Domestic Debt Balloons to USD5.1billion
Africa’s second largest copper hotspot, Zambia has in the last two years recorded a 115.7% rise in domestic debt from the Kwacha equivalent of USD5.1billion from USD2.56billion levels. However, a worrisome piece is that this doubling is not backed by a similar pattern in gross domestic growth rate. Ideally one would expect that justification for a higher debt appetite would come with rising needs to expand the economy.
Africa’s second largest copper hotspot, Zambia has in the last two years recorded a 115.7% rise in domestic debt from the Kwacha equivalent of USD5.1billion from USD2.56billion levels. However, a worrisome piece is that this doubling is not backed by a similar pattern in gross domestic growth rate. Ideally one would expect that justification for a higher debt appetite would come with rising needs to expand the economy. For Zambia the economy has grown by an infinitesimal amount. During the monetary policy announcement by the Governor Dr. Denny Kalyalya on Wednesday 16 May, it was established that the stock of outstanding domestic debt for Zambia is K50.9billion. This figure is comprised of K30.6billion in bonds and K20.3billion in treasury bills.
A rise in debt appetite should translate to some level of growth especially if the borrowing is for capital expenditure as opposed to absorbing recurrent expenditure needs. One would expect that a doubling in domestic debt from 2016 period would have been explained by significant GDP growth which is not the case for Zambia. The recent budget commitment to fund the fiscal side with 60% domestic and 40% external has brought domestic debt under more scrutiny. The Ministry of Finance will be expected to finance 4% of GDP with the Kwacha equivalent of domestic debt translating to USD1.1billion.
However, a USD250million debt incurred in Q1: 2018 versus a USD1.1billion target gives a picture of where government is at and the last two under-subscriptions in treasury bill sales are a source of concern because this could threaten the drive by government. Being in the middle of an IMF negotiation for USD1.3billion which doesn’t seem likely to close this year has made the state step up its efforts to widen the net of potential subscribers to these debt offerings as was mentioned at the launch of the road show for sensitization of government securities in Lusaka.
Of the domestic debt K12,6billion is in arrears reflecting obligations owed to suppliers of services to the government that have not paid and are directly linked to commercial banks contributing to the rise in non-performing loans – NPLs which have ballooned to 13% versus the 10% regulatory limit. With the advent of NPLs commercial banks are skeptical of doing business with contractors and this has implications on economic growth which if not managed will constrict the economy. The sooner the Ministry of Finance dismantles the arrears the better it will be for economic growth. Until this is achieved risks to economic growth will still be existent.
Ariel view of Kansanshi mine in Africa’s second largest copper producer, Zambia whose domestic debt position has more than doubled over the last 2 years to USD5.1billion Kwacha equivalent yet not backed by strong economic growth.
See below domestic debt graph showing the rise in borrowing appetite by government from March 2016 to March 2018 as per MPC presentation by the Governor.