Debt Restructuring: Prospects for the Manufacturing Sector
Zambia's President His Excellency, Mr. Hakainde Hichilema and his team have successfully agreed and negotiated new repayment terms with the country’s official creditors under the G20 common framework on up to $6.3billion (￡5billion) of debt, including over $4billion owed to China. This news has been received with jubilation in the country and beyond with French President Emmanuel Macron, describing the deal as a historic achievement for Zambia.
With the debt restructuring agreement, Zambia is expected to be granted an extended repayment time of 20 years, including a three-year grace period within which only interest payments will be made. ?What does this mean for the manufacturing sector?
The three-year grace period and the deal in general lessen the demand on the United States Dollar in view of the fact that Zambia’s debt is denominated and serviced in foreign currency. With this decreased demand, the kwacha is expected to appreciate against the United States dollar and a stable exchange rate is anticipated. The performance of the local unit will be further bolstered by the renewed confidence in Government securities particularly from Non Resident investors.
Zambia’s manufacturing sector is characterized by imports of raw materials cardinal in the production of final goods. With a stable exchange rate, therefore, manufacturers are able to make cost projections with certainty unlike periods marked by volatility in the forex market. It can thus be expected that the planning function of the private sector will be enhanced in the medium to long term over the horizon of the debt agreement.
Furthermore, an appreciation in the kwacha will lead to reduced and favorable fuel prices which will materialize in a reduction of the cost of doing business and create a conducive business environment. Fuel is an important source of energy used to generate electricity with generators and in powering vehicles including trucks to transport goods and services. The ultimate effect will be a steady decline in the annual inflation rate towards the Bank of Zambia target of 6% -8%.
The debt restructuring agreement allows for an extended repayment time of 20 years which allows for funds in the national budget to be channeled to other priority sectors such as education, health and infrastructure all which are inextricably linked to manufacturing. For the manufacturing sector to thrive, it needs highly skilled and healthy personnel. Additionally, infrastructure such as roads are important to the growth and development of the manufacturing sector.
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The agreement presents a more stable macro-economic environment which increases investor confidence. With increased investor confidence, Foreign Direct Investment (FDI) inflows to different economic sectors will rise in tandem, the manufacturing sector inclusive. With the ratification of the African Continental Free Trade Area and soon its implementation, for Zambia to best position itself, the country needs to industrialize and increase local value addition. Investment in the manufacturing sector will enable the sector to grow and increase production of diverse value-added products that will be competitive on the international market.
The country is likely to experience a decline in its credit rating due to the debt restructuring agreement. Nonetheless, and in view of the impeding agreement with private sector creditors, the benefits have the potential to spur economic growth, create more job opportunities and attract investment all of which will add to Government revenue generation through increased taxes.
To conclude, manufacturers remain optimistic for the future and ready to work with Government to ensure the growth and development of the sector. This is in line with Government’s industrialization agenda and aspiration to increase the sector’s contribution to the nation’s Gross Domestic Product to 36.12% by 2030 as outlined in Vision 2030.
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Author is a Research and Policy Analyst at the Zambia Association of manufacturers