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Wednesday, January 20, 2021

Is Zambia in a Debt Crisis?

Economy Is Zambia in a Debt Crisis?

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.

CONCLUSION
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).

37 COMMENTS

  1. The truth of the matter is that there is no country in the world that has been helped by IMF to recover economically!!! We all know this. So why bother?

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  2. BORROWING IS THE BEST WAY TO CONSEAL INEFFICIENCY AND CORRUPTION. THE UNPATRIOTIC FEW WHO WERE IN THE FOREFRONT OF BORROWING HAVE EXTERNALISED EVERYTHING AND SEE THE REST US AS STUPID.

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  3. People’s eyes need to be opened as you have, others who just criticize everything are using the conditions of what existed in past. People can’t argue today’s problems using the past conditions as reference because time has elapsed and things have changed along the way. IMF cannot be looked at today as it used to be back the with SAP program it had. And in my understanding in the past attempts it’s not us who walked away from negotiations but IMF who seem reserved or unwilling to give us any debt due to other reasons that may include the possibility that we as a country are either not meeting the conditions required or failing to provide actual requirements data, documentation etc on our current debts to other institutions to enable us access the loan with IMF.

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  4. The IMF need Zambia more than we need them. Zambia has trillions of dollars worth of natrual assests and you are busy trying to sell the very soul of our country to the devil. How much is Zambia’s debt? In the current situation, anyone that tells you that no country is going to be in debt is plain lying to you. US and UK have already accummulated huge debts to focus on the lives of their people but for you, the best you can do is throw cheap shots at your own country. Shame on you. WE DON’T NEED IMF! Zambia can get itself out of poverty by first protecting it’s people and second, it’s assets.

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  5. It is so said when African think because they have copper in the ground they are rich. How come Finland Sweden who have nothing are 1000% richer?
    You can can have all the copper in the ground and will remain poor till Jesus comes back.
    You can not entrust your destiny in the hands from drunks from compounds as presidents and expect to be rich. (Need I say with a grade of 9 in maths) Go see who is the president and ministers in Sweden and Finland

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  6. The writers attempt to sell IMF to us is a worthless way to spend a few days writing an article that does nothing else but ‘spin,’ the lies out of orbit.

    First, you have bumped up the external and total debt by adding domestic debt, but if you just left the actual external debt as is, it’s clear we have some room to manoeuver. We seen intelligent attempts to shore up internal debt by Banks offering Loans left right and centre recently to increase student loans and currently to struggling businesses. That will help to increase earnings from interest rates. If Banks find more local products to entice locals we are in a better position not to have to print money thus not losing control on inflation. BUT as stated the preferred borrowing is from other Markets than Satanic IMF. If…

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  7. You were told not to borrow but when you so the Chinks coming with bags of cash you couldn’t help yourselves even going to Beijing to queue up for loans without strings now you are talking of spending more than half your GDP to debt servicing ….we told you that in the end its everyone who will suffer but we were called bitter. I am surprised Chibamba can even reference to a bootlicker like Chitala who only cares about his stomach.

  8. If we are smart and work hard ‘together’ with citizens chipping in we should Rideout this trying time no thanks to antsy opposition desperate for power. The most limiting aspects of Zambian landscape has been tiresome opposition.

    In recent days we have seen ridiculous former Bankers, Finance Ministers, and some dubious people calling themselves Economists, shamefully misrepresenting the current economic climate by blaming it on His Excellency President Lungu. President Lungu is one of the most successful Presidents of all time. He has delivered development, and sad to say it costs. His administration has been plagued by tricky opposition just being obstructive and debilitating peaceful process of which Intelligent wily citizens will not tolerate come 2021. We have eyes to see…

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  9. How many times are we going back to the IMF with a begging bow? Just a few years ago they forgave 5billion USD worth of debt, the question is what have you done with that debt relief? This is sheer stupidity, no wonder the IMF has not added Zambia on the countries that will receive covid debt relief. When are we going to learn to be self sufficient? So you abuse and corruptly squander the money with the hope of going back to the IMF, what nonsense.

  10. Our biggest debt is our mindset. Our failure to think beyond IMF, Eurobonds liberate ourselves from the beggar-status set to us by our colonial masters. Are we so blind to see that their method of “use and refuse” will never change? More than 50 years after colonization, they have not been able to help us in a major way to recover from their economic sabotage to us, so what makes us believe they can still be useful to us?

    The solution to our crisis lies nowhere but within ourselves. We must begin to look for answers within our people – especially the upcoming generation. WE are our biggest assets. Not Eurobonds or IMF funds.

