RESOLVING ZAMBIA’S SOVEREIGN DEBT PROBLEM: A HOME-GROWN SOLUTION OR AN IMF SUPPORTED PROGRAMME?
Background and Problem
The last five years have seen government making frantic efforts to clinch a ‘bailout package’ from the International Monetary Fund (IMF). Success in clinching the package has however been elusive. With the change of government in August 2021, there has been renewed effort by the new government to bring the IMF to the table for assistance. A few meetings have since been made with the Fund to chart the way forward with the country’s debt problem. This has sent opinion-makers and critiques talking. Some critiques feel that the government is getting too close for comfort to the IMF, arguing that the newly found closeness between the government and the Fund reeks of a return to neo-liberal ideals which, apparently, wreaked havoc on the masses while the SAPs and HIPC initiative lasted. There has therefore been calls for home-grown solutions to the country’s debt problem.
The Depth of Zambia’s Debt Problem
The volume of Zambia’s sovereign debt has increased several folds in the last ten years. Between 2016 and 2020, the debt stock almost doubled from US$11,0 billion to US$20.5 billion. Table 2 shows that the majority (70%) of this debt has been external debt, which has also doubled from $7.7 billion in 2016 to $14.3 billion in 2020. The speedy growth in debt stock has exerted a lot of pressure on the nation’s treasury. Further, it led to downgrading of the country’s credit rating and loss of investor confidence: Moody’s rating downgraded the country’s credit rating to junk status, making the country a high-risk investment destination.
Foreign Debt Pitting the Country
Of all external debt contracted so far, 46.5% is commercial, 29.9% is bilateral and 23.7% is multilateral. The fact that 70% of the total sovereign debt is foreign pits the country against the vagaries of the foreign exchange market and developments in the balance of payments. A depreciation of the local currency for instance entails an increase in debt obligations denominated in foreign currency. As a matter of fact, the increase in debt obligations payable every year in the last few years can be attributed partly to depreciation of the local currency.
Debt Sustainability Debate
Debate as to the sustainability of the country’s sovereign debt started in the early parts of the last decade. While some opinion-makers argued that the country would soon be chocked with debt, government snubbed such arguments and re-assured the public that debt levels were within manageable and sustainable limits. The question of debt sustainability was however settled last year in 2020. Zambia become the first African country to default on its sovereign debt by failing to pay a coupon of $42.5 million on European issued bonds. While this default may not have been anticipated, looming problems on debt stress had already been acknowledged in the 2017 Debt Sustainability Analysis (DSA), and the 2019 Joint World Bank-IMF DSA actually concluded that Zambia’s risk of external debt distress was high (IDA[1] and IMF, 2019).
Full working paper here
The last five years have seen government making frantic efforts to clinch a ‘bailout package’ from the International Monetary Fund (IMF). Success in clinching the package has however been elusive. With the change of government in August 2021, there has been renewed effort by the new government to bring the IMF to the table for assistance. A few meetings have since been made with the Fund to chart the way forward with the country’s debt problem. This has sent opinion-makers and critiques talking. Some critiques feel that the government is getting too close for comfort to the IMF, arguing that the newly found closeness between the government and the Fund reeks of a return to neo-liberal ideals which, apparently, wreaked havoc on the masses while the SAPs and HIPC initiative lasted. There has therefore been calls for home-grown solutions to the country’s debt problem.
The Depth of Zambia’s Debt Problem
The volume of Zambia’s sovereign debt has increased several folds in the last ten years. Between 2016 and 2020, the debt stock almost doubled from US$11,0 billion to US$20.5 billion. Table 2 shows that the majority (70%) of this debt has been external debt, which has also doubled from $7.7 billion in 2016 to $14.3 billion in 2020. The speedy growth in debt stock has exerted a lot of pressure on the nation’s treasury. Further, it led to downgrading of the country’s credit rating and loss of investor confidence: Moody’s rating downgraded the country’s credit rating to junk status, making the country a high-risk investment destination.
Foreign Debt Pitting the Country
Of all external debt contracted so far, 46.5% is commercial, 29.9% is bilateral and 23.7% is multilateral. The fact that 70% of the total sovereign debt is foreign pits the country against the vagaries of the foreign exchange market and developments in the balance of payments. A depreciation of the local currency for instance entails an increase in debt obligations denominated in foreign currency. As a matter of fact, the increase in debt obligations payable every year in the last few years can be attributed partly to depreciation of the local currency.
Debt Sustainability Debate
Debate as to the sustainability of the country’s sovereign debt started in the early parts of the last decade. While some opinion-makers argued that the country would soon be chocked with debt, government snubbed such arguments and re-assured the public that debt levels were within manageable and sustainable limits. The question of debt sustainability was however settled last year in 2020. Zambia become the first African country to default on its sovereign debt by failing to pay a coupon of $42.5 million on European issued bonds. While this default may not have been anticipated, looming problems on debt stress had already been acknowledged in the 2017 Debt Sustainability Analysis (DSA), and the 2019 Joint World Bank-IMF DSA actually concluded that Zambia’s risk of external debt distress was high (IDA[1] and IMF, 2019).
Full working paper here