ZAMBIA’S DEBT SUSPENSION DEALS AND NEXT YEAR’S NATIONAL BUDGET
ZAMBIA’S next parliamentary national budget presentation has been fixed for this month-end. As expected, there has never been a time when Zambia felt an urgent need to dismantle its huge external debt and at the same time seek debt relief than in recent months.
With the relay baton towards paying the almost US$15bn foreign debt passed on to the new UPND government by the former ruling PF, it is not surprising that most Zambians are hoping for a quick solution to the debt burden.
Clearly though, President Hakainde Hichilema’s government is making frantic efforts to reduce the debt burden, which is choking the country’s economy. There is no doubt that debt servicing will take a few more years, but it is encouraging that the UPND administration has started engaging lending institutions to lessen the pressure of attending to other socio-economic needs amid debt servicing. The Debt Service Suspension Initiative (DSSI) agreements’ signing between our government and a number of lenders, who include the Paris Club, Kuwait Fund, Saudi Fund and the Development Bank of Southern Africa (DBSA), brings hope to the nation.
Undeniably, this is besides the previous government and China Development Bank (CDB) having reached a deal in October 2020 to defer interest and principal payments for a commercial loan facility, among others. Last November, the then-Secretary to the Treasury announced that under the DSSI, Zambia and China Eximbank reached a debt suspension agreement for interest and principal payments due between May and December of 2020. Undoubtedly, these DSSI agreements would give our newly-elected government space to replicate and allocate funds to healthcare and education services.
Indeed, most skeptical Zambians don’t want to hear of another debt-default because doing so would put the economy under immense pressure. However, the DSSI should not be taken as a panacea because a lot still needs to be done to improve the image with other lenders like the IMF and World Bank. Our newly-elected government must not allow last year’s debt-default to perpetually haunt the citizens but find ways to unlock the economy by negotiating with more transnational lenders.
Now then, Zambia benefited from the HIPC debt relief in 2005 but had borrowed heavily since 2012 and is now in debt distress. China is the single biggest creditor, but Zambia had also borrowed from others, including the development banks and the commercial Eurobond market. This is the time for our newly-elected government to make right decisions in formulating next year’s national budget and beyond to guarantee debt sustainability and breathing space for economic growth. Options for debt sustainability include postponing new loans and new projects, renegotiating loans from China and others, entering an IMF loan agreement, and generally adopt more prudent financial management.
Zambia had borrowed for important infrastructure in roads, energy, railways and telecommunications, while other loans had covered budget deficits. Some loans for infrastructure have had significant socio-economic benefits, while others had generated few benefits so far. Economic decision-making was centralised in the Office of the President without adequate economic considerations, and generally without prudent financial management. Chinese project loans are often on a build-operate-transfer (BOT) model, resulting in Chinese or joint management for many years of specific projects, but no full take-over of whole institutions. In Zambia, this is the case inter alia for the hydropower projects with ZESCO, the digitalisation of the broadcasting services at ZNBC, and two ultramodern international airports.
However, there is limited transparency in Chinese lending and financial flows to Zambia with little accurate data on loan conditions. This Chinese approach to finance inadvertently creates incentives for kickbacks and inflated project costs that may lead to rent-seeking and cronyism. Despite the previous government’s denials, “hidden loans” may have also existed – albeit China is accused of promoting debt trap diplomacy by Western media outlets. Nonetheless, Zambia’s status quo shows that many of the dramatic claims about Chinese take-over of major state assets were exaggerated. Yet, they should not be disregarded.
With UPND’s yet-to-be-fulfilled myriad of campaign promises and with just few days before this month’s parliamentary national budget presentation, most UPND politicians appear to have failed to convince a skeptical Zambian electorate that they have not shifted goal-posts of campaign promises. But will the 29 October parliamentary budget speech by the Minister of Finance Stumbeko Musokotwane prove to anxious voting public that no UPND campaign promise was made to be broken?
As observers of the country’s political landscape are acutely aware, our newly-elected government must take full responsibility for the debt crisis as they had received ample pre-election warnings against the increasing debt burden from its own economists and UPND-aligned NGOs, as well as from external advisers, the IMF, World Bank and donors. After all, China is equally concerned about the level of debt and viability of projects funded by the Chinese policy banks. This may lead to increasing attention to debt sustainability, especially in relation to future concessional loans.
Chinese lending to developing countries has come under sharp focus since the release of several reports that have reshaped the debate. Unsurprisingly, many reports, like those from the China Africa Research Initiative (CARI) are ringing alarm bells. But these reports should rather prompt new thinking on how to establish a more efficient and sustainable lending regime. Questions have been raised over the public policy choices made by the Zambian leaders signing these deals. It’s important to acknowledge that they’re operating in a space defined by limited financing options and an overload of short-term political goals at home.
Yet, the lack of public scrutiny doesn’t instill confidence that these loans were the best available options at the time. The only way to determine the true cost of Chinese loans is through greater transparency, better regulation, and accountability by both the lending and borrowing countries. The fact that Zambian leaders have very little leverage to compel Chinese lenders to reform their lending practices means that any realistic mitigation would have to come from the borrowers’ side.