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  11. Ba President, please next time you do reshuffles try Chibamba Kanyama (or is Kabamba Chinyama?) either as Finance Minister of Bank Governor. The chap has lots of ideas. He may just pull us out of the doldrum .

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  12. @ nine chale. If we a people who think. How do we end up in this mess after debt forgiveness at the turn of the century. As if that is not enough, we allowed the same old UNIPists who messed up the economy in 70s, 80s and early 90s who we brought back (as PF but with a copy & paste UNIP constitution) to ruin the economy for second time. Do we really think properly or we think with our stomachs.

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  13. Borrowing is ok but the problem is that we are borrowing to steal and abuse. If these loans were spent on productive sectors like Agriculture which has proved all times to be sustainable in the medium and long term strategy, that would be great. We have a problem of leadership in Zambia, the corrupt leadership even if you give them $100 billion to inject in the economy they will finish it by sharing amongst themselves not even a pit latrine can be built.

  14. “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.”

    If this makes sense to anyone, please let me know.

  15. Mwanawasa took us from HIPC and he worked very hard together with selfless people like Magande as his Finance minister, Agriculture was the most priority to them. Now with these PF goons who despise Agriculture is the reason is faced with hunger in some parts of the country. They can even accuse nature for their inefficiency. Foolish leaders!

  16. This country has become a country of speculators, bonethrowers, soothsayers and magicians. HOW DO WE DEVELOP FROM THIS BACKDROP??? PF decision makers need to close their ears to such scaremongers and plan for the country. Get Mopani, merge it with KCM, start mining gold, rearrange the pensions system and let’s roll, please!!!!

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  17. At the head of all our problems in the country now is leadership. With due respect, leadership is not bench marked on humility, in fact surrounded by all the haughty, selfish, accountability opposed and jungle law oriented core leaders below the head of state, this is the quality that trail at the tail end of a long list of all the key ones. With the head of state so humble and non dominant, Zambia will be ripped apart into very tiny pieces economically. We are likely to get more irretrievably broken.

  18. @Bashi Chite not all of us think with our stomachs. I believe we can still learn from our errors and rewrite the principles that cripple our economy. Of course it has a lot to do with leadership and the decisions/policies that are made but we can still play a role as citizens by participating and offering solutions on how to resolve these issues.

  19. If I find you at Linda turnoff heading towards Sandy’s Creation then you ask for a lift that you want to go to Kitwe to meet Bullock, my first reaction would be to check your sanity; and obviously can’t give you a lift no matter how much you plead. It would make sense if I find you at Mandevu or Kabangwe because that’s the route to Kitwe. There are 3 categories of Chinese debt: Govt to Govt, Govt to Chinese banks and Govt debt default. It’s the 3rd category that the PF doesn’t want to talk about. They awarded contracts to Chinese companies which went and borrowed from Chinese banks. Even Ministers without the mandate to commit GRZ to debt signed those tenders, especially for roads and buildings. When these projects are handed over GRZ is under obligation to pay within 28 days upon…

  20. receipt of the certificate of completion failure to which it begins to accumulate interest at 24% per annum. The Chinese borrow at 6% from their banks so they make a cool 18%. This is the debt that the PF isn’t transparent about and the exact amount isn’t known. However, when you tabulate the projects going on or done already it gives around US$17BN. This is the reason some quarters have asked the PF to own up and declare the true debt. So how can you help somebody who doesn’t want to tell the truth? Further, the PF still want to borrow more money, it’s now the lenders that are refusing to give them more nkongole. They’re on Kafue road going southwards thinking they’ll reach Kitwe, you’re wasting time trying to help such kind of people, may be give them a lift and drop them at…

  21. Mr Kanyama please don’t beat about the semantics and economic technical terms, Zambia is in deep debt doodle…and S&P ratings have ranked us 6 places below junk status. Whoever takes over in 2021 has an almost impossible task to dig us out of this s-hole. But expecting the same people that brought us here to also dig us out is the second definition of madness….and we should not make any mistake about it, getting out of this economic crisis shall be extremely painful for all citizens apart from those who have stashed their loot elsewhere. We have exhausted the room for borrowing, plundered the borrowed funds and now we have no choice but to ask IMF, with its new adjustment program, to bail us out in order to get on our path to recovery.

  22. Regardless of your GDP coming in at $27.5 billion, the fact that you have a staggering external debt in excess of $11.2 billion exacerbated by a local debt burden of the same amount must be very worrisome to any economist, even charlatan vodoo ones like Derrick Mbiter Chitala. Our economy is now in a serious recession compounded by the disastrous effects of the Coronavirus whose effects Lungu is doing absolutely zero to mitigate. To make matters worse, the terms and conditions for the external debt are wholly draconian, and that’s what happens when you send foolish ignorant *****s like Miles Sampa and his ancient Neanderthal uncle, Chikwanja, to negotiate on your behalf. Just wait and see what happens next year when the US balance of payments support is withdrawn and both the principle…

  23. …. principle and interest on the Eurobonds become due, Zambia will be absolutely in hell economically. Kukaba ukunya, Zambia inyelile pweleteteee…..

