Croatian International Relations Review - CIRR

XXIV (81) 2018, 113-136

ISSN 1848-5782
UDC 336.27(689.4)
DOI 10.2478/cirr-2018-0006

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An Analysis of Public Debt Servicing in
Zambia: Trends, Reforms and Challenges
Talknice Saungweme, Nicholas M. Odhiambo

Abstract

The main goal of this paper is to discuss the dynamics of public debt servicing – both domestic and
foreign – in Zambia, tracing the trends, reforms and challenges over the period from 1964 to 2015.
The paper shows that the exceptional rise in public debt servicing obligations in Zambia over the
period under review has been principally due to high domestic and foreign interest rates, frequent
debt rescheduling at commercial rates, and capitalisation of non-liquidated service obligations at
commercial rates. Also revealed in the paper is the fact that prior to 2005, Zambia experienced
severe public debt servicing problems which eased after 2006 owing to debt relief initiatives
and an economic rebound. Among the government debt service reforms discussed in the paper
are structural adjustments in foreign exchange management, fiscal and monetary reforms, and
aggressive engagement of traditional creditors. Primary among the identified challenges of public
debt servicing in Zambia was the insistent economic crises that dogged the country during the study
period. Notwithstanding the current public debt service sustainability and remarkable economic
performance that characterise the country today, the paper found that the recent contraction of
nonconcessional loans by the state poses a threat to debt service sustainability in future. Hence, the
paper recommends, among other things, for aligning of public sector infrastructure spending with
revenues to ensure budget sustainability, and to continue diversifying the economy to minimise the
impact of external commodity price shocks on the economy.

KEY WORDS:
public debt servicing, economic growth, Zambia
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 Introduction

In theory, the debt overhang hypothesis asserts that public debt servicing
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depresses economic growth via a multiplier accelerator effect through

various mechanisms: (1) it drives up domestic interest rates, thereby
increasing the cost of borrowing, which then crowds out private sector
investment; (2) it causes a net flow outwards of domestic resources
(comprising of external grants, aid and foreign exchange resources)
in the form of foreign public debt repayments; (3) it presents future tax
uncertainty and a deterioration in domestic policies, which directly impact
on real returns on investment; (4) it increases government participation
in domestic capital and money markets, which can then lead to credit
rationing; and (5) it increases the government’s appetite to borrow so as
to service its debts, among other reasons (Clements, Bhattacharya and
Nguyen 2003; Krugman 1989; Metwally and Tamaschke 1994; Patenio and
Tan-Cruz 2007; Sachs 1989).

However, the results of empirical research by Chowdhury (1994), Elbadawi,

Benno, and Njuguna (1996); Fosu (1999), and Pattillo, Poirson and Ricci
(2004), among others, reveal that there is no evidence supporting the
negative linkage between public debt servicing and growth in studied
countries. These contradictory results indicate that there are some
systematic variations in the cost of public debt servicing across countries,
varying also over time. Extending the discussion to Zambia will assist the
country in its debt service management and in policy formulation, given
the drive by state authorities to transform the country into a prosperous
upper middle-income country by 2030.

Historically, the evolution of the Zambian public debt has been a result of
sagging world copper prices in the mid-1970s until the late 1990s, which
caused substantial decline in both economic growth rates and central
government revenues from mineral taxation and exports (McCulloch,
et al., 2000). The persistent rise in (i) budget deficits (see Appendix), (ii)
domestic and international interest rates on debt, and (iii) rolling over of
domestic public debt between 1975 and 1991 made Zambia one of the
highly indebted poor countries in sub-Saharan Africa (Thurlow and Wobst
2006; McCulloch et al., 2000). The high public debt stocks (domestic and
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foreign) translated into unsustainable public debt service obligations.
Consequentially, the huge budget outlays towards public debt servicing
in Zambia had been perceived as one of the hurdles to the country’s
economic growth process and also to poverty alleviation (Government of
the Republic of Zambia “GRZ” 2008). Regrettably, the high domestic public

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debt service payments were not being transformed into productive uses by
the recipients; thus, these allocations were an impediment to sustainable
economic growth and development in Zambia (Bigsten and Kayizzi-
Mugerwa 2000). Of much concern is the fact that between 2007 and 2014,
national budget allocations for Zambia’s domestic public debt servicing
have consistently been rising relative to those allocated for new capital
spending (Southern African Development Community “SADC” 2015).

