The Africa Confidential reports that despite Zambia having an unclear debt pile, Edgar Lungu’s government has no plans to stop borrowing.
The Africa Confidential Report Volume 59 No. 7 of April 6, 2018 reports that: “Edgar Lungu’s government has no plans to stop spending, but the amount that it owes is rapidly growing beyond control.”
The report outlined that demands for clarity on Zambia’s national debt were intensifying, as the stand-off with the International Monetary Fund (IMF) continued and senior figures in the government fear “a Zimbabwe-style economic crisis and currency crash”.
“They say that contrary to official figures, the debt now stands at 100 per cent of GDP. They worry that President Edgar Lungu has no plans to halt the borrowing spree. Oblivious to the alarm bells sounded by Zambian officials and politicians, as well as international financial institutions, he may be steering the country towards a cliff edge, pundits fear,” the Africa Confidential stated.
“The precise size of Zambia’s debt pile is unclear. Officials now put the figure at anything between US$15 billion and $25 billion. The difficulty in establishing a number internally demonstrates just how far government has lost control. The former finance minister Felix Mutati, whom Lungu replaced on 14 February with commerce, trade and industry minister Margaret Mwanakatwe, has told confidants that he was not aware of all the loans contracted during his tenure. Ministries increasingly bypassed him, and the Central Bank. That Mutati was trying to curb borrowing is one reason, say sources in the governing Patriotic Front, that he was demoted to the Ministry of Works and Supply.”
It seems Edgar doesn’t care about what happens to this country after he leaves office. What matters to him is the present. Most the debts they have contracted will not be due for repayment while they are in office. They are today effectively spending money that should be spent in the future. That means the future governments will have no money to spend.
Left unchecked, the government’s unending borrowing could mean higher interest rates and a slower economy.
At between $15 billion and $25 billion, Zambia’s debt is gigantic in relation to our gross domestic product of $25 billion.
And the numbers are only getting scarier. It’s truly huge – we’re talking 60, 100 per cent of gross domestic product.
We haven’t seen anything like that in this country’s history. For most people, this is unprecedented.
When will this government’s habit of maxing out its borrowing finally hit home?
Soon, we will start to feel the pinch of Edgar Lungu’s borrowing binge.
At some point, it may be much harder to finance our debt. As a result, we would see an economic or market solution and that would mean either higher interest rates or a lower value of the kwacha, or a combination of both. The potential for future growth could be less, and you could see a slower growth in the standard of living or even a decline.
Consumers will also be affected. Interest rates on treasury bonds serve as the benchmark for many consumer loan products, including mortgages, car loans and credit cards. As interest rates inch up, so will rates for consumers.
And just in case you’re thinking the Bank of Zambia can step in and hold rates down indefinitely, at some point, the Bank of Zambia can’t really control interest rates. The market is not stupid. The market sees that eventually interest rates have to go up.
If interest rates ramp up, a greater portion of the government’s budget will go toward interest payments, leaving fewer kwachas for other, more economically stimulating types of spending, such as funding for education and health.
Higher debt in general is a drag on economic growth. The government is still stimulating the economy by spending lots of money. When it gets more expensive to do that, they will have to pull back. That will further slow the economy and the job market.
Government spending currently accounts for not less than a quarter of economic activity in Zambia.
Twenty ngwee of every kwacha is coming from the government. If the government can no longer afford to do that, that is going to have a very sharp, negative effect on the consumer.
At some point, the government has to think about raising more revenue, which means higher taxes. And if we don’t address this debt problem, it’s going to end up being a bigger and bigger problem.
Public demand is essentially crowding out private demand. It’s the old definition of too much money chasing too few goods, and it breeds inflation.
But when demand returns from the private sector, additional competition will crop up for a limited supply of goods, which in turn will cause prices to rise. Inflation is particularly harmful for consumers because it erodes purchasing power and can ultimately lead to a lower standard of living. Savers will also feel the pain if the inflation rate outpaces yields on certificates of deposit or other savings accounts.
Only time will tell whether this Patriotic Front government of Edgar can get the recipe right.
What makes things worse is that a big portion of the money they are borrowing is wasted on things that do not boost economic productivity.
Moreover, interest rates are not static, anything borrowed at today’s rates will be refinanced at tomorrow’s. But as the government unwinds that, borrowing interest rates rise.
Another problem is that as interest payments rise, national saving declines. And that decline means reduced private investment opportunity. If we accept, as the vast majority of economists do, that effective investment is the key to boosting productivity and thus wages and living standards, the debt’s role in crowding out investment is a big problem.
The national debt matters. If we wish to leave a better nation to our children, we need to get a grip and reduce borrowing.