Zambia in Debt Default
What does Debt Default mean?
A debt default happens when a borrower fails to pay his or her loan at the time it is due.
National (Sovereign) Debt Default means that the government is either unable or unwilling to make good on its fiscal promises to repay bondholders. In short it's the failure of a government to honor some or all of its debt obligations.
Understanding Sovereign Default
Countries (sovereigns) have a complicated economical structure. Zambia's economy is exposed to a wide range of factors; from political risk (corruption index level, autocratic leadership), legal risks (how reliable their legal system is) to economic growth cycles (how dependent their growth on a service or export is and how productive their revenue system is).
Governments require money to pay existing debts and to perform pension and social service commitments. Country’s government has a treasury department or finance ministry which maintains its capital and ensures the country has enough money available.
Believe it or not, some investors prefer to invest in non-democratic countries because their policies are stable and predictable. In Zambia's case investors have a small chance of investing as of now.
Governments can raise capital in various ways; such as from increasing revenue, taxing its people and services, issuing treasury bonds or to borrow money from foreign countries.
Let’s Move On To Treasury Bonds And Foreign Debt
Think of governments issuing treasury bonds as borrowing loans from public. Governments pay money back periodically to the bond holder. The money borrowed by issuing bonds is known as local country debt because the bonds are issued in local (domestic) currency. If the government is unstable then you can expect the government to pay higher interest on the treasury bonds.
When countries borrow money from foreign countries, it is known as foreign country debt. If the government has poor rating and is already in high debt then the foreign countries will charge higher interest rate on the borrowed loans.
When countries like Zambia fail to pay back on their loans to their creditors then they declare bankruptcy and are then considered defaulted. Most of the sovereign defaults are foreign currency defaults, Zambia uses the Dollar.
What Happens When A Country Defaults?
The real question now is, what will happen to Zambia with it's debt default? This section highlights the core of this article. In this section, I will outline some of the top potential consequences Zambia face for defaulting:
1) First and foremost, Zambia's currency (Kwacha) will be devalued. This will make it expensive to import products. Additionally, export businesses might suffer due to selling products and services cheaper in short term. For exporters, currency devaluation is a double edge sword; when services and products get cheaper, it increases their demand. Exports become attractive and raises competition in market. As exports are cheaper for foreign countries, they tend to buy more from the defaulted country. Additionally domestic service providers might benefit due to foreign investments and tourism boosts due to foreigners visiting more frequently as it happened after pound devalued in 2016. Hence default has positive effects for the country too.
2) Secondly, debt can be restructured such as by extending the loan payment date or by reducing the loan amount or by further devaluing the currency.
3) Austerity measures might be followed which includes spending cuts and tax increase.
4) Living standards of the Zambian people will also be impacted. It might start with riots on the streets leading to banking crises. The core reason for banking crises can be that the people might attempt to take all of their money out of the banks due to uncertainty and confusion (I somehow suspect Barclays Bank saw this coming). The chances of banking crises might increase, as an instance by up to 10% and the government may close down its banks to avoid money withdraw. Occasionally, withdrawal is permitted but capital controls are imposed.
5) The country's default on foreign currency debt might also end up defaulting on local currency debt. This means that, for instance if you bought treasury bonds and the country defaults on foreign currency debt then you might not receive your bond periodic payments.
6) Turmoil might be experienced in stock market. This can be due to uncertainty in market. No one might willing to buy anything. Many investors might even decide not to do business with the country until the situation is stable.
7) The government may refuse to pay any money or reduce the borrowed money as it happened in Argentina in 2001.
8) The country will face loss of reputation, its rating might decline which makes it harder to borrow money in the future.
9) GDP will slow down however it is usually for short term only (1–2 years). Cost to borrow money might even increase. Due to higher export demands, current account deficit can decrease and this in turn ends up increasing economic growth. Again, there are some positive side effects.
Defaults can be avoided by restructuring debt agreements and to seek help from a guarantor (IMF).
Countries That Have Defaulted In The Past
It is probably worth mentioning that many countries have defaulted in the past.
Furthermore, it is not surprising for a country to default.
This is a list of famous sovereign defaults:
> Venezuela: 2017
> Greece: 2015
> Ecuador: 2008
> Argentina: 2001
> Russia: 1998
> Mexico: 1994
> France: 1958
> Egypt: 1880s
> Spain: 15+ times by 1939
It is not uncommon for a country to default.
Summary
This article explained what default means and then the article outlined consequences of a country defaulting. Finally a number of countries were mentioned that have defaulted in the past.