Government Ignored All Indicators of Possible Default - JCTR

Jesuit Centre for Theological Reflection (JCTR) has said the Zambian Government chose to ignore the many indicators of a debt default that have characterised Zambia’s debt discourse since the issuance of Zambia’s first Eurobond in 2013.

In a statement released to the media and attributed to Father Alex Muyebe, S.J. JCTR Executive Director, JCTR said that even the recent credit FITCH Ratings downgraded Zambia’s credit rating to ‘C’ from ‘CC’ warning of a high risk of a missed debt payment, Government chose to ignore the warning and gave the assurance that it will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached.

JCTR said that the admission to likely default is, therefore, a reversal from the Finance Minister’s assurance last month that Government had budgeted for Eurobond coupon payments next year to avoid default in the event that holders rejected the Government’s standstill request.

JCTR urged the Government to seriously reflect on the debt problems that Zambia faces and resolve to walk the talk in addressing Zambia’s debt crisis.

Below is the full statement

Less than a month since the Minister of Finance, Dr Bwalya Ng’andu presented to parliament the 2021 National Budget, Government has admitted that it will likely default on external debt service if a favourable agreement with creditors is not reached. On September 22nd 2020, Government applied to holders of its US$3 billion in Eurobonds to defer debt service payments for six months while it works on a debt-restructuring strategy. This period covers the upcoming three coupon payments due on 14 October, 2020, 30 January, 2021 and 20 March, 2021, on the respective bonds. Zambia becomes the first African country to ask for debt suspension on its Eurobond. The Government has further gone ahead to ask all creditors for similar relief, after some non-commercial creditors agreed to a payment freeze under the G20 Debt Suspension Service Initiative (DSSI). China in particular, has given a one-year grace period and suspension and rescheduling of three years of repayment amounting to US$225million, US$426.3million and US$428 million for 2020, 2021 and 2022 respectively.

The Jesuit Centre for Theological Reflection (JCTR) wishes to remind the nation that Eurobond holders are due to meet on Oct 20 to vote on the proposal to suspend Zambia’s debt service payments. Before then, about US$42.5 million payment on $1 billion of dollar bonds due in 2024 is scheduled for Oct 14 2020 which must be honoured within 30 days before it’s deemed to be in default.

JCTR is concerned that Government chose to ignore the many indicators of debt default that have characterised Zambia’s debt discourse since the issuance of Zambia’s first Eurobond in 2013. Most recently, on 25th September 2020, FITCH Ratings downgraded Zambia’s credit rating to ‘C’ from ‘CC’ warning of a high risk of a missed debt payment. Government however gave assurance that it will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. The admission to likely default is therefore a reversal from the Finance Minister’s assurance last month that Government had budgeted for Eurobond coupon payments next year to avoid default in the event that holders rejected the Government’s standstill request.

JCTR urges Government to seriously reflect on the debt problems that Zambia faces and resolve to walk the talk in addressing Zambia’s debt crisis. Under the Patriotic Front administration, Zambia’s external debt ceiling increased by 700% from K20 billion in 2011 (as guided by Statutory Instrument (SI) 53 of 1998) to K160 billion in 2016. This exponential increase was not backed by increased economic performance evidenced through growth in real Gross Domestic Product numbers. The raising of the external loan ceilings followed the issuance of Zambia’s three sovereign bonds. As far back as 2016, the Minister of Finance could not explain how the money would be paid back. Many stakeholders questioned the capacity of Government to pay back the loans and warned of an impending debt crisis if Zambia continued on the same trajectory. This was on the basis of strong indications that the country was drifting into a debt distress.

By February 2020 at an exchange rate of K14.7 to the US dollar, external debt amounted to K164 billion, K4 billion above the threshold. Today, Zambia’s total debt stock (external and domestic) is estimated at $US18.5 billion as at end of June 2020. Of this, US$11.97 billion is external. Thus, eight months later at an exchange rate of K20.13 this translates to K240billion, K80 billion above the prescribed threshold of K160 billion (the Loans and Guarantees (Maximum Amounts) Order No. 27 of 2019).
JCTR reiterates that Government must be committed to reining in on debt contraction. Government must provide evidence that it has slowed down on debt contraction. In the 2021 resource envelope, 44.9% of the budget will be financed through borrowing compared to 32.2% proposed in 2020. JCTR implores Government to ensure that debt sustainability is operationalized.

This article originally appeared on Lusaka Times