net has to widen so everyone knows Uncle Sam and gets the benefit.
I see people here pointing at each other fingers, stressing that you are the one who is dull. I want to mention that Zambia is a failed project and my point is we are already in a hot cocoon and it is up to us citizens to fight to come out of it. We shall keep on on calling each other names, and pointing others as tribal when the enemy is free and squandering everything. Why cant we unite to fight the disease? Why?