WB Cautions Zambia over Debt Management

 

Lusaka ‑The World Bank has said Zambia has enough room to borrow from external sources for the improvement of its economic infrastructure.

However, there is need for caution against losing capacity to manage the widening debt portfolio, which has extended to over US$4 billion since September this year.

World Bank country director for Zambia, Kundhavi Kadiresan, said it was important for the government to ensure that it has capacity to manage the widening and more complex debt choices as well as the resulting portfolio.

There was an urgent need to develop that capacity before significant amounts of new public investments were undertaken.

Kadiresan said, for instance, the US$750 million Euro bond issued by Zambia would have to be repaid as a one-off lump sum after 10 years.

This required adequate planning to mobilise resources for repayment.

She also noted that there were risks such as currency and exchange rates that needed to be well-managed. Zambia’s external debt, as at the end of 2012, stood at about 18 percent of the Gross Domestic Product (GDP) but Kadiresan said that the figure was relatively low by international standards and that gave government space to borrow more.

Kadiresan noted that it was important to manage the debt in a sustainable manner while borrowed resources should be used to escalate those investments by government that could help the economy grow faster.

“What this means is that all new external borrowing should fund projects with established high rates of return in terms of their impact on growth. 

It is unclear whether an economic analysis of public investments in a systematic manner is being carried out,” she said.

According to the World Bank, Zambia still had low capacity to undertake economic analysis of government projects.

The economic brief pointed out that Zambia needed a medium-term debt management strategy to manage the risk exposure of potential variations in the cost of debt servicing and its impact on the budget.

The government was urged to be prepared to spend the borrowed funds expeditiously.

“What we learn from the experience of the US$750m bond issue is that the government should have planned better on how to use the money that was raised,” World Bank country director said.

“When the funds cannot be used in a timely manner not only do we pay interest on them unnecessarily but also there is a greater likelihood that they are diverted to relatively less productive uses,” Kadiresan said.

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