Zambia must stop accumulating new external debt, advises AfDB

TO ATTAIN debt sustainability, Zambia must stop accumulating new external debt and curb runaway public spending, the African Development Bank has advised.

The AfDB also notes that poverty in Zambia is expected to increase due to significant job losses in the service sector.

In its economic outlook on Zambia posted on its website, the AfDB said the economy of Zambia fell into a deep recession due to the adverse impact of the COVID-19 pandemic.

“To attain debt sustainability, Zambia must stop accumulating new external debt, increase domestic revenues, curb runaway public spending, and create a stronger institutional public financial management framework,” it advised.

The bank also noted that Zambia’s stock of public debt increased to an unsustainable 104 per cent of gross domestic product (GDP) on September 30, 2020 and was expected to rise slightly in 2021 before decreasing in the medium term because of improved coordination between fiscal and monetary policy, as espoused in the Economic Recovery Programme.

“Outlook and risks – The economy is projected to grow by 1.0 per cent in 2021 and 2.0 per cent in 2022, underpinned by recovery in the mining, tourism, and manufacturing sectors. The recovery in international demand and copper prices are positive developments, while a reduction in COVID-19 cases will boost activity both in manufacturing and tourism,” the AfDB noted. “However, the economy faces substantial risks that a second wave of the pandemic will impede global economic recovery and stifle demand for copper…In the banking sector, the ratio of non-performing loans is expected to increase and contribute to a drying up of bank liquidity, dampening private sector activity. Against this backdrop, poverty is expected to increase due to significant job losses in the service sector (on average, 30.6 per cent), manufacturing (39 per cent), personal services (39 per cent), and tourism (70 per cent).”

It warned that a COVID-19 second wave could also undermine the revival of such critical sectors as tourism and manufacturing.

“Failure to effectively implement the Economic Recovery Programme, which is intended to resolve most of the critical economic constraints such as debt sustainability and stabilisation of the macroeconomic environment could also pose a high risk to Zambia’s economy,” AfDB said.

It noted that real GDP contracted by an estimated 4.9 per cent in 2020, after growing by 4.0 per cent in 2018 and 1.9 per cent in 2019 as a result of an unprecedented deterioration in all the key sectors of the economy.

The AfDB indicated that manufacturing output fell sharply as supply chains were disrupted, while the service and tourism sectors were hurt as private consumption and investment weakened due to measures taken to contain the spread of COVID–19.

“Mining output, which declined initially due to falling global demand for copper, is recovering amidst production disruptions in South America. Sustained commodity price increases beyond the current forecast could lead to lower economic contraction. Even before the pandemic, the economy was experiencing serious macroeconomic challenges, such as high inflation, widening fiscal deficits, unsustainable debt levels, low international reserves, and tight liquidity conditions. Price levels and the financial sector have not stabilised, despite government efforts to deploy monetary easing in 2019 and 2020,” AfDB noted.
“Inflation has been rising, mainly driven by the pass-through effects of the depreciation of the kwacha and elevated food and transport prices. Following the outbreak of COVID-19, inflation rose to 17.4 per cent in 2020 and is projected to remain above the target range of 6–8 per cent in 2021. The external position also worsened in 2020, with dwindling reserves (averaging 1.6 months import cover), and will remain depressed in 2021 due to copper price and output fluctuations, rising public debt payments, and elevated non-oil imports.”

The bank added that: “The government’s pursuit of expansionary fiscal policy for public investments, despite falling revenues, has resulted in widening fiscal deficits (8.3 per cent of GDP in 2019 and 11 per cent of GDP in 2020).”

“The expansionary fiscal policy, mainly financed by external and local borrowing, caused Zambia’s public and publicly guaranteed debt to hit 91.6 per cent of GDP in 2019 and 104 per cent in 2020. It will remain elevated in the medium term,” said the AfDB.

The World Bank’s overview of Zambia of March 19, 2021 indicated that after 15 years of significant socio-economic progress and achieving middle-income status in 2011, Zambia’s economic performance has stalled in recent years.

The bank revealed that Zambia’s economic activity through the third quarter of 2020 contracted by 1.7 per cent as declines in industry and services outweighed growth in agriculture.

The bank however, said a gradual recovery was expected with GDP growth projected at 1.8 per cent in 2021 and would average 2.8 per cent over 2021-23.

“Timely achievement of macroeconomic stability will largely depend on progress on debt restructuring, fiscal consolidation efforts and the availability of the COVID-19 vaccines. A prolonged fallout from COVID-19 could amplify fiscal and domestic liquidity challenges and lengthen the time for Zambia to embark on key macroeconomic and structural reforms,” indicated the WB.

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