Cost of repaying high government debt is hitting ordinary Zambians as social sector spending is squeezed

An increase in government spending on debt-interest payments – which take up almost 1 in every 4 kwacha that the Government raises in domestic revenues - has squeezed spending on social services such as the public service pension fund

, social cash transfers and the economic empowerment programmes, according to the Zambia Institute for Policy Analysis and Research (ZIPAR).

In an analysis of Government spending released today, ZIPAR shows that while Government spending on debt interest payments for the first half of 2018 was much more than planned (K9.1 billion spent in comparison to K6.2 billion budgeted for), spending on key social sectors are not receiving promised funding – for example, only 27% of the budget for Social Cash Transfers has been dispersed.

Government debt, including arrears, has increased in recent years and at the end of June 2018 it stood at about 58% of GDP. This is in the territory of unsustainable debt levels. In October 2017, the IMF issued a red flag that Zambia was at high risk of debt distress.

ZIPAR points out that this increase in debt is having real world implications for ordinary Zambians. For example, support to social protection programmes aimed at protecting the poor is likely to suffer a set-back. Support for the 574,000 poor households who in 2018 are intended to receive Social Cash Transfers appears to have been hit. The cost of this programme for the whole year is approximately K822 million, which means that half way through the year Government is expected to have disbursed close to K411 million. However, at mid-year, only K197 million was disbursed, only enough to pay for one bi-monthly payment cycle.

ZIPAR commends government for taking steps to manage the growing debt by publishing a medium-term debt strategy (MTDS). This will enable Government to plan and negotiate the best available new borrowing and financing options. It will also improve debt management capacity through restructuring the debt office and ensuring the credibility of debt data. This is very welcome.

However, the plan does not spell out clear intentions to reduce the rate of debt accumulation, neither does it specify measures to ease debt distress and return Zambia to low levels of risk. To address the challenges raised in the reports, ZIPAR recommends a number of policies and measures as follows:

  • Government needs to prioritise expenditure on projects that stimulate growth and human development, such as schools and health facilities.
  • Returning to fiscal sustainability: reducing the risk of debt distress requires strong and sustained fiscal consolidation, including taking measures to limit spending overruns and improve domestic resource mobilisation.
  • Government debt management needs to be backed by legislation: The revised Loans and Guarantees (Authorisation) Act would be a useful tool to manage debt. The Act should include measures that mandate a review of the MTDS on a rolling basis through regular debt sustainability analyses.
  • Periodically set fiscal rules: The Act should specify the setting out of fiscal rules on Government budgetary allocations which will influence political decisions of the executive and the legislature in the management of fiscal affairs. ZIPAR further proposes the introduction of debt ceilings expressed in relation to the size of the economy and the law should be clear that all public debt-related activities should be carried out in compliance with the Debt Strategy with legal consequences of non-compliance enforced.

Mr. Patrick Nshindano, Executive Director-Civil Society for Poverty Reduction said:

ZIPAR is right to highlight the consequences of the cost of repaying high debt on ordinary Zambians. The crowding out effect of debt on social spending has pushed more citizens into the poverty trap as a result of weak social protection programmes. Disbursements for programmes including social cash transfers are delayed and have become increasingly erratic subjecting the poor Zambians to hunger and even death.

Notes to Editors

  1. This is based on two ZIPAR reports titled “Reversing Zambia’s high risk of debt distress” and “Debt servicing and the delivery of social services”.
  2.  ZIPAR is a socio-economic think-tank whose mandate is to conduct research and policy analysis. ZIPAR was established by the Government Republic of Zambia (GRZ) with the support of the African Capacity Building Foundation (ACBF).

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