IMF concerned by Zambia’s indebtedness

Jeff Kapembwa

Lusaka – The International Monetary Fund (IMF) still exists and has raised alarm over Zambia’s increasing debt, which the international lender fears might reach 60 percent of the gross domestic product.

The Zambian Government has been courting the IMF for a loan of more than US$1.3 billion. However, the talks have been put on hold since August this year, with the international lender arguing that more fiscal discipline needs to be exercised to save the country.

While Zambia’s growth path needs commendation, the Southern African state needs to slow down on debt commitments and, if need be, the authorities should seek concessional loans to save the country, the Bretton Woods institution contends.

Zambia’s debt portfolio is around 42 percent of the country’s gross domestic product (GDP) and experts have warned that it might skyrocket beyond 60 percent with the ongoing infrastructure development countrywide, which could put the country at risk of failing to repay all the debts, including honouring the over US$3 billion owed in Euro bonds.

“We appreciate the idea of closing infrastructure gaps but we need to adhere to debt sustainability through, among other initiatives, fiscal consolidation to create space,” IMF head in Zambia, Alfredo Baldini noted in Lusaka last week.

Speaking during the Zambia Institute for Policy Research Analysis (ZIPAR) on the country’s public debt in Lusaka last week, Baldini said Zambia needs to realign its policies and avoid falling into a debt trap through contraction of non-concessional loans, as this poses greater risk of failing to remain on sustained path.

“It’s IMF’s concern that the public debt had reached unprecedented levels and had eroded the capacity of the private sector to borrow and grow their businesses, hence the call to slow down and undertake among other housekeeping measures, fiscal consolidation, restraint on non-concessional borrowing, and strengthened debt and public investment management capacities to hop on a sustainable path,” he said.

IMF is more worried at the increasing external debt, which has continued to soar, putting Zambia at high risk of debt distress.

“The public and publicly guaranteed debt had risen to over 36 percent of GDP at the end of 2014 to 60 percent at the end of 2016, and this was largely driven by external borrowing coupled with the impact of exchange rate depreciation.” Baldini added.

While Zambia’s long-term outlook has improved in recent years, spurred by good rains and a surge in copper prices and the tight monetary policy succeeded in stabilising the exchange rate and slowing down year-on-year inflation to 6.6 percent in September 2017, the country needs to relook various debt contraction agendas or risk defaulting when payments are due, said the IMF official.

IMF has commended Zambia’s removal of subsidies on electricity and petroleum, noting that the decision will save resources for economic growth.

Baldini, however, warned Zambia against perpetuating the political impasse that has characterised the country since April 10 this year when opposition leader, Hakainde Hichilema was arrested on treason charges saying this was affecting investment into the country.

ZIPAR agrees with the IMF’s observation, and warns Zambia of the risk of defaulting on repaying the principal amounts on the three Eurobonds due 2022-2027 because of the high-risk debt distress, says research fellow Shebo Nalishebo.

According to ZIPAR findings, between 2017 and 2021, the Zambia would spend about $237,4 million per annum, as interest payments towards the three Eurobonds, which was about the entire social protection budget. ZIPAR urged the Zambia government to urgently start looking at strategies to pay back the Eurobonds now to meet the principal and interest payments on the bonds instead of waiting up to 2019.

Nalishebo further urged the government to further consider issuing a local bond for small investors to widen domestic creditor sources, which would help in mitigating the risks associated with domestic borrowing and refinancing as other options to cover up for the Sinking Fund, which has not been operationalised yet until 2018.

At the same occasion, Ministry of Finance investments and debt management department director, Masitala Mushinga, said the government seeks to remain proactive and explore mechanisms for Eurobond redemptions such as the Sinking Fund.

In a presentation, Mushinga stated that non-concessional or commercial debt would be considered only for projects with high economic returns. Plans are underway to expand the investor base (and) financial inclusion initiative to promote government securities in conjunction with the Bank of Zambia through targeted outreach programmes, which will be undertaken.

November 2017
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