It is 20 years since the Washington based multilateral lender the International Monetary Fund (IMF) and World Bank provided its USD3.8billion debt relief program to Zambia. The initiative roughly reduced Zambia’s annual debt payments between 2001-2005 by USD260million per annum and by USD130million per annum between 2006-15. The program was developed under the Heavily Indebted Poor Countries (HIPC) initiative, which boosted Zambia’s economic progress in health and education, and in 2011 the country transitioned to a lower-middle-income economy from a low-income economy. The HIPC initiative was aimed at decreasing roughly 45% of The Government of Zambia’s debt and to support its economic growth and development plans. Between 2004-2014 Zambia had impressive growth levels that averaged 7.4% per annum, however, over the past 20 years, to date, 3 different, consecutive crises have occurred, increasing Zambia’s borrowings, with the “ugliest” being the current COVID-19 crisis. Zambia’s growth slowed to 3.8% in 2018 and 2% in 2019 and is projected, by the IMF, to contract by 3.5% in 2020. Fitch downgraded Zambia’s Long-Term Currency Issuer Default Rating to ‘CC’ from ‘CCC’, Moody’s and S&P also did the same downgrading Zambia’s credit rating to ‘Ca’ from ‘Caa2’ and to ‘CCC’ from ‘CCC+’.
I lived in Zambia between the ages of 1 to 3 years, when my father was located as an Ambassador to Zambia and Nigeria. I have also traveled a number of times in my working career, servicing clients in different sectors. Having visited and worked with various people in the country, there is a consistent, clear air of resilience that drives the environment of both the real and financial economies, however, like other neighbouring countries, the genetic nature of resilience is only an ounce of the medicine needed to drive the country beyond the current economic effects of COVID-19. The effort remains in a mixture of good leadership and action that needs to be focused on solving three pressing issues, which, amongst others, include the following:-
- The deficiency of POWER that has worsened with shortages of seasonal droughts putting pressure on Zambia’s economic growth.
- Fostering INNOVATION and diversity to the current contributors to Foreign Earnings and Gross Domestic Product (GDP).
- Closing the inequality gap that has worsened between real and financial economies.
The 3 “ugly” consecutive crises over the past 2 decades that have impacted Zambia include, firstly, the global financial crisis of 2008, secondly the commodity crisis that lasted between 2015-16, impacting hard commodities, and thirdly the COVID-19 pandemic era, which has resulted in the lock down of many economies. The debt relief received by the IMF and World Bank, 20 years ago, has been eroded under these three “ugly” crises. The government faces significant external debt service payments, which includes principal and interest, in total of USD1.5billion in 2020, approximately 115% of gross international reserves, as at end of January 2020. Much of the external borrowings in Zambia are tied to project financing and will not be readily available for debt servicing, however this will increase added pressure to the economy if foreign direct earnings remains sluggish. Nearly half of Zambia’s tax revenue is servicing debt obligations and the shock from COVID-19 has exacerbated Zambia’s already constrained liquidity, increasing the likelihood of events of defaults on existing borrowings.
The escalating amount of foreign debt raised, coupled with shrinking foreign reserves, drought and a weakening currency pours more fuel to an already weak economy. It brings us back to the perplexing, early 1980’s when Zambia faced similar challenges with large debt payments, falling copper prices, including liberation and austerity measures.
One of our core fundamentals at Alpha Reign lies in applying historical data analysis to how different countries in sub-Saharan Africa react in different crises. Although each crisis is unique, the early 1980’s mirrors where Zambia is now. In more developed countries the equivalent of the COVID-19 crisis was last seen during the times of The Great Depression between 1929-1933, this is almost a century ago. The full century provided developed nations more fuel in building reserves and savings, however in the case of Zambia the economy is still young, and in the process of building savings, like the majority of it’s population. In general countries in sub-Saharan Africa, have greater stumbling blocks to progress, given how youthful many are. – Taolo Modisi- CEO Alpha Reign.
Lives versus Lives Debate. Stanford Professor of Medicine, Jay Bhattacharya, was recently quoted saying the debate on COVID-19 is now a “Lives versus Lives,” debate and not only a “Lives versus Livelihoods” one. Although the lockdown periods were implemented to save lives and prevent the spread of the coronavirus, there is a clear balance countries in sub-Saharan Africa have to be cognisant of, in relation to the potential prolonged effects of lockdown periods on lives. These lives, mostly reside, in the real economy in rural areas, villages and in informal settlements, outside the financial economy. The inequalities between the real and financial economies will continue to rise with the impacts of COVID-19 and if the rift in the wealth gap is left unaddressed instability will grow. Given that no vaccine or cure has been provided, economic uncertainty remains and economists continue to debate on whether the outlook to recovery will take a W,U,V or ✓like-shape.
Zambia needs to utilise its natural resilience, during these uncertain times, to provide pandemic resilient solutions, which requires clear, concise leadership. A new world order needs to take shape to recovery and the negative outcomes from the history of recent crises, in the country, should not be repeated.
Taolo Modisi is an experienced Investment Banker serving as Non-Executive Director and Founder for Alpha Reign based in Johannesburg, South Africa.