In Search of Financial Pathways for Zambia’s Debt Overhang

by Mbewe Kalikeka and Caesar Cheelo

Zambia’s debt problems have kept mounting. Between 2014 and 2018, the total public debt including arrears grew by a staggering 21% per year in nominal US dollar terms. With the new austerity measures announced in mid-2019, we expect a slowdown in debt accumulation.

The Minister of Finance recently announced that the public debt stock has continued to balloon in 2019. External debt increased from US$10.18 billion in March 2019 to US$10.23 billion in June 2019 and domestic debt increased from K58.3 billion to K60.3 billion in the same period. Total domestic arrears have also increased from K15.1 billion in December 2018 to K16.7 billion in March 2019.

Between external and domestic debt, Zambia really needs to worry about external debt. During January-June 2019, the authorities planned to spend K4.2 billion on domestic debt interest payment but spent 2% less at K4.1 billion. In contrast, external debt interest payments escalated by 67%, from the planned amount of K3.1 billion to K5.2 billion.
In fact, external debt servicing costs have increased, rising by 51% from US$504 million in 2017 to US$759 million in 2018. The rising costs have caused adverse expenditure switches away from critical items like social protection. They have also led to the accumulation of domestic arrears.

Of the four main categories of external debt – namely Multilateral, Bilateral, Export and Suppliers’ Credit and commercial debt – commercial debt, at 53%, is Zambia's biggest headache. In turn, Eurobonds account for 57% of this commercial debt, with an annual average cost of 7.6% compared to an annual average cost of 0.9% and 6.2% for Multilateral and Bilateral debt, respectively.

With growing liquidity pressures from the rising external debt servicing costs, dwindling foreign exchange reserves and increasing yield spreads on Zambia’s Eurobonds (which resemble countries already in default like Venezuela), Moody’s and Fitch downgraded Zambia’s sovereign credit rating further into junk territory, citing growing concerns of an imminent debt default.

Zambia needs to pay the keenest attention to the Eurobond debt. The country needs to start unpacking solutions from its closet to find viable financial support before 2022. In 2022, the first Eurobond will mature. Before then, the spending pressures of a population census in 2020 and of a general election in 2021, among other expenditures, will come to bear. These spending obligations will not only add to the already widening fiscal deficit but also increase the stock of public debt.

We must emphasize that the issuance of Eurobonds per se is not a bad thing provided a country can ensure fiscal prudency, fiscal discipline and good governance structures. However, Eurobonds come with huge risks, which, as seen in the Zambian case, can readily come to bear.

Ultimately, we must ask ourselves: what options should Zambia pursue as financial pathways towards debt sustainability?

Firstly, the Government should strengthen its domestic revenue mobilisation efforts and simultaneously make stronger efforts to contain high expensive capital expenditures. This means that the authorities should frontload the austerity measures and keep strict adherence to them. This will aid in managing the debt servicing costs and avert having to incur more commercial borrowing for debt servicing. It will also create fiscal space that will allow the Government to channel more resources to other budget lines such as social protection which stand out to be highly underfunded. This will also help in dismantling domestic arrears.

Secondly, the authorities should consider negotiating with some of their bilateral partners like China towards reprofiling some of Zambia’s debt components, notwithstanding the recent debt write-offs of US$22 million and US$70 million by China. This would create fiscal space, which would in turn help the country build some buffers for eventually supporting Eurobond debt repayment.

Thirdly, and this is a key issue to emphasize, an IMF bailout package is crucial for Zambia. Currently, the nation is entitled to a quota of US$1.3 billion as IMF support. With a standby bailout package, the country would be able to pay off the full amount of the US$750 million in 2022, and then also pay US$562 million (56%) of the US$1 billion in 2024. In addition, over the medium-term, an IMF loan would help reduce the aforementioned high interest rates (7.6%) on Eurobonds, since IMF loans are of interest-free or low interest financing Moreover, an IMF-supported programme inherently acts as an external accountability mechanism and also serves as a positive signal of good governance and confidence. All these important benefits would support Zambia’s stabilization and economic growth recovery efforts.

While no option will single-handedly solve Zambia’s current debt problem, a mix of the aforementioned economic tools and a strong will to persistently apply prudent fiscal policies will definitely help. Viable financial pathways are available to Zambia, but if we do not commit to using these options to solve the debt problem, we might as well brace ourselves for a crippled economy soon.


The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR). For details contact: The Executive Director, ZIPAR, corner of John Mbita and Nationalist roads, CSO Annex building, P.O. Box 50782, Lusaka. Telephone: +260 211 252559. Email: This email address is being protected from spambots. You need JavaScript enabled to view it..

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