While on the campaign trail in Mpulungu recently, President Edgar Lungu said that he had no problem with borrowing money to bring development to the people both in rural and urban areas of Zambia. What President Lungu has failed to understand is that if Government manages the economy properly then Zambia does not need to borrow vast sums of money and make large interest payments yearly in order to fund such projects. Furthermore, the current administration has failed to appreciate that if they continue borrowing at the current rate they risk sending the country into a state of economic turmoil.
Unlike sensible governments that prioritise domestic resource mobilisation, the PF has been on a borrowing spree since coming to power in 2011. In 3 years the PF has accumulated the same level of debt that was collected in the previous 27 years. On a recent visit to Zambia the IMF indicated their concern that the Government is unable to generate enough revenue to meet its regular development expenditure. Yet the President has clearly signaled that they will continue their trend. The recent revelations that Government wishes to issue another bond to finance the current debt is grossly worrying, particularly given the limited transparency with which such funds are then spent.
Any government that meets its expenditure by excessively relying on borrowing is guilty of economic mismanagement, and the PF is no exception.
What the PF Government has been telling us:
· Increased borrowing will raise financing for development;
· At 32 percent of GDP (US$ 7.9 billion), Zambia’s public debt remains sustainable.
What they are NOT telling us:
· Government has resorted to excessive borrowing due to fiscal indiscipline. The high level of corruption and lack of transparency in the procurement of road projects and other unplanned infrastructure projects has bloated Government’s expenditure. The failure to broaden the tax base, the under-collection of corporate income taxes, especially from the mines, and the underperformance of domestic VAT have all resulted in lower revenues. Therefore, Government continues to spend more money than it can generate, leading to a high fiscal deficit. The fiscal deficit which was just 1.8 percent of GDP in 2011 peaked at 6.7 percent of GDP by 2013, and 5.2 percent in 2014. To finance the deficit, Government has resorted to heavy borrowing.
· The high fiscal deficit, coupled with the PF’s continued insatiable appetite for borrowing, will soon make public debt unsustainable. Total public debt is currently at 32 percent of GDP. In other words Zambia owes, in real terms, US$ 7.9 billion in both external and domestic debt. It therefore goes without saying that should Zambia issue another international bond of, say, US$ 1 billion, we would have reached the unsustainable debt threshold of US$8 billion at the current GDP levels. We must remember that the level of debt the PF has built up over three years is equal to that previously accumulated over 27 years and had to be written off.
The implications of more borrowing:
· Debt servicing costs are rapidly increasing and are crowding out pro-poor spending. The high interest debt burden absorbs a significant amount of government revenues. To illustrate this point, interest payments on both domestic and external debt, which were just K1 billion in 2011, now stand at K5.3 billion in 2015. This is nearly as much as the K5.6 billion Government intends to spend on road infrastructure in 2015 and more than the K4.5 billion health sector spending.
· A Kwacha that is depreciating against the dollar means more Kwacha is needed to pay off external debt. The recent fluctuation of the Kwacha has made external debt service payments more expensive. For example, at the time the budget was being prepared, the dollar was trading at K6.1 to the dollar and now it is K7.1 to the dollar. A debt of US$100,000 will now need payment of K710,000 and not K610,000; this means a loss of K100,000 within 6 months diverted from development needs.
· Government has been crowding out the private sector despite saying it is the engine of growth. Due to heavy borrowing on the domestic market, Government has been using up domestic private savings that would otherwise have been available for private sector lending. Most of the local firms which are SMEs have no access to international financing have been refused loans by local banks because of the PF Government’s insatiable appetite for borrowing without regard for the private sector. The smaller remaining pool of loanable funds in the market has raised the cost of capital for private borrowers (high interest rates), thereby reducing investment demand, and hence affecting growth and welfare. If you are wondering why economic growth has been on the decline since the PF came into power then this is part of the reason.
· The UPND will grow the economy by addressing the bottlenecks faced by the private sector which accounts for over 90 percent of employment and is the only way to create the amount of new jobs Zambia needs. We will look at reducing the cost of doing business (including interest rates) and improving access to investment capital.
· The UPND will prioritise domestic resource mobilisation by increasing the efficiency and effectiveness of the Zambia Revenue Authority and other revenue collection agencies, as well as curbing the high capital flight, tax evasion and tax avoidance.
· While Government continues to sing the song that the national debt is sustainable, they are not telling us how we will pay back the owed money. UPND will put in place a robust long-term debt management strategy that will ensure that new borrowings follow legal and fiscal responsibility guidelines, as opposed to the current haphazard borrowing.
· The UPND will use existing information and commission further research to estimate the cost of depreciation of existing capital stock to come up with optimal budget allocations in order to prioritise Operations and Maintenance of existing high-return infrastructure projects.
· The UPND will mitigate political expedience and corruption in infrastructure projects by, among other measures, reverting the Road Development Agency to the Ministry of Transport, Works, Supply and Communications and ensuring transparency and planning of projects in accordance with Government vision.
· Lastly, there are many options for infrastructure development that can be considered and would reduce the cost to Government, for example the Build Operate and Transfer (BOT) model that was used on the Kenneth Kaunda International Airport (KKIA) but later cancelled by the PF. The PF preferred to build the airport at the cost of over US$300 million as opposed to a BOT arrangement of US$100 million.
Together We Can