This blog is part of a series of articles Eurodad is producing in collaboration with our global partners on the implementation of the Debt Service Suspension Initiative (DSSI), complementing and updating the report "Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket?" published in July 2020. Over the coming months we will publish a variety of articles covering issues related to the implementation of the DSSI and the debt situation in several countries in the global south.

The Covid-19 pandemic has had significant health, social and economic effects in Zambia. As of 15 September, the country had reported a total of 13,819 cases and 324 deaths related to Covid-19. Until now the government has avoided the adoption of draconian policies to contain the pandemic. The official response has been based on a combination of partial lockdown measures mainly aimed at reducing gatherings in public spaces. 

The pandemic has had a devastating impact on the living conditions of the population. Before the crisis, 58 per cent of the population was living below the poverty line (i.e. on an income below US$ 1.90 per day). This is expected to increase as the crisis is taking a significant toll on jobs. The informal sector accounts for 68 per cent of employment in the country. With the emergence of the pandemic, most businesses have experienced severe disruptions due to the reduction in the number of person-to-person interactions that characterise the informal sector. The impact is especially severe for smallholder farmers in rural areas. Up to 77 per cent of the population is living in poverty in these regions. 

These dynamics affect women disproportionately. As of 2019, less than one out of four working-age women in the country had jobs. The informal sector accounts for 76 per cent of total employment for women. In this context, the Covid-19 crisis has had a dual impact on women in the country. On the one hand, job losses in the informal sector are set to see an increase in female unemployment. On the other hand, caregiver burdens largely fall on women in Zambia. As a result of the unequal gender distribution of informal care in the household, women are likely to see their work and life opportunities further constrained in the aftermath of the pandemic.

In this regard, the prospects for a strong recovery are concerning. A central issue is the large debt burden facing the country. Zambia’s public debt has increased significantly over the past few years. In 2018, total public debt reached US$ 18.3 billion, which is equivalent to 78.1 per cent of Gross Domestic Product (GDP). From this figure, US$ 11.2 billion corresponds to external public debt. Nearly half of this figure (US$ 5.1 billion) are bonds and loans from private creditors. According to the International Monetary Fund (IMF), the country was already at high risk of debt distress before the impact of the Covid-19 pandemic. The ongoing crisis is making the underlying problem more complex to solve, as public finances deteriorate and debt levels continue to rise. This is a major source of concern for the population and civil society. 

Expenditure on debt servicing and salaries has been increasing at the expense of investments in key economic sectors such as healthcare, agriculture and mining just to mention a few. Before the pandemic struck, the country was experiencing systemic underinvestment particularly in its healthcare sector. Despite being a party to the Abuja Declaration of 2001, which committed Member States of the African Union to allocate at least 15 per cent of their budgets to the health sector, the country has yet to fulfill its commitment. Over the last five years, public healthcare expenditure has averaged 9.1 per cent of the government’s budget. In the meantime, during this same period, debt servicing alone accounted for 70.3 per cent of government revenues. This ratio is substantially above the IMF risk threshold, which recommends a relation of debt service to revenues no higher than 15 per cent. The pressure of the debt burden over public finances is set to increase further. The domestic currency (Kwacha) has depreciated over 24 per cent in the first quarter of 2020. This has increased the costs of meeting external debt payments severely impacting the country's stock of  international reserves. The World Bank estimates that the G20 Debt Service Suspension Initiative (DSSI) would allow Zambia to suspend debt service payments totalling US$ 139.2 million. This figure is equivalent to 0.6 per cent of GDP and 1.2 per cent of Zambia’s total external debt stock. The marginal impact of the DSSI on debt service requirements is explained by the structure of the financing of the country. Most of the public sector borrowing originates from multilateral and private sources. These creditors account for 73.3 per cent of external public debt. This group is only required to participate on a voluntary basis and thus far has not taken any steps to provide additional debt relief to the country.  

Failure of the DSSI to engage with private creditors is reflected in the steps taken by the government to address its debt burden. Looming in the horizon is a large principal payment of US$ 750 million to private bondholders in 2022. In May, the government hired Lazard, an investment firm specialized in sovereign debt, to advise the country on a potential restructuring process. On September 22, the government officially approached private bondholders to request a suspension of payments for 6 months. It is telling that the request is not within the DSSI framework. This is an indication that even in those cases where countries require private creditor participation, the DSSI is inadequate. While it is unclear whether private creditors will accept the request for a suspension, this is expected to be the first step of a wider restructuring process. 

Against this backdrop, civil society organisations have taken an active role in demanding a public response that minimises the negative impact of the pandemic. Civil society in the region has advocated for measures aimed at tackling the country’s growing debt burden . In this regard, it is increasingly clear that a debt suspension won't be enough to address the pressing problems faced by Zambia. Urgent support is needed from the international community to simultaneously address the recovery and development financing needs of the country and to address Zambia’s debt burden. Debt relief with private creditor participation is required now to ensure the country can boost its Covid-19 response and support a sustainable recovery.