Respected Former Bank of Zambia Governor Caleb Fundanga has raised serious concerns over the country’s worsening debt situation.
In his latest paper titled, “Fit for Purpose? An Analysis of Zambia’s Medium-Term Debt Management Strategy, Dr Fundanga observed the three Eurobonds have completely reversed the country’s almost debt free status attained before 2011.
Dr Fundanga noted that Zambia was one of the countries that benefitted from the Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDR) Initiatives noting that these initiatives left the country almost debt free.
He however observed that in recent years, the Zambian debt situation has completely reversed.
Dr Fundanga stated that with a debt stock of 18.9 percent of GDP in 2011 Zambia’s debt stock grew to 56.3 percent by 2015.
“This very rapid increase has occurred since 2012 due to the issuance of Eurobonds; US$750 million in 2012, US$1 billion in 2014 and US1.25 billion in 2015. The rapid increase in debt has translated into huge annual debt service payments; from US$34.14 million in 2011 to US$484 million in 2016,” he wrote.
Dr Fundanga observed that the domestic debt situation has been equally bad.
“This debt, mainly contracted through issuance of Treasury Bills and Bonds, has grown from ZMK11 billion in 2011 to ZMK33 billion in 2015 with resultant composite yield rates for Bonds rising from 15 percent in 2011 to 25 percent in 2015 whilst Treasury Bills rose from 11 per cent in 2011 to 24 per cent in 2015. When domestic arrears are added to this, domestic debt stock in 2016 stood at ZMK 51.8 billion – with arrears representing 36 per cent of domestic debt.”
The Former Central Bank Chief stated that the PF government has been using debt to drive growth.
He however noted that redemption of any debt works much better if the proceeds of the borrowed money are invested in productive sectors of the economy.
“In the case of Zambia a large portion of the loans went into expansion of public administration such as the establishment of a new province and new districts. Each of these led to employment of more public servants and increases in other related costs. A number of roads were also constructed, but these were at very high costs. Together this spending has not resulted in significant economic growth, or a larger tax base. This makes redemption of loans much harder,” he stated.
Dr Fundanga has however applauded government’s initiative to launch Zambia’s first Medium Term Debt Management Strategy (MTDMS) paper to cover the period 2017-2019.
He noted that a MTDMS is a document designed to help a government implement sound debt management for a period of between three to five years.
According to the World Bank and IMF, who have developed a tool for formulating MTDMS, the primary aim of debt management is to raise the amount of funding required by a country at the lowest possible cost over the medium to long-term, consistent with a prudent degree of risk.
The strategy should be such that it promotes macro-financial stability and financial sector development.
On domestic debt, Dr Fundanga stated that at 36% of Domestic Debt Zambia’s payment arrears are one of the highest in sub-Saharan Africa and reflect poor public financial management and that the huge arrears also reflect a lack of budget discipline.
He noted that the failure to pay suppliers to government negatively affects economic performance as these suppliers also fail to pay those who supply them with goods, including payment of salaries and wages to employees.
Dr Fundanga said payment arrears result in costlier procurement for government as the suppliers factor in delayed payment into price quotations.
“Payment arrears are also a source of corruption as supplies devise various approaches to exit the payment pipeline. The MTDMS could provide more clarity on the Government’s arrears strategy,” he wrote.
And on Eurobond redemption plans, Dr Fundanga said the MTDMS does not provide a concrete plan on how Zambia’s significant Eurobond debt will be redeemed.
“Recent statements from senior government officials have suggested two possible approaches; the first is establishing a sinking fund and the second is the refinancing of maturing bonds with longer dates bonds at a more favourable rate. A sinking fund would have worked better if established immediately at the time of issue of the first bond because annual outlays into the fund would have been modest.”
He observed that re-financing may be a better option at this time, but is subject to the vagaries of international debt markets.
Dr Fundanga charged that the MTDMS was a missed opportunity to offer the markets and international bodies clarity on the Government’s approach to redeeming the Eurobonds.
On controlling the acquisition of New Debt, Dr Fundanga said fiscal consolidation, or strong policies to reduce deficits and accumulation of debt stock, and measures to enhance revenue collection were expected to feature prominently in the MTDMS, but they are not present.
He stated that budget discipline as well as measures to deal with loss making parastatals are central features of fiscal consolidation and prudent debt management.
“While the charging of cost reflective electricity tariffs, removal of fuel subsidies and removal of some agricultural input subsidies have been undertaken by the government, there are still a number of loss making parastatals remaining and these are the same entities responsible for government contingent liabilities (which the MTDMS is silent on, but are classed as public debt by the IMF and international bodies). For Zambia what is particularly worrisome is the increasing number of parastatals being established by the industrial Development Corporation (IDC) including the establishment of a national airline, most likely, with borrowed funds,” he said.
Dr Fundanga said the MTDMS should encompass plans to manage these loans, but at the moment it does not.
He suggested that in addition to ensure Parliamentary oversight in the contraction of new loans the government should facilitate for the enactment of the Public Finance Act.
Dr Fundanga observed that such a law would ensure that no new loans can be contracted without the approval of parliament.
“Despite these potential gaps the MTDMS is a huge step forward and presents a welcome move by the Government in tackling the rising debt challenge. But the MTDMS can only be a success if the capacity, capability and resources are in place to implement the MTDMS. Good debt management requires that the National Debt Office is well staffed. Zambia requires well qualified officers to facilitate the segregation of front, middle and back offices. Further debt office staff should be professional enough to be able to tell the Government when its borrowing is excessive.”