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Zambia: Fiscal consolidation needed to end debt spiral

By David Whitehouse
Posted on Monday, 3 August 2020 17:27

Zambian President Edgar Lungu participates in a discussion at the World Economic Forum on Africa 2017 meeting in Durban, South Africa May 4, 2017. REUTERS/Rogan Ward

Zambia risks losing access to international debt markets unless it can offer a convincing programme of fiscal reforms.

The economy was already doing badly even before COVID-19 making the current debt situation “unsustainable”, says John Paton, CEO of the British Chamber of Commerce in Zambia.

Zambia’s problems highlight the difficulties faced by countries which move from low to lower-middle-income status, which reduces access to concessional financing and introduces bond market discipline.

  • After becoming a lower-middle-income country in 2011, Zambia sold three Eurobonds totalling $3bn, mainly to finance infrastructure development, between 2012 and 2015.
  • In December 2019, the Zambia Institute for Policy Analysis and Research (ZIPAR) reported that there was no clear sign of where the money for the first repayment of $750m in September 2022 was going to come from.
  • In July this year, the IMF completed a virtual mission to Zambia to discuss the country’s request for emergency support.
  • “The IMF has not been able to help countries who do not have sustainable income versus expenditure,” says Paton. “Something has to give. We have to bring expenditure under control.”
  • Between 40% and 50% of government expenditure goes on the civil service, he says. “It’s one way of getting votes,” says Paton, but “there’s not much left to run the country.” Furthermore, Paton says, Zambia’s debts to China are probably not fully accounted for in the official figures.
  • According to Rafael Molina at Newstate Partners, which is representing a committee of Zambia’s creditors, the government should engage with civil society to show that it is serious about developing an economic reform programme.

READ MORE Zambia: IMF support needed to avoid Argentina-style default

A result of spending too much on infrastructure and the civil service, is that not enough has been allocated to health notes Paton. People with COVID-19 who can’t afford private treatment are being turned away from hospitals. Some have been sleeping in cars outside hospitals in the hope of getting a bed. Nor is there the capacity to compile reliable statistics on the numbers of people killed by COVID-19.

Fiscal weakness

Even before the onset of COVID-19, the ZIPAR wrote in December 2019 wrote that the country was “sliding closer and closer to a sovereign default.”

  • Tax revenues in September 2019 were 17% lower than had been projected.
  • The ZIPAR argues that “credible fiscal consolidation” is key to bringing down the fiscal deficit and slowing debt accumulation.
  • That means strengthening domestic revenue mobilisation and containing capital spending. “The markets want to see a commitment from the Government to stabilise the fiscal and macroeconomic environment.”

Fiscal consolidation will have to be achieved at the same time as supporting small businesses reeling from the economic effects of COVID-19. From May 11 to June 5, Impact Capital Africa surveyed 416 Zambian businesses on the impact of the pandemic.

  • Of those companies, 48% said they were at risk of business failure within the next 12 months. Most of those were micro and small businesses.
  • The worst affected sectors are construction and infrastructure, media, transport and logistics, and waste management.
  • The government has put in place a medium-term refinancing facility worth 10bn kacha ($550m) to refinance or extend new credit to businesses and households.

Zambia should avoid a default “at all costs”, the ZIPAR says. “The short-term and long-term costs of defaulting are immense and would be catastrophic for the ordinary Zambians.”

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Access to international debt markets would be lost for a long time or for good. “The IMF sends missions, the markets don’t,” says the ZIPAR. “Instead, they dump the bonds in the secondary market.”

Bottom Line

Increasing tax income is likely to be easier than reducing spending in the context of the pandemic.

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