• Weaker currency makes external debt repayments more costly
  • Kwacha is the world's worst-performing currency this year

The collapse of Zambia’s kwacha is wreaking havoc with the government’s debt ratios, according to the World Bank.

Total debt may reach 56 percent of gross domestic product by the end of the year if the currency remains near current levels, Gregory Smith, an economist with the Washington-based lender, said by phone from Lusaka, the capital, on Friday. In June, before the kwacha’s rapid depreciation and the government’s third Eurobond sale, the ratio was about 32.7 percent, according to Finance Minister Alexander Chikwanda.

The kwacha has lost 51 percent of its value against the dollar this year, the most out of 155 currencies tracked by Bloomberg, as falling copper prices and a power crisis weighed on the economy. The currency’s slide contributed to annual inflation quickening to 14.3 percent in October, from 7.7 percent the previous month, prompting the central bank to increase its policy rate by a record 3 percentage points to 15.5 percent this week.

The kwacha fell 2.7 percent to 13.11 per dollar by 3:12 p.m. in Lusaka after earlier reaching a record of 13.13. Yields on Zambia’s $1.25 billion Eurobonds sold in July and maturing from 2025 jumped 14 basis points to 11.07 percent.

Currency depreciation is boosting debt ratios
Currency depreciation is boosting debt ratios

Zambia’s external debt stood at $6.3 billion kwacha at the end of August, according to Chikwanda. That’s up from $3.7 billion in 2012.

While the World Bank’s projected increase in the debt ratio is an “extreme variation” based on the current exchange rate, measures using an average exchange rate over time also predict a worsening scenario, said Yvette Babb, an emerging market strategist at Standard Bank in Johannesburg. The International Monetary Fund, for example, in October forecast Zambia’s debt-to-GDP in 2015 at 41.9 percent, climbing to 44.9 percent next year, she said.

Still, “there has been a sharp deterioration,” Babb said by phone. “Clearly the depreciation of the kwacha is very detrimental to the cost of servicing debt and debt sustainability.”

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