Every functioning economic entity uses debt-financing for a variety of reasons. For a corporation, debt-financing may be used to facilitate growth and expansion or to invest in research and development which in the long-run improves the corporation’s competitiveness in the market.
In the case of a sovereign state, debt financing is mainly used to cushion budgetary deficits or embark on infrastructural development projects. The two main types of debt that developing economies such as Zambia has acquired are Domestic government debt (which is denominated in local currency; Kwacha) and External debt (denominated in foreign currency mainly the United States Dollar, USD).
The amount of external debt owed by Zambia has risen over the years. In 2014, external debt stood at $4.8billion and in 2019, external debt was reported to be $11.2billion, 48% of GDP[i]. On 13th November 2020, Bloomberg reported that foreign bondholders were unwilling to grant Zambia the six-month payment deferral it had requested in October, citing a lack of transparency and miscommunication as reasons. The coupon payment Zambia was due to pay in October was $42.5million. While the Minister of Finance released a statement saying that Zambia would default on the coupon payment, it is unclear whether or not the nation has defaulted at the time of publishing.
This article focuses on the socioeconomic effects of debt in Zambia. While debt-financing can be thought of as necessary for economic growth, its effects on social welfare can tell a different story. Analysis of the National Budget from 2017 through to 2021 shows that the proportion of total debt repayments to total expenditure has risen drastically. In 2017, the percentage of total debt payments over total expenditure was 17.8%, while in 2019; five years later that percentage grew to 38.5%. Let’s closely compare and contrast these figures on debt financing with spending on select social welfare amenities[ii].
Education
It is generally accepted that for a country to develop, it must invest heavily in its education sector. A more educated population is guaranteed to make better governance choices, contribute more to the growth and development of its country and enjoy better welfare levels, all things remaining equal. As the government dedicates more and more finances towards debt repayment, the education sector has consequently received a lower percentage of allocated funds. In 2018, the percentage spent on education stood at 16.5%, declining to 15.3% in 2019, 12.4% in 2020 and finally 11.5% in 2021. Consumer Unit and Trust Society (2019) reported that the teacher to pupil ratio has remained high with an average of 1 teacher to 60 pupils. For reference’s sake, the recommended teacher to pupil ratio to facilitate optimal learning speed and particular attention to each pupil is 1 teacher to 18 pupils.
Health
Access to quality healthcare, well-trained medical and support personnel and well-stocked hospitals and clinics are all indicators of a good health sector. For citizens to engage in meaningful economic activities, they must be healthy. In 2017, the health sector was allocated 8.9% of total available funds, a percentage which increased to 9.5% in 2018. In 2021, the percentage spent on the health sector fell to 8.1%. The International Insulin Foundation (2018) reports inequitable access to basic health services between urban and rural areas. In urban areas, 99% of households are within 5 kilometres of a health facility compared to only 50% in rural areas. Long distances to access healthcare centres in rural areas are not unheard of.
Social Protection
The Social Protection portion of the budget includes spending on social cash transfers, food security, school feeding programmes and women’s development programmes among other things. In 2017, the government increased the number of Social Cash Transfer beneficiary households from 242, 000 to 590, 000. As a function of total expenditure, the percentage of social protection declined from 2017 to 2019. In 2017, the percentage allocated towards social protection was 4.2% of total funds, reducing to 3.2% in 2018, 2.5% in 2019 and further declining to 2.4% in 2020. This decline reveals an unsettling trend in the way that the welfare of the most vulnerable citizens in our country is taken care of.
In conclusion, the proportion of total expenditure made on public services such as health, education and social welfare has reduced. We have a situation where the government’s expenditure on debt repayment is greater than the proportion spent on education, health and social protection combined. For the average Zambian, a continuation of this trend translates into lower literacy rates, poorer access to health facilities, and consequently a lower quality of life. Tackling the debt situation will require bold steps in ensuring fiscal discipline, transparency in the levels of debt to build investor confidence and enacting legislature required to improve financial management in the country.
[i] Figures sourced from Aljazeera’s report on Zambia’s default at https://www.aljazeera.com/economy/2020/11/13/zambia-will-not-pay-overdue-eurobond-coupon-finance-minister-says
[ii] All figures sourced from the Zambian National Budget Address obtained from the Parliament website.