Zambia Favors Kwacha Debt Over Eurobonds for 2018 FinancingBy and
Finance minister still confident of $1.3 billion IMF deal
About 27% of 2018 state revenue will be spent servicing debt
Zambia won’t sell dollar debt in 2018 as it focuses on raising kwacha loans and increasing tax collection, Finance Minister Felix Mutati said.
The government plans to borrow 11.2 billion kwacha ($1.2 billion) from the domestic market next year, more than triple the amount in the 2017 budget. This is part of its strategy to tilt funding in favor of the local market, after external debt bulged to $7.5 billion by mid-year from $2 billion at the end of 2011. Africa’s second-biggest copper producer tapped the Eurobond market for $3 billion since then.
“When you look at the cost parameters of foreign-denominated instruments of borrowing and you add the exchange-rate risk, you find that you are better off borrowing on the local market,” Mutati said in an interview in Lusaka, the capital, on Thursday. The shift toward local borrowing is due to “purely issues of cost,” he said.
Debt sustainability is at the core of Zambia’s discussions with the International Monetary Fund over a $1.3 billion loan and economic program. As the government has continued to increase borrowing, debt-servicing costs have shot up. The southern African nation will spend 27 percent of revenue next year, its biggest expenditure item, on paying back loans, according to the budget Mutati presented to lawmakers on Sept. 29. Ultimately, this should be reduced to about 20 percent, freeing up resources to invest in the economy, Mutati said.
The government aims to reverse the ratio of foreign-to-domestic debt from the current 61 percent in external borrowing and 39 percent in local borrowing, said Mutati, who has been in the position for a year. In its debt management strategy, the Finance Ministry targets 60 percent domestic debt by 2019.
“While the accumulation of external debt heightens Zambia’s vulnerability to negative balance sheet effects, high domestic borrowing contributes greatly to the crowding out of the private sector,” Irmgard Erasmus, an analyst with NKC African Economics in Paarl, South Africa, said in a note on Oct. 4. Shifting borrowing to longer-dated kwacha bonds “will pave the way towards greater debt sustainability.”
Yields on Zambia’s $1 billion of Eurobonds due 2024 have fallen 1.83 percentage points this year as prices for copper, which accounts for three quarters of the country’s export revenue, rebounded and investors bet that the government will reach a deal with the IMF. At the most recent auction in September, 10-year government kwacha bonds had an 18 percent yield.
Mutati will be heading to Washington this week to attend the World Bank and IMF annual meetings, where he plans to resume loan talks that have dragged on for most of the year.
Negotiations will seek agreement on “the macro framework around the spending needs and also the borrowing needs with the principal objective to ensure debt sustainability,” he said. “We remain confident that we will secure a deal. Our target is that we need to reach a deal as quickly as possible, and preferably before the end of the year.”
Zambia’s budget deficit will shrink to 6.1 percent of gross domestic product next year, from 7 percent, even as spending rises by 11 percent, according to Mutati. That’s largely because of more aggressive targets he agreed to with the tax authority, and explains a jump in spending in the 2018 budget from the medium-term expenditure framework published Sept. 10, he said.