In search of Zambia’s 'hidden' public debt
hat is the true size of Zambia’s public debt stock? That is the question on many people’s lips since the International Monetary Fund (IMF) issued a red flag last year, warning that the country was at high risk of debt distress. Zambia has breached one or more sustainability thresholds, but it does not currently face any repayment difficulties. In its report, the IMF contends that the present value of Zambia’s public and publicly guaranteed external debt as a share of GDP rises gradually from 34.5% in 2017 to 44.3% of GDP in 2020 before gradually falling below the 40% threshold in 2024. The debt-service-to-revenue ratio temporarily breaches the 20% threshold in 2022 and 2024 when Eurobond payments become due. The other debt burden indicators are below their respective thresholds.
The Zambian government has an impeccable track record of meeting its debt obligations, and Ministry of Finance officials contend a default is out of the question. But you know what they say: there is a first time for everything. Furthermore, an increasing number of analysts believe that the true level of public debt may be higher than what has been officially reported. Several things immediately come to mind at this point with regard to what is perceived as ‘hidden debt’ in Zambia: first, how did we get to this point; second, the scope and definition of public debt; third, inconsistencies in some loan figures; and fourth, the question of timing – at what point does a loan contracted become part of the debt stock?
How did we get here?
In a bid to bridge the large infrastructure gap and improve service delivery, excessive spending in the face of relatively low and flat revenues began emerging in 2012, and by 2013 the fiscal deficit on a cash basis reached 5.4% of GDP. Lack of adequate policy response to external and domestic shocks weakened government revenues and led to significant spending overruns and the fiscal deficit widened to 9.4% of GDP in 2015.
To bridge its increasing and arguably unsustainable spending, government resorted to massive external borrowing. It tapped into the international capital markets to increase its financing options. Commercial borrowing became a prominent feature of external financing substituting multilateral and bilateral sources. Further, the liquidity crunch that ensued in the fourth quarter of 2015 following the sharp tightening in monetary policy by Bank of Zambia led to a rapid accumulation of arrears. These developments have resulted in a considerable change in Zambia’s debt structure.
The country has thus been on a steep learning curve, with increasingly more sophisticated debt management involving a shift from concessional to more market-based financing. You now hear mention of ‘restructuring’, ‘refinancing’ and ‘buy-backs’, jargon scarcely understood by people outside the field of finance. Further, government has to deal with a considerable amount of arrears, is increasingly involved in transactions of on-lending to subnational entities and extending guarantees of various types to other government institutions, thereby increasing fiscal risks.
Defining ‘public debt’
That government chooses to report what some may perceive to be ‘convenient truths' really depends on how the debt is treated. There is no internationally agreed measure of public debt; it can be defined for different types of public institutions (central government, general government or public sector) and/or on a cash, accrual or commitment basis. Public debt in Zambia is often reported for the central government only, with or without arrears and with or without publicly-guaranteed debt. Based on the official external debt of US$8.7 billion, K48.4 billion in government securities, K12.7 billion in arrears and guarantees of about US$1 billion (own estimates), against a nominal GDP of K245.7 billion and an exchange rate of K9.55 to one US dollar, public debt for 2017 can plausibly be as low as 54% of GDP or as high as 63% of GDP, depending on whether or not arrears and guarantees are included. So whatever the true size of the debt, hidden or unhidden, our backs are already against the wall even with the current official estimates of public debt.
With regard to sovereign guarantees, government can issue a guarantee to institutions specified in the Loans and Guarantees Act (a corporate body established by any written law or one in which government has shareholding, registered cooperatives and public utilities). Government (the guarantor) records contingent liabilities (or potential liabilities) when the guarantee is issued and it monitors to ensure the institutions are making payments. Government only records it as a liability and assumes the debt obligation of the borrower if that borrower defaults. Further, a loan can be partially or fully guaranteed, making government liable for only a portion or all of the debt. With regard to arrears, they first have to be reconciled and audited among at least three government institutions: the budget office, the office of the Accountant General/Controller of Internal Audit and the institution that has defaulted on its payments.
Regarding inconsistencies in debt numbers, consider the green-field Ndola International Airport. It is unclear if the project cost is US$397 million, US$522 million or US$580 million - all three figures have been mentioned by senior government officials, but based on annual economic reports from the Ministry of Finance, the most plausible value is US$397 million. Differing figures floating around for the same project breeds suspicion. For consistency, government officials and the Ministry of Finance must confirm loan contraction figures before issuing them.
At what point does a contracted loan become part of the debt stock?
Based on information from the IMF’s 2017 Debt Sustainability Analysis on loans in the pipeline, government will disburse approximately US$3.5 billion in new non-concessional loans over the next five years, on top of US$4 billion in already contracted loans, mainly to support capital projects.
We answer this by considering the loans contracted during 2012-2017 which amounted to US$11.2 billion. That works out to an average of US$1.8 billion per year. In the same period, the stock of public external debt increased by US$6.7 billion (or an average of US$1.1 billion per annum). That gives a contracted loan to debt stock ratio of 60%. This shows that not all contracted loans immediately get into the debt books. Loans for huge capital projects are disbursed at different times of the life of the project as is the case with the Ndola International Airport, in which government contracted US$337.6 million for the project in 2016, and US$59.6 million in 2017.
From the above, it seems far-fetched that government number crunchers are deliberately hiding debt á la Mozambique. However, the ball is really in government’s court to be consistent, transparent and provide regular updates, clarity and detail on the debt position. Several measures of debt should be produced, and reconciled, to paint a full picture of public finances. A good starting point is the government’s most recent debt sustainability analysis, which we are all eagerly and impatiently awaiting. This report will not only show the current state of play but also give us an idea of the medium and long-term outlook. Should government keep those numbers under wraps, it will only add fuel to the already blazing flames of doubt and mistrust.
(Main image: Waldo Swiegers/Bloomberg via Getty Images)