ZAMBIA COUNTRY DEBT PROFILE UPDATED 2015 Economic and Social Analysis Zambia's economic growth in real terms decreased to 6.5% in 2013, mainly due to a fall in agricultural output, particularly maize and cotton. The growth in real GDP was largely driven by manufacturing, mining, construction, transport, communications and the public sector. Copper remains the country's mainstay, contributing about 70.0% to export earnings. However, over the last few years non-traditional exports have grown substantially. Economic performance in the medium term is expected to remain strong. Real GDP growth is projected to increase to 7.1% and 7.4% in 2014 and 2015, respectively. Infrastructure investment, especially in mining, power generation and roads, with the Link 8000 project, will ensure that growth remains robust. The main areas of policy focus are creating employment opportunities for the majority of Zambians (especially the youth), improving accountability and strengthening the fight against corruption. The government plans to create 200 000 decent jobs per year. The government will also focus on strengthening fiscal management in an effort to narrow the fiscal deficit, which doubled in 2013 due to expansion of infrastructure spending and an increase in public sector wages. The coming years will require a concerted effort to broaden the tax base and expand the pallet of potential taxes to generate additional government revenues, as well as streamline expenditures, focusing less on recurrent spending and more on priority areas. Private sector competitiveness needs to be strengthened given the pressure on demand for higher wages, especially for skilled labour, which is in short supply. Manufacturing accounted for about one-tenth of GDP in 2013. The country is landlocked and is constrained by high costs of transport, which add up to 40% of the cost of the final product. The extractive industry is the main exporter in the country and has potential for upstream value chain development. Competitiveness of downstream activities may be constrained given the distance from the main markets for copper products. Food and beverages account for more than two-thirds of manufacturing value. A growing market in the Katanga province in the south of the Democratic Republic of Congo (DRC) fuelled by mining activity offers opportunities for Zambian firms and farmers. Another potential consumer market is South Kivu, also in the DRC, which is accessible from Mpulungu Port on Lake Tanganyika. 1
Table1: Macroeconomic Indicators Year 2012 2013 2014 2015(p) Real GDP growth 7.2 6.5 7.1 7.4 GDP/Capita growth 4 3.2 3.8 4.2 Inflation 6.6 7.1 6.8 6.3 Budget Balance %GDP -2.8-7.3-6.6-5.7 Current account balance 2.1 0.2-0.2-0.4 Source: African Economic Outlook External Debt Developments External debt in Zambia has evolved from a position of a huge external debt overhang in the 1980s (which limited citizens to benefit from their resources and also constrained the governments abilities to effectively plan and implement national plans) to more sustainable levels in recent years, as indicated by the country s external debt indicators as of end 2013 (fig 1 below). It is estimated that in 1986, Zambia spent approximately 86% of its export earnings on debt service and was left with only 14% to distribute to other sectors of the economy. This trend continued even with the onset of Highly Indebted Poor Countries (HIPC) when in 1999 Zambia paid over three times of its combined budget for health, education and social security in debt service. 1 As of end 2000, the country s external debt to exports and external debt to gross national income (GNI) stood at 652% and 188.6% respectively. 2 With the attainment of the HIPC Completion Point (HIPC-CP) in April 2005, there was debt cancellation by both bilateral and multilateral creditors, resulting in a 36.2% reduction in the country s external debt from US$7,080million as of end 2004 to USS$4,519.3million as of end 2005. Consequently, the country s external debt to GDP ratio declined to 63% end 2005 from 130.2% as of end 2004 as shown in fig 1 below. Following a further qualification for debt relief under the Multilateral Debt Relief Initiative (MDRI) which began in 2006 following the July 2005 proposal by the G-8 that the International Monetary Fund (IMF), World Bank (WB) and the African Development Fund (AfDF) should cancel 100% of their debt claims on HIPC countries in order to free up additional resources for these countries to advance towards meeting the United Nations Millennium Development Goals (MDGs), the country received debt relief under the MDRI in 2006, which resulted in a 77.9% reduction in its total outstanding external debt between 2005 and 2006 as shown in fig 1 below. Consequently, external debt to GDP declined to 9.3% as of end 2006. As a proportion of total public debt, external debt also declined to approximately 31% as of end 2006 from 65.7% as of end 2005. Among others, debt relief included: 1 Jubilee Zambia. The Benefits and Challenges of Debt Cancellation in Zambia. Testimony submitted to the Foreign Relations Committee of the United States Senate for Hearing, Building on International Debt Relief Initiatives, April 24, 2008. Page 3. 2 World Bank International Debt Statistics 2013, page 304. 2
