There have been alarming articles, interviews, opinions and statements following the statement attributed to His Excellency the President of the Sovereign Republic of Zambia, the President of this Great Nation, HE. Edgar Chagwa Lungu where he, during his hosting of his Turkish counterpart, President Recep Tayyip Erdoğan, made reference to the interest of a Turkish private firm to refinance Zambia’s $750 million Eurobond contracted in 2012. In addition to the $750 million Eurobond, Zambia also contracted $ 1 Billion and $ 1.25 Billion Eurobonds between 2014 and 2015.

The plea to have a private Turkish firm refinance the $750 million bond has raised serious dust and debate, with varying views on how best Zambia could finance its debt. Much of this debate, however, has been devoid of a deep understanding of government fiscal policy. While many views have been expressed, not many, if any, offer a succinct appreciation of the role of government in the economy, and how debt financing is linked to overall economic policy, and its depth intertwined with the politics of a democratic country like Zambia.

This article is aimed at providing, at the bare minimum, a premise on which debate could ensue by making non economists appreciate the Principals of Public Finance, and the role of debt in an economy like ours. I share this with the humility of knowledge in public sector economics.

B.The Basics of Public Finance: Provision of Public Goods and Services:

The key role of government is the provision of Public Goods and Services. By Public Goods and Services we refer to those commodities or services that are provided to ALL members of the public, by government a profit on the part of the provider, the government. In strict economic terms, by virtue of these services being ‘public’, they have the qualities of non-excludability and non-rivalry in consumption. What this means is that the consumption or use of Public Goods by one individual does not in any way reduce the amount of the good available for another person. Furthermore, the consumption of the Public Good does by one individual does not exclude others from the consumption of the same.

If we look around us, every day we use public goods and services, among these, such as: The services of the Police, the Army, the Airforce, ZNS or we drive on government built roads and attend public schools, or, when we get sick we go to public hospitals and clinics to be attended to, usually for free or at highly subsidized rates. So think about it, ALL Zambians who own a car can drive along Independence Avenue in Lusaka and enjoy the lighting of the city without having to pay at all. A PF cadre’s use Independence Avenue does not stop a UPND Cadre’s use of the same road. UPND and PF Cadres both board their busses to their respective villages from Intercity Bus Terminus, without any discrimination. All Zambians are protected – in land and on the borders – by the police, army e.tc. without any discrimination. These are Public Goods and Services.

In our daily lives, we call these public goods and services “Va Boma” – “For the Government”. We say so because we don’t really pay for them when we use, and when they break down, we don’t pay for their repair – that is why we have many pot holes on our roads, “Niva Boma!”. But have you ever wondered who pays for them? How they are paid for? Where the money comes from? That is where the role of government comes in.

To provide the public goods and services that our country needs, the government in power, guided by its party manifesto, will articulate its Fiscal Policy agenda. Fiscal policy is merely government’s Revenue Generation and Expenditure Plan: Where will money come from? How much will be raised? Where will the money be used? What will be the effects of these on society (Lower Taxes? More Jobs? More Money in People’s Pockets?). What perhaps you may not have noticed is that the campaign promises of all the parties we have in Zambia are all centred on Public Finance. The PF’s “Lower Taxes, More Jobs and More Money in Your Pockets” message epitomizes and succinctly summarizes the role of Public Finance. The UPND have their 10 Point Plan which I am yet to memorize (It is too long!), but it too is around Public Finance.
In all, the role of government is to provide public goods and services to the public. To provide for these, however, government needs to raise the money. Where does the money come from?

C.Financing Public Goods and Services: Government Revenue Generation:

Now that we know the role of government, how does the government generate money to finance its operations in the provision of public goods and services?

There are a number of sources of government revenues and I list the key ones below:

1. Taxes – as administered by ZRA
2. Borrowing – both local and international borrowing
3. User Fees – such as toll gates, hospital fees, fees to access national parks etc.

