Africa’s second largest copper producer Zambia, faces an array of economic hurdles ranging from pandemic amplified inflationary burdens currently at a two decade high, weakening currency in the wake a falling reserves and suppressed manufacturing pulse. To ease the burden on its civil service, the Public Sector Management Division – PSMD announced debt restructure initiatives that will easing the debt repayment burden of the public service at time when the cost of living continues to widen.
A VANILLA DEBT SWAP TO EASE NET OBLIGATIONS OF THE PUBLIC SERVICE
One key initiative announced was a debt – swap which will net potential dues or obligations between the public service and the state which have been building up and remain mismatched for quite some time. The counterparty classes in question will have respective aggregate obligations net off to allow any excess to be borne and paid off by an owning party. This was noted for settling allowances, leave pay, relocation allowances and many others.
Debt dismantling remains constrained by cashflow hurdles which the MinFin took to addressing aggressively earlier last year and as such has intensified absorption to mitigate any delays that would deprive the civil service of the liquidity they require especially in economic hardship times as these. It remains vague as to the magnitude of the arrears owed within the public service but the Zambian treasury did disburse K200 million mid-year to partially absorb the outstanding net obligations in the public sector. Arrears dismantling remains a key target for the MinFin as it seeks to restore fiscal fitness of the sovereign.
DEBT RESTRUCTURE RELATING TO EXPOSURES WITH THIRD PARTY LENDERS
The most controversial intervention relates to a debt restructure process concerning an additional class of public sector employees with credit exposures with private lenders – Financial Institutions – FI and Non Bank Financial Institutions – NBFIs which if not managed cautiously could breed credit risk pressures. The PSMD will seek to buy-off all its public sector exposures in the industry and house this credit risk profile with the sovereign through a Public Sector Management Division Microfin. However for the FI’s and NBFI’s to transfer civil service liabilities to another vehicle, the assuming counterparty will need to liquidate outstanding obligations. Credit obligations are contractual in nature which by no means can not be breached unless with the consent of the lender or through liquidation and additionally, termination of terms could come at an early redemption cost.
COULD THE PROPOSED DEBT RESTRUCTURE SPIRAL CREDIT RISK BOOMERANG EFFECTS
While it may seem that most governments in pandemic times are subsidising many sectors i.e. energy through delayed pump price hikes, agriculture through distribution of inputs at below market prices and many other interventions such as social welfare payouts seen across the world, the concern remains as to how far the sovereign can go extending reprieve to its citizens.
It is clear that social effects on citizens of these economic hardships amplified by the pandemic have continued to outweigh the need for market reflective pricing in the quest to ease consumer burden, it also causes concern on the implications of key sectors in not managed appropriately. Central banks similarly have paused rate hikes against all odds even when fundamentals have signalled the contrary. Rate decision meetings are more pandemic than inflation based as observed in developed, developing, emerging and frontier markets. As for Zambia, the COVID19 pandemic has amplified its fiscal fragilities which led to default credit rating in 2020 with the International rating agencies.
Debt restructure, has the positive, on one leg, of easing repayment obligation at household level through the 3 month holiday in transition period and a lengthened repayment duration. Disposable incomes of the public sector will increase but with potential implications on third party lenders that currently house credit risk exposures. The NBFI space will be impacted by loss of business as civil service clientele base, that forms a significant portion of clientele base, shifts to a PSMD Microfin that will seek to manage and extend credit at lower rates and lengthened periods. The ripple credit effects reside in funding the outstanding civil service obligations vis loans with the private lenders which could add pressure on the domestic money markets through the treasury bill and bond market. This approach could overcrowds the domestic credit market and dent growth momentum. Execution of the debt restructure portion of the initiative could require a rethink as it would be more effective through the central bank.
The Kwacha Arbitrageur