1. 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

2. 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

3. 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

4. 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

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

6. 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

7. 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)

8. 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