Zambia Increases Local Debt Auctions to Fund Bulging Deficit

Updated on
  • Rising yields, weaker currency increased costs of dollar debt
  • Budget deficit set to be more than double government's target

Zambia will boost the value of Treasury bills and bonds it offers to investors taking advantage of increased demand for the securities as it seeks to fund a fiscal deficit that’s set to grow to more than double what Finance Minister Alexander Chikwanda budgeted for.

Local-currency debt sales will increase to 700 million kwacha ($71 million) per auction from 450 million kwacha for Treasury bills, and to 800 million kwacha from 600 million kwacha for bonds, the Lusaka-based Bank of Zambia said Wednesday in an e-mailed statement. The increased tender amounts take effect Thursday, it said.

The government will increasingly rely on Treasury bills and kwacha-denominated bonds to fund a 2016 budget deficit that’s likely to be slightly smaller than last year’s 8.1 percent of gross domestic product, Deputy Finance Minister Christopher Mvunga told reporters last month. Chikwanda targeted a 3.8 percent deficit in his 2016 budget statement, saying that exceeding this would “send the economy into a spin.”

Financing the deficit will be difficult, according to Tobias Rasmussen, resident representative at the International Monetary Fund.

“How the government deficit will be financed in the months ahead –- and also over the next couple of years –- is one of the key challenges facing the country,” he said in reply to e-mailed questions Wednesday. “As we have noted before, government finances are under stress, and delays in implementing corrective measures to reduce the deficit will only make the situation more difficult.”

Zambia has largely depended on the sale of $2.25 billion of Eurobonds last year and in 2014 to fund a budget shortfall as economic growth slowed to the lowest pace in 17 years. A currency that’s depreciated 26 percent over the past 12 months against the dollar has made repayments in the U.S. unit more costly, while yields have increased to more than 12 percent.

High Rates

While subscriptions at Treasury-bill auctions have increased and interest rates declined slightly, yields for the one-year securities were at 25.5 percent at the last auction on April 28. The rate has been above 25 percent at every sale this year, and reached a record 28 percent in March tenders.

“It would be imprudent for the government to continue to borrow externally at unsustainable levels,” Mvunga said April 21. “We may even consider increasing the ticket size for the Treasury bills, if the appetite is there. And the market has indicated that it is there.”

The government cut local-debt auction sizes in February after yields climbed to a record and the finance ministry sought to cut spending.

(Updates with IMF comments starting in the fourth paragraph.)
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