Of these three, taxes are the key sources of government revenue. With that, we can therefore say that government fiscal policy will be tax policy on one side, and then link the revenues raised from these taxes to expenditure on the other end. What government spends on will be a reflection of the party in power’s priorities. Since 2011, the PF government’s priorities have been in infrastructure development. We have seen the beautification and expansion of our road network. We have seen the construction of many health centres and hospitals and schools throughout the country. All these are the ‘Public Goods and Services’ that I introduced in section B above.

The financing of these public goods is costly, however, and general tax revenues may not be sufficient to generate the necessary revenues. A government can increase the tax rates in the country so that it raises more money. However, this may not be politically sexy. In any case, you cannot tax your citizens beyond a certain limit before they revolt! In an economy such as Zambia where the informal sector accounts for over 80% of the economy, economy wide taxation is hard, and thus the burden of taxes falls on the small formal sector. However, philosophically this should make sense: Those who earn more should pay more because they have a higher ability to pay. Furthermore, those who earn more have a higher likelihood to demand for more public goods and services from government, hence they should also pay according to the benefits they receive from public goods and services.

Borrowing comes in as the next to look to option so that people can be saved from the heavy burden of taxation. The government can borrow locally or internationally. When the government borrows locally, it does so by issuing Treasury Bills and Bonds on the local financial market. To attract buyers (banks, private firms and individuals), the government has to offer a high rate of return on these debt instruments (Treasury Bills and Bonds). The rate of return which the government offers is called the Risk Free Rate – government is a ‘safe investment’. The higher the demand for money by the government to finance its operations, the higher the rate it must offer. However, given the low risk and high rate, local financial institutions (banks) will tend to direct a large part of their resources to government bonds, leaving very little money to lend to the public. For the little funds that are left, these are only available at very high interest rates, and thus takes away opportunity for the private sector to borrow to start or grow their businesses. This is the phenomenon called “Crowding Out”. By borrowing heavily from the local financial market, government not only raises the cost of borrowing and thus the cost of doing business, but also reduces the amount of credit available to the private sector. In the streets, we usually here statements like: Ndala kulibe mu circulation – Chayuma. This, colleagues, is bad for our economy.

To avoid crowding out the private sector, government can look to international financial markets and issue Eurobonds. By issuing Eurobonds, government can give ‘relief’ to the local citizens since the revenues that would have had to be raised through high taxes are now raised through international bonds. Furthermore, by issuing these bonds, the local interest rates would be lower and more credit would be available, hence fueling private sector growth. What is also key to note is that with the Eurobonds, the repayment period is longer and has a lower interest rate than locally contracted debt.

The big question many have asked is:

How does government pay back its debts?

The answer is quite simple:

Through tax generated revenues!

As I stated at the start of this section, tax is the single important source of revenues for government to finance its operations. There have been arguments that government should have invested the money from the Eurobonds in ‘income generating activities’ so that the bond can pay itself back. Colleagues, I hope by now you appreciate that this doesn’t make sense given the nature of the goods and services that government creates and provides. Public goods and services, as seen earlier, have no immediate return to the service provider – government. Think about it, when you neighhour’s house is protected by Armcor security and thieves break into your house, do you Armcor to come and protect you or do you call Zambia Police Flying Squad? Flying Squad of course! And when the Flying squad comes to your rescue, do you get a bill at the end of the operation? No! Why? Because it is a Public Good!

Since government is solely concerned with the provision of Public Goods, any money that the government borrows will be invested in the procurement and provision of public goods! However, given the Non – Excludability and Non – Rivalry in Consumption nature of public goods, their return on investment are low, and can in fact be negative such that they would fail a private sector assessment on investment. In addition, the return to these public investments take time to manifest. For example, when you build a school from the Eurobond in Dundumwezi, it will take you a minimum of 12 years for the first crop of the schools’ students to leave high school and another 4 years for them to finish college or university before they are decently employable and can start paying taxes to government. That is a total of 16 years, yet, the Eurobond’s maturity period is only 10 years, and in between these years, government will have to be servicing the debt by paying annual interest payments on the debt.

