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The Central Bank of Zambia

Zambia's Foreign Debt Problem?

Borrowing money from foreign governments, banks or multilateral organisations such as the IMF can provide the impetus for economic growth. In LDCs where the level of incomes and hence private savings is low it is foreign capital flows that provide much needed private investment. However, there are costs of taking of such debt. The financial cost of accumulating a large debt is called debt service. It comprises of:

Amortisation i.e. the repayment of the principle of the debt
Payment of the accumulated interest on the debt

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Unfortunately Zambia cannot pay these in its own currency, the kwacha. Foreign creditors require payment in their own currency or in a convertible hard currency. Hence, both of these must be paid off by using foreign exchange. Thus servicing this debt i.e. repaying the principle and the interest, can only be done by:

Generating export earnings
Reducing import spending
Additional borrowing

Many countries including rich industrialised MDCs from time to time suffer balance of payments deficits and finance it by borrowing. However, not all suffer to the same extent as Zambia and other LDCs. Foreign debt becomes a significant problem in certain circumstances:

The debt is so large that the rate at which the amount that has to be paid back grows more rapidly that inflows of foreign exchange with which to pay it
The debt shifts from being long-term official concessional borrowing to short term market rate borrowing from commercial banks
An external shock such as an increase in the price of oil or a hike in world interest rates increasing the scale of any commercial debt the country faces
The country faces severe longer term balance of payments problems as the prices of primary commodities fall causing the terms of trade to worsen
Capital flight causes local residents to move large sums of foreign exchange out of the country
The government faces ever-increasing public expenditure demands for subsidised services such as free education and health care to an economically disadvantaged population

When these combine together the debt becomes self-reinforcing and the debt becomes a major barrier to economic development, "the constant need to borrow in order to service debt; the constant need to service our debt in order to borrow - we can no longer get out of this vicious circle... Is human development a possibility when so much of Africa's wealth is channeled into debt servicing?" is how Julius Nyerere, former president of Tanzania, described the situation. In the case of Zambia during the 1980s and 1990s all of the above factors have had some impact on the debt situation in the country. Other factors have been penalties by creditors and a substantial decline in the flow of foreign aid as a result of President Kaunda's 10% export earnings limit on debt repayments; plus the difficulties caused to the land-locked country by UN sanctions against its neighbours, Zimbabwe and South Africa.

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