- The impact of Corvid-19 is clearly a factor in the current situation in Zambia.
- But it is also true that Zambia has been heading into a debt crisis for many months.
- In the statement announcing the formal notice, Lusaka admitted that the suspension of payments resulted from economic pressures well before Covid-19.
Who will be the next one ? Zambia has just notified a default on the sovereign debt of three outstanding Eurobonds for an amount of $ 2 billion.
The government of President Edgar Lungu has announced that it is seeking “the suspension of debt service for a period of six months” from the private creditors holding the bonds. Indeed, Lusaka is asking for permission to defer interest payments until next April when it plans to restructure its debt.
The impact of Corvid-19 is clearly a factor in the current situation in Zambia. But it is also true that Zambia has been heading into a debt crisis for many months. In the statement announcing the formal notice, Lusaka admitted that the suspension of payments resulted from economic pressures well before Covid-19.
We must wait and see if Zambia’s action will have a ripple effect on other countries in sub-Saharan Africa where the economic circumstances are not too dissimilar. We may be preparing for a series of similar cases in the region.
But Zambia is one of many African countries suffering from a heavy debt burden and if its default raises the specter of a series of similar cases, access to international capital markets could become problematic.
Zambia said it would follow its request for the G20 Debt Service Suspension Initiative in August with a similar request for debt service suspension from its commercial creditors, including including holders of notes.
The difficult situation the Zambians find themselves in made me think about our own situation here. Everything indicates that the government is facing extreme pressure on its finances. This is shown by declining revenues and increasing unbudgeted spending.
When you look at the statistics from the Central Bank of Kenya, the trend you see there is that the government is on the verge of exceeding its overdraft limits.
In the coming days, and following the recent resolution of the deadlock on a revenue-sharing formula between county governments that has been dragging on in the Senate for months, the Treasury will face pressure to raise 361 billion shillings which owe be paid to decentralized units. .
It is clear that the fiscal strategy adopted in the current budget would become increasingly unsustainable. While this year’s budget assumed a budget deficit of between eight and nine percent, recent trends in revenue collection point to a much larger gap in government finances.
Note, it was already forecast in the current budget that debt servicing would consume 49 percent of regular revenue, which means that at best only 51 percent is available for budget execution. Current projections are that the situation will be much worse.
Experts believe the administration may be forced to return to parliament to demand a revision of the upper limit on public debt to a figure above the current figure of Sh 9 trillion.
Like Zambia, Kenya is in a very precarious situation in terms of external debt service. Three factors are at play: domestic economic pressures, the poor performance of the export sector, recent pressures on the shilling and reduced access to concessional spending.
In the current budget, provisions have been made for huge amounts to be paid for maturing China-related debt and to service a 7-year syndicated loan that we have taken out from the Trade Development Bank of Kenya to offset accumulated Eurobond payments.
But is Kenya likely to seek relief under the G20 debt service suspension initiative? From what I understand, Kenya is reluctant to seek relief under this framework because it has taken the position that it makes more sense for the country to negotiate debts with its biggest creditor – China.
Apparently, the administration is also concerned that an agreement with the G20 could plunge the country into a conditionality regime that it might find politically unacceptable to implement, thus presenting antagonistic diplomatic relations with its main Western allies.
Overall, Kenya will face tough economic times in the coming months. Public finances are in the red, with a huge hole in the coffers made worse by Corona mainly caused by crippling revenue deficits and a shortage of external funding.