Avoiding debt default and turning Zambia around — at the same time - Dr Greg Mills
Zambia is skirting the edge of financial default. If I held the country’s paper, I would be nervous.
Zambia’s external debt had been reduced to under $1-billion by 2006 as a result of various global forgiveness schemes. Then, akin to a recovering alcoholic, the Zambian state was supposed to stop drinking, get a paying job, and become a productive member of society.10
But like many drunks, sadly, Lusaka quickly fell off the wagon. Governments hate curtailing expenditure, even of money they don’t possess, because they want to be liked. Spending also offers opportunities for enrichment. So rather than staying out of bars, they started to buy everyone in the local saloon rounds using other people’s money.
Foreign debt has today ballooned to $9.5-billion, excluding government guarantees estimated at $1.2-billion. In the process the debt-to-GDP ratio has increased from 25% in 2012 to more than 70% in 2018 through a combination of regular borrowing from the Chinese and other development partners, a $3-billion Eurobond issue over three years (2012, 2014 and 2015), taking out “bridging loans” from the Bank of Zambia and syndicated loans with commercial banks, scaling up the issuing of government securities in 2016 and 2017, and the conversion of fuel payment arrears into loans.
The 2019 budget highlights that external debt service payments will increase by 90% in 2019 to $1.4-billion. Debt service costs, which accounted for 27% of all revenue raised in 2018, risks becoming the largest component of government expenditure.
And the spending hangover is about to strike. Some $750m of Eurobond debt matures in 2022, $1-billion in 2024, and $1.25-billion between 2025 and 2027. The grace repayment period on some of the larger Chinese loans also ends in 2020.
Local debt has increased, too, to more than $5-billion.
Rather than being put exclusively to productive purposes such as investing in infrastructure, much of this new debt has been spent on salaries and corruption. The public service comprises 237,000 of the 625,000 people who are formally employed in the economy.
Public service salaries, which have increased by more than 50% in real terms since 2011, account for nearly half the government budget. If debt service is half of the budget and salaries the other half, that will leave nothing over to enable development. Something will have to give.
Over the border, Robert Mugabe used to wake up, apparently, in cabinet meetings to say “We are a rich country. We have money. Find it.” Of course, while a political genius, he was an economic moron, as his country’s travails betray.
Like Zimbabwe, Zambia desperately needs foreign capital to invest given the low rates of local savings. But its highly indebted status makes this more difficult, as do concerns about its governance and spending patterns.
Increased debt risks saw Zambia downgraded by all three credit rating agencies in 2018, while the price paid by investors for Zambia’s Eurobonds plummeted to 75c in the dollar. New loans or a bond issue is unlikely without agreement on an IMF programme. Moreover, Zambia’s low foreign exchange reserves of just $1.6-billion increase its vulnerability to external shocks and raise the premium to borrowing.
The options for Zambia are to cut back on expensive projects and reduce its burgeoning fiscal deficit, acquire better terms from the Chinese and to sign up to an IMF programme. It is, of course, reluctant to cut back and subject itself to external conditionality because it likes to spend, not least with an election coming up in 2021, even though an IMF deal would certainly bolster the faith of investors and boost the forex reserves.
It would be more enticing for the government to rather try to get support from a new donor, such as among the Gulf states, or perhaps again the Chinese. Those options are unlikely, however, to come without strings.
The government is likely to continue to push hard to up its revenue, including from the mining sector. A new tax regime increases royalties on production of copper, which of course incentivises limiting production. Overall, increasing taxes to meet short-term spending and political pressures can only undermine the very growth on which the revenue system depends.
Yet, there is another way out of this mess. If Lusaka was to grab this offer, it is not the only solution required, but one that offers a firm foundation for a reformist shift.
From the 1980s the state-owned and run Zambian Consolidated Copper Mines was bleeding money at an alarming rate, as much as $1-million a day, draining the fiscus dry and then some. Privatisation stopped the bleed. The new mine owners embarked, in many cases, on massive capital programmes to recover run-down and neglected mines, even though the copper price continued to fall.
The Zambian state retained an interest in these mines through ZCCM-Investment Holdings (ZCCM-IH), usually between 10-20%. This free carry investment (since they did not actually invest any hard and much-needed dollars) was done to satisfy an emotive view by the public that Zambia must retain an equity interest in its mineral legacy.
With capital programmes, copper production has increased from just 260,000 tonnes annually to four times that between 1999 and 2018. With the vast levels of capital expenditure required over the past two decades, most of the mining companies themselves are still not, in fact, earning a clear profit; rather they are still recovering their huge investments. Those that have managed to earn a profit have largely reinvested, and hence little if any dividends have been paid out.