Zambia’s current debt situation has been a constant source of debate, but what does this debt actually constitute? On 7th October 2021, the Minister of Finance and National Planning gave a statement on the public external debt situation in the country. This gives a summary of the public and publicly guaranteed external debt and indicators of the new dawn government’s plan on debt settlement as proposed by the Minister of Finance.
What is public and publicly guaranteed debt? According to the World Bank, public debt is an external obligation of a public debtor, including the national government and autonomous public bodies while publicly guaranteed debt is an external obligation of a private debtor that is guaranteed for repayment by a public entity. By definition, the Ministry of Finance of Zambia refers to Public and Publicly Guaranteed (PPG) debt as the sum of public domestic and external and guaranteed state-owned enterprise (SOE) debt, and excludes domestic arrears.
Below is a diagram of Zambia’s current external debt stock
Source: Ministerial Statement on Zambia’s Public External Debt
As at the end of June 2021, 88% of the external debt stock was public debt amounting to US$12.91Billion while 11% of external debt was publicly guaranteed debt amounting to US$1.57Billion. The total stock of public and publicly guaranteed external debt as at the end of the second quarter stood at US$14.48Billion. According to Ministry of Finance computations, we add SOE debt. Total Non-Guaranteed SOE debt on ZESCO, as at end June was US$195.71Million, this accounted for 1% of the external debt. Therefore according to the Ministry of Finance definition, as at end second quarter, total Public, Publicly Guaranteed and Non-Guaranteed Debt was US $14.67Billion, excluding interest arrears.
40% of the US$14.67Billion external debt is owed to Chinese creditors, which has been a source of interest locally and internationally. Of the US$5.95Billion owed as at end June 2021, not including interest arrears, Dr. Musokotwane reported that US$4.47Billion is owed by central government to Chinese creditors. US$1.34Billion is owed by state owned enterprises, mainly ZESCO, on facilities guaranteed by the central government while US$139.60Million is owed by ZESCO on Chinese facilities not guaranteed by the central government.
The Minister of Finance, Dr. Musokotwane has highlighted that debt restructuring is top priority, and as such, has taken advantage of The Common Framework for Debt Treatment beyond the Debt Sustainability Service Initiative (DSSI). In November 2020, the G20 with the Paris Club endorsed an initiative in which low income countries can request support in the event of unsustainable debt. As a response to the request, a Creditor Committee is setup and negotiations are supported by the IMF and the World Bank, through their Debt Sustainability Analysis. The objective is that the debt treatment is complemented by reforms that will ensure future sustainability of public debt consistent with the parameters of an Upper Credit Tranche (UCT) International Monetary Fund (IMF) supported program.
To this end, the Zambian government has engaged the IMF for a funded program that will not only foster economic recovery but also provide an anchor to debt restructuring engagements, as reported by the Minister of Finance. These discussions have been set out in a two phased engagement strategy. The first phase which started on Monday 27th September to Friday 1st October was aimed outlining the Budget priorities which will be part of the Macroeconomic Framework to be agreed on then the second phase later this year will zero in on the actual Extended Credit Facility (ECF) program. Dr. Musokotwane indicated that the goal is, “to reach a staff level agreement with the IMF later this year by agreeing a macroeconomic framework for the medium term and then design, with the assistance of our international financial and legal advisors, Lazard Freres and White & Case, a debt restructuring strategy that will lead us into actual engagements with creditors under The Common Framework initiative.”
The immediate impact of debt restructuring may not be seen and Reuters has reported that, “the G20 initiative aimed at reducing financial strains on the world’s poorest countries has led to less than a quarter of debt payments being suspended – well below expectations of what the program would deliver.” However, there are short-run indicators of a successful debt restructuring process. The new dawn government has been given five years to prove the effectiveness of its policies and has promised transparency in reporting the debt position, which, if it does, the IMF reports, “if you are transparent about your debt, it is more likely it will be restructured, including with private sector participation.” Therefore, six indicators to watch during the new dawn government’s era, besides the external debt are the External Debt to GDP ratio, the Public Debt to GDP ratio, the short-term debt (external) to reserves ratio, the real annual growth rate, annual CPI inflation and Budget Balance as a percentage of GDP.