ZAMBIA, in a single day, must repay US$750 million and US$1billion towards the Euro-bonds in 2022 and 2024 respectively, the World Bank has revealed.
And the World Bank says Zambia has stopped publishing the country’s debts with the annual debt reports only being made public on Ministry of Finance website in 2012.
According to the World Bank’s 10th Zambia Economic Brief titled ‘How Zambia Can Borrow Without Shame’ produced in December 2017, money borrowed in a single day must be repaid in a single day.
“This is an issue for many African sovereigns that issued Eurobonds shortly after the financial crisis. In a single day in 2022, Zambia must repay US$750 million and in 2024, it must repay US$1 billion. The third Eurobond (issued in 2015) has a different structure and amortises in three equal installments in 2025 – 27. The mounting repayment risks reflect not only large payments in single years, but also the bunching of repayment years. Zambia’s redemption profile highlights how efforts will likely be needed to buy back some of this debt in the hope of smoothing repayments. The concentration of Zambia’s maturities coincides with that of many other African countries, a further potential source of roll-over risk,” the World Bank stated.
The brief added that unsustainable debt burden would impact on poverty reduction in Zambia. The World Bank Brief states that this would reduce not only public investment and income growth, but would also reduce fiscal space for social spending as the cost of servicing the debt increases.
“The cost of servicing the Eurobonds has increased with each issuance, with the coupon rate increasing from 5.375 per cent in 2012, to 8.5 per cent in 2014 and 8.97 per cent in 2015. This has left very little in the way of discretionary resources to fund service delivery, as over half the budget is needed to meet the government wage bill. This reduces the ability of Government to respond to funding needs identified in the national development plan,” the brief stated.
The World Bank stated that its and IMF’s debt sustainability analysis puts Zambia at high risk of debt distress, indicating that there are heightened vulnerabilities associated with public debt.
“This indicates that Zambia is accumulating too much debt too quickly and a calmer and more sustainable pace is now required…. Zambia had limited borrowing options in the 1990s and early 2000s, and these were linked to cooperating partners like the World Bank or African Development Bank. Zambia would know the terms; the loans would be concessional; and support would be given to help design, appraise, and implement the projects. However, now that Zambia is tapping from debt capital markets and has many sources of borrowing, a new ‘active’ approach to debt management is needed that contrasts with the ‘passive’ approach to debt management,” according to the brief.
The bank added that the environment for public debt management in Zambia had been changing, and would continue to change in the coming years.
It also stated that access to grants and to funding on concessional terms would reduce while debt issued on market terms would increase.
“The bad news is that costs will increase further. The good news is that market borrowing comes with financial choices, i.e. the government can better achieve its preferred debt composition and risk exposure. The tragedy is not the recent rapid build-up of debt, but the lack of productive assets Zambia can show from the borrowing. The first two Eurobonds were accompanied by a detailed plan on how they would be spent. The third Eurobond had no such plan,” according to the brief.
The World Bank added that the debts most likely have been used to finance government consumption.
“Most of the resources were earmarked for the transport sector and mainly the road sector. Roads therefore are a good lens through which to assess how well borrowed resources have been invested. Unfortunately, when compared to the median cost of paving roads in the region, Zambia’s roads stand out as being very expensive,” the bank revealed.
“Where resources have not been linked to specified investment, it is most likely that they have been used to finance Government’s consumption. Most of the recent trunk road investments since 2011 have been delivered as part of the Link Zambia 8000 (US$5.4 billion for 8,000km of roads, 2012-17) and the Pave Zambia 200 project. Other urban road programmes, include Lusaka 400 (US$350 million to rehabilitate and upgrade 400km) and the Copperbelt 400 (US$492 million for 406km). To fund these ambitious programs, the government utilided lending from China, other traditional and non-traditional development partners, and US$28 million earmarked from the Eurobond proceeds.”
“There is not much argument about whether investment in infrastructure is necessary (Zambia’s infrastructure lags that of southern African peers and is important for growth), but there has been concern about whether the right projects have been selected and whether value for money has been achieved,” the brief reads.
“The road programs were very ambitious (9,000km of roads in five years) and were not well prioritised. A framework was absent to direct resources if less than US$6 billion were made available. When the available resources fell short of this figure, the selection of roads became haphazard and was not always motivated by economic and social returns. The cost of the roads has also been high relative to the cost of construction elsewhere in the region. For Zambian roads, the median cost of construction and upgrading of paved roads under 100km was US$457,000 per km per lane, and for roads over 100km the median cost was US$360,000. When compared to the median cost of paving roads in the region, Zambia’s roads stand out as being very expensive. It is often argued that Zambian roads are more expensive than other countries in the region because of the higher cost of inputs such as steel, cement and bitumen,”
according to the brief.