Against this background, the aim of this study is to analyse the evolution
of government debt servicing in Zambia since 1964 by highlighting debt
service trends, reforms and challenges. The paper attempts to examine
the heavy burden that government debt imposes on the country’s
development prospects. The rest of the paper is arranged as follows:
Section 2 presents an overview of the Zambian economy; Section 3
discusses the trends in public debt service in Zambia; while Section 4
reviews the public debt service reforms in Zambia. Finally, Section 5
discusses the challenges facing public debt service management in
Zambia and Section 6 concludes the paper.

Overview of the Zambian economy

Since the early 1900s, the Zambian economic performance has been
largely concentrated in two economic sectors: mining (mostly copper)
and agriculture (mostly maize and tobacco). While the mining sector is
predominantly capital-intensive, using modern technology, the agricultural
sector is principally labour-intensive, using traditional methods (United
Nations 2016). According to the United Nations (2016), construction and
transport industries have since 2010 also been characterised by capital-
intensive production methods and their contribution to the country’s
economic growth has been on the rise. Generally, Unauthenticated
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 Zambia is heavily dependent on copper mining, which accounts for over
70% of the country’s total export earnings, but employing less than 2%
of the population (Central Statistical Office “CSO” 2016). Unemployment
and underemployment rates in Zambia stood at 7.9% and 10.2% as at
end of 2015, with the highest proportions of people employed in the
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agriculture, forestry and fisheries industries (World Bank 2016).

As of 2015, the Zambian economy was considered one of the fastest-

growing economy in sub-Saharan Africa, characterised by robust
economic growth rates averaging 6.9% between 2005 and 2015, driven
mainly by unprecedented high commodity prices (GRZ 2017). With a per
capita gross domestic product (GDP) of around US$ 1,700 in 2015, Zambia
is now a lower-middle-income country (World Bank 2016). However, a
combination of declining world mineral prices, particularly of raw copper,
and inadequate production and supply of industrial enablers such as
electricity, lowered the economic growth rates of Zambia beginning
2015, which recorded a 2.9% growth rate relative to 7.6% in 2012 (GRZ
2017). Inflation in Zambia averaged 11.4% and 9.9% between the periods
2006-2009 and 2011-2015, respectively (GRZ 2017). Following the slump in
world commodity prices by the end of 2014, the fiscal deficit of Zambia
worsened, increasing from 2.4% of GDP in 2011 to 9.4% of GDP in 2015, thus
necessitating increased public borrowing, both domestic and foreign, to
fund expansionary fiscal policies (World Bank 2016).

Trends in public debt servicing in Zambia

The huge stock of government debt, public and publicly guaranteed,

in Zambia since the 1970s brought about solemn implications for the
country’s debt servicing obligations and general economic performance
as it directly affected credit creation, national gross savings, national
gross investment, and central government gross revenue performances
(Clements, Bhattacharya and Nguyen 2003). The active presence of the
government in the domestic capital markets in the early 1990s, in addition
to foreign borrowing, not only affected domestic interest rates and also
crowded out investments, but also brought about severe tax reforms to
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raise revenue for debt servicing (Clements, Bhattacharya and Nguyen
2003). According to Atique and Malik (2012) and Tasos (2014), a high
public sector debt service obligation reduces the private sector incentive
to invest, which leads to negative economic growth. Figure 1 indicates
the trends in public debt service ratios in Zambia during the period from

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1978 to 2015.

