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Where will this endless govt borrowing leave us?

Despite concerns being raised by many institutions and individuals about Zambia’s high indebtedness, Edgar Lungu still wants to borrow more money.

The International Monetary Fund has put on hold bailout talks with Edgar’s government after it unveiled large borrowing plans it believed threatened debt sustainability.

Edgar’s government has a budget of almost a billion dollars (K8.6 billion) for road infrastructure in the 2018 when the IMF had advised that huge expenditures on such projects should be rationalised.

Edgar’s government can’t stop spending on huge infrastructure projects because this is the main source of money for its members, league. This is where they get their kickbacks, bribes, subcontracts which often they discount. It is also their political lifeline – they have to show the Zambian people they are ‘working’, they are ‘developing’ the country. But at what cost, damage to the country and its future?

Edgar doesn’t care about what happens to this country after he has left office. This endless borrowing by Edgar’s government has very serious consequences for the future of the country.

Edgar’s government has been on a borrowing binge. High on debt and intoxicated by power; it’s not willing to stop borrowing. There is now both a short-term and long-term structural imbalance between what Edgar’s government spends and how much money it raises in tax. This endless borrowing to cover unnecessary and avoidable deficits is unsustainable. Even if the excesses don’t get any worse, we’re all in for a massive hangover. And the more we borrow, the bigger our interest payments get. The more we spend on interest, the less we have to pay down debt or invest for the future. That interest is dead money, which means higher taxes for years to come.

It doesn’t need complicated economics knowledge for one to see and understand that government borrowing increases the total demand for credit in the economy, driving up the cost of borrowing in the process. Higher borrowing costs make it more expensive to finance investment in equipment, stock and other capital goods in the private sector. This harms the ability of the private sector to create the wealth and jobs needed to get our people out of poverty.

And endless government borrowing crowds out private capital and means even less investment in business and real jobs.

And as the government’s debt capacity reduces, it starts to pay more in interest for every dollar it borrows, suffocating our deeply unhealthy economy even further. And everything from trade finance to mortgage payments would get more expensive.

Edgar and his minions shouldn’t cheat themselves that they are smart. Yes, they may be trying to play smart, but without being clever. At this rate of endless borrowing, they may soon be forced to make savage spending cuts to balance their budget, the kwacha may plummet and they would need an International Monetary Fund bailout to stave off complete bankruptcy. And economic and social breakdown could conceivably follow.

Clearly, endless borrowing weakens the country’s fiscal outlook.

A strong fiscal outlook is an essential foundation for a growing, thriving economy. Putting our nation on a sustainable fiscal path by rationalising our government borrowing and infrastructure development creates a positive environment for growth, opportunity and prosperity. With a strong fiscal foundation, the nation will have increased access to capital, more resources for public and private investments in our future, improved consumer and business confidence, and a stronger safety net.

However, if we fail to act on this endless borrowing, the opposite is also true. If our long-term fiscal challenges remain unaddressed, our economic environment weakens as confidence suffers, access to capital is reduced, interest costs crowd out key investments in our future, the conditions for growth deteriorate, and we put our nation at greater risk of economic crisis. If our long-term fiscal imbalance is not addressed, our future economy will be diminished, with fewer economic opportunities for individuals and families, and less fiscal flexibility to respond to future crises.

Again, as debt increases, the government will spend more of its budget on interest costs, increasingly crowding out public investments. Yet those interest costs are not investments in programmes that build our future. Instead, they are largely about the past. And the more resources are diverted to interest payments, the less they will be available for government to invest in areas that are important to economic growth.

At some point, investors might begin to doubt the government’s ability to repay debt and could demand even higher interest rates, further raising the cost of borrowing for businesses and households.

Over time, lower confidence and reduced investment would slow the growth of productivity and wages.

In addition the debt negatively impacts economic opportunity and social mobility because it crowds out investments that help people get ahead. Higher interest rates make it harder for people to buy houses, cars, or pay for their children’s education. Fewer education and training opportunities would leave workers without the skills to keep up with the demands of a more technological economy.

Slower economic growth generally would also make our fiscal challenges even worse, as lower incomes reduce tax collections and put the budget further out of balance.

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