For the very first time in Zambian history the government of the republic of Zambia has issued a Medium-Term Debt Management Strategy (MTDS) via the Ministry of Finance. Its more exciting than it sounds, I promise. This publication is meant to provide information to all market participants and stakeholders on the objectives of debt management that the Government targets.
The announcement stated that despite good economic growth over the past 5 years, the country has experienced some fiscal vulnerability. The world bank defines this as “a situation where the government is exposed to the possibility of failure to achieve is fiscal policy objectives.” Or when the government is exposed to the possibility of failing to meet expenditure objectives.
So to begin with, what do we mean by National Debt Management and why is it important?
The International monetary fund describes it as “the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals that the government may have set, such as developing and maintaining an efficient market for government securities.”
If the debt is poorly structured in terms of factors like maturity, currency or interest rate composition, the potential outcome as seen historically will be an economic crisis for the country. The IMF highlights an example where crises often arise because governments often put too much focus on cost saving associated with large volumes of short term debt, however this leaves government budget exposed to constantly changing financial market conditions like changes in the countries credit worthiness for example.
This would mean that essentially, if the government manages public debt prudently, the country becomes less vulnerable to financial risk thus giving us a more or less stable financial sector and creating a favorable environment for investment and growth.
This also brings to light the significance of the publication of the MDTS. The private sector can now use the information published here in order to plan and predict future economic patterns in the country thus allowing for better decision making and general management of businesses. This could in turn reduce some of the risks being faced by the business owners or at the very least make them more aware of the risks.
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 portfolio is captures the Government’s preferences in regard to the cost-risk trade-off.
The MTDS is strongly focused on managing the risk associated exposure which is embedded in the debt portfolio. The government specifically wants to look at the potential variations in the cost of debt servicing which is the amount of money needed to make payments on the principal and interest on outstanding loans, bonds, or the maturing of bonds. A good example of this is like payment on student loans. The govt is also looking to manage the impact the debt servicing has on the budget, specifically, how cost and risk vary with the composition of the debt.
The Medium-Term Debt Management for 2017 to 2019 is meant to summarize Government’s primary debt management objective which is ensuring the Government’s financing needs and payment obligations are met at the lowest possible cost, consistent with a prudent degree of risk.
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.
Look out for my next article where I break down exactly what the strategy is as well as analyze the possible implications of the measures taken. We as a people welcome this step towards a more transparent and productive, efficient and financially stable Zambia