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A significant overshooting of the fiscal deficit in 2019 highlights the Zambian government's difficulties in reining in debt accumulation, Fitch Ratings says. Already high debt levels will remain a key vulnerability, even if recently announced measures are effective in slowing the pace of further debt accumulation.

 

According to a fiscal update from the Minister of Finance, Zambia recorded a preliminary fiscal deficit of 8.2% of GDP in 2019 in the government's definition, well above the budget target of 6.5%. Excluding debt amortisation and including arrears accumulation, the deficit was closer to 9% of GDP on a commitment basis. Government revenues were higher than the government's target, boosted by higher than expected inflation and improved revenue collection. Expenditures exceeded the 2019 budget by approximately 9%, reflecting higher interest payments, which were 1% of GDP above target due to the currency's sharp depreciation, and by capital expenditures and subsidies.

Fitch affirmed Zambia's 'CCC' rating in December 2019, noting the high and rising government debt in the context of an ambitious capital expenditure programme. Fitch's forecasts assume that debt will peak in 2020, but remain at a level that keeps the government's external financing requirements high relative to official FX reserves.

 

The 'CCC' rating is indicative of Fitch's view that Zambia faces a heightened probability of default. An increase in international reserve coverage or a fiscal adjustment that increase refinancing options could lead Fitch to take positive rating action.

 

Zambia's 2020 Budget, approved in September 2019, called for narrowing the fiscal deficit to 5.5% of GDP. However, the government's inability to meet spending targets in 2019 highlights how difficult it will be to achieve any substantial narrowing of the deficit in 2020.

 

In late December, the cabinet approved measures to slow the contraction of new external project loans and cancel or reduce undisbursed external loans that had already been contracted. If implemented, these measures could reduce the stock of undisbursed loans by USD5 billion, or 21.5% of GDP, and slow the accumulation of new debt. However, similar, albeit less specific, commitments under the previous finance minister had not led to significant progress in reducing deficits or debt accumulation. As a result, we are also sceptical about progress on an IMF programme, although the government will hold further discussions with the IMF in March and April.

 

In addition to a credible plan for reducing deficits, the IMF may insist on a debt re-structuring. In his recent remarks, the Minister of Finance also mentioned that the government is seeking debt re-profiling, pending a review of legal implications.

 

Persistent fiscal deficits increased general government debt to 88% of GDP in 2019, from 32% in 2014. External public debt was US11.1 billion (54% of GDP). Zambia faces approximately USD1.5 billion in external debt servicing (105% of current international reserves) in 2020. While the government is likely to manage its 2020 debt servicing requirements, Eurobond repayments of USD750 million in September 2022 and USD1 billion in April 2024 will lead to a surge in external debt servicing in these years.

 

Meanwhile, the external position fared better than expected, as gross international reserves ended 2019 at USD1.4 billion, unchanged from end-2018. The reserves position was helped by the turn of the current account to a surplus of about 1% of GDP. Zambia's current account last was in surplus in 2014, prior to the collapse in copper prices.

 

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