Figure 1: Public debt service growth trends in Zambia (1978-2015)

Source: SADC Statistical Year Book (2015); World Development Indicators (2016)

RGDP = Real Gross Domestic Product GNI = Gross National Income

PDS = Total Public Debt Service GR = Government Revenue

Public debt servicing trends in Zambia can be split into three phases: (i)
1980-2005, (ii) 2006-2015 and (iii) 2016 and beyond. While the first two
phases are visible in Figure 1, the third phase gives a public debt servicing
forecast for Zambia based on past and present trends in public sector
borrowing and on the general economic performance of the country. In
the first phase, 1980-2005, the debt service burden of Zambia was rising
exponentially, reaching its worst peak between 1990 and 1996. During this
phase, Figure 1 portrays a deteriorating debt service payment capacity of
Zambia as signified by the persistent fall in public debt service-to-exports
of goods and services ratio. As manifested in Figure 1, between 1991 and
1994, the ratios of public debt service-to-GNI, public debt service-to-
exports of goods and services, and public debt service-to-revenue were
at their worst in the country’s history -- and so was economic performance
(GRZ 2006b). While Figure 1 shows a lower public debt service-to-GNI and
public debt service-to-export of goods and services ratios between 1987
and 1990, scheduled debt service was actually much higher (World Bank
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 2015). The government’s policy of putting a ceiling on foreign public
debt servicing contributed to the noticeable fall in the debt service ratios
between 1987 and 1990 (World Bank 1993: 60).

During the period of 1985 to 1996, Zambia’s average annual growth rate
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was 0.29% (World Bank 2012). The observable spikes in 1991, 1994 and
2003 in Figure 1 are a result of drastic shifts in political regimes (1991 and
2003) and of substantial economic and financial structural reforms (1991,
1994 and 2003). These years, 1991, 1994 and 2003, are associated with
the lowest growth rates of the period, that is, -0.04%, -8.63%, and 3.3%,
respectively (World Bank 2012).

Phase two, 2005-2015, is characterised with considerable reductions in

public debt stock owing to the debt relief initiatives that started in 2000.
As indicated in Figure 1, the period is associated with declining public
debt servicing ratios. The reduction in public debt service burden after
2000, especially on foreign public debt, boosted public savings and
investment prompting increased physical infrastructure and human
capital development, which then led to an economic rebound beginning
2006 (Bigsten and Kayizzi-Mugerwa 2000). During this phase, economic
growth and inflation averaged 6.9% and 10.6%, respectively, and the
fiscal position of the country improved significantly (GRZ 2017).

Also depicted in Figure 1 is the new twist of public debt service ratios,
which began trending upwards after 2012 due to renewed domestic
and foreign public borrowing, debt roll-over and gradual deterioration
in international copper prices (United Nations 2016). Consequentially,
Zambia’s risk of foreign public debt service distress, according to the IMF
debt sustainability analysis, changed from low to moderate after 2012
(IMF 2015). Consequently, phase three provides a futuristic outlook of
Zambia’s public debt service burden, which is expected to be increasing
with the level of the country’s output by 2020 (IMF 2014a). As government
indebtedness increases, possibilities are that Zambia’s public debt
service commitments after 2020 will be financed by distortionary means
(like seigniorage), especially if existing gross national investments fail to
yield meaningful returns (IMF 2014b). Moreover, although all of Zambia’s
public debt sustainability indicators are expected to remain below the
IMF and World Bank applicable thresholds until 2020, the public debt
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service-to-government revenue ratio is expected to exceed the 18% IMF/
International Development Association baseline threshold (IMF 2015).
Table 1 and Table 2 provide a comparison of Zambia’s foreign public debt
service payments in the pre- and post-Highly Indebted Poor Countries
(HIPC) periods.