US$ Million % The International Development Agency (IDA), AfDF who cancelled 100% of debts contracted prior to December 2003 and December 2004 amounting to US$1,813million and US$300.6million respectively; The International Fund for Agriculture Development (IFAD), the Arab Bank for Economic Development in Africa (BADEA), the European Investment Bank (EIB) and the Organization of the Petroleum Exporting Countries (OPEC) Fund for International Development who provided debt relief amounting to US$729.6million; and Non-Paris Club countries also provided debt reduction on Paris Club comparable terms with China providing partial cancellation of interest free loans that matured in 2005 amounting to US$11.3million Fig 1: Evolution of Government of Zambia s Total Outstanding External Debt as of end December 2004 to 2013 8000 140.0 7000 120.0 6000 5000 4000 3000 2000 100.0 80.0 60.0 40.0 1000 20.0 0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Govt External Debt Stock External Debt as a % of GDP External Debt as a % of Total Public Debt Source: Compiled from the Bank of Zambia Data, Ministry of Finance Annual Economic Reports and the 2013 African Statistical Yearbook However, in 2006 again, the government acquired six new loans on concessional terms, estimated at approximately US$79.7miilion so as to finance its various activities such as public service management reforms, investment in the water sector, smallholder livestock investment and the TAZARA protocol. More loans were also acquired on concessional terms in 2007 to fund targeted priority areas identified in the country s Fifth National Development Plan (2006-2010) such as road rehabilitation, poverty reduction budget support, water supply & sanitation and the copper belt feeder road rehabilitation project among others. Export credits also increased by 80.8% mainly for the Mulungushi Textiles Limited Project debt that the government took over during the same year for the non-performing portfolio of the Development Bank of Zambia. 3
Even though the government continued with these external borrowings, it is notable that up to end 2011, the total external debt of the government remained below US$ 2 billion (% of GDP, % of exports) and was mainly composed of concessionary sources. However, external debt increased by 61% between 2011 and 2012, to reach approximately US$3.2billion (% of GDP) as of end 2012 as also shown in fig 1 above. The major contributing factor to the rise in external debt stock during that year was the country s issuance of a debut 10 year US$750 million Eurobond on the international capital market in September 2012. The Eurobond funds were envisaged to be spent on infrastructure projects that promote growth as follows: Fig 2: Utilisation of the Eurobond (%) Source: Ministry of Finance, 2013 Citizen s Budget Decomposition of outstanding external debt by creditor shows that as of end 2012, commercial debt which was nonexistent in the country s external debt in the previous years, occupied 31.2% of the total outstanding external debt respectively. Consequently, the dominance of debt from multilateral creditors declined from 65% as of end 2011 to 44% as of end 2012 respectively, as shown in fig 3 below. 4
% Fig 3: Creditors Share of Total Outstanding Government External Debt Stock 100.0 80.0 9.2 8.5 22.7 31.2 27.7 60.0 69.8 73.6 17.8 25.8 40.0 20.0 0.0 64.7 43.5 41.4 21.0 17.9 12.7 7.5 5.2 2009 2010 2011 2012 2013 (%) Bilateral Creditors Multilateral Creditors Suppliers Credit Commercial Debt Source: Compiled from the Bank of Zambia, 2012 Annual Report External debt increased further by 10.5% from the end 2012 position to reach US$3512.93million (% of GDP) as of end December 2013. The increase was mainly attributed to a rise in supplier s credit, most of which were net disbursements from the Exim Bank of China for such projects as the upgrading of the Mbala-Nakonde Road, rehabilitation of urban roads and the Lusiwasi/Lunzua Hydropower Stations. There was also another Eurobond issue during the year respectively. Vulture Fund Issue for Zambia Another interesting development on Zambia s outstanding external debt is the vulture fund issue between Zambia and Donegal as shown in table 2 below. 5
