Zambia, Debt and Covid-19

28 September by Afrodad , JCTR

Lusaka, Zambia (CC - Wikimedia)

The pandemic has had a devastating impact on the living conditions of the population of Zambia. Debt relief with private creditor participation is required now to ensure the country can boost its Covid-19 response and support a sustainable recovery.

The Covid-19 pandemic has had significant health, social and economic effects in Zambia. As of 15 September, the country had reported a total of 13,819 cases and 324 deaths related to Covid-19. Until now the government has avoided the adoption of draconian policies to contain the pandemic. The official response has been based on a combination of partial lockdown measures mainly aimed at reducing gatherings in public spaces.

The pandemic has had a devastating impact on the living conditions of the population. Before the crisis, 58 per cent of the population was living below the poverty line (i.e. on an income below US$ 1.90 per day). This is expected to increase as the crisis is taking a significant toll on jobs. The informal sector accounts for 68 per cent of employment in the country. With the emergence of the pandemic, most businesses have experienced severe disruptions due to the reduction in the number of person-to-person interactions that characterise the informal sector. The impact is especially severe for smallholder farmers in rural areas. Up to 77 per cent of the population is living in poverty in these regions.

These dynamics affect women disproportionately. As of 2019, less than one out of four working-age women in the country had jobs. The informal sector accounts for 76 per cent of total employment for women. In this context, the Covid-19 crisis has had a dual impact on women in the country. On the one hand, job losses in the informal sector are set to see an increase in female unemployment. On the other hand, caregiver burdens largely fall on women in Zambia. As a result of the unequal gender distribution of informal care in the household, women are likely to see their work and life opportunities further constrained in the aftermath of the pandemic.

In this regard, the prospects for a strong recovery are concerning. A central issue is the large debt burden facing the country. Zambia’s public debt has increased significantly over the past few years. In 2018, total public debt reached US$ 18.3 billion, which is equivalent to 78.1 per cent of Gross Domestic Product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP). From this figure, US$ 11.2 billion corresponds to external public debt. Nearly half of this figure (US$ 5.1 billion) are bonds and loans from private creditors. According to the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF), the country was already at high risk of debt distress before the impact of the Covid-19 pandemic. The ongoing crisis is making the underlying problem more complex to solve, as public finances deteriorate and debt levels continue to rise. This is a major source of concern for the population and civil society.

Expenditure on debt servicing and salaries has been increasing at the expense of investments in key economic sectors such as healthcare, agriculture and mining just to mention a few. Before the pandemic struck, the country was experiencing systemic underinvestment particularly in its healthcare sector. Despite being a party to the Abuja Declaration of 2001, which committed Member States of the African Union to allocate at least 15 per cent of their budgets to the health sector, the country has yet to fulfill its commitment. Over the last five years, public healthcare expenditure has averaged 9.1 per cent of the government’s budget. In the meantime, during this same period, debt servicing alone accounted for 70.3 per cent of government revenues. This ratio is substantially above the IMF risk threshold, which recommends a relation of debt service Debt service The sum of the interests and the amortization of the capital borrowed. to revenues no higher than 15 per cent. The pressure of the debt burden over public finances is set to increase further. The domestic currency (Kwacha) has depreciated over 24 per cent in the first quarter of 2020. This has increased the costs of meeting external debt payments severely impacting the country’s stock of international reserves. The World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

estimates that the G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). Debt Service Suspension Initiative (DSSI) would allow Zambia to suspend debt service payments totalling US$ 139.2 million. This figure is equivalent to 0.6 per cent of GDP and 1.2 per cent of Zambia’s total external debt stock Debt stock The total amount of debt . The marginal impact of the DSSI on debt service requirements is explained by the structure of the financing of the country. Most of the public sector borrowing originates from multilateral and private sources. These creditors account for 73.3 per cent of external public debt. This group is only required to participate on a voluntary basis and thus far has not taken any steps to provide additional debt relief to the country.

Failure of the DSSI to engage with private creditors is reflected in the steps taken by the government to address its debt burden. Looming in the horizon is a large principal payment of US$ 750 million to private bondholders in 2022. In May, the government hired Lazard, an investment firm specialized in sovereign debt Sovereign debt Government debts or debts guaranteed by the government. , to advise the country on a potential restructuring process. On September 22, the government officially approached private bondholders to request a suspension of payments for 6 months. It is telling that the request is not within the DSSI framework. This is an indication that even in those cases where countries require private creditor participation, the DSSI is inadequate. While it is unclear whether private creditors will accept the request for a suspension, this is expected to be the first step of a wider restructuring process.

Against this backdrop, civil society organisations have taken an active role in demanding a public response that minimises the negative impact of the pandemic. Civil society in the region has advocated for measures aimed at tackling the country’s growing debt burden . In this regard, it is increasingly clear that a debt suspension won’t be enough to address the pressing problems faced by Zambia. Urgent support is needed from the international community to simultaneously address the recovery and development financing needs of the country and to address Zambia’s debt burden. Debt relief with private creditor participation is required now to ensure the country can boost its Covid-19 response and support a sustainable recovery.

This blog is part of a series of articles Eurodad is producing in collaboration with our global partners on the implementation of the Debt Service Suspension Initiative (DSSI), complementing and updating the report “Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket?” published in July 2020. Over the coming months we will publish a variety of articles covering issues related to the implementation of the DSSI and the debt situation in several countries in the global south.

Source: Eurodad


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