Zambia will raise kwacha loans, to try tilt funding in favour of the local market
Lusaka/Johannesburg — Zambia will not sell dollar debt in 2018 as it focuses on raising kwacha loans and increasing tax collection, its finance minister, Felix Mutati, says.
The government plans to borrow 11.2-billion kwacha ($1.2bn) from the domestic market in 2018, more than triple the amount in the 2017 budget. This is part of its strategy to tilt funding in favour of the local market, after external debt bulged to $7.5bn by mid-year from $2bn at the end of 2011. Zambia has tapped the Eurobond market for $3bn since.
"When you look at the cost parameters of foreign-denominated instruments of borrowing and you add the exchange-rate risk, you find that you are better off borrowing on the local market," Mutati said in an interview in Lusaka, the capital, on Thursday. The shift toward local borrowing is due to "purely issues of cost," he said.
Debt sustainability is at the core of Zambia’s discussions with the International Monetary Fund (IMF) over a $1.3bn loan and economic programme. As the government has continued to increase borrowing, debt-servicing costs have shot up.
The Southern African nation will spend 27% of revenue in 2018 on paying back loans, according to the budget Mutati presented to legislators last week. Ultimately, he said, he would like to bring this down to about 20%, freeing up resources to invest in the economy.
The government aims to reverse the ratio of foreign-to-domestic debt from the current 61% in external borrowing and 39% in local borrowing, said Mutati, who has been in the position for a year.
Yields on Zambia’s $1bn in Eurobonds due in 2024 have fallen 1.83 percentage points in 2017 as prices for copper, which accounts for three-quarters of the country’s export revenue, rebounded and investors bet that the government would reach a deal with the IMF. At the most recent auction in September, 10-year government kwacha bonds had an 18% yield.
Mutati will be heading to Washington next week to attend the World Bank and IMF annual meetings, where he plans to resume loan talks that have dragged on for most of the year.
"What we are going to do next week is to agree on the macro framework around the spending needs and also the borrowing needs with the principal objective to ensure debt sustainability," he said. "We remain confident that we will secure a deal. Our target is that we need to reach a deal as quickly as possible, and preferably before the end of the year."
Zambia’s budget deficit will shrink to 6.1% of GDP in 2018, even as spending rises 11%, according to Mutati. That’s largely because of more aggressive targets he agreed to with the tax authority, and explains a jump in spending in the 2018 budget from the medium-term expenditure framework, published on September 10, he said.