  24. Any one calling lungu a successfully president needs to be on ati depressants ……

    we had Zambians being burned alive in our towns by fellow Zambians for the first time in the history of this land !!

    Ati highly successful presidentea ?

    To all people doing write ups on where Zambia is headed , just sit back and enjoy the PF show…..2021 is fast approaching.

    Even me a layman in economics can tell you the IMF will not give Zambia anything until after the 2021 elections.

    Just let the PF govern as they see fit, it is their time , and unfortunately there is massive collateral damage.

  25. Chibamba Kabamba wakasondokide! You are definitely looking for a job from Chagwa that’s why you are hanging on the fence so shamefully. These guys just won’t give a Tongaman any job, you are a lone wolf, no matter how hard you go out houling everyday nobody will open the door for you.

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  26. We may have all the resources in the ground but do we have the technology, the finances, and a prudent government in place to exploit them profitably? NO! This is the only solution remaining in our hands.

  27. I like Chibamba Kanyama is a very sober and will do well as a future Finance Minister – he already has the IMF connections so could negotiate well on Zambias behalf.

  28. The key point is that IMF is a profit making institution. Read the economic hitman by John Perkin. Yes we need money, but they prescribe how to use that money. If Zambia presentd a proposal that I volves manufacturing, money will not come. But extractive industry, they will you. Manufacturing is for them so that they export to Africa.

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  29. All of you commenting on here, ask yourselves this question, how can you be assisted in LOAN terms if on the other hand you shut down tax paying institutions that could help you repay your debts? Case in point,Prime TV? Post newspaper and so on?
    Is the black man and woman incapable of thinking?
    Economic matters require a sober reflection and not emotional imbalances and tantrums.. in other words maturity is a prerequisite to leadership! Appointed or otherwise!

  30. Kanyama does not have IMF connections, he was just a clerk there for two years, nothing more. His understanding of economics is also very rudimentary, these articles he writes are laughable really because they are so devoid of any indepth intellectual analysis of the economic malaise we find ourselves in and his suggested solutions are always so shallow it makes one laugh how such an economic snob can ever be considered an authority on the matter. Both him and Mbiter Chitala are damn novices. You put them on a platform with Magande, Aka etc and you will realise how ill equiped this charlatans are in this field. It’s like Mwanakatwe Mhango Margaret, she was without doubt the most completely useless Treasury boss since independence. She knew only banking but zero economics but spent half…

  31. the time she was in office under babalazaland recovering from drinking sprees with Dora, Bwezani and Chagwa. Ka Mhango, that “Malawan”, I also wonder what it is about her conjugal alliance with Mwanakartwe, it must be very unholy because that woman is very adulterously promiscuous.

  32. Let me add my voice at this late hour to the already well articulated debate by men and women who obviously mean well for our beloved country Zambia.
    Putin has clearly told us that we should not expect anyone else to remove us from the struggles we are facing as Africa.
    This begging bowl mentality should stop. Yes we may appear to be in a mess but what do we have in our country that has been given by God is far much more than what the Western have……
    Zambians have become so unpatriotic and is so scary. What we need to do is put our act together and stop thinking that we can only develop from begging.
    Mines are mining different minerala from this country and only declaring revenues from copper. These natural resources are God given and need to be accounted for.
    Some policy that…

  33. Not sure what the conditions of IMF are today, as compared to what they used to demand in past–the SAPs conditions that by and large impoverished small nations around the world. They may have relaxed the conditions, but I still would be careful when dealing with them. Either way, it’s not a good idea to get IMF loan while these crooks are still in charge, i.e. corrupt Lungu and his minions. If there should be any attempt at getting any loan from the IMF, it should be done once corrupt PF gets out of office. Otherwise, nothing of substance will come out of the loan, but will only add to the huge debt we already have.

  34. Zambia is a Christian nation and yet keeps ignoring Proverbs 22:7 which says the rich one rules the poor and the borrower is a slave to the lender. Over time we have seen some leaders violate this wise counsel at the expense of Zambians being impoverished and enslaved by foreigners. Let us learn from past mistakes and prudently use God’s people, the land and our natural resources to sustain our livelihoods. No politics or economics will help but rather heeding to a simple Bible principle could save the future of our children.

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