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Table 1: Public debt service payments of Zambia (Pre-HIPC era) (1990-
1999)

Foreign public Foreign public debt

Foreign public debt service service/ Foreign
debt (US$ millions) (US$ millions) public debt stock (%)

1990 7,237 647 8.9

1991 7,271 718 9.9

1992 6,971 678 9.7

1993 6,791 522 7.7

1994 6,583 541 8.2

1995 6,859 590 8.6

1996 7,181 453 6.3

1997 6,758 376 5.6

1998 6,862 315 4.6

1999 5,950 386 6.1

Sources: BOZ Annual Reports (various), IMF Country Reports (various) and
Budget Speeches

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 Table 2: Public debt service payments of Zambia (Post-HIPC era) (2000-
2015)

Foreign public Foreign public debt

Foreign public debt service service/ Foreign public
debt (US$ millions) (US$ millions) debt stock (%)
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2000 5,831 169 2.9

2001 5,771 158 2.7
2002 6,684 148 2.2
2003 5,286 151 2.9
2004 7,080 211 3.0
2005 4,528 302 6.7
2006 2,513 96 3.8
2007 1,189 121 10.2
2008 1,982 130 6.6
2009 3,638 137 3.8
2010 3,202 135 4.2
2011 3,544 139 3.9
2012 4,281 121 2.8
2013 5,318 101 1.9
2014 6,170 101 1.6
2015 7,805 109 1.4
Sources: BOZ Annual Reports (various), IMF Country Reports (various) and Budget Speeches

From Table 1, it can be observed that in the pre-HIPC era, foreign public debt
service payments were all above US$300 million annually, an amount too
high for a country already suffering from balance-of-payment challenges
and incessant government revenue constraints (World Bank 2012). Despite
being insignificantly proportional to total foreign debt stock, the foreign
public debt service disbursements constituted a significant percentage of
the overall government revenue (CSO 2005; World Bank 2012). A period
high debt service ratio of 9.9% was recorded in 1991, when the country
made a once-off payment of US$300 million to the World Bank, thereby
clearing all its debt service arrears to the institution, with the intention of
normalising relations and also as a gesture of subscribing to the Bank’s
sponsored new economic reforms (Andersson, Bigsten and Persson 2000;
World Bank 1993). On the contrary, foreign public debt service payments
between 2000 and 2015 averaged US$144 million annually, owing to the
debt relief initiatives extended to Zambia by its creditors (World Bank 2015).
In essence, it can be construed from Table 2 that the HIPC and Multilateral
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Debt Relief (MDR) initiatives generated huge savings for Zambia through
a reduction in foreign public debt servicing commitments.

Generally, prior to the debt relief in 2005, the average foreign debt-to-GDP
ratio was 154%, meaning that the Zambian economy had no capacity to

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generate sufficient financial resources to pay back its foreign financial
dues (African Development Bank “AfDB” 2010; Thurlow and Wobst 2006).
The remarkable rise in public debt service burden in Zambia between 1987
and 2000 had been predominantly due to rising inflation, high domestic
and foreign interest rates, not merely additional government borrowings
(Dinh, Adugna, and Myers 2002). Inflation in Zambia rose rapidly from
the late 1980s reaching a peak of 186% in 1993, and averaging 97.6%
between 1987 and 1993 (World Bank 2003). Domestic interest rates on
both lending and government securities averaged 72.8% between 1990
and 2000, with a period peak of 143.5% in 1993 (Thurlow and Wobst 2006).
Foreign interest rates on debt between 1987 and 2000 averaged 53.3%
(World Bank 2003). Given the dwindling government revenues due to
depressed copper prices and de-industrialisation, unredeemed public
debt securities were recapitalised at the going high market interest rates,
thus worsening the debt levels and repayment ability of the government.
In terms of foreign debt service payments’ composition, half of the money
was going towards interest payments while the remaining small balance
was channelled towards principal debt repayment (Copestake and
Weston 2000). Figure 2 shows the trend in public debt interest payments in
Zambia between 1990 and 2000.

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 Figure 2: Foreign public debt interest payments in Zambia (1990-
2000)
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Source: Bank of Zambia Annual Reports (various)

Figure 2 reveals that interest payments on foreign public debt were

on average US$300 million between 1990 and 1995 and constituted
approximately 50% of the total debt service payments (World Bank
2003). Compared to the average annual central government revenues
during the period 1990 to 2000, the foreign public debt service payments
indicated in Figure 2 represent a high proportion of the country’s budget
expenditure (CSO 2005). From a historical point of view, Zambia’s interest
payments due on outstanding foreign public debt were on average
US$120 million annually between 1986 and 1991 (World Bank 1993: 60)
and US$237 between 1990 and 2000 (World Bank 2003). This means that
the high world interest rates of the 1990s exacerbated the foreign debt
service burden of Zambia by blowing up interests on outstanding foreign
public debt, principal and arrears.

