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IMF bailout uncertain due to Zambia’s rising public debt

ZAMBIA’S chances of getting a US$1.3 billion bailout package from the International Monetary Fund have thinned out following the Bretton Wood institution’s concerns over the country’s rising public debt. The IMF, in its recent report on Zambia, has stated that public debt had been rising at an unsustainable pace, crowding out lending to the private sector and increased the vulnerability of the economy.

According to the IMF, Zambia’s outstanding public and publicly guaranteed debt rose sharply from 36 per cent of GDP at the end of 2014 to 60 per cent at the end of 2016, driven largely by external borrowing and the impact of exchange rate depreciation. It listed as a high risk increased external commercial borrowing, saying such costs would squeeze fiscal space for priority spending.

“Rely more on concessional external borrowing for public investment projects and greater scrutiny of financial and economic viability of projects financed by non-concessional loans,” the IMF has recommended.

Another high risk area for Zambia is increased domestic borrowing which the IMF says will crowd out credit to the private sector.

“Continued accumulation of domestic arrears will increase stress in the financial sector and slowdown growth. Increased non-concessional external borrowing will worsen debt dynamics. Delayed fiscal adjustment increases risk of sudden stop/reversal of portfolio inflows to domestic government securities market,”

IMF stated, recommending the implementation of fiscal consolidation measures, such as strengthening prioritization of capital spending, rationalizing subsidies by full application of cost-reflective pricing in the energy sector and improved efficiency in the Farmer Input Support Program.

It further stated that increased participation of foreign investors in the government securities market had eased the government’s financing constraint but made the economy more vulnerable to swings in market sentiments and capital flow reversals.

“The medium-term outlook for the economy is contingent on policies. Real GDP growth has picked up after a marked deceleration from 7.6 per cent in 2012 to 2.9 per cent in 2015. Growth is projected to reach 4 per cent in 2017. However, achieving sustained high and inclusive growth requires a stable macro-economic environment as well as policies and reforms to increase productivity, enhance competitiveness, strengthen human capital and support financial inclusion for small and medium-scale enterprises,”

IMF stated.

“Domestic risks to the outlook include delayed fiscal adjustment which would continue to crowd out credit to private sector and entrench an unsustainable debt situation and unfavourable weather conditions which would affect hydro-power generation and agricultural output. External risks include tighter global financial conditions and volatility in the world copper price.”

It also noted that ambivalent policies such as those on fiscal consolidation, maize exports, and private sector role in procurement of refined petroleum products, were clouding the investment climate.

“The government should speak with one voice on key objectives and policies; provide space for private sector to take the lead in maize marketing and procurement of refined petroleum products,” IMF recommended.

It stated that Zambia would return to moderate risk rating if authorities do not restrain themselves from non-concessional borrowing.

“Zambia is assessed to be at high risk of debt distress based on a full LIC-DSA prepared by Fund and World Bank staff (Text Figure 2). Under “current policies”, the present value (PV) of external debt-to-GDP ratio breaches its threshold (40 percent) during 2019-23, while the PV of debt service to revenue ratio breaches its threshold (20 percent) in 2022 and 2024 when Eurobonds mature. Sensitivity analyses indicate that all indicators breach relevant thresholds in the face of shocks related to export earnings, growth and the exchange rate. Debt dynamics improve substantially under the “adjustment” scenario; the PV of external debt-to-GDP remains below the 40 percent threshold throughout the projection horizon, but the debt-service-to-revenue ratio temporarily breaches the threshold in years when Eurobonds mature. The DSA suggests that Zambia would return to a moderate risk rating if the authorities restrain non-concessional borrowing and implement measures to achieve the fiscal consolidation path consistent with the adjustment policies scenario,” IMF stated.

The IMF executive directors, however, welcomed the recent improvement in Zambia’s economic outlook.

“However, directors noted that domestic and external risks pose significant challenges. They advised the authorities to take advantage of the current favourable conditions and implement decisive and prudent macro-economic policies and reforms to place public finances and debt on a sustainable path, build international reserves, increase the economy’s resilience to shocks and achieve higher and inclusive growth. In this regard, they welcomed the launch of the Economic Stabilisation and Growth Programme and the Seventh National Development Plan,”

stated IMF.

“Directors commended the authorities for taking strong measures to phase-out regressive fuel and electricity subsidies and for scaling-up spending on social protection programmes. At the same time, they noted that achieving the government’s fiscal consolidation goals will require stronger efforts to increase domestic revenues, including by addressing widespread exemptions and broadening the VAT and income tax bases. Directors emphasised the importance of containing recurrent spending, improving commitment controls, phasing out subsidies and strengthening public financial management.”

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