Drowning in Debt Has Zambia bitten off more than it can chew?

Drowning in Debt Has Zambia bitten off more than it can chew?

Zambia has paid over US$90 million to its external creditors for debts up to September 2013, a scenario that has raised concerns that the Southern African country might fall back into debt trap due to excessive borrowing.

The money was paid to cover external debts accrued by the government from various creditors, among them the Paris Club, in financial year 2012/13. This represented 1.8 percent increase in what was paid the previous financial year.

By the end of September 2013, Zambia’s external debt had swelled to US$3.13b from US$3.08b at September 30, 2012. That means the debt now stands at nearly 30 percent of the country’s GDP.

The government recently went on a borrowing spree to rehabilitate and build new roads and bridges, as well as improve railway and energy infrastructure.

Part of the US$13.13b external debt includes the US$750 million Eurobond that the government floated in 2012 as part of the infrastructure financing drive.

From the bond, the government forwarded US$120m to the national railway firm, while electricity utility ZESCO got more than US$500m for hydro-power generation. But there is a huge catch to the bond.

Over the next ten years, the government will have to pay out US$400m in interest. Added to the principal, this means the government must find more than US$1b for the Eurobond alone.

This borrowing has raised concerns that the country could slip back into the debt trap that it found itself entangled in from the early 1990s. In 2005, the country benefited from debt relief offered to dozens of “highly indebted poor countries” by the Paris Club, a grouping of the world’s major state lenders. At that time, the country had a debt of US$7.2b, and less than a decade later it already owes about half that.

Former Finance Deputy Minister Miles Sampa has expressed concern that the government has already spent the US$750m acquired through the Eurobond issue in September 2012 – and so it will seek to borrow more money.

Sampa said there were indications that the government would soon be back on international markets in search of additional financing, mainly for infrastructure development. A proposal to borrow more funds is expected to be tabled before cabinet soon.

“We are in a hurry to develop and the manner in which we have dispensed the Eurobond funds shows our resolve to move fast,” Sampa said.

This has seen a lawmaker, Vincent Mwale (Movement for Multiparty Democracy – MMD), moving a motion in Parliament to curtail the powers of Finance Minister Alexander Chikwanda from contracting foreign debts.

If the motion is successful, the government and the Finance Minister would be compelled to seek Parliamentary approval before borrowing internationally.

In his motivation in Parliament on October 18, 2013 Mwale noted that if the motion is implemented it would curb borrowing. He argued that the rate at which the government was borrowing, was “reckless” and a cause for concern as it could see the country drowning in debt.

Mwale, who chairs the Parliamentary Accounts Committee, noted that within the last two-year period, the Zambian administration had borrowed over US$3.3 billion compared to the last five years.

Add to this the US$2b that the previous regime accrued and Zambia has thus borrowed US$5.3b in four years.

At the current rate of borrowing, it has become conceivable in some quarters that the external debt could rise by another 100 percent in the next three years. Mwale told Parliament that “granting power to one individual to commit the country to high levels of indebtedness is not progressive at all”.

He went on to note that if borrowing continued at current levels, then “the likelihood by government defaulting on its debt service obligation increases and as a risk of a country risking defaulting on its debt service obligation would also increases, adding that the country would in the end loss its social, economic and political power to bargain on any issues of national security”.

Manageable Debt

But Dr Bwalya Ng’andu, Deputy Governor (Operations) at the Bank of Zambia, said current borrowing trends and levels were sustainable. “Our debt level is about 29.4 percent of the GDP; that is within the capacity of the country to meet that level of debt. If you compare it to other countries that are B-rated in Africa, it is about 49 percent.

“So government has been reasonably prudent with the position it has taken to ensure that debt still remains sustainable. What you don’t want is borrow and begin to carry a burden you can’t afford in terms of servicing. “Governments all over the world run deficits; what is important is what you use the money for. If the money is going to enhance the productivity sector as the case is here, it’s a good thing. So there is no need for hullabaloo.

“Borrowing to invest in infrastructure, you make other sectors of the economy more productive and therefore, it will pay back. Borrowing to investing in infrastructure is the right thing to do,” he said. In an editorial, the influential The Post newspaper said the government should proceed with caution on the matter of borrowing.

“As things stand today, most of the revenue government collects through taxes is spent on paying the wages and salaries of civil servants and other public workers. Very little remains for capital expenditure. And to engage in capital expenditure, the government is forced to borrow.

“But debt capacity is always limited. You can only borrow up to a certain limit, a certain percentage of your income. It is not possible for one to have loan repayments that take up almost all the money that one earns, that is one’s total income…

“Soon, we will not be able to borrow anything that we can manage to repay. Debts need to be serviced. And the money that goes to debt servicing reduces current expenditure.

“What we have borrowed this year will take time to be fully repaid. And this means that every year we will have to reduce our expenditure by debt repayment obligations. But expenditure can also not be easily reduced.”

The paper urged the government to invest in sectors that would create revenue streams so that the country would not have to borrow as much. “If they take their destiny into their own hands and take an active attitude in increasing productivity, then national income increases.

And when national income increases, this means that the government will have more revenues to spend on social services and on infrastructure development.”  The Post also agreed with the Bank of Zambia that borrowing to finance infrastructure was sound practice.