Zambia Debt Analysis
Recently the Minister of Finance presented the 2014 Budget and estimated the budget deficit to be around 8.5% of GDP. Standard & Poor recently changed their outlook to negative while Fitch Downgraded Zambia’s debt. This and many other recent events called for a fresh review of Zambia’s debt.
Intro
In April 2005, Zambia reached the completion point of the enhanced initiative of Highly Indebted Poor Countries (HIPC Initiative). This resulted in more than 80% of Zambia’s external debt being forgiven (2000 – US$6.5billion, 2004 – US$7.1 billion, 2006 US$0.7 billion). Further, given the prevailing conducive macro-economic environment, domestic borrowing has been on the rise hence threatening the sustainability of domestic debt. (Masengo, 2011)
Fitch Ratings
On October 28 Fitch Ratings downgraded Zambia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. Its foreign currency senior unsecured bond ratings have also been downgraded to 'B' from 'B+'. The Outlook is Stable. Simultaneously, the Short-term IDR has been affirmed at 'B' and the Country Ceiling downgraded to 'B+' from 'BB-'.
The authorities expect a deficit of 8.5% of GDP in 2013, against an expected deficit at the time of the budget of 4.5% and an average of 2%-3% between 2006 and 2011. The overshoot largely reflects overspending on subsidies, which will total 4% of GDP, against 0.7% in the budget. This reflects perennial under-budgeting for subsidies, delays in scrapping the fuel subsidy as well as arrears payments and taking on contingent liabilities of the Food Reserve Agency. Lower-than-expected revenue also contributed towards the deterioration. (Reuters, 2013).
Domestic Financing and Crowding Out
In addition, though it is healthy to borrow domestically, excessive borrowing is distortionary. If the government becomes heavily indebted domestically and inflation and interest rates rise, the government will have to pay high interest to service this domestic debt. Further, in most cases domestic debt cannot be defaulted or rescheduled unlike external debt. This is because domestic debt is mostly held by the banking sector and default may trigger a banking crisis. Domestic borrowing has distortionary effects in the economy when excessively done. It can affect interest rates – heavy borrowing can lead to increased interest rates. It can also lead to “crowding out effect” – where the private sector’s access to finance for investment is shadowed by heavy government borrowing (Masengo, 2011).
It can also result in the ponzi game effect – where there is accumulation of borrowing to service already existing domestic debt (borrowing to pay off maturing debt and interest thereof).
Debt: The Bigger picture
Reports by (Masengo, 2011) suggest that Zambia’s domestic debt has become sustainable, owing to the past decades positive developments– external debt cancellation, price and financial system stability. These results have been similar for both revenues with and without grants. The first reason explaining this result is the attainment of the HIPC completion point which led to (and has continued to result in) cancellations of most of the external debt stock. This has freed resources from external debt service towards domestic deficit and project financing. This has also reduced the size of the Government’s total expenditure as it includes external debt service.
Notably, Zambia has embarked on and succeeded in bringing and keeping inflation in single digit levels since sometime in 2006. GDP growth rate has also been consistently above 5% since 2003. Exchange rate stability has been achieved and maintained for relatively long periods. Project financing has been directed towards intended sectors like infrastructure development, citizen’s empowerment and poverty reduction. This, if properly done will enhance economic development and poverty reduction and help break the syndrome of repeated borrowing for the same expenditure.
However, it is important that Zambia continues with its economic diversification efforts so as to reduce dependency on exports of raw copper. There is need to enhance the manufacturing and processing sectors to begin exporting value products in both mining and agriculture. Further the Government needs to widen the tax base to incorporate the informal sector. This will reduce the tax rates and reduce incidents of tax avoidance and tax evasion. Therefore, it is evident that Zambia has continued to make progress in fiscal management and economic development, and indeed performing an analysis of domestic debt sustainability, for quarterly data for the recent period of say 2000 to 2010 would yield more precise and convincing results. However, this study recommends that for Zambia to achieve and maintain a strong form of sustainability for both domestic and indeed external debt, a debt sustainability monitoring office needs to be permanently set up. This office should regularly carry out thorough analysis for sustainability of both domestic and external debt (Masengo, 2011).
Economics Association of Zambia Insight
We are aware that the MoFNP has been conducting Debt Sustainability Analysis to guide the levels of additional loans that the Government contracts. The Ministry has indicated to the EAZ that the DSA conducted in 2007 and confirmed by the Word Bank and IMF in 2008 showed that the country’s debt is sustainable over the period 2007 to 2023. The analysis further indicates that the country can still sustain additional non-concession borrowing of US$1.0 Billion and concessional borrowing of the same amount. According to the Ministry, this analysis was confirmed in the subsequent DSA conducted in 2009 and 2010 (Economics Association of Zambia , 2012).
