A significant overshooting of the fiscal deficit in 2019 highlights the Zambian government’s difficulties in reining in debt accumulation, Fitch Ratings says.
Already high debt levels will remain a key vulnerability, even if recently announced measures are effective in slowing the pace of further debt accumulation.
According to a fiscal update from the Minister of Finance, Zambia recorded a preliminary fiscal deficit of 8.2% of GDP in 2019 in the government’s definition, well above the budget target of 6.5%.
Excluding debt amortisation and including arrears accumulation, the deficit was closer to 9% of GDP on a commitment basis.
Government revenues were higher than the government’s target, boosted by higher than expected inflation and improved revenue collection.
Expenditures exceeded the 2019 budget by approximately 9%, reflecting higher interest payments, which were 1% of GDP above target due to the currency’s sharp depreciation, and by capital expenditures and subsidies.
Fitch affirmed Zambia’s ‘CCC’ rating in December 2019, noting the high and rising government debt in the context of an ambitious capital expenditure programme.
Fitch’s forecasts assume that debt will peak in 2020, but remain at a level that keeps the government’s external financing requirements high relative to official FX reserves.
The ‘CCC’ rating is indicative of Fitch’s view that Zambia faces a heightened probability of default.
An increase in international reserve coverage or a fiscal adjustment that increase refinancing options could lead Fitch to take positive rating action.
Zambia’s 2020 Budget, approved in September 2019, called for narrowing the fiscal deficit to 5.5% of GDP.
However, the government’s inability to meet spending targets in 2019 highlights how difficult it will be to achieve any substantial narrowing of the deficit in 2020.
In late December, the cabinet approved measures to slow the contraction of new external project loans and cancel or reduce undisbursed external loans that had already been contracted.
If implemented, these measures could reduce the stock of undisbursed loans by USD5 billion, or 21.5% of GDP, and slow the accumulation of new debt.
However, similar, albeit less specific, commitments under the previous finance minister had not led to significant progress in reducing deficits or debt accumulation.
As a result, we are also sceptical about progress on an IMF programme, although the government will hold further discussions with the IMF in March and April.
In addition to a credible plan for reducing deficits, the IMF may insist on a debt re-structuring.
In his recent remarks, the Minister of Finance also mentioned that the government is seeking debt re-profiling, pending a review of legal implications.
Persistent fiscal deficits increased general government debt to 88% of GDP in 2019, from 32% in 2014.
External public debt was US11.1 billion (54% of GDP). Zambia faces approximately USD1.5 billion in external debt servicing (105% of current international reserves) in 2020.
While the government is likely to manage its 2020 debt servicing requirements, Eurobond repayments of USD750 million in September 2022 and USD1 billion in April 2024 will lead to a surge in external debt servicing in these years.
Meanwhile, the external position fared better than expected, as gross international reserves ended 2019 at USD1.4 billion, unchanged from end-2018.
The reserves position was helped by the turn of the current account to a surplus of about 1% of GDP.
Zambia’s current account last was in surplus in 2014, prior to the collapse in copper prices.
Why should we be classified by some criteria of credit rating created by some western countries. Even when they say you have A rating that doesn’t translate into economic development for those at grassroots level. For us we will continue with infrastructure development of our people which is improving our economy and improving lives. Kz
KZ. What do you expect when you keep borrowing from the western countries who have data on how Zambia is performing debt wise.
Advice was given for free on this platform, it is not possible to borrow out of poverty without a proper repayment plan which is bankable and not a wishful thinking.
Vultures circling poor countries.
Anyway all Financial Markets are recording massive drops on everything. All economies are struggling with effects of the Corona virus.
But borrowing for development is a trick on poor economies. We should line up Hons. Chikwanda and Mwanakatwe up against the wall and throw rotten tomatoes at them!
I wonder how KZ was advising ECL if he can think this low. These matters are the reason why the Kwacha is running down the hill at full throttle. It is now at 16
Exchange rate does not feed the nation. Credit is money that does not exist. Wake up my friends. For us we are concerned about peoples welfare rather than just numbers that say you are doing well. Muzadya A rating ?
@kaizar Zulu. shut your stinking filthy mouth you moron.
This level of argument is a new low. It is like a person say he need no salary increment as the increase is just a number or stats. While he is thinking in can improve the welfare of his/her family without change with the bottom-line, in this case the earning power.
Fitch: “Persistent fiscal deficits increased general government debt to 88% of GDP in 2019, from 32% in 2014.”
Now 2014 was about the time our humble president was first elected and sworn into office, we then elected and swore him into office for the second time in 2016. That is the constitutional bit, but more important is the economic bit: the economy collapsed during the time he held office twice. Under Sata the government debt only reached 32%. Despite the current debate, I think that the humble president will do the right thing, earlier than nomination day, probably as early as the party convention in June.