The foreign public debt service payment reduction visible in 1993 in Figure 2
was due to the Paris Club debt pardoning initiatives (BOZ 2002). According
to the HIPC Report of 2000, Zambia spent approximately 20% of its GDP
on foreign public debt service payments between 1990 and 2000, relative
to 3% and 2% allocated to education and health sectors, respectively
(BOZ 2002). This massive disparity in budget allocation between foreign
public debt service payments and social sectors explains the direct effect
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of huge foreign public debt repayments on economic development in
Zambia between 1990 and 2000.

Historically, Zambia’s debt service burden increased progressively in the

early 1990s, before declining steadily after 1996. Whereas the downward

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trend in interest payments on debt after 1995 was an indication of severe
economic crisis and revenue constraints, the drastic fall in the public debt
payments noticeable in 2000 in Figure 2 was a result of massive debt relief
from the Paris Club and Bretton Woods institutions (World Bank 2001).
Following the debt relief and subsequent economic recovery, Table 1
assesses the foreign debt burden and debt sustainability of Zambia in the
post debt-relief era -- the bigger the ratio, the higher the debt problem.

Table 3: Foreign debt sustainability ratios of Zambia (2005-2015)

Foreign Foreign Foreign debt

Foreign Foreign debt/ debt service/
Indicator debt/GDP debt/Exports Government service/ Government
revenue Exports revenue

Indicative 40% 150% 250% 20% 18%

threshold

2005 86.7 215.6 56.8 11.2 4.0

2006 43.4 56.7 46.8 3.5 3.2

2007 23.8 59.3 48.4 2.6 2.6

2008 21.2 58.2 41.2 3.2 2.1

2009 23.8 82.7 65.6 3.7 2.4

2010 20.4 57 57.7 2.9 1.8

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 Foreign Foreign Foreign debt
Foreign Foreign debt/ debt service/
Indicator debt/GDP debt/Exports Government service/ Government
revenue Exports revenue

2011 24.3 48.1 49.1 2.1 2.2

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2012 27.7 42.8 82.3 2.4 6.8

2013 26.9 56.7 94.3 3.4 7.1

2014 28.2 61.8 101.1 4.1 7.3

2015 38.7 54.2 97.6 3.8 6.9

Source: African Statistical Yearbook (various editions), Central Statistics Office (CSO) (various
issues), Bank of Zambia Annual Reports (various years)

The foreign public debt relief initiatives extended to Zambia by its traditional
creditors eliminated the country’s public debt service distress by 2006, and
both foreign debt to-GDP and foreign debt service-to-exports ratios fell to
within baseline thresholds. The proportion of the country’s export revenues
committed to foreign debt service was reduced from 11.2% in 2005 to
1.9% in 2010, as shown in Table 3, thus widening Zambia’s fiscal space.
As revealed in Table 3, Zambia’s debt sustainability ratios since 2006 fell
to within indicative thresholds, meaning that the country could no longer
qualify for additional debt relief under MDR initiative.

More so, the debt and financial crises in Zambia’s major creditor
economies, and the subsequent implementation of austerity measures
by these countries, contributed to the reduction in new debt flows to
Zambia, leading to marginal decrease in foreign public debt-to-GDP
ratio in 2010, as revealed in Table 3. Nonetheless, faced with little room
to pursue counter cyclical interventions, Zambia diversified its foreign
sources of finance by issuing Eurobonds in 2011 (Zambia Institute for Policy
Analysis and Research “ZIPAR” 2015). In 2012, the government of Zambia
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issued 10-year US$750 million worth of Eurobonds, and collectively, the
amount increased to US$1.75 billion by 2015, bringing the total foreign
debt to US$6.3 billion at the end of August 2015 (United Nations Economic
Commission for Africa “UNECA” 2016; ZIPAR 2015). The Eurobond funds
were to fund expansionary infrastructure development and rehabilitation,

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mostly road and rail networks, energy generation, and transmission and
central government hospitals (Ministry of Finance and National Planning
“MOFNP” 2013). The issuance of these Eurobonds contributed to the rise
in foreign public debt-to-GDP and foreign debt-to-government revenue
ratios after 2013.

