ZAMBIA’S RISING DEBT ZAMBIA’S RISING DEBT - SHOULD WE WORRY? - SHOULD WE WORRY?

Musonda KabingaJesuit Centre For Theological Reflection

(JCTR)

1

Presentation OutlinePresentation OutlineWho we are - JCTRExternal and Domestic Debt Govt’s Rationale for Borrowing Increased Debt Levels: a Source of Worry or Not?JCTR’ s position on DebtConclusion

2

Who We AreWho We AreJCTR a faith based CSO organization involved in research, education, advocacy & consultancy on issues of social justice

JCTR with other organizations involved in advocating for debt cancellation

Hosted Jubilee debt cancellation campaign

Zambia’s external debt cancelled under the HIPC and MDR

3

Who we are – Organizational Who we are – Organizational StructureStructure

JCTR

Faith & Justice

Social & Economic

Development

Outreach

Livingstone

MonzeMong

uKabw

eNdola

Kasama

4

Trend in External Debt IncreaseTrend in External Debt Increase

Source: Ministry of Finance

Prior to the debt cancellation period under HIPC, external debt stock was around US 7 billion dollars

YEAR 2006 2007 2008 2009 2010 2011

2012 2013

US Millions

US Billions

Total Govt External Debt 971.77 1.1 1.18 1.5 1.7 1.9 2.2 3.2

Total External Public debt as % of GDP

11.2 9.20 10.55 11.14 10.93 10.73 11.6 15

5

Trend in Domestic Debt Trend in Domestic Debt IncreaseIncrease

Domestic Debt Stock in K’billion rebased

Source: Ministry of Finance and the 2014 Budget Address

* Missing information

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013

Domestic Stock

6.1 7.7 8.2 8.4 10.3 10.8 14 15.12 19.7

Domestic Debt as a % of GDP

19.32 20.02 17.92 15.49 16.00 13.99 14.93 * 16.3

6

Its worth noting that about 10.51 billion of the 2014 budget will be financed from foreign and domestic borrowing

Therefore, despite a significant increase in the 2014 budget, 24.6% of the budget will come from borrowing

*Without doubt Zambia’s debt stock (external & domestic) is rising

Financing for the 2014 Budget

7

Govt Rationale for BorrowingGovt Rationale for BorrowingInfrastructure development (roads, rails etc), Delivery of social services (education, health etc) E.g US$ 750million Eurobond

While the intentions are certainly in the strategic interest of the nation, there is need to be “cautious” so that we don’t overburden the future generations with the loan agreements we are signing now

8

The very fact that we have some sufficient breathing space (Debt sustainability – below 40% of GDP for external debt & below 25% of GDP for domestic debt) is no cause at all to allow for excessive borrowing

Borrowing for investment should be seen to be matched by a careful balance of prioritization, fiscal discipline and a well articulated debt management framework

9

The Big Question “Increasing debt Stock, Should we The Big Question “Increasing debt Stock, Should we

WorryWorry?”?”

High debt levels Imply, high debt service payments which if not well managed could lead to serious consequences (*Lenders are business institutions with profit motive, no debt forgiveness, high interest payments on delayed debt service payments etc)

Auditor General Report (AGR) for financial year of 2012, reveals US$123 million debt not serviced. (*AG 2012 report “its difficult to ascertain whether there is an effective monitoring and mgt of bonds by MoF”)

Without an effective monitoring framework of debt, it would be difficult to know the true levels of the country’s indebtedness

10

The Big Question “Increasing debt Stock, Should we The Big Question “Increasing debt Stock, Should we Worry?”Worry?”

Essential sectors of the economy will be affected in due course owing to a potential future shift in national spending which will be directed towards servicing of the loans that are currently being contracted

JCTR study: “Responsible Borrowing”, US$ 290 million per year spent on debt servicing, btn 2003 and 2005

The most vulnerable sector that is sacrificed in favor of debt servicing is the social sector (* E.g Cuts in Social sector spending during the HIPC period AFFECTED the effective delivery of health & educational services)

11

Cuts in social sector spending could worsen the already existing poor state of health & education services in some rural areas. E.g ShangómboMulele Area, Shangómbo the CURRENT state of social services;

Source: JCTR Rural Basket, March 2013

Service Status

Water 32 boreholes, but 14 are out of use. Borehole at school broken down and pupils bring water from homes

Education basic school (grade 1-7) 1 teacher, 74 pupils, the school is not adequately staffed

Health People walk to Mutomena clinic about K28kilometers & they are 2 medical staff there

Agriculture Extension Officer rarely visits the area due to transport challenges

12

The Big Question “Increasing debt Stock, Should we The Big Question “Increasing debt Stock, Should we Worry?”Worry?”

Where and How are we Investing the Borrowed Resources?

. Roads, Rail etc Improving these sectors could lead to increased investments. However, delays in procurement of key equipment & services, reported mismanagement of funds *e.g the case of ZRL. This could delay progress on some rail and road works.

.Delayed works on these road & rail projects would entail reduced capacity for the country to generate more revenues to service debts

13

The Big Question “Increasing debt Stock, Should we The Big Question “Increasing debt Stock, Should we Worry?”Worry?”

With the potential depreciating of the kwacha, against major foreign currency particularly the US$ dollar external debt service payments could cost more

Resources to finance debt servicing will come from taxes. However, with few taxes collected in the informal sector, the formal sector will be overburdened with higher taxes in order to finance debt servicing

Zambia has a young population that will need to be employed in the next 10-20 yrs, public sector still the largest employer. (“this population could delay to enter the labour market in order to provide fiscal space for govt to service debts”)

14

JCTR Position on Debt StatusJCTR Position on Debt StatusThe Loan contraction process still lacks transparency and wider participation of the public as it has remained the preserve of the Executive (*Without transparency and wider public participation its difficult for the public monitor the utilization of debt resources)

The Laws and policies that governed loan contraction and management prior to debt cancellation in 2006 still exist. Some of these laws give too much borrowing powers to the Minister of Finance with limited stakeholders consultation. There is need to comprehensively review these pieces of legislation

Zambia can still raise sufficient revenues to finance development projects by reviewing the whole national revenue collection structure

15

Conclusion Conclusion Borrowing should take into account the country's capacity to pay without affecting the delivery of essential services to the public

The loans that are contracted must be subjected to Parliamentary oversight and their use verified. (*Inclusion of this provision in the draft constitution is a step in the right direction)

Only an effective debt management framework will guarantee a responsible borrowing strategy that takes into account; provisions for debt servicing, priority sectors to invest borrowed resources, extensive parliament involvement , etc

16

THANK YOU FOR YOUR ATTENTION

www.jctr.org.zm

17