LAST week, I looked at the extent of Zambia’s debt stock and the justification for further debt contraction.

As I promised, today we focus on the case against borrowing and some of the policy recommendations as espoused by economists from two local economic think-tanks.

Zambia Institute for Policy Analysis and Research (ZIPAR) research fellow Shebo Nalishebo and Jesuit Centre for Theological Reflection (JCTR) official Musonda Kabinga tackled the issue about fortnight ago.

Since then, a lot has happened, with Zambia issuing the second sovereign bond of US$1 billion, 25 per cent higher than the
$750-million one issued two years.

One day we will look at the implication and impact of that move but not today. According to Mr Nalishebo one of the common effects touted by the critics of domestic debt is that it crowds out private sector investment.

The private investors lose out on financing since they cannot effectively compete with the government for these loans from lending institutions.

When Government borrows domestically, it uses up domestic private savings that would otherwise have been available for the private sector.

In the end the growth of the private sector, which is supposed to be the engine of economic development, is stifled.

Mr Nalishebo said public debt has adverse repercussions on fiscal and debt sustainability.

For instance, domestic debt interest payments in 2013 amounted to K1.8 billion compared to K361 million interest payments on external debt.

The interest payments on domestic debt for 2013 were, for instance, higher than the K1.5 billion approved estimates for the Ministry of Community Development, Mother and Child Health for the year.

Debt contraction could also be deemed as the easy way out for financing Government operations as opposed to improving the revenue collection system, observed Mr Nalishebo.

For example total revenues and grants in 2013 amounted to K24.9 billion against the target of K26.3 billion.

Faced with the constraints of collecting adequate tax revenue, Government could just resort to borrowing from the domestic market rather than enhancing their tax mobilisation efforts.

Zambia can still raise sufficient revenues to finance development projects by reviewing the national revenue collection structure.

Mr Nalishebo said there are risks of short-term debt in that overall debt portfolio is dominated by treasury bills, which are short-term debt instruments.

“This makes Government vulnerable to significant defaulting risk on servicing the debt since they have to constantly roll over large amounts of debt due to unavailability of adequate funds. Frequent rollovers of domestic debt could also result in higher administrative costs,” he said.

Then there is the aspect of making banks ‘lazy’ since domestic debt instruments are generally high-yielding and can make banks complacent about costs and reduce their drive to mobilise deposits and fund private sector projects.

Indeed the incentive to provide credit to the private sector is often weakened by a poor credit environment.

“Hence, they weigh their risks and find that government debt is highly attractive, providing a constant flow of earnings.

“As a result, banks will have less incentive to expand credit to riskier private borrowers or cut their overheads Borrowing should take into account the country’s capacity to pay without affecting the delivery of essential services to the public,” he said.

On the other hand, Mr Kabinga noted that the fact that Zambia has sufficient breathing space, since the debt is still within sustainable levels, is no excuse for excessive borrowing.

“Borrowing for investment should be seen to be matched by a careful balance of prioritisation, fiscal discipline and a well-articulated debt management framework.

“High debt levels imply high debt service payments which if not well managed could lead to serious consequences.

“Lenders are business institutions with profit motive, no debt forgiveness [and will demand] high interest payments on delayed debt service payments,” he said.

According to him, the essential sectors of the economy will be affected in due course because of a potential future shift in national spending which will be directed towards servicing of the loans that are currently being contracted.

A JCTR study dubbed, “Responsible Borrowing” revealed that US$290 million per year was spent on debt servicing between 2003 and 2005.

The most vulnerable sector that is sacrificed in favour of debt servicing is the social sector.

Mr Kabinga concluded that without an effective monitoring framework of debt, it would be difficult to know the true levels of the country’s indebtedness.

He was supported by Mr Nalishebo who said that the loans that are contracted should be subjected to Parliamentary oversight and their use verified.

Mr Nalishebo said only an effective debt management framework will guarantee a responsible borrowing strategy that takes into account provisions for debt servicing, priority sectors to invest borrowed resources and extensive Parliament involvement.

Currently, Mr Kabinga observed, the loan contraction process still lacks transparency and wider participation of the public as it has remained the preserve of the government.

The Laws and policies that governed loan contraction and management prior to debt cancellation in 2006 still exist.

Some of these laws give too much borrowing powers to the Minister of Finance with limited stakeholders’ involvement. There is need to comprehensively review these pieces of legislation.

Clearly, Zambia requires a domestic debt policy and generally a tight debt management framework to ensure prudent utilisation of debt which should be kept within sustainable levels.

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