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DEBT BURDEN: Experts Warn Uganda as Zambia Edges Closer to Default

Uganda should take keen interest in Zambia’s sovereign debt sustainability challenges especially after bondholders rejected the southern African nation’s request for debt relief, experts have warned.

The development set Zambia on course to becoming Africa’s first sovereign default since the onset of the coronavirus pandemic.

Bloomberg reported that holders of Zambia’s $3 billion of Eurobonds voted against the country’s proposal to suspend interest payments for six months.

The government, which skipped a $42.5 million coupon on Oct. 14, had until the end of Friday to either pay the arrears or trigger a default event that could leave the government shut out of debt markets for years.

While the coronavirus pandemic added to Zambia’s woes, with the economy forecast to shrink for the first time since 1998, its debt problems started years earlier.

The government borrowed heavily since 2012, building up nearly $12 billion in external debt and ignoring warnings from the IMF of growing debt distress risks.

The country’s $1 billion of 2024 Eurobonds held a gain of 1% to trade at 45.3 cents on the dollar by 11:38 a.m. in London. The bonds are down 34% this year.

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Economist Enock Twinoburyo says the message is crystal here for Uganda.

“Fiscal indiscipline expecting others to bear the burden: the social called moral hazard may soon be thrown out of the window. Default and associated downside risks manifesting would be adversity of the economy that runs twin deficits (fiscal and trade),” Twinoburyo, a senior economist at SDG Centre for Africa, told ChimpReports on Monday.

“The funding for those will not materialise and the necessary investments won’t actualize.  Growth which is consumption plus investment and government expenditure plus exports minus imports will dwindle,” he added.

Civil Society Organisations recently warned the Government of Uganda on the over increasing public debt stock, saying that debt servicing continues to exert fiscal pressure on the country’s budget.

Uganda’s interest payments rose from Shs 1.7 Trillion in FY 2016/17 to Shs 4.1 Trillion in the FY 2020/21.

According to Bank of Uganda’s report on the performance of the economy September 2020, Uganda’s public debt stock by June 2020 stood at Shs 56.53 Trillion, growing Shs 10.33 Trillion equivalent to 22.4 percentage growth from Shs 46.20 trillion as at June 2019.

Much as Uganda’s debt to Gross Domestic Product (GDP) ratio remains below the 50 percent threshold, the country’s liquidity ratio to debt is very weak, at 22 percent in FY 2019/20 against the IMF standard of 15 percent, which puts Uganda in a vulnerable state.

David Mugisha, an economist, says Zambia was tempted to take a debt option (Eurobond) which Uganda was wise to reject.

“Rwanda, Kenya and Ghana are other African countries that issued Eurobonds and they are in trouble,” said Mugisha, adding, “Uganda has no Eurobond debt.”

Moody’s Investors Service (Moody’s) recently downgraded Rwanda’s economic outlook from stable to negative.

Moody’s cited four reasons for the downgrade — sharp decline in Rwanda’s exports, dwindling tourism receipts, the drying up of personal remittances from abroad, and reliance on concessional donor financing.

Second, the International Monetary Fund (IMF) announced that Rwanda’s rising public debt burden is set to reach 67 percent of the gross domestic product (GDP).

The IMF says that public corporations, public-private partnerships, and loan guarantees provided by the Rwandan government pose high risks.

Zambia’s finance ministry implied it’s heading for a default, saying its only other option was to run up arrears, even after Vice President Inonge Wina said earlier Friday that Zambia would honor its debt obligations.

“We remain committed to finding a consensual and collaborative resolution to debt sustainability issues,” the finance ministry said in an emailed statement after the bondholders meetings. “Agreeing to consensual standstills or accruing arrears are the only options available to the country while we design a plan to put our debt on a sustainable trajectory.”

Zambia is a major importer of pharmaceuticals and military uniforms from Uganda.

Recently, the Ugandan High Commission in Tanzania managed to get market for Ugandan milk products in Zambia.

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