In line with the recommendations of the JCTR Report in 2007, the EAZ believes that it is in the interest of the country to develop a comprehensive debt strategy and policy that will stipulate when to borrow, at what terms and for what purpose. This should also be reinforced by a policy that debt should not finance recurrent expenditure but only capital expenditure. Adequate guidelines should also be set regarding the contraction of domestic debt. The Government’s strategy of rolling – over could be defective and a careless way of using public resources (Economics Association of Zambia , 2012).
There is also need to move towards reorganization of the debt offices particularly to centralize borrowing powers, strengthen the monitoring capacity of the debt stock and strengthening of the debt strategy and policy. In line with this, there is need to improve debt data management systems. As observed by the JCTR report, Zambia does not have a centralized comprehensive domestic debt database. The data is usually inconsistent and has moving figures in certain particular years. This has resulted in the lack of control and monitoring of the debt (Economics Association of Zambia , 2012).
The Economics Association of Zambia is also aware that there are intentions to review the legislation to address issues relating to the weakness in the debt management practices. Among these issues is the inclusion of a provision requiring the Minister to obtain approval and authorization of National Assembly and also to report on:
The source of the loan
The extent of the total indebtedness by way of principal and accumulated interest
Provision made for servicing or repayment of the loan
All borrowings by any state institution or authority annually
Provision requiring debt managers’ strict adherence
Provision for the establishment of a central depository of original loan agreements
Setting limits to the indicators such as Public debt/Gross Domestic Product (PD/GDP)
It is the Economics Association view that these proposals be supported by the members of the parliament as they are meant to enhance the debt management system in Zambia
EuroBond
Zambia, which 13 months ago issued its first international debt, is considering the sale of a record $1 billion Eurobond to plug a budget deficit that contributed to a credit downgrade.
Africa’s biggest copper producer will try to contain some spending to reduce the fiscal shortfall to below the forecast of 8.5 percent of gross domestic product for this year, Treasury Secretary Fredson Yamba said in a phone interview from Lusaka, the capital, today. The government this month raised its estimate for the gap from 4.3 percent and is finalizing as much as $250 million in syndicated loans as funding needs are pushed higher by government spending on wages and subsidies.
Yields on Zambia’s $750 million of bonds have climbed 161 basis points since being issued in September 2012 compared with an average 123 basis-point increase for dollar-denominated African debt tracked by JPMorgan Chase & Co. Fitch Ratings yesterday lowered Zambia one step to B, five levels below investment grade. Standard & Poor’s downgraded its outlook to negative on Oct. 25, while retaining its B+ rating.
The sale of a second Eurobond “is one of the avenues available,” Yamba said. “We are looking at various options. We have to go out there and see which is the cheapest source.”
While the southern African country would be able to sell a $1 billion Eurobond, it will be more expensive than its debut securities, Chris Becker, a market strategist at Johannesburg-based ETM Analytics, said by phone. A sale would follow record issuances by African nations, including debut bonds from Rwanda and sales by Ghana, South Africa and Nigeria, with plans by Tanzania, Kenya and Senegal to tap international markets.
Conclusion
Some might say that Zambia should not borrow externally and even as sincere as they may be they are wrong. When the Government borrows locally “Crowing out” happens. This raises the cost of borrowing for private companies. As this research indicates there is room for concessional and non-concessional borrowing.But prudent fiscal and debt management should not be overlooked.
Sincerely
Kampamba Shula
Member of Economics Association of Zambia
Economic Advisory at Economeka Capital
References
Economics Association of Zambia . (2012). THE STATUS OF ZAMBIA’S DOMESTIC AND EXTERNAL DEBT. Lusaka: EAZ.
Masengo, P. C. (2011). DOMESTIC DEBT SUSTAINABILITYANALYSIS. Lusaka: UNZA.
Reuters. (2013, October 28). Fitch Downgrades Zambia to 'B'; Stable Outlook. Retrieved October 30, 2013, from Reuters: http://www.reuters.com/article/2013/10/28/fitch-downgrades-zambia-to-b-stable-outl-idUSFit67460520131028
http://www.bloomberg.com/news/2013-10-29/zambia-considering-1-billion-eurobond-after-rating-cut.html
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