Economist Magazine writes about Zambia’s reckless borrowing

Economist Magazine writes about Zambia’s reckless borrowing

Published in the Economist Magazine 

Reckless in Lusaka

Zambia’s looming debt crisis is a warning for the rest of Africa
A decade after debt relief, the country is horribly in hock again

DEBT stalks Africa once again. Over the past six years sub-Saharan governments have issued $81bn in dollar bonds to investors hungry for yield. Piled on top of this are murkier syndicated loans and bilateral debts, many to China and tied to big construction projects. Public debt has climbed above 50% of GDP in half the countries in sub-Saharan Africa. The risk of a crisis is growing. Consider Zambia. In 2012 this southern African country could borrow more cheaply than Spain. Now bond yields have jumped above 16%, suggesting that investors fear that it will default (see article). This fall from grace offers several lessons.

Time to tighten the copperbelt

The first relates to the “moral hazard” of debt write-offs. Zambia, along with 29 other African countries, had many of its debts wiped clean since 2005 under the IMF’s “heavily indebted poor countries” (HIPC) scheme. Sceptics such as William Easterly, an economist, warned at the time that debt relief would simply encourage more reckless borrowing by crooked governments unless it was accompanied by reforms to speed up economic growth and improve governance.

To be fair, the scheme did a lot of good by freeing up money for schools and clinics. But Mr Easterly’s warning was prescient. Zambia took barely a decade to run up fresh debt worth 59% of GDP. The government blames a fall in copper prices from 2011. But the real reason is that Zambia is run by an inept and venal elite who used easy credit to line their own pockets. Much of the money Zambia borrowed was squandered or stolen. Bigwigs skimmed from worthy-sounding contracts. When the country bought bright new fire-engines their price somehow ballooned by 70%, to more than $1m each. Its new roads mysteriously cost twice as much per kilometre as its neighbours’. Its new airport terminal was designed to accommodate an improbable ten-fold jump in traffic. A slide into authoritarianism made corruption harder to check. Zambia’s main independent paper, which used to squeal about graft, was shut down.

The second lesson is that an increasing number of creditors are willing to encourage irresponsible borrowing. By 2016, when it was clear that Zambia was hurtling towards a crisis, the IMF urged it to put a brake on new borrowing. A spike in interest rates in the bond market provided some discipline. Yet governments, particularly China’s, were happy to fill the gap. China now holds perhaps a quarter to a third of Zambia’s external debt. (No one knows how much—itself a cause for concern.) The regime has also asked for loans from Turkey, which has ambitions in Africa. That leads to the third lesson. The rules for how to handle Africa’s debt crises are changing. In the past much of the money was owed to the World Bank, IMF and Paris Club, an informal group of Western government creditors. This gave the fund the power to demand prudent economic reforms as a condition for help. Now China’s influence has risen—and it puts much less emphasis on good governance. The IMF’s clout has diminished. When the fund’s representative irked Zambia’s president, Edgar Lungu, the regime demanded his removal. Amazingly, the fund complied.

Because so many competing interests are involved, Zambia’s latest debt mess will be much harder to unscramble. Western creditors and the IMF want the government to stop wasting money on overpriced infrastructure. But the Chinese banks that finance infrastructure projects are also large creditors whose short-term loans to Zambia need to be restructured. If projects are cancelled, they may refuse to roll over existing loans. Or they may demand to be given, say, Zambia’s state power utility as compensation. A crisis will be inevitable unless all creditors, China included, give the IMF the backing it needs to chivvy Zambia into getting its finances in order and its economy back on track. Alas, that seems all too unlikely.

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COMMENTS

WORDPRESS: 7
  • comment-avatar
    nefertiti 1 week ago

    I can see with my own eyes what the borrowed money has done for this country. We’ve discovered the formula of getting rich. OPM. And of course certain sections of the global community aren’t happy. Tough luck

  • comment-avatar
    Joseph.Mwape 1 week ago

    This the end result of voting people who have no VISION twasebana.

  • comment-avatar
    Mainza 1 week ago

    Well written, but who will listen? Certainly not the master thug, electoral thief and chief kick-back taker and tribalist.

  • comment-avatar
    CHINESE WOMAN 1 week ago

    I feel pity for the Zambian black bitch our Chinese men have very small and short dicks we are never satisfied that’s why I’m sleeping with a Zambian who has a 100 inch dich I normally faint afterwards he is one of the cabinet ministers

  • comment-avatar

    Zambia’s debt at about 32% of GDP is much lower. Japan’s debt is at 220% of GDP , United States at more than 100% of GDP, Greece at 180%, South Africa, Ghana and Cameroon’s is at more than 50% of their GDPs

  • comment-avatar
    sipinya sa ng'aka 1 week ago

    Ne nsoni ta ba kwata, galivanting all over the world with a huge debt tag connected to their name. Despicable! Live within your means and frugality should be the by word.

  • comment-avatar
    Newbi 1 week ago

    Good analysis and unfortunately true.  Hard times are upon Zambia due to irresponsible, reckless, immoral behavior by it’s government. 
    But ZWD, what the hell does this article have to do with the Chinese man/Zambian woman pictures above? 
    Can’t you ever just report facts with professionalism and decorum or must you always show your ass as ignorant and slanderous?