Columnists

Zambia loan default lesson for Kenya

lungu1

Zambian President Edward Lungu (centre). FILE PHOTO | NMG

jaindikisero_img

Summary

  • The impact of Corvid-19 is clearly a factor in Zambia’s current predicament.
  • But it is also true that Zambia has been hurtling towards a debt crisis for many months.
  • In the statement announcing notice of default, Lusaka admitted that suspension of payments arises from economic pressures that far predate Covid-19.

Who will be next? Zambia has just given notice of sovereign debt default on three outstanding Eurobonds amounting to $2 billion.

President Edgar Lungu’s government announced that that it was seeking “the suspension of debt service payments for a period of six months” from private creditors holding the bonds. In effect, Lusaka is seeking permission to defer interest payments until next April as it plans to restructure its debt.

The impact of Corvid-19 is clearly a factor in Zambia’s current predicament. But it is also true that Zambia has been hurtling towards a debt crisis for many months. In the statement announcing notice of default, Lusaka admitted that suspension of payments arises from economic pressures that far predate Covid-19.

We must wait and see whether Zambia’s action will have a ripple effect on other sub-Saharan African countries where economic circumstances are not too dissimilar. We may be bracing for a string of similar cases across the region.

But Zambia is one of several African countries suffering from a heavy burden of debt and if its default raises the spectre of a string of similar cases, access to international capital markets may become problematic.

Zambia has said that it will be following the application it made for the G20 Debt Service Suspension Initiative in August with a similar request for debt service suspension from its commercial creditors, including noteholders.

The predicament the Zambians find themselves in got me thinking about our own situation here. All indications are that the government is facing extreme pressure on its finances. This is the evidence in declining revenues and increased unbudgeted expenditure.

When you look at the statistics from the Central Bank of Kenya, the trend you see there is that the government is hurtling close to bursting its overdraft limits.

In the coming days, and following the recent resolution of the stalemate over a revenue sharing formula among county governments that has been dragging at the Senate for months, the Treasury will be facing the pressure to raise Sh361 billion which must be disbursed to the devolved units.

Clearly the fiscal strategy adopted in the current budget would become more and more unsustainable. While this year’s budget assumed a budget deficit of between eight and nine per cent, recent trends in revenue collections point to a much bigger gap in the finances of the government.

Mark you, it was already projected in the current budget that debt service would consume 49 per cent of ordinary revenue which means that- at best- only 51 per cent is available for budget implementation. The projections right now are that the situation will be much worse.

Experts believe that the administration may be forced to go back to parliament to seek a review of the upper limit of public debt to a figure above the current figure of Sh 9 trillion.

Like Zambia, Kenya is all in a very precarious situation when it comes to servicing external debt. Three factors are at play: domestic economic pressures, poor performance of the exporting sector, recent pressures on the Shilling and reduced access to concessional spending.

In the current budget, provisions were made for huge amounts payable to maturing Chinese related debt and to service a 7-year syndicated loan we took from the Trade Development Bank of Kenya to offset accruing Eurobond payments.

But is Kenya likely to apply for relief under the G20 debt service suspension initiative? From what I gather, Kenya is reluctant to seek relief under this framework because it has taken the position that its makes more sense for the country to negotiate debts with it’s largest creditor- China.

Apparently, the administration also fears that a deal with the G20 may plunge the country into a conditionality regime it might find politically unpalatable to implement thereby presenting with antagonistic diplomatic relations with its key Western allies.

Al in all, Kenya faces difficult economic times in the coming months. Public finances are in the red, with a huge hole in the vaults aggravated by Corona by mainly caused by crippling revenue shortfalls and a dearth in external financing.