The government is currently on an international roadshow looking to borrow $2bn through a new Eurobond. The money is needed to plug a funding hole in the revised 2015 Budget that has arisen due to the reduction in mining revenues following the mineral taxation regime reversal, lower copper prices and volumes. GRZ also has accumulated a number of expenses in arrears including payments to to the public pension system, agriculture subsidies and road projects.
So this Eurobond is different from previous Eurobonds because it is a necessity born out of fiscal incompetence. This point is important for two reasons. First, the price GRZ will pay for borrowing through this new $2bn Eurobond is likely to be dear, somewhere between 9-10% annually which will substantially push up debt serving costs (currently 25% of tax revenues). The servicing costs will get worse as the Kwacha depreciates further. Secondly, public debt levels are currently around 39.6% of GDP. With new external debt this is likely to rise above 50% of GDP, with sharper rises next year as election looms. Little wonder the ratings agencies appear worried.
The independent think tank JCTR recently observed :
A government that throws away its mining tax regime that would have ensured a more balanced budget should not be trusted with borrowed resources. Government has further surrendered markets and bus stations that would have brought in more revenue to government to PF cadres and yet they expect Zambians to support their borrowing spree. The poor economic choices of the government are no longer sustainable. Therefore, we call for the Executive to put its act together by intensifying domestic resource mobilization, rationalizing expenditure and asserting the nation’s fiscal sovereignty".
The JCTR is right to be worried. Unfortunately, the problem is that it is not clear what GRZ can actually do now that would make a material difference in 2015-16. The JCTR measures will not make a material difference. Even if the 2015 mining taxation was in place it would not solve the fiscal problems because copper prices have fallen substantially below GRZ projections. In any case GRZ's fiscal deficit projections have consistently been above projections for the last three consecutive years, which means the spending is always greater than budgeted for. One cannot trust Chikwanda's economic forecasts. Part of the reasons is that the fiscal deficit estimates never take into account the arrears. Zambia has a high underlying deficit.
What makes the issue even more desperately difficult currently is that there are serious revenue and expenditure risks facing GRZ. The revenue risks include the current energy shortage. We have a power deficit of around 560 MW which is affecting mining operations and other businesses. A sustained fall in copper prices may also lead to widening of the deficit as copper revenues come up short due to falling prices and volumes. The expenditure risks major around the forthcoming parliamentary and presidential elections scheduled for September 2016, which is likely to put enormous pressure on spending. GRZ also faces new spending pressures to address the power deficit itself. ZESCO is facing losses estimated at $270m (power import costs and reduced revenue). That is all without factoring in potential credit downgrades, rapid Kwacha depreciation, etc.
The macroeconomic situation is a very precarious one. So whilst the JCTR is to be applauded for its stance, the solutions it suggests there seem less credible in the short term. What people should do is acknowledge that there are few choices 2015-16 and focus on a medium term alternative, that takes on board the worsening situation 2015-16. We would suggest that macroeconomic picture will necessarily get worse before it gets better. And the getting better is not guaranteed, unless a new credible medium term plan for economic management is put forward by the Lungu administration.
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