Government last week issued the press release below on the current levels of public debt. GRZ is not known for this level of information flow, so the update represents a right step in keeping people informed :
The Zambian Government is on course with all external debt obligations. This is consistent with the need to maintain credit worthiness and safeguard macroeconomic stability through debt sustainability.In addition, both external [adding the USD 1 Billion Sovereign Bond] and domestic debt levels remain below the international thresholds of 40% and 25%, respectively. To ensure that we continue on this path, the Ministry of Finance will continue to maintain high standards of financial and economic governance.
As at end of March, 2014, external debt stood at US $3.16 billion or 15.72% of GDP whilst domestic debt stood at K20.2 billion or approximately 16.57% of GDP.
For the period under review, total external debt service (principal plus interest payments) stood at USD48.8 Million of which USD 8.9 Million was a payment made in January, USD 2.3 Million in February, and USD 37.7 Million in March, 2014.During the same period, total domestic debt service (principal plus interest payments) stood at K2.6 Billion of which K930.8 Million was a payment made in January, K887.3 Million in February, and K830.2 Million in March, 2014, respectively.The economy is heading out of turbulence as attested by the positive response of the international investor community to issuance of the USD1 Billion Sovereign Bond. The ratings actions of International Rating Agencies, Standard & Poor’s and Fitch are also positive factors to consider.Precision in the implementation of development programmes overseen by relevant Ministries, Provinces and other Spending Agencies will be cardinal in order to ensure that projects, whose progress was constrained by rains, are now speedily executed in conformity with the Governments objective of widespread job-creation and poverty reduction.(Source: MINISTRY OF FINANCE)
There's a lot of misguided points in the press release. And I have not got time to go through it in detail.
But one thing that baffles me is this repeated reference to "international thresholds of 40% and 25%". There's no such thresholds. As I understand these figures the numbers are taken from general empirical work by Reinhart and Rogoff.
As with all empirical work it is not supposed to be taken literally. For one thing the work should not be taken to mean that as long as you are below 40% you are okay. For the simple reason that some emerging countries have experienced defaults below that level.
The other point is that that simply looking at 40% threshold ignores other factors that lead to debt crises. These include : country’s economic quality, country’s political and institutional quality, and government’s debt quality. The last factor is not to be ignored. Simply put : who you have borrowed from matters!
Incidentally, if we learnt anything last year about public debt, it is that the empirical evidence is fiercely debated. In 2013 Reinhart and Rogoff came under attack by a new paper from three economists who uncovered data omissions and questionable methods of weighting in their empirical work on debt. Since then many people look on their empirical work in this area with scepticism.
These are all very complicated issues. My point here is simply to observe that the notion of "international thresholds" is analytical comedy at best, which preys on the ignorant. Here is what the IMF Working Paper (2014) by Escartori et al released in February concludes :
Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt TRAJECTORY can be as important as the debt level in understanding future growth prospects.
That conclusion actually gives greater ammunition to people who worry that the problem with Zambia's debt is not so much its level but its rapid upward TRAJECTORY. The RATE at which Zambia is borrowing is what concerns many. And that is what is not being addressed in all these press releases.
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Chola Mukanga | Economist
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