Zambia’s cost of external debt servicing has drastically risen to around US$706 million in 2017 from just US$63 million in 2013, a new World Bank report has revealed.
According to the Bank’s latest Economic Brief, the PF-led administration spent US$706 million on meeting external public debt servicing costs last year, up from only US$63 million in 2013, a staggering increase of US$643 million in a four-year time period.
“The cost of debt service has increased substantially. In 2017, interest payments as a percent of domestic revenue rose to 23 per cent from 6 per cent in 2011. External debt service accounts for 54 per cent of total debt service and has become the main source of foreign currency outflows. Foreign currency outflow to service external public debt was US $706 million in 2017, from US $63 million in 2013,” the Brief, released last month, states.
“In Q1 2018, debt service has already consumed over a third of its annual budget, prompting the government to increase the initial budget allocation to debt service by 26 per cent.”
The 11th Brief, dubbed: “Agro-led Structural Transformation”, also notes that the huge debt servicing costs have squeezed fiscal space for other critical social sectors like education.
“The cost of debt service has gradually reduced fiscal space for social services and productive spending. For example, as the cost of debt service has averaged 22 per cent above its budget between 2011 and 2017, the following sectors have seen their actual disbursement below budget allocations: education (by 35 per cent), economic sectors (by 25 per cent), social benefits (by 14 per cent), and health (by 12 per cent),” it states.
The Bank explained that the kwacha’s rapid depreciation, experienced back in 2015, was among the factors leading to an escalating increase in debt servicing costs.
“Three factors are behind the fast increase in the costs of debt service. First is the successive increase in the cost of external commercial debt issuances. For example, the coupon on Eurobond issuance increased from 5.4 per cent in 2012 to 8.5 per cent in 2014, and 9.0 per cent in 2015. Second is the depreciation of the kwacha in 2015, which led to a substantial increase in the cost of external debt service. Third is the high proportion of Treasury Bills (40 per cent) in domestic debt, which makes domestic debt vulnerable to changes in interest rates,” states the World Bank, who further advised government to regularly issue quarterly and annual debt reports.
“Having issued non-concessional debt, Zambia now faces a high demand for timely and comprehensive debt reports. Yet, annual debt reports were last produced in 2012, and quarterly debt reports are not being published. Although global debt reporting guidelines recommend, and the current Loans and Guarantees Act requires that guarantees are reported regularly, they are not recorded along with the debt numbers.”
Zambia’s stock of external debt as at end of first quarter this year was around US $9.4 billion, with the stock of domestic debt at K51.86 billion as at end June, 2018, while the country’s domestic arrears in the first quarter of 2018 increased to K13.91 billion from K12.77 billion due to a rise in arrears-related to roads construction.
The country’s external debt stock has risen from only US $1.6 billion in 2011 when the PF assumed office, according to Ministry of Finance data.
The World Bank’s latest Zambia Economic Brief is the 11th instalment in a series of publications, produced twice a year, that focuses on macroeconomic developments locally, as well as regionally and beyond.