Macro Outlook

Zambia’s dependency ratio indicates future debt crises

By David Whitehouse

Posted on November 25, 2020 13:23 – 2020-07-15T090243.544 © Zambia’s harvest starting in April will be crucial for food inflation. REUTERS/Darrin Zammit
Zambia’s harvest starting in April will be crucial for food inflation. REUTERS/Darrin Zammit

With a population that has a higher number of children and elderly, Zambia is left with not enough workers. Its dependency ratio leaves it vulnerable to taking on too much future debt, regardless of any post-default restructuring solution.

Zambia is far from alone. A report from Charles Robertson at Renaissance Capital in November advises investors to be wary of countries with current-account deficits combined with fertility rates which are forecast to stay high until 2040.

High fertility rates combined with large cohorts of older people create a low dependency ratio, where there are relatively few people of working age to generate enough money to support the young and the elderly. Such countries, Robertson writes, will need high interest rates and will be under most pressure to take on too much debt, as happened in Latin America in the 1970s and 1980s.

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The dependency ratio can be used as an indicator of likely future debt crises – and of the likelihood that a country will want to turn to China to borrow. Countries most at risk of an excessive debt burden in Africa over the next 20 years include Zambia, Nigeria, the Democratic Republic of Congo, and Angola, which is at risk of default, Robertson writes.

  • He gives Morocco and Mauritius as examples of countries with fewer children and higher levels of private saving.
  • According to the World Bank, Zambia’s dependency ratio, defined as the number of people younger than 15 or older than 64 for every 100 working-age people, stood at 87 in 2019. That’s the same as in Nigeria, and compares with 96 in the DRC and 95 in Angola.
  • African countries with fewer dependents for every 100 people of working age include Morocco and South Africa on 52, Algeria on 59 and Tunisia on 49.

“A high fertility rate coupled with low levels of schooling and disproportionate burden on the adults within the formal and informal labour force suggests a high burden on available human and household financial capital resources, structural pressure on personal income tax and lower potential to improve household spending capacity,” says Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town.

  • In such countries, she says, the fiscal account will “remain under pressure due to high recurrent expenditures and below-potential personal tax revenue receipts, which could leave a structural shortfall that need to be met via borrowing.”
  • A consequence of too many dependents, Erasmus argues, is to distort the results of borrowing even for capital investment. The basic premise of borrowing for energy and transport infrastructure projects is that future revenue streams will pay off the project loan.
  • “Weak disposable household income capacity limits the degree to which households can be levied for the use of these public goods,” says Erasmus. This shifts the burden towards companies, erodes their profitability and lowers business income tax revenue, she adds.

Zambia elections

Zambia faces a long road back to economic stability following default in November. Its current account deficit and debt woes, Robertson notes, have worsened despite copper prices near five-year highs.

Short-term economic prospects are poor. According to RMB Markets Research, the economy will contract by 4.8% in 2020, while inflation will average 15.2%. The kwacha, now at 20.94 to the US dollar, is forecast to keep weakening and end 2021 at 32.5. That will drive up inflation to 18.7% next year, says RMB.

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With elections due in August 2021, the near-term chances of bold economic reforms are thin.

  • Hakainde Hichilema, leader of the opposition United Party for National Development (UPND), may have a chance of victory if he presents himself as capable of delivering macroeconomic and debt stability, says Zaynab Mohamed, a political analyst at NKC.
  • If President Edgar Lungu wins again, Western lenders and businesses will likely steer clear, unless a bailout can be agreed with the IMF or a there is a change of leadership within the ruling Patriotic Front, she adds. “The government’s international reputation has been severely damaged.”
  • Any long-term way out for Zambia, says Erasmus, depends on achieving a higher national savings rate. This could be done by raising productivity through broadening the formal labour market and accelerating skills development, she says.

Bottom line

The dependency ratio gives a clue to which African countries are best placed for sustainable recovery once the worst of COVID-19 is over.

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