Saturday, April 12, 2014

IMF fears Zambia may slip back into debt trap

By Chiwoyu Sinyangwe
Thu 26 Dec. 2013, 14:00 CAT

THE IMF fears the 10 per cent increase in total public debt in the last two years might plunge Zambia into another debt trap.

And International Monetary Fund (IMF) has warned that Zambia will next year borrow money at a higher interest rate after rating agency Fitch downgraded the country's credit rating to B from B-plus on the country's crumbling government finances and expectations that the deficit will remain high.

Meanwhile, the IMF has described the recently approved 2014 national budget as a step in the "right direction", which the government should adhere to religiously.

IMF resident representative for Zambia Tobias Rasmussen said although Zambia's current public debt was still sustainable, its growth trajectory in the last two years needed to be checked so that it does not choke the country.
Zambia's total national debt has accelerated from 20.1 per cent of the GDP in 2011 to 30.3 per cent at the end of 2013.

"The debt level at this level is still modest, so, where the concern will be is about the 10 percentage points change and that change is essentially the result of high fiscal deficit," Rasmussen said. "There have been some recent developments that probably will lead to somehow a lower figure but we are concerned about the increase in the deficit and we think at such a level, there will be problems with debt continuing to increase and that would be eventually unsustainable. However, we are encouraged that there is a plan over the medium term to reduce the deficit levels so that that situation does not arise. I just stress that it would be important that the budget deficit which by our classification would lead to a deficit of 6.2 per cent of GDP in 2014 is adhered to and the plans for the reduction, down to three per cent, over the medium term is also followed."

And the IMF said the October 28 downgrade of Zambia's credit rating to B from B-plus would make the country's borrowing rate higher.

Treasury sources recently revealed that the government plans to issue Eurobonds of US$2.550 billion between 2014 and 2018 as it is expected borrow US$5 billion externally in the next five years, according to IMF sources.
Proceeds from the Eurobonds are expected to plug a budget deficit and also help to sustain the government's "front-loaded fiscal adjustment".

But Rasmussen said: "The downgrade by Fitch is something that will make it more expensive for government to access funds. The downgrade in the justification that the company Fitch did was driven largely by the fiscal deterioration that we have also noted and that only emphasises the importance of sticking to the budget for 2014 and delivering on that consolidation that will eventually bring the deficit to that budgeted three percent of the GDP."'
Rasmussen also opposed the planned multiple bonds by government agencies like Road Development Agency, Zesco and some local authorities.

"These are bond issuances that have been discussed to be issued by various sub-national entities like Zambia Railways…what is recommended is that rather than individual agencies issuing bonds themselves, it would be better that bonds are issued by the sovereign similar to the US$750 million eurobond that was issued last year and then those funds are then allocated to the respective agencies," he said.

"It's true that the environment is not as favourable as it was last year when the US$750 million first bond was issued but I think that was exceptionally favourable period then. While the environment is probably not favourable one year later, that doesn't rule out that another bond issue can be placed."

Meanwhile, Rasmussen described the K42. 68 approved national budget for 2014 national budget as a step in the right direction as it attempted to stem the fiscal deficit which this year widened to 8.5 per cent of the GDP from the initially planned 4.5 per cent.

"So, it's a consolidation of about two percentage points implied by the budget and we think that's certainly a step in the right direction and we can hope that consolidation continues over the years to reach the three per cent of the GDP target," said Rasmussen. "It will require significant effort to achieve but it will be important that those efforts are made so that the planned targets are met."



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