Sovereign debt is considered sustainable if the government can meet all its current and future debt service obligations without requiring financial assistance or defaulting. Sustainable debt levels are important and excessively high debt service payments can significantly exceed the potential returns from new investments. Zambia aims to maintain debt sustainability through annual Debt Sustainability Analyses (DSA), aligned with its Medium-Term Debt Strategy. Earlier this year, the Ministry of Finance and National Planning, alongside the Bank of Zambia, published the 2023 DSA. Thus, in this week’s opinion will delve into debt sustainability, referencing the findings of the 2023 DSA and examining Zambia’s progress in restructuring its public debt.

To monitor Zambia’s debt sustainability, the DSA uses a composite indicator to assess the country’s debt-carrying capacity and four external debt burden indicators. The composite indicator aggregates various economic factors, including GDP growth, foreign exchange reserves, remittance inflows, and global economic conditions. Countries are classified based on their Composite Indicator (CI) score into three categories: strong (above 3.05), medium (2.69 to 3.05), and weak (below 2.69). The 2023 DSA for Zambia assigns a CI score of 2.59, placing it in the “weak” category, indicating limited capacity to manage high debt levels without significant risks such as servicing challenges and potential defaults.

Meanwhile, the external debt burden indicators include two solvency indicators and two liquidity indicators. The solvency indicators encompass the ratios of the present value of debt to GDP and exports. According to the International Monetary Fund (IMF)/World Bank Low-Income Country Debt Sustainability Framework (LIC-DSF) which is a critical tool used to assess the debt sustainability of low-income countries, a country’s debt is unsustainable if these solvency indicators exceed thresholds of 30 percent and 140 percent, respectively. The liquidity indicators are measured by the ratios of external debt service to exports and revenue, with thresholds of 10 percent and 14 percent, respectively.

Since the November 2020 default on its US$42.5 million Eurobond coupon payment, Zambia has breached all four external debt burden indicators. According to the 2023 DSA, the present value of external debt service to revenue peaks at 61 percent in 2024, significantly above its 14 percent threshold. Similarly, the present value of external debt service to exports ratio peaks at 26 percent in 2024 and is projected to remain above its 10 percent threshold until 2029. The report also shows a significant breach of the present value of public debt to GDP, which remains above the recommended threshold of 35 percent throughout the projection period.

So far, about 77 percent of the country’s public debt has been restructured, while ongoing economic management and fiscal governance initiatives supported by the IMF aim to enhance debt-carrying capacity. However, these efforts coincide with several challenges, including a drought causing significant energy deficits and extended hours of load-shedding, a financing gap in excess of K23 billion, and halved growth forecasts for this year to 2.3 percent from 4.8 percent.

Furthermore, the country is dealing with structural issues such as tight liquidity conditions and Kwacha volatility that continue to plague financial markets. The Bank of Zambia has already recorded major undersubscriptions in both treasury bills and bonds this year. By the end of May 2024, the Bank only managed to raise K16.3 billion from a target of K31.5 billion, indicating almost 50% undersubscriptions. This poses potential risks for budget financing, especially as the government hopes to raise more from domestic financing.

At the same time, progress in debt restructuring, particularly regarding Eurobonds, suggests a resumption of debt servicing according to the proposed amortization profile. The restructured Eurobonds are expected to demand US$341 million this year, including a US$75 million down payment on the bond exchange date, debt service payments of US$187 million by the end of June, and US$79 million by the end of December 2024. These payments, coupled with the underperformance in domestic financing, drought-induced financing gap, downgraded economic growth projections, significant energy deficits, extended load-shedding, tight liquidity conditions, and Kwacha volatility, may exert substantial pressure on the treasury. These factors also pose significant risks to both the liquidity and solvency indicators, ultimately impacting the debt sustainability composite indicator.

Zambia’s journey towards debt sustainability remains fraught with challenges. The country faces the dual task of managing immediate financial pressures while implementing long-term structural reforms. Look out for next week’s edition of the opinion as we continue with discussions on Zambia debt sustainability journey.

About the Author:
Peter N Mumba is a policy researcher and development economist currently coordinating the Zambia Debt Alliance. He holds a master’s degree in economics from the University of Namibia, along with additional qualifications in monitoring and evaluation and business information systems.