With a foreign public debt to GDP ratio of 38.7% in 2015, as indicated in

Table 3, relative to the 40% indicative threshold of the IMF/World Bank; and
a combination of (1) the Zambian Kwacha depreciation against major
trading currencies, (2) emergence of current account deficits in 2015, and
(3) reduced export earnings caused by the decline in commodity prices
and low manufacturing production capacity; the country’s chances of
experiencing debt repayment problems in future are on the rise. Between
2006 and 2014 Zambia had been recording current account surpluses (GRZ
2017). These adverse developments in the Zambian economy require the
government to continuously seek external balance-of-payment support
and to implement appropriate longer-term budgetary measures to ensure
public debt service payments sustainability in future.

Furthermore, Table 3 also shows that although the Zambia’s foreign

debt service to government revenue ratio is within the IMF sustainability
range, it is actually on the rise. With the maturing of Eurobonds and newly
contracted nonconcessionary loans, the country’s foreign debt service
costs are likely to double by 2020 (IMF 2016). Also, the rising international
interest rates on debt are expected to aggravate the debt repayment
challenges of the country in the foreseeable future (World Bank 2015).

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 Public debt servicing reforms in Zambia

The high government debt in Zambia – both domestic and foreign –

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prior to the debt reliefs, directly implied massive debt service obligations
for the country. Zambia’s exceptionally high government debt service
costs emanated from soaring domestic and foreign interest rates, poor
performance of the domestic economy, frequent debt rescheduling at
commercial rates by creditors, and the capitalisation of non-liquidated
service obligations at commercial rates (Andersson, Bigsten and Persson
2000). By the late 1970s, Zambia was already in a serious foreign debt service
trap, which prompted the government to undertake debt service reforms.
In 1973, 1976, and 1978, the government negotiated a series of contractual
agreements with the International Monetary fund, the World Bank and the
Paris Club with the intention of easing public debt payments and enhancing
economic performance (World Bank 1993). However, these agreements
failed to serve the purpose because of transitory terms-of-trade respites and
rising poverty levels (Andersson, Bigsten and Persson 2000).

Between 1980 and 1986, the government of Zambia re-negotiated for

a more orchestrated and coordinated foreign public debt servicing
package with its traditional creditors, mostly the Bretton Woods institutions
and the Paris Club (World Bank 1993: 59). However, in 1981, for instance,
an Extended Fund Facility, which had been negotiated with the IMF, broke
down and was replaced by a new set of debt rescheduling agreements
beginning in 1983, particularly with the Paris Club and the London Club
commercial banks (GRZ 2006a).

Upon realising that the adopted reforms were not reducing the debt
servicing obligation of the country and that the foreign payments were
drawing substantially on scarce financial resources that otherwise could
be used to advance national developmental programmes, the Zambian
government revised its financial, structural, and economic reforms.
Consequently, in 1987, the country adopted regulatory policies as
evidenced by the implementation of a 10% ceiling on foreign public debt
payments in a move meant to tame resource outflow (Bigsten and Kayizzi-
Mugerwa 2000). Even though the country’s economic performance
partially improved and stabilised, this 10% foreign public debt servicing
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restriction policy caused Zambia to be isolated economically as most
creditors substantially reduced the flow of foreign aid and other forms
of support to the country (Organisation for Economic Co-operation and
Development 2011).