“However, the difference in the cost of bitumen and cement explains only some of the high cost of Zambia’s roads. The reason for the high costs relates more to poor public investment management (especially a lack of competitive tendering) and long delays in payments. The much higher costs of road building increase the avenues for corruption. International evidence highlights that the costs of road construction are higher in countries with higher levels of corruption and that these effects are robust to controlling for a country’s public investment capacity and business environment. An investigation into roads contracts by the Auditor General in 2009 also showed that unit costs are substantially higher than they need be, based on detailed procurement, financial and technical audits that revealed widespread inefficiency in the management of road contracts.”
The World Bank further questioned if the roads where completed at reasonable cost in 2011-16.
“ A study of 172 World Bank and African Development Bank (AfDB) road projects in Africa revealed that the costs of roads depended on their length (longer roads were cheaper due to economies of scale). For the construction and upgrading of paved roads under 100km, the median cost was US$271,023 per km per lane (NB the figures have been deflated from 2006 US$ in the AfDB study to 2016 US$). For roads over 100km, the median cost was US$175,011 per km per lane. The top quartile (25 per cent) of the roads cost US$506,116 per km per lane (under 100km) and US$192,738 per km per lane (over 100km). A sample of 31 Zambian road projects (covering 3,470km) reveals that the median cost of construction and upgrading of paved roads was US$ 402,000 per lane per km (2016 US$) and the average cost was US$627,000. For roads under 100km, the median cost was US$457,000 per km per lane and over 100km, the median cost was US$360,000. One very important consideration is that there is no such thing as a ‘typical’ unit cost. This is because (i) unit costs are calculated through a process of standardising projects that are broadly similar but which differ in their design details and specific circumstances, and (ii) the size of the project invariably has an overriding effect on the unit rate (economy of scale).”
The World bank added that Zambia had huge development needs, and access to new borrowing sources provides good opportunities for development finance.
“However, efforts are needed to both reduce the pace at which debt has been accumulating and to strengthen the management of debt and public investment, if debt distress is to be avoided. This includes shifting to an ‘active’ approach to debt management…the following ideas are provided to support the government in meeting these challenges: 1. Halt the pace at which debt is accumulating. The World Bank and IMF debt sustainability analysis has shifted Zambia to high risk of debt distress. This assumes that current policies continue and new loans totalling US$3.5 billion are added to the US$4 billion of already contracted debt over the next five years. However, there is another path (the adjustment scenario) in which the government halts the signing of any new non-concessional borrowing, except for a US$282 million government communications project and any issuance with the purpose of reducing the repayment risks or rolling-over the existing Eurobonds,”
the brief added.
The World Bank noted that as Zambia’s debt levels soared in 2015, the government’s response was to stop publishing debt reports or mentioning the overall debt levels in their speeches and official documents.
“Some numbers were provided, but they were never aggregated. It was left to the reader to solve the puzzle. This led to a range of narratives, at times more negative than the reality. Annual debt reports were last made public on the Ministry of Finance website in 2012, and since then, no quarterly debt reports have been published.
Since 2012, the only published debt numbers have been found in government speeches and other economic reports. However, the external debt was often mentioned in US$, the domestic debt in kwacha, and the total ratios never summed or announced,” reads the brief.
“Furthermore, other debt sources, such as guaranteed debt, are excluded from the discussion of total public debt. Public sector debt typically includes both external and domestic debt. The IMF and World Bank also include publicly guaranteed debt to measure ‘total public sector debt and publicly guaranteed debt’. For Zambia, this was recorded at 60.5 per cent of GDP (US$13.3 billion) at the end of 2016, up from 35.6 per cent in 2014. This includes all disbursed debt, but
excludes government’s pipeline of future commitments or projects, and loans that have already been signed but where money has not yet been disbursed,” the brief stated.
The World Bank brief added that public debt had accumulated rapidly in recent years, following large and repeat fiscal deficits and huge external borrowing followed by a currency shock in 2015.
“Fiscal deficits have been financed by new non-concessional sources, including China and international debt markets. In 2015, total public and publicly guaranteed debt increased to 61.4 per cent of GDP before declining slightly to 60.5 per cent in 2016, following an appreciation of the kwacha,” the brief stated.
The World Bank noted that despite debt being an important source of development finance, and a key tool for eradicating poverty, it must be managed properly.
“Countries all over the world borrow to finance their investment and development. Zambia is no different. There are huge and immediate needs, including that infrastructure must be improved and expanded. However, the debt needs to be managed carefully and the proceeds of borrowing shrewdly invested,” the bank’s brief stated.
And in her foreword to the brief, World Bank Zambia Country manager Ina-Marlene Ruthenberg stated that there remained a need to look closely at ways to improve debt management to ensure that economic growth had sustainable foundations and that borrowed money was invested wisely to ensure inclusive growth.
“I am pleased to share the tenth Zambia Economic Brief with a focus section on sustainable borrowing and improved debt management…we hope that the findings of this Economic Brief will stimulate a healthy debate around these questions so that Zambia can shift to a path of more inclusive growth,” stated Ruthenberg.