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Saturday, 18 January 2014

Debtmania Zambia

The planned $1bn Eurobond before Christmas did not materialise. It is due any moment in the near future. In meantime GRZ has already been very active on borrowing from other sources. Last month alone Zambia borrowed over $200m. The publicly announced borrowing include :

A loan agreement with European Investment Bank (EIB) worth $102 million (€75m) to support improvement to water and sanitation infrastructure in the Copperbelt where most existing water infrastructure is more than 50 years old. The money will go to Mulonga Water and Sewerage Company (Source : New Europe).

A $38m loan with the African Developmen Bank (ADB) to support to farmers who have been affected by “climate change” to improve their yield. GRZ estimates that the loan will benefit over 800,000 households in six districts across Lusaka, Central and Southern Provinces over the next five years. Daniel Munkombwe worryingly believes “the project will help turn Southern Province into a food basket of the country”. (Source : ZNBC)

A mixed loan and grant agreement with China worth US$66m to be repaid over a period of 20 years. The deal was heralded by Alexander Chikwanda as an effort “to accelerate development". China's Zhou Yunxiao was more circumspect by suggesting how the money is used is to be "discussed by the two governments" (Source: ZANIS)

These borrowing agreements demonstrate the many challenges the country is facing. We are desperate to borrow because we are in a deplorable condition. One only needs to look at the desperate state of our water supply to see that it is on life support. And yet, it is also clear that endless foreign borrowing is not sustainable because we can't borrow our way out of all our problems! There are essentially at least five governance problems with PF's rampant borrowing.

First, it is not evidence based. Securing debt is not necessarily a bad thing if we are spending money on projects subjected to cost benefit analysis (CBA). Unfortunately, we seem to borrow at every opportunity. The causes may appear good on paper but the there's no clear assessment of how various projects compare within a given portfolio. Nor is it clear the extent to which foreign borrowing is a better approach than other policy / finance choices (e.g. raising taxes or private sector funding). Just how are decisions made about what, when, where, why and how to borrow?

Secondly, it is based on flawed understanding. There are people in Zambia who think borrowed money is free. We need to realise that debt incurred today means higher taxes. So no one should be deluded that foreign borrowing is free money. We are taxing future generations by borrowing today! How do we think that external debt will be paid back? It is never wise to build an economy on large foreign borrowing because it makes us poorer in the long term. Especially when many of these loans go on things that are mere enablers of development with no direct short or medium term financial benefits.

Thirdly, it is not transparent. The terms of these loan agreements are not made public. Apart from the Eurobond no one really knows the detailed terms of all the loans we have. This is especially the case for loan contracts between China and Zambia which are essentially agreed by the Finance Minister and President. This lack of transparency makes it difficult to assess how much debt is being contracted and on what terms. It also increases the risk that funds will not be used for the intended purposes and might turn out to be cases of illegitimate debt in the future.

Fourthly, it is largely foreign driven. Many of the debt acquisitions by Government actually are forced on the Zambian people one way or another. Whether through political capture or just general ignorance of the public. This is usually done by foreign governments who lend money to Zambia to achieve their geopolitical goals. When the Chinese give you a loan to buy their fighter planes, it is usually on their terms and for their purposes. This is why Mr Zhou Yunxiao always likes to add that where money is to be spent depends on "discussion" with Beijing.

Finally, lack of oversight. Zambia's debt acquisition rests solely in PF hands and not the Zambian people. There's zero parliamentary oversight because no legal framework in form of a proper Debt Management Bill exists. Government after government has rejected it. Right now the PF government has not published its Debt Sustainability Analysis. So how do MPs really know it is sustainable to borrow? How do they know Zambia can afford to pay back without significant cost cutting in other areas?

All of these points to the need for an overhaul of the debt contracting system. If we have learnt anything from the bad mining development agreements saga is that the Zambian people should have a greater say on long term financial arrangement that their children and grand children will eventually have to pay back. There should be a halt to all external debt procurement by public bodies until that is resolved - not least because Zambia has not fully capitalised on leveraging domestic sources of revenue. We must keep demanding change in this area and never tire! It is our future!

Chola Mukanga | Economist
Copyright © Zambian Economist 2013

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