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Monday, 6 July 2015

Zambia's borrowing spree!

Finance Minister Alexander Chikwanda’s speech to Parliament last month announced that government has a new unforeseen shortfall of K20bn ($2.7bn). It needs to find this to meet its spending commitments. He said that he hoped to cut that down by K5bn ($0.7bn) from “rationalising expenditure” (i.e. making cuts to existing commitments). We were told that the remaining $2.0bn would need to come from external borrowing.

But then in the same speech he said this: “I requesting the House to increase the ceiling on external borrowing from the current K35 billion to K60 billion. This will enable us to have greater recourse to external financing which at current international rates is cheaper than domestic borrowing. we intend to use any such resources to complete the various developmental projects that we commended”.

Since that speech the debt ceiling has indeed been increased by $3.3bn. So now Chikwanda has room to borrow an additional $3.3bn when allegedly he only needs $2.0bn. Why this discrepancy? The answer is that Chikwanda does not really believe the $0.7bn can be found through cuts elsewhere plus he anticipates even more overruns with next year’s election in sight.

The upshot of all this is that we can safely assume that GRZ may nearly double public sector debt this year with probably more next year. This should worry everyone especially that currently we are spending 25% of tax revenues on debt servicing. This is only likely to get worse with more borrowing. In short, we are like a person in debt who is just borrowing to repay debts, hoping that the small investments (on roads and electricity) will somehow help us break free. This level of borrowing will now mean more that Zambia’s debt is above 50% of its GDP. Significantly above Chikwanda’s so called “international accepted debt threshold” of 40%.

With economic growth slowing down, it is not clear where the “breaking free” will come from. Zambia appears to be now locked in some debt spiral. The latest downgrade from S&P comes at a time when the Kwacha has renewed its depreciation., following a brief recovery when the Sata mining taxation regime was abandoned and BOZ undertook monetary tightening. But now the Kwacha is struggling again, as weak growth prospects combine with diminishing confidence in the Lungu government's ability to manage national finances. 

The markets are not confident that Chikwanda has a plan beyond just borrowing at any cost. Until that changes things will get a lot worse. One only has to look at the yields on the existing Eurobonds which reached record levels this week. 

Chola Mukanga 
Copyright © Zambian Economist 2015 

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  1. Given that we are just returning from at least two eurobond rounds of borrowing, there is cause for serious worry. Our leaders need to re-assess the decisions they make and show some care for the long-term implications. We have been down this path before. And all this hardly 10 years after the massive write-off of the HIPC era in the Mwanawasa Administration. What really happens to the money that falls into government hands?

  2. I always knew that Zimbabwe was the fiscally responsible country - until for 5 years (1991-1996) they followed the 'conditionalities' and ESAP of the IMF/World Bank and almost destroyed the economy.

    This is Zimbabwe's fiscal position today:


    (NEWZIMBABWE) Chinamasa mediocre, economically illiterate, says Biti
    03/08/2015 00:00:00
    by Staff Reporter

    In the statement, Chinamasa revised the country’s revenue projections for 2015 to $US3,6 billion, down from $US3,99 billion while estimating government expenditure to hit US$4,1bn by the end of the fiscal year.


    So they have a budget overrun of a mere $0.5 billion.

    How does that compare to the billions lent by the PF government in the form of Eurobonds?


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