By Hon Davies Mwila
The previous article discussed some factors negatively affecting the global economy such as the U.S-Sino Trade War, U.S Auto Tariffs and No-Deal Brexit, which have led IMF and World to cut global and African economic growth forecasts for 2019 and 2020, with the U.S economy predicted to see a significant economic slowdown growing by only 1.9% in 2020.
In addition to the above factors, the Zambian economy has been negatively affected by adverse weather conditions which have negatively affected the agriculture and energy sector, and the entire economy. This challenge and policy interventions under implementation by the Patriotic Front (PF) Government will be discussed in this article.
THE STATE OF THE ZAMBIAN ECONOMY
In his speech during the official opening of the National Assembly on 13th September, 2019, His Excellency President Edgar Chagwa Lungu stated:
“Our economy has, in the recent past, faced some serious headwinds. The country registered a Gross Domestic Product growth rate of 3.7 percent as at end of 2018. The growth rate for 2019 was earlier projected at around 4% but is being revised downwards to about 2% on account of adverse weather conditions, which has affected the energy and agricultural sectors.
Since 2015, when we experienced droughts that affected electricity generation, growth slowed down to an average of 3.5 percent between 2015 and 2018 from an average of 6.4 percent between 2011 and 2014. This slowdown was largely attributed to climate variabilities.
Our fiscal space must continue to grow, and this can only be achieved by ensuring macroeconomic stability and maintaining debt within sustainable levels. We have procured debt for development, which is one of the many financing options that we pursue. We can see it in the road infrastructure, bridges, alternative power generation investments, including but not limited to massive infrastructure development in the health, education and communications sector. This we all can see and attest to”.
MACROECONOMIC STABILITY AND DEBT SUSTAINABILITY
In order to ensure macroeconomic stability and maintain debt within sustainable levels as stated by President Lungu above, the PF Government, through the Ministry of Finance, has put in place the following measures.
1. DEBT SUSTAINABILITY ANALYSIS
The rise in public debt over the years has obviously raised concern among the general citizenry and other stakeholders in Zambia and the international community. True to it, debt can accelerate growth through investment in growth enhancing projects. However, when debt is accumulated to levels where it causes a debt overhang, it can lead to deceleration in growth and provision of social services (Source: Ministry of Finance).
The PF Government will not let Zambia’s economy go into deceleration or fail to provide social services! As President Lungu said in his speech above:
“The Patriotic Front Manifesto articulates the collective aspirations of our people for a better life, which gives this assurance, and I quote: _‘we are committed to meeting and exceeding these expectations of the people of Zambia”.
Indeed, prudent debt management calls for regular checks on our debt to ascertain whether we are on the sustainability track or the unsustainability track. Government therefore conducts regular debt sustainability analyses to inform policy decisions with regard to prudent debt management. The critical indicators of sustainable debt considered under a DSA exercise include the county’s capacity to carry its debt, which is measured against the county’s Gross Domestic Product (GDP) and the capacity to service debt obligations, which is measured against the country’s revenues. The Debt Sustainability Analysis (DSA) conducted by Government in April 2018 revealed that if no measures are taken on the debt, the public debt to GDP ratio (domestic and external debt) would go above 60% in the medium term, above the sustainability threshold of 56%. _(Source: Ministry of Finance).
As stated by President Lungu in the abovementioned speech:
“The art of borrowing is the ability to pay back. Yes, I am aware that there is accumulation of domestic arrears which has not only negatively impacted the operations of suppliers and contractors, but also on the performance of the financial sector through an increase in non-performing loans…. This has got to be managed”.
And, this is being managed through policy responses below.
2. POLICY RESPONSE TO THE DSA RESULTS
The DSA results dictated the need for adjustment to avoid getting the country into a position of debt distress.
Following the outcome of the DSA, Government, through the Ministry of Finance, announced measures, in July 2018, anchored on the DSA and MTDS as follows;
1) Postponement of the contraction of all pipeline external debt until the high risk of debt distress is brought to a moderate level.
2) Cancellation some of the contracted loans that have not disbursed, in order to reduce the debt service burden.
3) Undertaking an asset liability exercise on selected loans to extend the maturity profile and attain lower interest costs.
4) Cease issuance of guarantees to commercially viable projects.
5) Cessation of the issuance of Letters of Credit and Sovereign Guarantees to institutions that are technically insolvent until their balance sheet challenges are resolved. _(Source: Ministry of Finance, Zambia).
Through these and other measures, the PF Government will be constraining the primary balance and attracting concessional financing for the Budget to mitigate the adverse implications of high debt service in the medium term by curtailing the accumulation of debt and reorganizing the current debt portfolio in order to minimize costs and mitigate the risks associated with it; in line with PF Government’s 2017-2019 Medium Term Debt Strategy (MTDS) which outlines Government’s plan over the medium term with regards to fiscal and debt management.
As revealed by the DSA, fiscal restraint, aimed at achieving low levels of primary balance deficit is critical. Control of the fiscal deficit is a high priority for the PF Government. In 2018 for example, without measures being undertaken, the deficit would have been higher at over 9% of GDP.
Over the Medium Term, the current Medium-Term Expenditure Framework (MTEF) currently under preparation has taken into account the measures and adjustments particularly on the pipeline debt. (Source: Ministry of Finance).
In view of the forthcoming Eurobond redemptions, Government is committed to the repayment of its liabilities, and is thus cognisant of the need for a structured redemption plan aimed at ensuring smooth redemption of the Eurobond debt. The Ministry of Finance has drafted a Eurobond Redemption Strategy (ERS) that is due for cabinet approval. The strategy is aimed at establishing an optimal plan for redeeming the bonds, taking into account Zambia’s fiscal and macroeconomic situation, as well as other factors that may influence the selection of a favourable redemption option.
The Eurobond refinancing strategy gives an array of options that include;
1. Implementation of a Sinking Fund. The Medium-Term Expenditure Framework, which will soon be issued, will outline the provisions that Government has made for the Fund,
2. A debt buyback strategy, using the sinking fund provisions, and
3. Refinancing through issuance of a new tenure of Eurobonds in the capital markets.
Refinancing is not peculiar to Zambia. Countries such as Kenya, Ghana, Senegal and other emerging economies have in recent years gone to the market and successfully issued debt with the resources earmarked for bond redemption with longer maturities.
Why refinancing of the bonds?
The refinancing option ensures continued presence in the international capital markets, which offers opportunities for signaling to international investors on the state of economic affairs in the country and giving a risk indication for private sector borrowing in the country as Eurobonds are used for benchmarking. This was one of the objectives the country had at issuance of the Bonds. _(Source: Ministry of Finance)._
Against the above global economic challenges, the PF Government has put in place several policy interventions to ensure macroeconomic stability, maintain debt sustainability, and achieve significant growth to achieve the Vision 2030 objective.
Zambia is currently NOT defaulting on its debt obligations and is therefore NOT in a debt crisis!
As President Lungu emphasized: _“the art of borrowing is the ability to pay back” and “we have procured debt for development… We can see it in the road infrastructure, bridges, alternative power generation investments, including but not limited to massive infrastructure development in the health, education and communications sector. This we all can see and attest to”.
The Author is Patriotic Front Secretary General