Press Release by JCTR :
Zambia's Sovereign Credit Rating May Increase Zambia's Debt Burden
Zambia has been rated with a B+ by an American Credit Rating Agency, Fitch Ratings, as announced by the Minister of Finance on 3rd March 2011. The rating is meant to estimate Zambia’s credit worthiness and has been partly influenced by among other things; low levels of external debt, a fast growing economy and a stable political environment. With substantial debt reduction through the Highly Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI), an annual average economic growth rate of 6.1% in the last five years and a stable political and economic environment; Zambia’s credit worthiness has improved and thus has joined countries like Ghana, Kenya and Angola and can now access credit on the international market by issuing bonds.
The development has elated many, especially those in government circles. This is because of wider international sources of credit that the rating has created. With declining donor aid and a tax system that has failed to optimise tax revenue from the economic growth the country has been recording, it is not surprising that this development has excited government. Aid financing in the 2011 budget for example has reduced from 14.5% in 2010 budget to 7.7%.
“While a sovereign rating is a milestone for Zambia as it offers alternative sources of financing to traditional ones (IMF and World Bank), It is however important to be mindful of the debt burden implication of this development for Zambia”, warns Geoffrey Chongo, Programme Manager of Economic Equity and Development of the Jesuit Centre for Theological Reflection (JCTR). The grade itself is not good enough to attract loans at very low interest rates. “As the B+ status implies a high possibility of default by the country issuing bonds, Zambia will have to offer high interest rate on bonds to attract investors which will certainly increase the county’s debt burden and ultimately compromise government’s ability to deliver social and economic services”, adds Geoffrey.
JCTR’s concerns largely stems from the fact that both external and internal debts have been steadily rising and if left unchecked might take the country back to unsustainable debt levels of the pre HIPC/ MDRI period. The public external debt currently stands at US$1.2 billion and with the pending issuance of US$1 billion worth of bonds; it will soon rise to US $2.2 billion. Private and Parastatal debts stand at US$2.2 billion and domestic debt at K10.5 trillion (approximately US $2.2 billion). We are being told Zambia can borrow more because repayment is in the distant future and we only owe US$1.2 billion as public debt. According to Mr Chongo, “It should be noted that though a larger share of external debt is private, part of it is publicly guaranteed and if private and parastatal borrowers fail to pay, the Zambian people will have to pay.” Government therefore ought to be cautious in the way it contracts new debts.
The sovereign rating must bring about real development into people’s lives otherwise it will be meaningless to the majority of the Zambian people. While at the macro level the rating might indeed result into increased capital flow to Zambia and possibly a decline in domestic interest rates; mechanisms must be put in place to ensure that ordinary people benefit from expected increased flow of capital. As long as Zambia continues to borrow to finance projects that have no direct benefit to the people, the sovereign rating will mean nothing to Zambians. The assertion that Zambia can continue borrowing because the economy is growing fast only holds for public debt if government is collecting enough tax revenue proportional to the growth in the economy to repay debt. However, this has not been the case with Zambia. While the economy has been growing, the tax revenue being collected has been declining from 19.2% in 2000 to 15% of GDP in 2009. Therefore, the economy’s capacity to repay public loans is still weak and therefore credit should not be contracted on this basis alone.
JCTR therefore continues to urge government to review its tax regime to make it more responsive to the growth of the economy for the country to be able to pay debts that is likely to result from the sovereign rating. JCTR also reiterates its call for effective Parliamentary oversight over Ministry of Finance and National Planning (MoFNP) in the area of loan contraction. “As long as MoFNP is left to negotiate and contract loans on behalf of the 13 million Zambians without Parliamentary oversight, Zambia will continue accruing debt with little impact on the lives of people”, states Mr Chongo.