Table 2: Vulture Funds Issue: The Case of Donegal v. Zambia The Government of Zambia is currently involved in vulture fund case with Donegal International. It is reported that in 1979, Zambia purchased agricultural equipment and services from Romania on credit. Being unable to service this debt, in 1999 Zambia and Romania agreed to liquidate it for US$3.28 million. However, before Zambia could seal the deal, a vulture swooped in, Donegal International. Donegal International is registered in the British Virgin Islands, its only business being pursuit of the Zambian debt. Donegal s director is Michael Sheehan, owner of Debt Advisory International, a Washington, D.C.-based consultancy. Mr. Sheehan s company bought Zambia s debt for $3.28 million and sued the Zambian government for $55 million seven years later, after the Zambian government had received debt cancellation. The British High Court ruled that the government of Zambia pay Donegal $15.4 million, 65 percent of what Zambia was saved in debt relief delivered through the MDRI in 2006. Source: Jubilee USA Network 3 External Debt Sustainability Using the World Bank/IMF external debt sustainability thresholds for countries with medium policies 4, table 3 below shows that from 2006 up to 2012 Zambia s external debt distress remained remarkably low with all the indicators falling below the indicated thresholds respectively. Furthermore, according to the IMF/IDA Staff Report for the 2012 Article IV Consultation-Debt Sustainability Analysis, the country s external debt sustainability indicators are projected to remain below their relevant thresholds up to 2032. External Debt/GDP External Debt/Exports External Debt/Budget Revenue External Debt Service /Exports External Debt Service/Budget Revenue Table 3: Zambia External Debt Sustainability Indicators, 2006-2012 Threshold 2006 2007 2008 2009 2010 2011 2012 40% 9.3 9.6 8.2 11.9 10.3 10.3 11.4 150% 23.9 23.2 22.8 33.4 32.7 37.6 58.5 250% 43.7 44.9 36.6 63.0 52.6 47.6 75.1 20% 1.7 1.3 1.2 1.2 0.7 1.0 2.9 20% 3.1 2.5 2.0 2.3 1.6 2.1 6.8 Source: Calculated from the 2013 African Statistical Yearbook, 5 Bank of Zambia Annual Reports, 6 World Bank Data 7 and the World Bank/IMF Debt Sustainability Framework Thresholds 3 Jubilee USA Network. Briefing Note Four. April 2008. Vulture Funds and Poor Country Debt: Recent Developments and Policy Responses available on : www.jubileeusa.org/fileadmin/.../policy.../408briefnotevulturefunds.pdf 4 Classification according to the country s Policy & Institutional Assessment (CPIA) index of 3.5 as of end 2012 5 Data for Budget Revenue was in Zambian kwacha and converted to US$ using the Average Exchange Rate (National Currency per US$ indicate source of the exchange rate) 6 Data for Annual External debt stocks and External debt service obtained from the 2005 to 2012 Bank of Zambia Annual Reports 7 Data on exports obtained from http://data.worldbank.org/indicator/bx.gsr.gnfs.cd?page=1 6
Domestic Debt Developments In addition to the above external debt acquisition, the country has also been borrowing domestically leading to the build up of domestic debt stock respectively. Domestic public debt in Zambia constitutes the total debt that the local, provincial, public enterprises and the central Government owes domestically 8. Based on this definition, data on domestic debt is generally disaggregated into two categories. The first is public domestic debt that comprises government securities such as treasury bills, government bonds and borrowings from the banking system. The second category is that of public liabilities which comprises domestic arrears such as outstanding debts to suppliers of goods, works and services; called up guarantees and parastatals debt; outstanding statutory payments such as pension arrears; awards and compensations such as determined litigations against the Government and/or its agencies and contingent liabilities. An analysis of the domestic debt developments shows that the domestic debt stock which stood at K5 498.81million as of end December 2004 increased by 259% to reach K19 744.57million as of end December 2013. Stock of debt in the first category increased as a result of the government issuing various debt instruments for the achievement of both fiscal and/or monetary policy objectives and also for the development of the secondary market respectively. In the second category, with the exception of pension arrears whose stock increased between 2011 and 2013, the government has made efforts to reduce the stock of domestic arrears to road contractors and suppliers of goods and services for instance. Consequently, there was an overall decline in the stock of total outstanding arrears during the same period as shown in table 4 below. 8 AFRODAD. Domestic Debt Management in Africa. The Case of Zambia, 2011 page 24 7
