Zambia calls for domestic debt to be part of major indices - ft

Zambia calls for domestic debt to be part of major indices - ft

Zambia Advocates for Domestic Debt Inclusion in Global Indices

Zambia has called for its domestic debt to be included in major global financial indices, reflecting broader shifts in African sovereign financing strategies. Governments across the continent now raise over half their funding domestically, a structural shift from historical reliance on external lenders. This trend is driven by a desire to reduce vulnerability to foreign exchange volatility, Eurobond market constraints, and external restructuring delays, as seen in Zambia's protracted debt workout under the IMF's Common Framework.

Local-currency debt issuance in Africa has tripled since 2010, reaching nearly $500 billion annually, with real yields on African bonds hitting 5% in 2024—the highest since 2007. However, domestic debt is not without risks. High borrowing costs, often 10–13%, and concentrated maturities strain fiscal space, while the bank-sovereign nexus deepens as institutions hold significant government securities. In Zambia, for instance, domestic creditors—including banks and pension funds—face exposure that complicates restructuring efforts.

Economist Kelvin Chisanga emphasizes the need for transparent reprofiling frameworks to stabilize Zambia's domestic debt market. He highlights the importance of auction transparency, resident vs. non-resident participation monitoring, and structural balance to avoid currency pressures and capital repatriation risks. Such measures aim to align borrowing with fiscal discipline while safeguarding investor confidence.

The inclusion of domestic debt in global indices could enhance market depth and attract foreign investors, but challenges persist. Domestic creditors, often political constituents, complicate restructuring, as seen in Ghana's 2022 debt exchange, where pension fund exemptions were mandated to avoid social backlash. Zambia's authorities similarly sought to exclude domestically issued debt from restructuring perimeters due to systemic risks.

For investors, Africa's evolving debt landscape underscores the interplay between sovereignty, fiscal policy, and political dynamics. While domestic financing offers policy autonomy, it also necessitates robust governance to mitigate fragility. As Zambia and others navigate these complexities, transparency and institutional reforms will be critical to balancing growth and stability.