By Chibamba Kanyama
Over a lunch discussion with the IMF Mission Chief to Zambia Tsidi Tsikata when I was still at the Fund, I learnt about how desperate he was about helping Zambia be on an economic path of recovery following the 2015/16 economic crisis. He considered putting Zambia on a programme would be the best retirement success for him as he turned 59 that year. I believed his genuine intentions, a Ghanaian national desperate to help another African country. For a mission chief who succeeds to put a country on a programme and gets it on a path of economic recovery and growth, it is a huge achievement. What stood in the way was how to get the Zambian government to cooperate by understanding the gravity of the problem and request a programme.
IMF is a very difficult institution to deal with though over the years, it has made significant reforms, among them the need to listen more to the needs of the authorities, involve the private sector and civil society in programme negotiations and place the protection of the vulnerable (poor communities) as part of the programm conditions. In other words, a programme should accommodate domestic needs unlike the case during the Structural Adjustment Programmes.
Recently, former ministers and advisors called for among other things the urgent need to resolve what they termed, ‘debt crisis’. I cannot doubt their intent; some of them managed the two post HIPC IMF programmes that the public never came to hear about. They managed them well, enabling the country to pay back the loans while the country grew an average 6.7 percent per year. Hardly any national asset was sold during that period (just as the case was with Ghana that just completed an IMF programme worth US$918 million; with an interest rate you cannot get from the capital markets).
However, there is another school of thought by citizens that given that our GDP is $27.5 billion, and our external debt is $11.2 billion we are not in a crisis. In my engagements with economists in their day-to-day work, I appreciated the need to have a thorough diagnosis of the health status of an economy. In medical terms, health experts will only determine the next course of action for a patient after thorough tests: body temperature, weight, heartbeat, blood pressure, etc. The doctor will not rush to ask the patient to go home because the temperature is 36.9 degrees or normal.
A debt crisis simply means that you are or fast approaching a situation in which you will not be able to honor your current and future financial obligations – without having almost all your national budget spent on servicing your debt and just the essential items like paying civil servants. Economists have their own way of determining whether a country is in a crisis or not. The first step is an assessment of the country’s face and nominal value of its debt portfolio (both domestic and external debt). Face value is what is repaid at maturity and the nominal value is principal sum borrowed plus interest accrued and not yet repaid. Both face and nominal value will be the same at maturity. In the case of Zambia, our external debt is $11.2 billion. When we add domestic debt, it comes to around $20 billion. So, the face value of Zambia’s debt is $20 billion.
The deal breaker even rating agencies use for Zambia is the nominal value. The requirement is that you outline the terms on which you borrowed your loans – this helps determine what the interest payments will be. When institutions say your debt numbers are opaque, they simply mean you have not provided enough information on your loan agreements (and I suspect this was what concerned Tsikata during the lunch discussion and the issue has continued to date). Without this input, even debt restructuring becomes a huge problem.
For example, if and we are paying interest rate of 10 percent per year for 10 years for the $11.2 billion with Eurobonds today amounting to $3 billion, it means the nominal value of your Eurobond debt is $6 billion. This means the nominal value of our total debt is already $23 billion before we know the terms you borrowed the other $8.2 billion (the non-eurobond money). Assuming you borrowed the $8.2 billion interest free, your face value debt-to-GDP ratio will be 74.0 percent and your nominal debt-to-GDP ratio will be 85.1 percent.
The second criteria to determine debt crisis is your debt service-to-revenue ratio. Revenue is what Zambia Revenue Authority collects in taxes and the non-tax by other ministries. According to economists I talked to, if your nominal value debt-to-GDP, face value debt-to-GDP, and debt service-to-revenue ratios are above 60 percent, 40 percent and 20 percent respectively then you are in a crisis.
In short, in the 2020 budget, Finance Minister Dr. Bwalya Ng’andu planned to raise K71.9 billion from domestic revenue and spend K33.7 billion on debt service (K21.1 billion on external debt and K12.6 billion on domestic debt). Therefore, our debt service-to-revenue ratio was projected to be 46.9 percent when the budget was unveiled in September 2019. And face value debt-to-GDP ratio is way above 40 percent threshold. The nominal value debt-to-GDP is higher than the 60 percent threshold given that even the face value is way above the same ratio. This surely is of concern to technocrats at the Ministry of Finance, that we are in the face of a crisis but how we come out of it is the question now.
When faced with uncertainty, the key question of leadership is, ‘Do we know enough about the situation? Given the various scenarios, what is the best option to take under the circumstances? What price are we paying and how do we prepare the people for it before we reap the benefits? As Dr. Mbita Chitala stated, the IMF route can be dehuminising. However, IMF route or not, a decision must still be made (still being aware that without an IMF letter of comfort, that strategy will need some unique approach).