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In 1990, the Zambian government implemented a policy which set a
limit on foreign public borrowing, in addition to adopting IMF-supported
structural adjustment measures. These IMF measures came as a result of
Zambia’s arrears in servicing its debts to the institution. To resume foreign
public debt servicing, particularly to the IMF, the country subscribed to
the IMF’s “rights accumulation programme” initiative, which stipulated
clearance of outstanding foreign debt arrears (IMF 2001). The period
between 1995 and 1999 was characterised by somewhat firm adherence
to the Enhanced Structural Adjustment Facility and the foreign public
debt servicing conditions set out by the World Bank and the IMF (World
Bank 2002).

The domestic public debt service reforms in Zambia comprised major

shifts in fiscal and monetary policies along with structural and institutional
reforms. The prime objective of these policy shifts was to reduce
government expenditures and mobilise more financial resources to service
both domestic and foreign debts (GRZ 2006b; Chileshe and Kafula 2015).
Following the abrupt depreciation of the exchange rate due to reduced
export earnings caused by the waning in commodity prices, and the
subsequent economic decline, the government in 1987 disregarded the
foreign exchange auction system and revalued its local currency (Bank of
Zambia “BOZ” 2012, Chirwa and Odhiambo 2016).

In response to the high domestic public service costs in the late 1980s and
early 1990s, the government turned to seigniorage and instituted the Public
Service Reform Programme, which resulted in the restructuring of state
enterprises. During the period 1988 and 1993, for instance, the average
annual inflation of Zambia was 143%, with a peak of 186% recorded in
1993 (World Bank 2003).

In 1993, the government adopted a cash budget system in which cash

was released to line ministries only if adequate funds were available in the
government’s main bank accounts to meet the required payments; and
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 the government also began to redeem its local debt with the assistance
of an increased proportion of concessional foreign borrowing (World
Bank 1993; GRZ 2006c). In 2014, the government reintroduced the cash
budget system in which government ministries and arms’ expenditure
were supposed to be limited to the disbursed funds (GRZ 2013).
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Challenges facing public debt servicing in Zambia

Public debt servicing challenges being experienced by the government

of Zambia are rooted in economic and financial policy choices, global
financial developments, and scanty foreign direct investment inflows
since 1964 (World Bank 2000). According to the African Forum and
Network on Debt and Development (AFRODAD) (2011), primary among
the challenges of public debt servicing in Zambia is the insistent economic
crisis that dogged the country from the 1970s until the late 1990s. The other
fundamental cause of Zambia’s increasing inability to service its public
debts was the narrowness of the economy’s production base, which
constrained the revenue base of the central government (IMF 2005: 9). As
a result, the government would divert a substantial proportion of received
aid to build foreign currency reserves for payment of foreign arrears (IMF
2007: 2).

Although there has been sound improvement in macroeconomic policies

and credible public debt servicing management strategies in Zambia
since 2000, there still is need for greater diversification of the economy,
expansion of the export base, and improvement in government project
appraisals in order to maintain public debt stocks and government
service payments within sustainable ranges, especially in the face of rising
nonconcessional public borrowing commencing 2012 and also of the
possibilities of external financial and economic shocks (IMF 2016).

The high nominal interest rates experienced between 1987 and 1996
made repayment of domestic public debt very difficult in the late 1980s
and early 1990s (GRZ 2006c). These high rates of interest caused structural
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imbalances as the interest cost of outstanding domestic public debt
exceeded primary fiscal surpluses (BOZ 2002). As a result, after 1994, the
government was unable to meet the financing of both maturing domestic
debt and the interest due on the securities (GRZ 2006a). Moreover, the
servicing of local-currency denominated public debt was adversely

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affected by both the government’s limited capacity to tax and the small
size of the country’s tax base (MOFNP 2004). This, in addition to ineffective
tax collection strategies, loss-making state-owned enterprises, and
massive capital outflows, are among the reasons that assist in explaining
the evolution of public debt and subsequent debt repayment difficulties
during the period prior to 1999 (IMF 2000).

