EAZ Public Discussion on Debt Lusaka, April 3, 2014 Public Debt: Some General Considerations

Outline 2 Defining debt and relevant considerations Debt trends in international perspective Findings and conclusions

What is Public Debt? 3 Total financial obligations of public sector To residents (domestic debt) To non-residents (external debt) Central Government + wider public sector Change in debt = fiscal deficit Differences due to e.g. debt relief, exchange rate and valuation changes

Why Borrow? 4 Borrowing used to finance investment that earns a rate of return greater than the interest rate is a net positive for the economy → need good project selection; rate of return analysis; investment management But debt can also mean added vulnerabilities reduced scope to finance larger deficits during economic slowdowns repayment (roll-over) risks when debt becomes due at the extreme, an economic (debt) crisis Debt management framework can help

Thresholds? 5 Higher debt → less return, more vulnerabilities Notion that debt ratios (e.g. to GDP) above certain levels leads to worse economic outcomes Reinhart & Rogoff (2010): marked change at 90% debt/GDP. Others (e.g. IMF WP/14/34, 2014) find no evidence of any “magic” threshold IMF/World Bank debt sustainability analysis Baseline debt path and stress tests to assess vulnerabilities Thresholds for external debt and debt service ratios to GDP, exports, and government revenue.

Sustainability? 6 Debt dynamics hinge on: real interest rate (r) real growth rate of the economy (g) primary fiscal balance as ratio to GDP (p) If r-g>0 then debt/GDP ratio increases over time (becomes unsustainable) unless offset by p>0 Long-term outcomes are very sensitive to these parameters

Debt Trends in Global Perspective 7 Source: IMF, SSA Regional Economic Outlook, May 2013.

8 International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, May 2013 Sub-Saharan Africa: Distribution of Total Public Debt, Mean Sources: IMF, DSA database; and IMF staff calculations. Note: The "box and whiskers" plot summarizes the distribution of debt-to-GDP ratios across sub-Saharan African countries. SSA: Debt Generally Falling in 2000s

Still Large Investment Needs 9 Note: Road density is in kilometers per kilometer squared; generation capacity is in megawatts per million population; water and sanitation coverage are in percentage of population.

10 International Monetary Fund, Regional Economic Outlook for sub-Saharan Africa, May 2013 Public Sector Debt Levels in 2012 and Sustainability Thresholds Sources: IMF, DSA database; and IMF staff calculations. Note: Excludes Eritrea and Zimbabwe. Debt to GDP ratios pertain to public sector debt as defined in the Debt Sustainability Framework. Most SSA Countries Below Thresholds

But Large Debt Increases in Some Countries 11 Group I is the 40 percent of SSA countries where debt ratios increased by more than 10 percentage points since the pre-crisis period or their lowest public debt level since 2001 (whichever is lower). Source: WEO Database

Conclusions 12 Need to balance consideration of longer-term development needs with fiscal space How depends on country-specifics, but a number of things can improve the trade-off, including: Careful investment selection, to get high returns Plan ahead and identify risks Ensure link with broader macro-economy → Grow the economy and avoid debt distress