How Zambia Can Borrow Without Sorrow

Debt is an important source of development finance, and a key tool for eradicating poverty. Countries all over the world borrow to finance their investment and development. Zambia is no different. There are huge and immediate needs, including that infrastructure must be improved and expanded. However, the debt needs to be managed carefully and the proceeds of borrowing shrewdly invested.

After US$6 billion of debt relief in 2005-06, responsible and sustainable borrowing was the goal. However, the accumulation of debt has accelerated at a rapid pace since 2012. So much so that in October 2017, Zambia was classified as at ‘high risk of debt distress’ by the World Bank and IMF. Therefore, many people in Zambia are once again discussing issues of indebtedness, and questioning how debt problems and risks could return so soon.

Zambia’s total public sector debt and publicly guaranteed debt reached 60.5% of GDP at the end of 2016, up from 35.6% in 2014. This includes all disbursed debt. It excludes government’s sizable pipeline of future commitments or projects, and excludes loans that have already been signed but where money has not yet been disbursed. 

The tragedy is not the rapid build-up of debt, but the lack of productive assets Zambia can show from the borrowing. A new approach, that closely links managing investment and responsible borrowing, is required going forward. 

The fact that investors will buy a country’s bonds should not be taken as a signal that an economy is doing well. It could mean that the risks are worth facing for the investor, if the returns are high enough, or that the investor might not know exactly what they are buying if they are investing in indexes. This suggests that opportunities for finance should not be an automatic cause for celebration and signatures. Instead, a careful strategy and a more ‘active’ approach to debt management is required. 

The environment for public debt management in Zambia has been changing, and will continue to change in the coming years. Access to grants and to funding on concessional terms will reduce, and debt issued on market terms will increase. The bad news is that cost will increase further, the good news is that market borrowing comes with financial choices, i.e. the government can better achieve its preferred debt composition and risk exposure. The following three ideas, based on a recent World Bank Economic Brief, should support government in meeting these challenges.

First, halt the pace at which debt is accumulating, by carrying out a full review of the non-concessional loan pipeline with the intention of reducing the number and scale of the commitments. A check could be made to whether the projects contribute to the national development plan, and whether they have been well designed and appraised. Only projects with the highest returns should be short-listed and some of these might need to be delayed in order ensure debt sustainability.

Second, switch from passive to active debt management. Being active means implementing a well-crafted strategy to reduce the cost of borrowing, extend the terms, and diversify the sources of debt funding. Repayment risks can be better managed, including by buying back some of the outstanding Eurobond debt in the years prior to their maturity. New skills will be needed in the debt management office to communicate better with investors, to monitor the markets, and improve the quality of data management and reporting.

Third, strengthen the management of public investment. Projects need to be better prioritized, designed, tendered, and implemented. If borrowed money is invested in an effective manner, then Zambia can carry more debt and realize its development goals.