Table 4: Snapshot of the Decomposition of Domestic Debt, 2011 2013 (Kwacha Million) Debt Category 2011 2012 2013 Treasury Bills 91 days 178.14 128.62 113.18 182 days 506.28 811.41 1581.70 273 days 1101.03 1468.61 2027.07 364 days 4612.99 4432.17 6220.92 Sub Total 6398.44 6840.81 9942.88 Bonds 2 Years 977.27 947.45 608.10 3 Years 1280.85 1481.99 1969.52 5 Years 2662.94 2967.61 3601.76 7 Years 272.88 433.56 671.09 10 Years 255.68 360.50 705.49 15 Years 153.38 172.81 262.21 Mega 10Years 1120.97 1120.97 1120.97 Sub Total 6723.97 7516.89 8939.13 Total Government Securities 13122.41 14357.70 18882.00 Domestic Arrears Various Creditors 520.96 483.51 486.14 Sub Total 520.96 483.51 486.14 Pension Arrears Public Service Pensions Fund 78.14 66.93 126.65 Sub Total 78.14 66.93 126.65 Awards and Compensation 453.51 164.71 250.78 Sub Total 453.51 164.71 250.78 Total Arrears 1052.61 715.15 862.57 Grand Total 14175.02 15072.85 19744.57 Source: Ministry of Finance, 2013 Annual Economic Report Regardless of the above mentioned 259% nominal increase in the country s total outstanding public domestic debt, it is noteworthy that as a percentage of GDP, it has actually declined from a high of 25.9% as of end 2005 to 13.6% as of end 2012, as shown in fig 5 below. This implies that the burden of domestic debt on the economy has been declining as GDP has been growing at a much faster rate respectively. Before the country received external debt relief under the HIPC/MDRI in 2006, domestic debt was less dominant than external debt, averaging approximately 34.3% of the total outstanding public debt as of end 2005. However, following the 79% decline in the country s external debt stock in 2006, the proportion of domestic debt in the public debt portfolio increased significantly, reaching 68.2% as of end 2006 as depicted in fig 5 below. Domestic debt has remained dominant, accounting for 50.4% of the total outstanding public debt as of end 2013. However, it is important to note that there is no clear domestic debt strategy regardless of these increasing domestic debt levels. 8
Kwacha Billions % Fig 5: Evolution of Public Domestic Debt, 2004 2013 25 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Total Domestic Debt Stock Total Domestic Debt/GDP Domestic Debt as a % of Total Public Debt Source: Compiled from AFRODAD, Bank of Zambia and the 2013 African Statistical Yearbook 9 Decomposition of Government Securities There has generally been an almost split balance between treasury bills and government bonds as shown in fig 5 below. At 51% of the total government securities as of end 2004, treasury bills were slightly dominant than bonds which accounted for 49% respectively. There was a shift in this dominance as bonds increased to reach 52% of the total outstanding securities as of end 2012. The increase in the stock of bonds was as a result of purposeful interventions to reduce short term debt while focusing on increasing the stock of long term debt in order to eliminate the refinancing risk. However, between 2012 and 2013, the increase in treasury bills issuancewas higher than that of bonds, which resulted in treasury bills being higher than bonds as of end 2013, at 53% and 47% respectively. 9 To find the proportion of domestic debt in the total public debt portfolio, external debt figures were converted to kwacha using the Bank of Zambia end of period mid-exchange rates 9
% Fig 5: Decomposition of Government 100 90 Securities 80 70 60 50 40 30 20 10 0 49 51 52 47 51 49 48 53 2004 2011 2012 2013 Government Bonds Treasury Bills Source: Compiled from the Ministry of Finance, Annual Economic Reports Holdings of Outstanding Treasury Bills and Bonds As of end December 2012, commercial banks continued to dominate investment in Treasury bills, accounting for 70.4% of the total treasury bills in circulation. The non-bank public and the Bank of Zambia accounted for the remaining 20.8% and 8.8% respectively. In the Bond market, the non-bank public, which is dominated by institutional investors, accounted for the bulk of Government bonds outstanding, holding 43% of the total outstanding stock as of December 2012. These were followed by the commercial banks and the Bank of Zambia with holdings of 39% and 18% respectively. Sustainability of Domestic Debt Unlike the case for external debt, there are currently no internationally