According to the United Nations Conference on Trade and Development

(UNCTAD) (2012), the collapse of the world commodity market beginning
the mid-1970s, especially of unprocessed copper, compelled the Zambian
government to over rely on foreign and domestic public borrowings in
a bid to uphold high levels of government spending. The undiversified
Zambian economy caused the country’s revenue sources to remain
susceptible to external shocks, especially highly volatile world commodity
prices (IMF 2010). Generally, during the period between 1987 and 1999,
increased foreign public debt servicing costs offset overall improvements
in export performance (IMF 2000). As a result, central government
revenues continued to be subdued, falling below recurrent expenditures
and foreign public debt servicing obligations (IMF 2009a, 2009b). Thus,
foreign debt servicing problems in Zambia were mainly influenced by high
and volatile world interest rates and weakening in the country’s terms of
trade. More fundamentally, foreign public debt servicing difficulties and
currency mayhem in Zambia since 1987 led to sharp increases in defaults
and the emergence of non-performing loans in the financial sector (World
Bank 2000). The rescheduling of foreign public debt payments by creditors
through the so-called Paris Club arrangements proved not to be a solution
to the servicing obligations of the country, as evidenced by the persistent
presence of servicing challenges prior to 2005 (BOZ 2010). In conclusion,
most of the discussed debt service challenges disappeared after 2006
following massive debt relief and tremendous economic recovery.

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 Conclusion

This paper has discussed the public debt service dynamics in Zambia,
XXIV (81) - 2018

from 1964 to 2015. In the discussions, it was highlighted that the dynamics
in world commodity prices, particularly of copper, have predominantly
determined the trends, reforms and challenges in public debt service in
Zambia over the period under review. The paper identified three distinct
episodes of public debt servicing in Zambia: (1) 1980 to 2005; (2) 2006 to
2015; and (3) 2016 and beyond. In the first episode, the country was facing
high debt servicing costs emanating from both huge non-concessionary
debts and high interest rates. In the second episode, the debt service costs
of Zambia decreased radically following the HIPC and MDR debt relief
initiatives and also owing to high economic growth rates. The third phase
provided an overview of Zambia’s future debt service sustainability. In this
third phase, the paper revealed that, if the government fails to expand
its revenue base by diversifying the economy, the country is likely to face
liquidity and solvency challenges. Among the discussed debt-service
reforms, there were exchange rate policy changes, economic structural
adjustment policies, and active engagement of the international creditor
community through contractual agreements. The paper further revealed
that the country’s major debt service challenges emanated from, among
other things, a narrow government revenue base, high and volatile interest
rates, and exceptionally high government debt stocks. Going forward,
the paper recommends that the government of Zambia (1) embarks on
stringent austerity measures that limit both domestic and foreign public
borrowing, so as to curb the accumulation of high interest payments on
public debt; and (2) improves its fiscal position, by aligning public sector
infrastructural spending with revenues to ensure budgetary sustainability;
and (3) continues with the diversification of the economy so as to minimise
the impact of external shocks, particularly in terms of rampant fluctuations
in world commodity prices.

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APPENDIX

Fiscal deficit and real GDP growth in Zambia (1964-2000)

Source: World Bank 2003

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 Talknice Saungweme ([email protected]) is a PhD
student in economics at the University of South Africa with
interdisciplinary research interests in public sector economics,
international economics and macroeconomic policies. His
career goal is to contribute positively to macroeconomic
XXIV (81) - 2018

policy development, mostly in low-income countries and in

emerging economies. He holds a Master of Science Honours
degree in Economics and a first-class Bachelor of Science
Honours degree in Economics, both from the University of
Zimbabwe.

Nicholas M. Odhiambo ([email protected]) holds a

PhD (Economics) degree from Stellenbosch University (South
Africa). His research has over the years focused on the
dynamic linkages between the various macroeconomic
policies in developing countries and their effect on economic
growth and poverty reduction. He has a strong bias towards
sub-Saharan African countries, which are currently ravaged
by low levels of economic growth in per capita terms and high
levels of poverty. He is currently working at the University of
South Africa (UNISA) as Professor & Chair of Macroeconomic
Policy Analysis (MPA) research flagship programme.

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