This is part 2 of a 2-part analysis on the MTDS. If you’re only joining us now let me give a quick recap of the previous article. Basically, the Zambian government, through the Ministry of Finance are publishing the very first Medium-Term Debt Management Strategy. The publication is meant to provide information to all market participants and stakeholders on the objectives of debt management that the Government targets. Zambia’s MTDS for 2017 to 2019 has been developed using a rigorous quantitative assessment and evaluation of the costs and risks associated with Zambia’s public debt portfolio. This article is a breakdown analysis of what exactly the strategy is.
So, the initial announcement by the Ministry of Finance highlighted that the strategy they intend to pursue would focus on restructuring the debt portfolio. Currently, it is at 45% domestic debt which is the amount of money raised by the government in local currency from its own residents. This includes banking and non-banking borrowing such as issuance of government bonds.
The remaining 55% of the portfolio is external debt. This is the proportion of a country’s debt that was borrowed from a foreign lender which could include foreign governments, banks and international financial institutions like the IMF. These loans are often paid back in the currency they are borrowed in and as such are subject to exchange rate risk. Historically, we as a country have suffered at the hands of fluctuating exchange rates and it has often come at a huge cost not only to the government, but to non-governmental business owners as well.
External debt is also subject to roll-over risk. To explain this I’ll use an example, in paying back a Eurobond it is paid back as a lump sum when it matures. While it possible to refinance existing debt obligations by issuing another bond, a change in market sentiments or a change in their economic fundamentals would make the option of refinancing impossible. Therein lies the roll-Over risk, i.e., there is a risk that we would not be able to roll over the debt.
In this light, it’s easy to see why the government wants to restructure the portfolio to contain 60% domestic debt and 40% external debt during the implementation of their strategy. It is my sincere hope that with time and expertise we can continue to reduce the amount of external debt held in the portfolio as it only serves to benefit the country in the long term.
But I digress, so, the strategy plans to further maximize concessional external borrowing which is simply loans that typically have a longer grace period and are more generous than market loans. The concessionality is achieved either by interest below those on the market, the longer grace periods or a combination of these. In addition to this, it plans to address refinancing exposure in domestic debt which is basically when the terms of a loan are changed, often times in order to reduce the rate of interest being paid. They plan to do this by using more medium to longer tenure securities.
Okay so the strategy itself is made up of 5 “pillars”. We’ve already talked about domestic and external debt.
Next is the Debt Management Capacity. This refers to the human resources that the government will need in order to carry out this exercise. The debt office will undergo a restructure. This involves ensuring that not only are enough people recruited to carry out this exercise, but they are aptly qualified to ensure optimization of efficiency during the implementation. The Ministry of Finance has stated that they will undertake the training of recruited staff in debt management skills in collaboration with capacity building institutions such as the IMF, the World Bank, The Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) and United Nations Conference on Trade and Development (UNCTAD).
Its easy to see how this part is a win. Not only are they recruiting for the much needed jobs, more importantly, they are training their staff with skills that they can carry with them wherever they go. Even after the 2019 benchmark set for MDTS. This should increase the quality of employees in the country which should increase efficiency which should in turn increase the growth of the country. It’s a lovely a ripple effect.
Debt sustainability is the next pillar and it’s a measure put in place to ensure that public external debt stays at sustainable levels over the medium to long term. According to the publication, The internationally accepted thresholds or ratios, like the Public Debt to GDP or External Debt Service to Revenue, which are proportionate with Zambia’s status as a middle income country will highlight debt target levels for the debt office to aim for. This will be complimented by periodic comprehensive Debt Sustainability Analyses (DSA’s). These will be carried out to confirm Zambia’s debt situation and inform on threats to debt sustainability allowing the country to stop focusing on only being reactive but create a proactive environment that can prevent certain situations because prevention is always better than cure.
Finally, the last pillar mentioned is Communication. As mentioned in the previous article The Ministry of Finance has promised a Government securities issuance calendar and auction announcements, the results of which will also be published regularly and the publication of quarterly debt statistical bulletins and an annual debt report in order to get maximum outreach to stakeholders and equip them with the correct perspective of Zambia’s debt situation.
The ministry of finance expects that the principles laid out in the strategy will be fully implemented.
We can only wait and see how this all works out and hope it goes well. This marks the end of the 2 part series on Zambia’s Medium Term Debt Strategy.
What else do you think Zambia can do to better manage the debt situation?