Zambia’s Debt Build-Up Continues Apace Despite IMF Warnings

(Bloomberg) -- Zambia, which the International Monetary Fund has warned is at high risk of debt distress, contracted an additional $2.6 billion of new external loans last year, according to the Finance Ministry.

If the funds are disbursed, they’ll increase the southern African nation’s external debt to $12.7 billion, from $10.1 billion at the end of 2018. The new loans suggest the government is too complacent about rapidly increasing debt risks, Gregory Smith, fixed-income analyst at Renaissance Capital in London, said by email.

“Last year, the government pledged it would be canceling loans and slowing down the accumulation of debt,” he said. “Adding more new loans is only going to aggravate what is already a dire situation.”

Zambia will manage the $2.6 billion of new loans in a way that the country has “a sustainable debt profile going forward,” Finance Minister Margaret Mwanakatwe told reporters Friday in Lusaka, the capital.

Zambia’s foreign-exchange reserves have plunged from a peak of almost $4 billion in 2015 to $1.4 billion in February as foreign-debt servicing costs soared. Yields on the country’s $1 billion Eurobonds due in April 2024 jumped 69 basis points to 18.09% on Thursday.

Infrastructure Spending

Africa’s second-biggest copper producer has boosted spending on infrastructure including roads and airports in recent years, which it has largely financed through external borrowing.

“We will continue to invest in infrastructure because we believe the opportunity out there is huge,” Mwanakatwe said. “We have a dearth of infrastructure investment. That’s why we went into this area. Now it is time to begin to reap that investment that we put in infrastructure.”

The benefits have yet to impact economic growth, which the IMF forecast will slow to 2.3% this year -- the lowest in 21 years. Foreign debt has more than doubled since 2014, and the cost of servicing it will increase by 90% this year, according to Smith. While analysts including Smith are concerned about the possibility of default in 2020 and in subsequent years, the government has dismissed these worries, saying the country has never defaulted before.

“Avoiding default in our view will require canceling some loans, not adding them, plus some combination of an IMF-financed program, Chinese debt re-profiling, and a People’s Bank of China credit line,” Smith said. “Debt sustainability would require a u-turn on most of the loans signed in 2018.”

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