SOCIAL IMPLICATION OF DEBT REFINANCING: A CSO PERSPECTIVE Geoffrey Chongo Jesuit Centre for Theological Reflection Presented During an Economics Association of Zambia Public Discussion Pamodzi Hotel 23rd August 2018

What is Debt Refinancing Refinancing is the replacement of an existing debt obligation with another debt obligation under different terms If the replacement of debt occurs under financial distress, refinancing is usually referred to as debt restructuring Debt refinancing is a common practice for any debtor facing financial distress; either as individuals or countries Debt restructuring therefore is a method used by debtors with outstanding debt obligations to alter the terms of the debt agreements in order to achieve some advantage

Reasons for Debt Refinancing To take advantage of a better interest rate To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees) To reduce or alter risk (for example, switching from a variable-rate to a fixed-rate loan) To free up cash for some other more immediate needs

Zambia’s Case Zambia’s reason for debt restructuring seems to be to free up cash more than other reasons Government is spending more in debt servicing than it is spending on Health In 2018, the share of external debt servicing to budget is 10% compared to 9% in Health. In 2012, the share of external budget servicing was 3% compared to 5% spent on health

Benefits of Debt Financing/ Restructuring Several studies have found a positive correlation between debt restructuring and some socioeconomic indicators A study by Cheng & Javier ( https://doi.org/10.24149/gwp339 (Official Debt Restructuring and development – Gong Cheng (European Stability Mechanism and Javier Díaz-Cassou of (Inter- American Development Bank)) notes the following:

Benefits of Debt Restructuring Debt Restructuring has the potential for the following: GDP growth Reduction in poverty and inequality Increased social spending However, this is dependent on the conditions of debt restructuring: Debt restructuring must bring about reduced nominal debt obligation; otherwise its impacts will be limited For instance if the new creditor charges lower interest compared with the rate on the original loan, then the restructuring is likely to have positive socioeconomic impacts

Risks of Debt Refinancing Some fixed-term loans have penalty clauses that are triggered by an early repayment of the loan, in part or in full, as well as "closing" fees There will also be transaction fees on the refinancing These fees must be calculated before embarking on a loan refinancing, as they can wipe out any savings generated through refinancing Delays in implementing structural reforms (debt relief may harm growth if it allows government to delay necessary reforms)

Conclusion There is need for transparency in the proposed debt refinancing: the cost of refinancing should not be higher than the cost of the current debt There is need for sustained reforms in the contraction and management of debt