Zambia’s 2020-2030 Economic Recovery Plan in the Face of High Public Debt Level zambia

INSIGHTS & OPINIONS

Introduction

The growth rate of GDP in Zambia has been on the decline for the past 3 years from 4 per cent in 2018 to 1.5 per cent in 2019 to -3.5 in 2020. This decrease is a result of a decline in economic activity in several sectors of the economy such as manufacturing and tourism due to restrictions implemented during the Covid-19 pandemic which negatively impacted consumption and investment. The decrease in growth was also attributed to the decline in global copper demand during the pandemic, which is a major source of foreign exchange reserves for Zambia.  Furthermore, the Zambian economy currently faces several macroeconomic challenges. Inflation has been on a rise from 7 per cent in 2018 to 17 per cent in 2020. The country’s fiscal deficit has also increased to 11 per cent of GDP in 2020 from 8.3 per cent of GDP in 2019. Additionally, the country’s international reserves have also fallen from an average of 2.4 months import cover in 2019 to 1.2 months import cover in 2020. Finally, public debt (external and local borrowing) has risen to unsustainable levels from 94.5 per cent of GDP in 2019 to 117.8 per cent in 2020. 

These economic challenges coupled with the adverse impact of the Covid-19 pandemic led to the recession of the Zambia economy in 2020. Hence, the government introduce an Economic Recovery Plan to revive the economy by reducing domestic arrears, bringing public debt to a sustainable level, and to reinvigorate key sectors of the economy while safeguarding social protection programmes. What follows, is a discussion on the government policy response to public debt challenges in the economic recovery plan, but first, is a brief overview of the Economic Recovery Plan.

Economic Recovery and Growth Plan

In 2020, the government launched the economic recovery plan to address the economic recession caused by the adverse impact of the Covid-19 pandemic. The plan aims to bolster and rejuvenate the economy by restoring macroeconomic stability, fostering growth and diversification of the economy, ensuring fiscal and debt sustainability, and reducing poverty and inequality by the year 2023. Thus, the main theme of the Economic Recovery Plan (ERP) is “Restoring Growth and Safeguarding Livelihoods Through Macroeconomic Stability, Economic Diversification and Debt Sustainability.”  Specific targets for the ERP include: to increase GDP growth rate above 3 per cent by 2022; to reduce fiscal deficit to less than 4.5 per cent of GDP by 2023; to increase domestic revenue by an average of 18 per cent of GDP by 2023; to achieve single-digit inflation by 2022 and; to ensure debt sustainability by the next 3 to 5 years. To achieve these targets the ERP outlines 5 pillars for the implementation of the programme.

1. Restoring Macroeconomic Stability

The objective of this pillar is to address the macroeconomics challenges such as exchange rate volatility and high price levels to bolster investment and growth of the economy. The focus of the pillar includes output stabilization, monetary and financial stability reduction of inflation, interest rate and fiscal deficits and sustainability of the country’s capital account.

2. Attaining Fiscal and Debt Sustainability

The objective of this pillar is to broaden the tax base and to curtail the rising public debt levels in other to ensure the sustainability of fiscal policies in Zambia. The policies pursued by the government under this pillar includes resource mobilization, rationalising and streamlining public expenditure, and reduction of public debt accumulation.

3. Restoring Growth and Diversifying the Economy

The focus of this pillar is to drive growth in the underperforming sectors of the economy namely agriculture, manufacturing, tourism, mining, and energy. This pillar also addresses issues related to the impact of climate change on climate-sensitive sectors of the economy such as agriculture, water, and energy.

4. Dismantling of Domestic Arrears

In the last 5 years, domestic arrears have grown from K641.2 million in 2014 to K27.7 billion in 2019. This is mainly caused by a significant shortfall in public revenue. These domestic liabilities have worsened the financial condition of public workers. What's more, contractors have been negatively affected and consequently, private sector credit and financial development have decreased in the economy further threatening the stability of the financial system. The focus of this pillar is to halt the accumulation of new arrears and dismantling current arrears.