agreed thresholds for assessing domestic debt sustainability. Various assessment approaches are in place and these include the Rules of Thump developed by the Commonwealth Secretariat, Debt Relief International and the EU s Maastricht Treaty among others. These rules arbitrarily set thresholds against which sustainability of a given country is measured. The key advantage of using these rules of thumb is that they can be used as early warning signs for fiscal sustainability. However, the rules of thump have the shortcomings that they are not derived from plausible economic theory, the ranges of indicators are too wide and the conclusions drawn can be conflicting at times. Furthermore, the indicators are static, which implies that they only operate in one period of time. The Debt Relief International (DRI) gives the following as the benchmarks for assessing domestic debt sustainability. 10
Table 5: Preliminary Benchmarks for Domestic Debt Sustainability Domestic debt indicator Threshold range (%) Total debt service / Revenue 28-63 Interest / Revenue 4.6-6.8 Debt/GDP 20-25 Debt/Revenue 92-167 Source: Johnson (2001) Based on these on these thresholds, countries with debt ratios at, or near, the top of the threshold range set out in Table 5above will have already accumulated payments arrears and will be facing an unsustainably high domestic debt burden, whereas those with ratios below, or near, the bottom of the range do not have arrears and hence their debt can be considered sustainable. Countries with ratios falling within the range can be considered to have potentially unsustainable domestic debt burdens. Fig 6: Domestic Debt/GDP The Domestic Debt/GDP ratio which as of end 2005 was at 26% and thus showed the existence of an unsustainably high domestic debt burden improved to sustainable levels from 2007 up to end 2013 respectively, where it consistently prevailed below 20%. Fig 7: Domestic Debt/Government Revenue The domestic Debt/ Government Revenue ratio which prevailed in the potentially unsustainable range between 2004 and 2009 also improved to sustainable levels from 2010 up to end 2013 respectively. 11
Fig 8: Interest Payments/Government Revenue From 2004 to 2010 the interest payments to government ration showed the existence of an unsustainably high domestic debt burden in the country, as it consistently prevailed above the top threshold of 6.8%. It improved slightly to potentially unsustainable levels in 2011 and 2012. However, at 6.9% as of end 2013, it once again reverted to unsustainably high domestic debt burden levels respectively Analysis of the debt developments and debt management process in the country Regardless of the sustainable external debt indicators, the following abstract from the 2012 Auditor General s reports about the government failure to service some loans and to monitor and manage bonds and treasury bills highlight some weaknesses which require attention respectively 10 : 1. Failure to Service Loans Records in respect of loans in amounts totalling US$123,446,502 as shown in the table 6below, revealed that the Government has not been consistent in servicing the loans from Brazil, Iraq and China. Loans from Brazil were last serviced in June 2001, from Iraq in July 1984 and those from China have never been serviced and interest has since accumulated to US$44,906,325 as shown in the table below. Table 6: Creditor arrears and interest accumulation Source: Report of the Auditor General on the Accounts of the Republic for the FY ended 31/12/2012 10 Report of the Auditor General on the Accounts of the Republic for the Financial Year ended 31 December 2012, page 263 12
2. Failure to Monitor and Manage Bonds - Treasury Bills According to the World Bank/IMF debt sustainability framework, the Ministry of Finance is required to sign an Agency Agreement with the Bank of Zambia (BOZ) which spells out the formalised roles and responsibilities of the two parties. However, during the period under review, the Ministry did not have an Agency Agreement with the BOZ. Further, although records obtained at BOZ revealed that K9, 110,865,743,600 was raised in treasury bills and bonds during the period under review, there were no records maintained at the Ministry. In this regard, it was not possible to ascertain whether there was effective monitoring and management of bonds by the Ministry of Finance. Despite the improvement in such debt indicators as External Debt/GDP, Domestic Debt/GDP and Public Debt/GDP) over the past years, which has been as a result of the strong economic growth in the country, it is of concern that the country s economic growth has not translated into significant poverty