Thursday 15 October 2020

The "Truth" About Zambia's Debt

 Zambian social media platforms, especially WhatsApp groups, were very active yesterday sharing and discussing the publication of the World Bank's latest International Debt Statistics Handbook. I've lost count of the number of friends on WhatsApp who sent me the hyperlink to the download page of the book. Ordinarily,  the publication of the Debt Statistics Handbook goes without notice in much of the world and especially in Zambia. So why all this interest this time around?

Well, in the last couple of weeks, "Zambia and its debt" has been a topical issue with prominent coverage in the Financial Times and Bloomberg among other international outlets. The latest round of interest comes on the heels of an official request from the Zambian government for a payment holiday on upcoming debt service obligations. So this week's publication of the World Bank's International Debt Statistics Handbook (hereafter IDSH) fell into this milieu of strong emotions around Zambia and its debt. 

So why all the fuss? Well, all the commentary on WhatsApp, Twitter and Facebook on the the IDSH zeroed in one single statistic reported at the top of page 150: Zambia's external debt at the end of 2019 was $27 billion dollars! This is certainly a huge number and would suggest that the country's external debt was almost equal to the size of the country's GDP. And for many of yesterday's commentators, this number was evidence that the Zambian government was understating the true nature of its external debt. For example, Finance Minister Bwalya Ng'andu recently told parliament that external public debt was $11.97 billion dollars, a number that is about $15 billion lower than the World Bank's number.   

So what is going on here? The confusion stems from the conflation of Total External Public Debt with Total External Debt. The two aren't the same thing even though they seem like they are. 

Total External Public Debt (the first one) refers to all foreign denominated debts that are owed by the Zambian government. This includes external debt directly owed by the government and debt guaranteed by the government but contracted by government or quasi-government entities. For example, Total External Public Debt would include the (in)famous Eurobonds and/or any guarantees issued by the government in favour of, for example, the Zambia Electricity Supply Corporation (ZESCO).   

Total External Debt, on the other hand, is the sum total of all the external debt owed by entities domiciled in Zambia. This includes debt owed by the Zambian government (as defined above) and that is owed by Zambia's private sector. Total External Debt would include external debt owed by the government plus external debt owed to foreign creditors by, for example, the privately-run mining industry. 

By definition, and given the above, Total External Public Debt can never exceed Total External Debt. The two can be equal which would imply that all external debt is government debt. In practice, Total External Public Debt tends to be lower than Total External Debt primarily because the private sector also borrows from foreign creditors.  

So what does all this mean for the publication of the IDSH and the commentary that followed? Well, the first thing is that the World Bank and the Zambian government are saying the same thing. The fourth line item on page 150 of the IDSH says that Total External Public Debt at the end of 2019 was $11.1 billion [1]. Minister Ng'andu told Parliament on 25th September 2020 that "[total] external public debt stock increased to US$11.97 billion as at end-June 2020 from US$11.48 billion at the close of 2019...". As one can see, these numbers are pretty much around the same ballpark. 

The June 2020 number, as reported by the Minister, is slightly greater than the 2019 numbers (from the government itself and the World Bank) because of the likely accrual of additional external public debt in the first 6 months of 2020. The 2019 numbers by the World Bank and from the government are slightly different from each other because of likely accounting/reconciliation issues. Interestingly, government's number for end 2019 is greater by about $300million. This might be the result of one public guarantee or the other that was not captured by World Bank statisticians. 

So in many ways the World Bank's IDSH is telling us nothing new beyond what the government has already told us regarding the country's external public debt. 

As to whether the $11 billion number (from both the World Bank and the government) is to be believed is a different question altogether. I have good reason to believe that the "true" external public debt is around this figure. Margaret Mwanakatwe, Ng'andu's immediate predecessor at Finance, instituted a debt reconciliation drive about two years ago and committed the Ministry of Finance to issuing quarterly debt briefings (although the frequency of the briefings has reduced lately). This was in response to heavy domestic and foreign criticism that the Zambian government did not know the true extent of its debt obligations. It appears the Ministry of Finance has gotten on top of this issue and, for example, recent IMF statements on the country are no longer broaching the subject of debt reconciliation as they did a couple of years ago. Economist Trevor Simumba, however, believes the true extent of external public debt might be higher owing to the opacity around debt contraction from China. He might very well be right. 

Before concluding, I want to briefly talk about one aspect that struck me from the IDSH that few talked about yesterday and that I had been unaware of. According to page 150 of the IDSH, Zambia's private sector owes a whopping $14.7 billion to foreign creditors! In other words, private multinational corporations, private companies and private individuals all domiciled in Zambia collectively owe about 54% of Zambia's Total External Debt (recall the definition of this from above). This implies that Zambia's private sector is just as indebted to foreign creditors as the Zambian government is. In actual fact, the private sector owes much more. 

As a country, we have not debated and thought about private sector debt as much as we should. It's worth engaging with this issue because, for one thing, economic crises can result from the unsustainable buildup of external debt by the private sector (see the Asian Financial Crisis) just as much as they can from unsustainable buildup of public debt. Second, pressure on the domestic currency (the Kwacha) can also arise from the demand for foreign currency by the private sector to meet its external debt obligations just as it can from demand by the government. So in a nutshell, any talks about devising a strategy for Zambia's external debt should include discussions about external debt held by the private sector. 


[1] The IDSH refers to it as "Public and Publicly Guaranteed Debt"