Why do we keep talking about debt? Why is it SUCH a big deal that we keep coming back to the topic? Why isn’t the evidence of road projects enough to settle the debate? Why is the issue of an IMF package still coming up and not being put to bed? Why is there so much negative information flow that seems to be hurting the economy? Is it that people are just critical “Debbie Downers” whose rhetoric is marred by partisanship or is there really merit and the heart of patriotism as the driving force behind some of these voices? Are Moody’s, S&P’s and Fitch’s (July, August and October) downgrades of Zambia’s sovereign debt ratings all misplaced? When the Central Bank issues their Monetary Policy Committee (MPC) statement and indicate that they decided to maintain their Monetary Policy Rate (MPR) at 9.75% because of: continued subdued and sluggish economic growth; elevated lending rates, partly attributed to high yield rates on Government securities; low private sector credit growth, is it really inconsequential? If the World Bank cautions that a growth rate of 3.5% in 2018 for Zambia is just not enough to make a real dent in poverty, do I just read that information and toss it away as exaggerations? These are just some of the questions that I have been pondering on over what is one of my favourite months in the Zambian calendar. A month that focuses on prayer, peace, reconciliation, freedom and independence. Below are some of my personal reflections around these issues as I ask are we really at peace and are we really independent physically, mentally and economically?
Local Debt
The levels of local debt have an impact on the growth of indigenous companies, especially ones that supply government and are not paid on time. Late payments create bottlenecks in the economy such as Non-Performing Loans (NPLs) that exacerbate the problem of access to credit in the economy. The Zambian Government is one of the largest consumers of goods and services produced in the country. Companies therefore borrow from banks to deliver goods and services to Government on the basis that once Government, who bear in mind “carry the least risk in an economy,” would pay, they would go on to settle their debts. This flow has not happened as fluidly as would be ideal; arrears owed to local contractors are slowly being disbursed by Government which means some businesses grind to a halt stifling private sector growth.
Unfortunately, for these companies, there’s no legal route that can be taken or avenue that can be pursued when the Government is not paying up within the agreed time. The lack of enforcement mechanisms creates no real incentives for the sovereign to be accountable and leaves these companies waiting indefinitely for funding. Banks on the other hand, are faced with the choice of choosing to lend to the private sector where some of these risks exist, not to mention the laborious process of credit appraisals or lend directly to Government who when it comes to treasuries, pay like clockwork.
The continued demand from Government for funding also makes money expensive-as the demand for credit from Government goes up, the rates have been going up to attract investors. The opportunity cost of money for most commercial lenders at minimum becomes the rate at which they can lend to Government, leaving the rest of the economy exposed to interest rates that are at premiums to those of the Government. The 182 day T-bill and 365 day T-bill major reference rates for on lending are currently sitting at 15% and 22.50% respectively and at these high rates only those companies that are price setters with significant financial muscle can manage to take on credit at these levels. As a result the majority of the private sector remains crowded out.
International Debt
Why is there noise about the Eurobonds then? Our external debt appears to be taking money away from social services; every time we service and pay debt, we seem to also be taking away from the quality of life for citizens. We would be able to see the improvement in the quality of life of citizens if taxes were reducing as a result of the contraction of the debt, what we have seen in the recent years and can expect for 2019 is an increase in the number of taxes as well as the percentage of the taxes to be paid. This is why we have heard critics of the infrastructure projects: having nicer roads of course is aesthetically pleasing and helps improve transportation networks but in an instance where the country is facing slow economic growth, road projects have to be prioritized in such a way that resources are channeled to productive routes that would be at the heart of the supporting economic activity. When budget allocations to basic care such as health and education are stagnating or reducing while the allocation to debt is going up it is an indication that quality of life for citizens via basic service delivery is unlikely to improve.
We cannot ignore what some of the news items regarding accountability of public funds have done to rock economic fundamentals such as the exchange rates and Eurobond yields. In September alone we saw what was the most drastic depreciation of the kwacha since the 2015 blowout. The Kwacha’s monthly movement was a depreciation of 18.95% while all three outstanding Eurobonds breached the 12.00% with the 2022 and 2014 exceeding 16.00% which in USD credit markets is high. What was clear was the impact that negative news can have on an economy and how swiftly the effects can be felt. The fact that the country has had a weakening FX reserves position (USD1.7 billion in August 2018, down from the USD2.1 billion or 2.4 months of current external payments at end of 2017) indicates that the Central Bank’s ability to intervene in the FX markets has decreased thus increasing the vulnerabilities in the local FX markets and the economy at large.
Information Around Debt
When there is a lack of transparency in the contraction and administration of debt, it creates a breeding ground for negative perceptions and we’ve seen that negative perceptions have been growing and the effects are clear. It would be beneficial for both the Government, citizens and other stakeholders to have a clear understanding of the debt in terms of contracted and pipeline debt, as pipeline debt is inevitable. The Ministry of Finance did commit to quarterly debt reports and it would be beneficial for us to have clear distinctions and complete information regarding the Zambian debt position as well as the costs of this debt. This would help prevent the type of confusion and misinformation that has far reaching consequences for the economy.
Proponents of an IMF package understand these inter-linkages and have insisted on the need for a package to not only channel funds directly into our dwindling reserves but also have conditions that encourage stability and there by incentivizing both local and foreign investors to make long term investments in the country. Investments would help push up the other elements of the GDP equation through job creation allowing for increased consumption, saving and productivity of export industries.
So why is this all important to me and any other well-meaning Zambian? Simple, Proverbs 13:22 says “A good man leaveth an inheritance to his children’s children.” Inter-generational equity-What Zambia will be left for our children and their children? Will they inherit debt burdens and financial issues created by those who have been placed with the responsibility of making national decisions to safe guard Zambians? What foundation and legacy is being created that we the youth and our children after us will have to build on? Are we obedient, loving and selfless enough to leave a worthwhile legacy? Are we really doing enough as custodians of the future?
God Bless Mother Zambia