reduction respectively, with 82.6% of the population estimated to be living under the international poverty line of US$2/day as of end 2008 11. The absolute number of the poor is estimated to have increased from about 6 million in 1991 to 7.9 million in 2010, primarily due to population growth. The urban picture is however better than the rural, for instance in the Copperbelt and Lusaka Provinces, the poverty incidence is fairly low (22% and 34% respectively), whereas in the rest of the country, which is dominated by agriculture, poverty rates are greater than 70% 12. Moreover, though there has been acquisition of debt to fund infrastructure development and thus help reduce poverty levels in the country s provinces respectively, it is of concern that there has been lack of effective implementation of the envisaged infrastructure development projects for which debt resources are being acquired for. For instance, in order to address the road infrastructure challenges faced by the agriculture sector in the Copperbelt province, the Government in 2007 and 2008 contracted a loan amounting to US$ 14 million from the Opec Fund for International Development (OFID) and the Arab Bank for Economic Development in Africa (BADEA) for the rehabilitation of forty feeder roads on the Copperbelt. However, as reported by the Committee on Economic Affairs in one of its 2011 reports: Though the project implementation was supposed to commence in February 2009, as of December 2010, the works had not yet commenced; instead of the initial 768km, only 210km would now be covered by the project at the same loan amount and interest; and the road network in the targeted roads in Mpongwe had worsened and had led to continued difficulties and increased cost of farmers transporting farm inputs and produce which was the objective of the project 13 It is also of concern that, regardless of the country s multifaceted debt structure, characterised by increasing borrowing from external commercial sources (international capital markets) and rising domestic debt, there is lack of a comprehensive debt management strategy that is 11 2013 African Statistical Yearbook, page 350 12 http://www.worldbank.org/en/country/zambia/overview 13 Report of the Committee on Economic Affairs for the First Session of the Eleventh National Assembly Appointed on Wednesday 19 October 2011, page 5 13
guiding this borrowing respectively. In this regard, as compared to other Southern African countries that have strategies that outline whether they aim to rely on either external debt or domestic debt depending on whether they aim to minimise either the rollover/refinancing risk associated with domestic debt or the exchange rate risk associated with external debt, there is no clarity on the path which Zambia is taking in this regard respectively. Research and engagements with the National Assembly have also revealed that there is lack of effective parliament oversight on debt issues. The loan contraction process has overally remained the preserve of the Executive. This obviously raises questions of transparency and accountability in debt contraction, management and monitoring in the country. Conclusions and Recommendations Regardless of the recent increases in the country s total debt levels, it is notable that as compared to the pre HIPC/MDRI position where the country had an external debt overhang, its debt repayment capacity has generally improved, as depicted by its debt sustainability indicators. However, it is important that constant monitoring and evaluation be done to establish and ensure that debt resources are strictly channeled to viable and productive sectors that generate resources that are commensurate to debt servicing and are also promotive of economic growth, job & wealth creation and poverty reduction respectively. The prevalence of the domestic debt interest payments to government revenue ratio in the current unsustainable ranges should be treated with caution considering the increasing refinancing risk associated with increasing domestic debt issues, particularly short term treasury bills. In this regard, there is need to minimize the cost of the domestic debt portfolio by constantly lengthening the maturity profile of the portfolio so as to minimize the risk and costs respectively. There is also urgent need for a comprehensive debt management strategy to guide both domestic and external borrowing in the country. It is also recommended that the continuous calls for the provision for parliamentary oversight in the contraction and management of debt on behalf of the Republic be entrenched in a legal framework and be effected urgently and effectively. 14