MPs should demand Musokotwane gives clear roadmap on ballooning domestic debt – M’membe
By Rhoda Nthara (The Mast)
SOCIALIST Party president Fred M’membe warns that should government default on domestic debt that will be the end of our economy.
Dr M’membe noted that the current ceiling of government securities approved by parliament is around K300 billion.
“At the rate the government is borrowing very soon, Treasury will be going to parliament to revise this ceiling upwards. We urge our legislators not to support this as it will increase the default risk on domestic debt,” he wrote on his Facebook wall yesterday. “If anything, our legislators should be taking to task the Minister of Finance to give a clear roadmap on ever ballooning domestic debt. Zambians should take this as a serious forward warning. Should government default on domestic debt that will be the end of our economy.”
Dr M’membe observed that the nation seems to have focused more on external debt restructuring to the extent that “we are not interrogating the local market”.
He said the scenario at the moment with regard to budget financing “is inwards focused on raising funding through issuance of government securities and Developing Financial Institutions (DFIs) such as IMF, World Bank, and African Development Bank”.
“This is because given our junk credit rating we cannot raise funds on the international capital markets. Consequently, the government has been pushed to raise money through the issuance of government securities on the open market. Most recently, the government has also issued government securities through private placement. This is where individual investors buy government securities outside the open bidding process,” he explained. “Now, this has resulted in a significant increase in domestic debt believed to be in the region of K250 billion. This upward build-up in domestic debt, which will continue to increase for as long as we do not have new revenue streams coming on board, creates a huge domestic debt default risk.
As government securities mature, they create two risks: Maturity risk – meaning government’s ability to pay the investors their principal investment plus interest for those investors that wish to exit the securities market. Foreign currency repatriation risk –
this relates to foreign investors who have invested in government securities and wish to exit and repatriate their investment back to their home countries. As an example, it is believed that our current international reserves estimated $3 billion would be wiped out if all foreign investors exited the securities market upon their investment maturing. It also creates a serious exchange rate risk as we do not have sufficient dollars to pay should there be a run of foreign government securities holders pulling out for one reason or the other.”
Dr M’membe said political stability is critical in this regard as any perceived form of instability would trigger a pull out.
“We therefore need the Treasury to explain to Zambians how these risks are being managed currently to avoid waking up and finding that we have defaulted on local debt. It happened in November 2020 on external debt, so what can stop the same happening on local debt. Let’s learn from experience. Praise Singers will say you are not offering solutions,” said Dr M’membe. “The solution is simply decelerating on the issuance of government bonds and starting to wind the current portfolio downwards. To achieve this, you need to up your revenue mobilisation measures. One clear measure we have advised over and over again is the sub optimal collections of tax revenues from the mining houses. We have gold all over Zambia, and we don’t even know where it’s going to once mined. Increase tax compliance, open up new industries, and I can go on and on.”