Mwanakatwe Updates Parliament on Debt Situation

FULL MINISTERIAL STATEMENT

Mr. Speaker, I wish to thank you for giving me this opportunity to brief the house on the country’s debt situation. Sir, let me commence my address this afternoon by sharing with the Honourable members the status of Zambia’s debt stock as at end June 2018, which was the last reporting quarter.

• The stock of external debt was US$ 9.37 billion. This represents 34.7% of GDP and was below the internationally agreed threshold of 40%;

• The stock of domestic debt, in form of Government securities, was K51.86 billion. This represents 19.2 % of GDP. Kindly note that there is no threshold defined internationally on domestic debt;

However, the threshold for the combination of domestic and external debt is 56% of GDP. Against this threshold, Zambia’s combined ratio was 53.9% of GDP;

• The stock of arrears stood at K13.9 billion or 5.1% of GDP; and,

• The total stock of guarantees were US$1.2 billion or 4.4% of GDP.

Sir, I would like to assure the house and the nation that Government takes seriously, issues of debt sustainability. As a practical step towards ensuring that we are sustainable, Government conducts annual debt sustainability analysis (DSA) exercises to gauge the carrying capacity as relates to economic parameters such as GDP growth, reserves and debt servicing capacity. The DSA gives us an indication of the level of debt that is desirable to ensure that growth is not impaired and the drive towards poverty reduction remains unabated.

Mr. Speaker, the last such exercise was undertaken by the Government in the first quarter of this year. Upon the outcome of the DSA, the Government announced a number of austerity measures to mitigate against perceived risks associated with the debt going forward. The measures will address these risks and ensure continued sustainability through fiscal consolidation.

Sir, I would like to assure Honourable members that the Government has not defaulted on any of its external commitments and does not intend to do so. We are very much alive to the serious repercussions of any default, on the economy and on other borrowings we have made through cross default clauses contained in financing agreements. It is our undertaking that we abide by the provisions in our loan agreements by ensuring that we do not abrogate the provisions of our constitution that ranks borrowing as a priority constitutional call on our revenues.

Mr. Speaker, the past few days have seen high levels of public interest regarding the purported ceding of some strategic assets owned by the republic to foreign creditors. Let me take this opportunity to inform the house and the nation that Government has not pledged any public asset as collateral on borrowings it has undertaken.

As the shareholding minister in state owned enterprises under the powers vested in me by cap 349 of the laws of Zambia [minister of finance – incorporation act], and in my capacity as minister in charge of loan contraction and debt servicing as stipulated in the loans and guarantees authorization act and the public finance act, I wish to emphasize that:

1. There has been no debt default by the republic of Zambia on debt obligations to the Chinese Government or to other lenders;

2. The loan at the Kenneth Kaunda International Airport [KKIA] is still being disbursed by the lenders. In this regard, we have not yet started repaying the loan because the new airport terminal is still under construction;

3. Zesco loans from Chinese lenders relate to the extension project for the Kariba North Bank Power Station and the Kafue Gorge Lower Power Station construction project, which two stations are independent of Zesco. Zesco only holds shareholding interest in the two power stations through separate special purpose establishments. Loan repayments for the Kariba north bank extension project are duly on course while loan repayments for the Kafue gorge lower power project have not commenced because the station is still under construction;

4. With regard to the digital migration programme, a loan was obtained from china to ensure that the programme is implemented in the country. Government is servicing the loan and is on course with debt servicing. Zambia National Broadcasting Corporation (ZNBC) was never offered as collateral for the loan. Instead, ZNBC and star times of china created an independent special purpose vehicle called top star to implement the digital migration programme; and,

5. For all other loans that have been contracted from the Chinese Government, the security on the loans is in form of insurance taken from Sinosure. For loans contracted by state owned enterprises, an insurance from Sinosure and guarantee from the Government are in place. Debt service for those that are due is on course.

In view of this, it is clear that no collateral in the form of public assets has been provided for borrowings and none of the sovereign guarantees has been called upon by the creditors. Therefore, the takeover of any asset by another Government is neither practical nor feasible.

Through you Mr. Speaker, the nation is informed that there has never been any discussion related to a debt/asset swap between the Zambian Government and any of its creditors, china inclusive.

Mr. Speaker, let me now address the issue of refinancing of the Eurobond that has equally raised interest. The Government has a full view on handling of the bonds and is committed to the repayment of its liabilities. We are thus cognisant of the need for a structured redemption plan that will ensure transparency and smooth processes for handling the redemption of the Eurobonds.

In this regard, the Government has defined a Eurobond redemption strategy (ERS) that will establish an optimal plan for redeeming our bonds. Once approved by cabinet, the strategy will be made public.

Sir, the Eurobond refinancing strategy gives an array of options that involve debt buy backs and refinancing options. I must point out that refinancing is a market practice that is not peculiar to Zambia and is consistent with the need for Zambia to have an instrument in the international capital markets that can be used to signal risk for the private sector.

Mr. Speaker, as we are undertaking these asset and liability management processes we are cognisant of the need for the country to maintain a stable macroeconomic environment, credible debt data, fiscal sustainability and a favourable credit rating. This is what will assure achievement of lower interest costs and longer maturities on the bonds.

The measures I announced in July 2018 are meant to ensure that we continue to achieve these objectives.

May I emphasise that any refinancing exercise will follow best market practice and will involve the consultation of bond holders with the investors getting full value of their investments.

Mr. Speaker, I would like to further inform this august house that the ministry of finance has now set a standard to be making reports on debt figures public, on a quarterly basis. This is meant to keep citizens and other interested stakeholders abreast of the developments on this topical issue that has attracted so much attention and interest. The quarterly releases are also meant to reassure and give those that are inclined towards skepticism an opportunity to benefit from facts that would satisfy their doubts, thereby fore-storing speculation.

Sir, let me conclude by mentioning that in order to address future misconceptions about Zambia’s external debt position, the ministry of finance has embarked on strengthening its reporting and communication policies to ensure that public debt information is availed to the public in a timely and credible manner.

Mr. Speaker, I will periodically be briefing the house on issues regarding debt sustainability.

Mr. Speaker, I thank you.