5. Safeguarding Social Protection Programmes

This pillar focuses on the protection of vulnerable individuals and households in the economy from economic adversity through the implementation of social support and welfare programmes such as cash transfers, food distribution, school feeding, support for women, social health insurance, and support for persons with disability.

Structural and Legal Reforms of the Economic Recovery Plan

To ensure successful implementation the Zambia government announced in the Economic Recovery Plan, several structural and legal reforms in key sectors of the economy. These reforms include business promotion reform aimed at reducing the cost of doing business and enhancing business support initiatives; citizens empowerment through the promotion of local content and increased competitiveness of local products; farmer input support programme; public investment management; public debt reform; public procurement reform; public financial management; fuel procurement; digital government systems; electricity reform; commitment control system; and the amendment of the Bank of Zambia Act.

Public Debt Challenges and The Economic Recovery Plan

Public debt in Zambia has risen to unsustainable levels from 94.5 per cent of GDP in 2019 to 117.8 per cent in 2020 plunging the country into a debt crisis. Decoupling the public debt into domestic and foreign obligations provides more clarity into the debt situation in Zambia. Domestic debt obligations in Zambia comprise treasury bills and bonds, infrastructure loans, commercial bank loans, public entities debt, and accumulated arrears on statutory liabilities. From 2017 to 2020, domestic debt increased from $4.8 billion in 2017 to $6.1 billion in 2020. Conversely, foreign public debt obligations mostly comprise non-concessional borrowing from multilateral and bilateral financial institutions, private banks, and export credit agencies. From 2017 to 2020 external debt increased from $9.4 billion to $14.3 billion, accounting for the bulk of Zambia’s total public debt. A significant problem associated with the rising public debt is the rising external debt service cost which continues to trend upwards from $463 million in 2017 to $1.1 billion in 2020. This increasing external debt service cost has impacted the sustainability of public debt in Zambia. In 2020, the country defaulted on its debt amidst an appeal to lenders for debt restructuring. Global sovereign debt rating agency ‘Fitch ratings’ now rates the country ‘CCC’ indicating the possibility of a debt crisis for the country.

In terms of addressing the public debt challenges, the recovery plan outlined in detail four plans for debt sustainability: tax reform and administration, rationalisation and streamlining of public expenditure, dismantling of domestic arrears, and measures to prevent increases in debt accumulation. Tax reform and administration strategies include broadening the base for excise taxation, the use of digital stamps and increased collaboration by revenue collection agencies. To streamline expenditure, the government aims to rationalise capital expenditure, reduce administrative cost, reduce the beneficiaries of the Farmers Input Support Programme from 80 per cent to 60 per cent, and fiscal rules to prevent budget deviation.

Furthermore, domestic arrears which are a major contributor to the country's rising budget deficit and public debt, has risen from K641.2 million in 2014 to about K27.7 billion in 2020 due to increases in capital expenditures, pension obligations and agriculture subsidies. To address this, the economic recovery plan intends to halt the accumulation of new arrears by restricting new capital plans and major capital procurement, strengthening internal control system, and implementing pre-paid services for utilities. Finally, to curb increases in debt accumulation, the government aims to continue to seek debt relief, reduce foreign financing of the budget, engage with creditors to reduce debt service payment, cease the acquisition of non-concessional debt, and ensure transparency in debt publication.

Conclusion

While the Economic Recovery Plan highlight a detailed strategy to ensure debt sustainability in Zambia, a cursory look suggests the Economic Recovery Plan might be too ambitious given the short-term nature of the development, 2020-2023. For instance, the recovery plan does not specify the basis for the GDP growth projections of 3 per cent by 2022, which seem in contrast with the IMF GDP growth projection of 1.1 per cent in 2022 given the economy is still recovering from a 4.2 per cent contraction in GDP growth rate in 2020. Similarly, the target of the economic recovery plan is to reduce the country’s fiscal deficit from 13 per cent in 2020 to below 6 per cent in 2022 while the IMF projection is about 7 per cent in 2022. Furthermore, the public debt forecast for Zambia by the IMF is still expected to increase to 129.5 per cent by 2022.

This article was written by Hycent Ajah.