So where does the money come from?


When the government borrows for infrastructure development, such as roads, the benefits of this are not immediate, and in the absence of toll gates, are intangible. So how will government benefit from the road construction? It’s easy:
By reducing tear and wear and travel time that road users face in bad roads, the cost of doing business is reduced. As the cost of doing business is reduced, firms make more profits, and the higher the profits the firms make, the more tax the government will collect to service the road and pay the Eurobond. Furthermore, as firms becomes more profitable due to good infrastructure, they employ more people who in turn pay tax through PAYE. This, colleagues, is what we call the ‘Transmission Mechanism’ of public sector investments.

D.Debt Repayment Options: More Tax or More Negotiated Debt

In the event that the productivity of the nation has not increased rapidly to generate sufficient sectoral growth for an increased tax base, the government has two options:

1. Raise additional taxes by increasing the tax rates or increasing the range of taxes.

2. Secure new debt to pay off the existing debt.

We have now found ourselves at a point where the nation has to make serious decisions on debt. It is clear that we have not increased our productivity enough, and that since most of the Eurobond money has gone into Public Sector Investments whose returns are low and have a longer time horizon, we have not, expectedly, raised sufficient revenues to pay off the principal of the Eurobond when it is due.

This is where debt refinancing comes in. It is normal practice in the world as well as in the private financial sector to package debt and sell it. This offers you immediate relief on the pressure to paying back as well as gives you breathing space to readjust your economy to enhance its productivity to be able to pay back. This, colleagues, is what his Excellency the President had in mind when he made those remarks to his Turkish counterpart recently in Lusaka.

There have been concerns and alarming statements that the Turkey debt financiers are from the private sector. Okay? So? Aren’t the Eurobonds from the private sector? Oh I see, you think Eurobonds are issued by the continent called Europe? No, on the contrary, these loans are issued by a multitude of private investors whose interest is profit making, just like the Turkish firm.

So there you have it folks, I hope we are now on the same page. If by the time you finish reading this article you haven’t understood Public Sector Economics/Public Finance, ninhsi iwe anakulowa anafa kudala!

Remember: If we don’t want to borrow, we can just increase our taxes and within a short time we can pay back these loans!

Now let’s hear your comments.

Yours truly,

Most Humble Highly Honourable Economist



Herryman Moono is a Lusaka based Economist with interest in Public Economic Policy, Health Care Financing in Resource Constrained Economies & Industrial Policy. He was educated at Oxford, Sheffield and YUNZA.


  1. I don’t agree with the above exposition. Okay the theory is good but it takes a simplistic approach and suggests that there could not have been any other way of doing things. I look at the Zambian debt accumulation as irresponsible borrowing with no results to show for it other than personal enrichment for PF morons. Its like in a home where the father is kaloba oriented. He can finnish the whole salary in one day at a bar or with a prostitute and thereafter land in financial problems. There is nothing really to point at where the Euro bonds went into. This tells you that nearly half of it went into private pockets (corruption) due to bad leadership. A prudent leadership always makes a difference and we had a taste of this type of leadership in Mwanawasa. HH could offer this type of leadership and even far better. He is tested from the corporate world. May be Milupi also could. The rest of the current political players, I am sorry to say, it will be basically same thing. What I mean is of course that many of these can do better that the PF nincompoops but it won’t change things much. Running a country is not for every jim and jack. Countries which are prosperous and reputable choose there leaders wisely. That is how Malaysia made it with the prudent leadership of Mahatia Mohamad.

    • My brother we are not a wise country, the majority of Zambian people are illiterate and the few so called educated are crooked. Zambia is a forgotten country. They will learn a hard way but it will be late. When you meet the so called educated analyse issues you feel sorry for mother Zambia.


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