Zambia is registered by the UN as one of the world’s least developed countries, and a recent poverty assessment in Zambia found the level of extreme poverty to be around 48 per cent in 2022, compared to around 41 per cent in 2015.
Already before the Covid-19 pandemic, Zambia was struggling with severe debt problems. Meanwhile, on the revenue side, Zambia continues to suffer from heavy impacts of illicit financial flows.
For more information, see the summary report.
Zambia’s debt profile has been deteriorating as a result of problems that predate the Covid-19 pandemic. Zambia had issued sovereign Eurobonds in the international markets in 2012, 2014 and 2015, particularly with the argument of promoting large infrastructure projects. Throughout that period, Zambia was assessed by the IMF as being at low risk of debt distress. “This coupled with a combination of optimistic expectations with regard to repayment capacity, sound economic performance, high commodity prices, optimistic growth forecasts, and low interest rates provided the country with strong standing in the international financial markets.” However, by end of 2016 the IMF signalled that there were risks of debt distress in Zambia, while concerns increased about the debt being higher than the data indicated. That led to market ratings for Zambia’s bonds falling rapidly. “This was exacerbated by the negative effects of climate change which led to droughts and power shortages, thereby affecting Zambia’s growth and recovery efforts.”
During the five years prior to the Covid-19 pandemic, public healthcare expenditure averaged 9.1 per cent of the government’s budget. In the meantime, during the same period, debt servicing alone accounted for 70.3 per cent of government revenues.
When the Covid-19 pandemic hit, the situation became totally unsustainable and Zambia failed to make the US$42.5 million interest repayments on its Eurobond in November 2020, becoming the first sovereign African nation to default on debt during the Covid-19 era. In parallel to Zambia’s default, the G20 launched the Common Framework, with Zambia as the first country to apply for debt restructuring under this new mechanism. Marred by lack of transparency and accountability, Zambia had to go through a long process in order to obtain the assurances from official creditors, including China, to agree to a debt restructuring, a necessary step to secure IMF support. A support that came with conditions in the form of a steep fiscal consolidation (in order to reduce the fiscal deficit from 6% of GDP in 2021 to a surplus of 3.2% of GDP by 2025) and other austerity measures, including the removal of fuel subsidies, increasing energy tariffs and reform of the Farmer Input Support Programme (FISP). The IMF programme also aimed at increasing tax revenue through broadening the VAT base, in a very regressive measure.
Zambia had also obtained bilateral debt payments suspension of US$168.4 million in 2020 under the DSSI. This figure was equivalent to just 0.6 per cent of GDP and 1.2 per cent of Zambia’s total external debt stock at the time. This is because private and multilateral creditors, the main creditors for Zambia, didn’t participate in the initiative.
Since November 2020, Zambia has been in default on its Eurobond debt and in a process of debt restructuring, in negotiations with both the official creditor committee (including bilateral creditors, notably China and Paris Club creditors) and the bondholders. During this period, to ensure equitable treatment to bilateral and private creditors, Zambia has suspended debt service to all its non-multilateral external creditors (with the exception of a few bilateral or commercial creditors financing nearly completed priority projects). Since Zambia stopped its bilateral and commercial debt payments, the country has been able to increase public spending on social services. According to Action Aid Zambia: “Total public spending per person on social sectors is expected to increase by 22% between 2021 and 2023. This includes healthcare, education, and social protection.”
In March 2024, almost three and a half years after defaulting, a preliminary deal with bilateral creditors and bondholders was announced, after a previous attempt was refused by bilateral creditors for being more generous to bondholders. The latest deal still expects a bigger effort from bilateral creditors than from private creditors. The deal offers savings to Zambia, but with the caveat that, if in the future the IMF and the World Bank assess bigger economic growth for the country, Zambia will end up paying more under an enhanced deal with creditors. However, there is no automatic mechanism to reduce debt payments if there are negative shocks and Zambia performs worse than expected.
In the fiscal year 2021, the tax revenue of Zambia amounted to 19.7 per cent of GDP. The ratio has seen a significant increase in recent years, from a level of 16.6 per cent of GDP in 2017.
A VAT was introduced in 1995. In 2008, the rate was reduced from 17.5 to 16 per cent, and it has since remained at that level. An overview produced by the Zambian Revenue Authority shows that, in 2021, the value added tax (both domestic and import VAT) brought in revenue at a level of 4.5 per cent of GDP, or 22.8 per cent of the total tax revenue. Meanwhile, corporate income tax accounted for tax revenue at a level of 4.6 per cent of GDP, or 23.4 per cent of the total. It should be noted, however, that 2021 was not a typical year. During the period 2018-2020, corporate income tax brought in revenue corresponding to, on average, 2.5 per cent of GDP while VAT brought in revenue corresponding to, on average, 5.4 per cent of GDP. It is also worth noting that the corporate income tax rate was reduced from 35 to 30 per cent with effect from 1 January 2022.
In the report State of Tax Justice 2023, Tax Justice Network has estimated that cross-border tax abuse is costing Zambia a total of US$829.5 million annually, corresponding to over 160 per cent of the country’s health expenditures. Of this loss, it is estimated that US$789.9 million stems from corporate tax abuse and the remaining US$39.6 million from offshore wealth.
The fact that Zambia is heavily exposed to illicit financial flows is well known. For example, the 2015 report of the High Level Panel on Illicit Financial Flows from Africa, which was published by the African Union Commission and the United Nations Economic Commission for Africa, highlighted illicit flows from copper mining in Zambia as a specific area of concern.
In the report State of Tax Justice 2023, Tax Justice Network has estimated that cross-border tax abuse is costing Zambia a total of US$829.5 million annually, corresponding to over 160 per cent of the country’s health expenditures. Of this loss, it is estimated that US$789.9 million stems from corporate tax abuse and the remaining US$39.6 million from offshore wealth.
The fact that Zambia is heavily exposed to illicit financial flows is well known. For example, the 2015 report of the High Level Panel on Illicit Financial Flows from Africa, which was published by the African Union Commission and the United Nations Economic Commission for Africa, highlighted illicit flows from copper mining in Zambia as a specific area of concern.
