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Zambian Public Debt Sustainability

Zambian Public Debt Sustainability

Zambian economic performance has been largely dependent on copper mining, particularly as a source of foreign exchange earnings[1]. Copper mining accounted for 77.4% of Zambia’s total export earnings in 2017 (2016: 66.2%)[2]. However, copper mining has a relatively small contribution to gross domestic product (GDP) and employment. Mining and quarrying contributed 13.2% of GDP in 2016 whilst employing only 58,007 people (1.7% of the Zambian labour force)[3]. Therefore, export earnings declined sharply and the ZMK depreciated significantly after copper prices declined by an annual average of 33.3% from 2014 to 2016[4]. As a result, the balance of trade declined from a surplus of USD 1.6 billion in 2014 to a deficit averaging -USD 30.7 million from 2015 to 2017[5]. In addition, foreign exchange reserves declined from USD 3.0 billion in 2015 to USD 2.2 billion in 2017; and the ZMK depreciated by an annual average of 10.7% over this period[6]. This resulted in rising public debt and deteriorated the external public debt position. Public debt increased to an annual average of ZMK 126.3 billion from 2015 to 2017 (2014: ZMK 59.5 billion)[7]. In 2018, public debt is projected to continue increasing to ZMK 164.8 billion (60.0% of GDP)[8].

At these levels, public debt is at the upper limits of 60.0% of GDP in terms of the SADC macroeconomic convergence criteria and the domestic public debt target of 60.0%[9]. In addition, Zambia is at moderate risk of public debt distress because debt servicing costs are projected to increase from ZMK 10.9 million (21.6% of government revenue) in 2018, to an annual average of ZMK 13.6 million (21.8% of government revenue) from 2019 to 2021[10]. However, international reserves are projected to increase from USD 2.6 billion (2.8 months’ import cover) in 2018, to an annual average of USD 3.3 billion (3.1 months’ import cover) over the same period[11].

Zambian Public Debt Sustainability
Overview of Zambian Public Debt Sustainability

 

The main sources of public debt in Zambia is correlated with domestic and foreign factors. The domestic component of Zambia’s public debt came largely from treasury bills and government bonds; infrastructure loans; borrowing from commercial banks through loans and advances; parastatals debts; and accumulation of arrears on statutory liabilities[12].  On the other hand, the foreign public debt component was a result of excessive non-concessional borrowing, mainly from multilateral and bilateral financial institutions, private bank, and export credit agencies[13]. Following the decline in world commodity prices by the end of 2014 and the sharp depreciation of the ZMK, the fiscal deficit of Zambia increased from ZMK 1.7 billion (4.7% of GDP) in 2014 to an average of ZMK 2.1 billion (3.4% of GDP) from 2015 to 2017[14]. As a result, public debt increased from 2.7% of GDP in 2014 to an average of 3.4% of GDP from 2015 to 2017. In the forward-looking medium-term, public debt is projected to continue increasing from 4.3% of GDP in 2018 to an annual average of 4.6% of GDP from 2019 to 2021[15].

Zambia’s total public debt is projected to rise gradually from 60.0% of GDP in 2018 to an average of 63.3% of GDP over the medium-term period from 2019 to 2021. At these levels, public debt is projected to exceed the SADC prudential limit. Nonetheless, public debt will remain at manageable levels over the long term. Zambia’s GDP growth rate has been above the real effective interest rate from 2015 to 2017[16]. From 2015 to 2017, Zambia’s GDP grew at an average rate of 3.4% compared to an average effective interest rate of 3.5%[17]. In 2018, GDP growth is projected at 4.5% compared to an effective interest rate of 2.7%[18]. Over the forward-looking medium-term from 2019 to 2021, GDP growth is projected to remain at an average of 4.5% whilst the effective interest rate decreases to an average of 2.5%[19]. This means that Zambia should continue “growing” out of its debt. In other words, the Zambian economy should generate enough returns to service public debt.

Although public debt is projected to remain sustainable, the government of Zambia is faced with increasing debt-servicing costs. Interest payments as a share of total government revenue have increased from an average of 3.3% from 2015 to 2017, to 4.0% in 2018[20]. In the forward-looking medium-term from 2019 to 2021 interest payments are projected to decline to an average of 3.4% of total government revenue[21]. Hence the government of Zambia is projected to spend approximately a fifth of its budget on debt analysis.

Zambia’s total external debt decreased from an annual average of 37.5% of GDP from 2015 to 2017, to 37.3% of GDP in 2018. In the forward-looking medium-term from 2019 to 2021, Zambia’s external debt is projected to rise to an average of 41.8% of GDP[22]. In the process, the share of domestic debt to total public debt grew from an average of 21.7% from 2015 to 2017, to 22.7% in 2018. In the forward-looking medium-term from 2019 to 2021, share of domestic debt to public debt is projected to decline slightly to an average of 21.5% of GDP[23]. These fluctuations were driven by rapid exchange rate depreciation and heavy reliance on external sources to finance the growing fiscal imbalances[24].

Zambia needs strong and sustained fiscal consolidation including measures to increase domestic revenues in order to ensure that public debt remains sustainable. Thus, borrowing should only be undertaken for high-return capital expenditure and there should be limits on project overruns to strengthen public investment management capacities[25]. In addition, the government of Zambia should avoid borrowing on commercial or non-concessional terms to enable it service its debt.

 


[1] Saungweme, T. and Odhiambo, N.M. 2018. ‘An Analysis of Public Debt Servicing in Zambia: Trends, Reforms and Challenges’, Croatian International Relations Review, Vol. 24, No. 81, pp. 113-136. Available At: https://sciendo.com/ [Last Accessed: 6 January 2019].

[2] CSO 2018. Zambia in Figures 2018, Central Statistics Office: Lusaka. Available At: http://www.zamstats.gov.zm/ [Last Accessed: 6 January 2019].

[3] CSO 2018. Zambia in Figures 2018, Central Statistics Office, ibid.

[4] UNCTAD 2019. UNCTADStat Database, on the United Nations Conference on Trade and Development Website, viewed on 25 February 2019, from http://unctadstat.unctad.org/.

[5] IMF 2017. Zambia 2017 Article IV Consultation Report, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 15 February 2019].

[6] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[7]  IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[8]  IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[9]  RoZ 2017. Medium Term Debt Strategy: 2017-2019, Republic of Zambia: Ministry of Finance, Lusaka. Available At: http://www.mof.gov.zm/ [Last Accessed: 19 February 2019].

[10] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[11] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[12] Saungweme, T. and Odhiambo, N.M. 2018. ‘An Analysis of Public Debt Servicing in Zambia: Trends, Reforms and Challenges’, ibid.

[13] Saungweme, T. and Odhiambo, N.M. 2018. ‘An Analysis of Public Debt Servicing in Zambia: Trends, Reforms and Challenges’, ibid.

[14]  IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[15] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[16]  IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[17] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[18] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[19] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[20]  IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[21] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[22] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[23] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[24] IMF 2017. Zambia 2017 Article IV Consultation Report, ibid.

[25] Chirwa, T. and Odhiambo, N. 2016. ‘Macroeconomic Policy Reform and Economic Growth in Zambia’, EuroEconomica, Vol. 35, No. 2, pp. 156-166. Available At: http://journals.univ-danubius.ro/ [Last Accessed: 13 February 2019].

 

 


Sylvia Olawumi Israel-Akinbo

Role: Regional Analyst
Contact: sylvia@politicaleconomy.org.za
Sylvia is an Economist specialising in environmental and natural resource management...

Sylvia Olawumi Israel-Akinbo

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