The Good The Bad And The Ugly: 10 Years Of PF Finances
Since the Patriotic Front (PF) came into power after the September 2011 elections, Zambia’s debt has risen from $1.9 billion to over $12 billion in 2021, a six-fold increase in a space of only 10 years.
The current government also became Africa’s first pandemic-era debt defaulter in November 2020 when it failed to repay a $40.2 million bond payment. A 6-month grace period for the repayment was also rejected. Adding to this, a second bond payment was missed on the 30th January this year for $56.1 million.
That is $96.3bn which the government was unable to pay back.
Subsequently, almost half of the current government budget is being spent on debt servicing to ensure defaults do not continue. To add, an estimated 40% of the budget is also spent in paying civil servant wages. Subsequently public services continue to be neglected, underfunded and difficult to access.
Zambia is proposing to reduce economic debt by reducing spending on healthcare and increasing spending on the servicing of debt repayments.
Where has the debt come from?
The debt which Zambia currently holds is a result of several loans which the government has taken out. These loans are mostly made on commercial terms, meaning higher interest rates and shorter time frames for repayment.
The main sources for Zambian loans are the commercial Eurobond market as well as Chinese credits and loans, with banks in India, South Africa, Nigeria and the Arab world also supplying them with high-interest funds.
Some private lenders are expected to earn up to 250% in profits from Zambia’s debt.
In December of 2020, Zambia asked the IMF for a financing agreement which would likely have a far lower interest rates than aforementioned international loans. Talks between Zambia and the IMF have been on and off for the 5 years which Lungu has been in power, having first asked the organisation for a $1.6bn aid package in 2016. This initial request was never agreed due to the IMF’s concern over Zambia’s commitment to economic reform. A more recent negotiation between Zambia and the IMF in December 2020 also failed.
The number of loans which Zambia has also increased sharply from 5 loans totalling $0.5billion in 2011 to 30 loans totalling $3.4billion in 2016.
The IMF are suspicious of the transparency of the number of loans which Zambia have.
Estimates of real Chinese debt range from $3billion to $20billion. It is possible that the Government itself doesn’t know the true costs of these loans as many of them are to sub-national entities.
This hidden debt has come as a major issue to bondholders, with several being reluctant to defer payments because they believe these payments would be diverted to Chinese loans.
Zambia could owe as much as $20 billion to the Chinese state.
What has the money been spent on?
It is unclear exactly what all this money has been spent on, however some of the accumulated debt is known to have been spent on large-scale infrastructure projects. Some of these projects include the upgrade of some schools and hospitals as well as improving telecommunications and roads. However, many of these projects have been criticised for costing more than necessary.
Zambian economist Grieve Chelwa said that the PF “have certainly transformed the country in many parts in terms of infrastructure, but there is also the mismanagement, theft and pilferage that comes with these large-scale infrastructure projects. I think we’ve got less bang for the buck”.
The Zambian government recently obtained more debt when the state mining company, ZCCM-IH, bought Glencore’s stake in the Mopani copper mine. This acquisition will see Zambia taking on an extra $1.5 billion in debt.
International business consultant, Trevor Simumba, described this as a “terrible deal” which he believes will add no real economic value to the country.
It is suspected that some of the $12 billion of debt may well have also lined politicians’ pockets.
The government contracted an additional $1.5 billion in debts to buy Mopani mines.
What was debt like before the PF were in power?
Until 2011, Zambia limited its borrowing, with any loans taken out coming from multilateral banks such as the World Bank and the African Development Bank on low interest terms.
In 2011 their external public and publically guaranteed debt was at about 11.6% of their GDP (now expected to be over 100% the country’s GDP), with the IMF considering the country to be at low risk from debt stress as a result.
How can the government fix its crippling debt?
Lack of consideration within government spending has landed the country in more debt than it otherwise should be. The Indeni oil refinery as well as the Zambia Electricity Supply Cooperation (ZESCO) are holding back the potential of the Zambian economy.
The Indeni oil refinery, built in 1973, has been declared by the World Bank as being technologically unsuited for 21st century fuel needs. As a result, running the refinery has resulted in increased energy costs for both consumers and industries.
In order to pay back its creditors and secure future loans, The Africa Report believe that the Zambian government needs to either professionalise or partially privatise its assets, especially ZESCO and the Indeni refinery. Subsequent reliable energy could bump Zambia’s industries into more efficient output and help ensure access to funding markets.
If Zambia also diversified its domestic energy pool, through using supplies such as wind and solar power, less money would need to be spent on poorly performing industries, allowing the country to pay off its Western and Chinese debts.
The IMF have advised that the pace of borrowing needs to be slowed significantly to align resources with the country’s absorptive capacity to ensure the sustainability of debt.
Debt has caused inflation to rise and the cost of many essentials like food to go up.
What do experts have to say?
Stephen Chan, an expert in African politics at the University of London, has said that in the 5 years that Lungu has been president, Zambia has seen “quite a reckless splurge in terms of debt accumulation”.
Critics have blamed Lungu’s poor economic management and concerns over corruption to provide reason behind Zambia’s escalating debt.
Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town believes that the best-case election result, in terms of debt, would be a victory for HH and the UPND. This would have the potential to create a fresh start for IMF negotiations and provide a break with the economic overstretching of the PF.
Opinions on the country’s relationship with the IMF are mixed, with Zambian economist Grieve Chelwa seeing the relationship as improving after discussions in December 2020. However, he is highly aware of the frivolous spending which the PF is likely to carry out in the run up to the 2021 elections. Subsequently, although he understands relationships to be improving, he believes that the chances of the IMF agreeing to a major programme in the run up to the election to be “quite low”.
International business consultant Trevor Simumba agrees in thinking that the IMF will be “reluctant” to agree a full programme of support before the elections start.