ECONOMIST Professor Oliver Saasa has cautioned the government that cancellation of debt repayments or renegotiation of existing loans is a costly undertaking that only brings partial relief in the short term.
Prof Saasa has, however, commended the government for finally accepting earlier warnings that the country was moving towards debt distress. Meanwhile, the Premier Consult managing director said the government has not clearly stipulated how the announced austerity measures will be implemented.
Finance minister Margaret Mwanakatwe a week ago announced the cancellation of some debts, suspension of repayments while others will be renegotiated to bring the country’s debt to sustainable levels. Mwanakatwe further announced a freeze on debt contraction and suspension on issuance of guarantees for any government institutions.
The announced measures came after constant denials by the government that the country’s debt had ballooned beyond sustainable levels. President Edgar Lungu, Mwanakatwe and national development planning minister Alexander Chiteme are all on record having said Zambia’s debt was sustainable and that repayments were all on schedule.
President Lungu, in response to IMF concerns on high debt last year, bragged that Zambia could borrow as much as it wanted and told those uncomfortable with this position to leave. However, following a Debt Sustainability Analysis conducted recently, the government has changed its position and moved to announce austerity measures to avoid further indebtedness.
But Prof Saasa has said because Zambia is vulnerable to external shocks, debt management should be cast in a predictable medium-term fiscal policy framework that would strengthen investor confidence regarding the country’s ability to cope with real and perceived risks.
“This is because long-term debt sustainability depends on solid growth based on sound government policies, including prudent external borrowing and debt management. In this regard, government should strive to maintain a sound macroeconomic policy framework over the medium to long term. To the extent that external imbalances are primarily the result of fiscal imbalances, fiscal consolidation, including tax reforms that strengthen the government’s fiscal payments capacity, is crucial for achieving debt sustainability. Cancellation of debt repayments or renegotiation of existing loans, as the government intends to do, is costly in the long-term and only brings partial relief in the short-term,” Prof Saasa cautioned.
“Extending, through renegotiations, the loan repayment period (tanor) would not cut costs. In fact, it will do the opposite, namely, increase interest on the loans. Nor would suspending ongoing road projects achieve the government’s intended goal of attaining debt sustainability. Rather, prudent budgeting and reorienting of expenditures from non-productive to growth-enhancing activities within a medium-term framework, should be pursued in order to further strengthen the country’s fiscal position which is currently stressed.”
He has also advised closer monitoring of loan application.
“…in terms of governance, there is justification for the provision of more debt oversight authority to Parliament. It should also include closer monitoring of how loans are being applied, based on the country’s debt management strategy that should be developed and approved by Cabinet as a matter of urgency,” Prof Saasa said.
“Government must, as a matter of emergency, develop and sustain a sound external debt management system that secures the country’s favourable international credit rating and adopting a prudent borrowing programme that is efficient, transparent and accountable. This calls upon government to keep debt to manageable and sustainable levels. In this respect, any new borrowing should be aligned to Zambia’s capacity to repay and on terms that would not unduly expose the country to preventable risk of defaulting. In this regard, government is urged to strive to meet the countrys financing requirements and its payment obligations at the lowest possible cost over the medium to long term and, while doing this, contain at an acceptable level the potential exposure to risk. Importantly and as opposed to what currently obtains, debt management should always be conducted within the framework of the requirements imposed by the country’s monetary policy and guidelines.”
He advised that all future loans should be used for high priority development activities “that are productive or those that build essential physical infrastructure and always doing this with value-for-money principles in mind”.
“In this regard, the government should always ensure that the rates of economic return on any investment that uses borrowed funds are adequate to generate sufficient returns to make good debt service payment obligations. The rather spurious expenditure pattern with little regard to cost efficiency in road construction has to stop without much debate,” Prof Saasa said.
“… in order to minimize the possibility of arrears accumulation due to bad loan or investment decisions, the government should be able to take corrective measures in a timely and prompt manner. This should entail closer monitoring of how loans are being applied, particularly by parastatals and state-owned financial institutions that have benefited from loans through state on-lending arrangements or government guarantees…it is important to recognise that debt sustainability can only be assured in the long term when, beyond the measures that the government has just announced, a parallel effort is made that targets the strengthening of the country’s policies and institutions and on increasing our access to global markets for goods and services exports.”
He further emphasised improvements on the rates of return on investment in Zambia as an important strategy towards growth and debt sustainability.
“Thus, in order to deal with debt repayment obligations of the country in a sustainable manner, the government’s external debt strategy should be anchored upon a more comprehensive view of fiscal risks arising from the broader public sector and the economy as a whole. In this regard, the government should strive to maximise economic productivity, focusing on addressing those factors that have continued to contribute to the country’s low output record…An important indicator of overall efficiency is the strength and vitality of the private sector. Thus, government should continue to lay the groundwork for increasing the role of private capital in the economy through, inter-alia, addressing those factors that still check the smooth entry and operations of private investment, both local and foreign,” Prof Saasa said.
Meanwhile, Prof Saasa said the government should be commended for coming out clearly in recognising that the country is slowly gliding towards a significant debt distress.
“…finding a solution to averting this calamity is long overdue and does explain, to a large measure, the difficulties the country has had with respect to reaching a positive outcome in our negotiations with the IMF. I am particularly gratified that the Minister has now publicly taken note of, using Mrs. Mwanakatwe’s own words, ‘Unsustainable debt stock and high pace of debt accumulation’. For quite a while, the Zambian government has been in a state of denial regarding the seriousness of sovereign debt contraction and a heated debate has characterised the political scene regarding the accuracy of the debt figures. I am particularly happy that the Debt Sustainability Analysis (DSA) has just confirmed what many of us have been cautioning government regarding the urgency of undertaking appropriate measures to arrest the pace at which voluminous debt has been contracted within an incredibly short period of time over the 2011-2018 period,” Prof Saasa said.
“The latest government-reported figure for external debt is US$9.3 billion and about US$5.4 billion domestic debt, amounts that are believed by sections of the Zambian society and outside as conservative and not reflective of the true picture. Whatever the correct figures, a combined domestic and external debt of US$14.7 billion (government figures) is sufficient to justify government’s expressed concern. I appreciate the government decision to indefinitely postpone the contraction of new debt until the debt distress is moderated; cancel some of the loans; renegotiate some bilateral loans to extend their maturity/tenor; cease issuance of guarantees for commercially viable projects; and stop the issuance of letters of credit and guarantees to technically insolvent parastatals.”
He said these were bold policy measures that require political will, commitment and capacity to secure their implementation.
“My main concern is that the Honourable Minister of Finance seems to have stopped where she should have started, namely, the ‘how’ aspect of the policy changes. Still, one hopes that, having outlined the policy stances, real issues and associated challenges at the level of implementation, by way of strategy, are going to be squarely addressed. To begin with, to come up with a lasting solution to the debt crisis, we need to acknowledge the real factors that brought us into debt distress in the first place,” said Prof Saasa. “The prudential application of the contracted money is yet another aspect that, if not adequately addressed, would significantly reduce the weight of the new government approach on debt management. By way of advice, I would like the government to consider a number of issues now that we are talking the same language on the importance of focusing of debt as one the country’s enemy number one.”