Impact of Zambia’s Debt Restructuring on the Insurance Industry

On 22 June 2023, the Zambian government announced that it had agreed on a comprehensive debt treatment with its official creditors under the G20 common framework. This involved the restructuring of US$6.3 billion of its bilateral debt. In the wake of this significant milestone, Zambia is now at a pivotal juncture for economic revitalisation. Discourse in this article focuses on the transformative impact of debt restructuring specific to the insurance industry. The key areas directly impacting the industry include potential improvements in Zambia’s sovereign rating, economic growth, more disposable income, stable exchange rate, lower inflation, lower interest rates, and increased foreign direct investment (FDI).

In his ministerial statement, Minister of Finance and National Planning, Dr. Situmbeko Musokotwane, highlighted that the debt restructuring deal extends the repayment period by over twelve years, sets favourable interest rates, and limits the annual principal repayments. Thus, Zambia’s debt restructuring resulted in circa US$5.8 billion in debt service savings, reducing the debt servicing obligations to just US$750 million. Additionally, the agreement unlocks funds from the IMF and World Bank to circa US$188.8 million and US$75 million, respectively.

The first impact could be on Zambia’s sovereign rating. A country’s sovereign rating plays a crucial role in the global financial landscape and holds significant importance for various stakeholders, including governments, investors, financial institutions, and businesses. The sovereign rating indicates a country’s creditworthiness and ability to meet its financial obligations.

In December 2022, Fitch affirmed Zambia’s Long-Term Local-Currency (LTLC) issuer default rating at ‘CCC’, while Moody’s last rating for Zambia was Ca. Despite Fitch’s positive outlook owed to the debt restructuring, an agreement with private creditors might still be necessary before it could be upgraded from the current level (IDR) (Fitch, 2022). With an improved sovereign rating, insurance players can obtain better international credit ratings from rating agencies like Moody’s Fitch, Standards and Poor, and Fitch. These rating agencies peg their rating criteria to a country’s sovereign rating. Local players with better credit ratings can become more competitive internationally. In return, these players, especially reinsurance companies, can bring the much-needed forex to the country.

Another critical effect of debt restructuring on the insurance industry is the projected increase in Zambia’s GDP. Some analysts project over five per cent growth against the lower growth rate of less than four per cent. Evidence suggests a positive correlation between economic growth and insurance uptake. This assertion is supported by the fact that increased economic growth increases demand for insurance. According to the 2021 PIA annual report, despite the impact of the COVID-19 pandemic, the Zambian industry recorded 16.97% growth rates in Gross Written Premium (GWP) during the year ended 2021 (27.75% in 2020), totalling K5,343 million in 2021. The growth trend is expected to continue and increase, especially with the positive developments regarding Zambia’s restructured debt.

Furthermore, the three-year waiver granted as part of the debt restructuring has implications for the foreign exchange rate of the Zambian kwacha. By providing temporary relief from debt obligations, the waiver can alleviate pressure on the country’s foreign reserves and stabilise the exchange rate. For example, in March, the kwacha was trading around ZMW21 to a dollar, while in April, the kwacha appreciated to about ZMW18. This caused some companies to record exchange gains in March and exchange losses the following month. A more stable exchange rate promotes confidence in the economy. It attracts foreign investment, which can drive growth in the insurance sector by facilitating cross-border transactions and expanding market opportunities.

However, the appreciation of the kwacha, while generally beneficial for the overall economy, can pose challenges for the domestic insurance industry arising exchange rate losses. A stronger kwacha means that insurance companies that have issued policies denominated in foreign currencies may face losses when converting the premium payments into the local reporting currency. As a result, re/insurers may experience decreased profitability and experience potential financial strain. According to the Bank of Zambia market rates, the kwacha trades around 17.5 ZMW to the dollar.

The monetary policy rate, which the central bank sets, is likely to be influenced by debt restructuring. Currently, it stands at 9.5%. As a result, of the restructured debt, the central bank may have greater flexibility in implementing monetary policy measures, such as reducing interest rates to promote price stability and support economic growth. This stability in monetary policy can create a conducive environment for insurance companies to plan and operate effectively.

The debt restructuring’s effect on inflation is likely to be favourable. With reduced debt servicing costs, the government can allocate more resources towards other sectors of the economy, leading to increased production and supply. This improved economic activity can help contain inflationary pressures and maintain price stability, reducing the inflation rate from the prevailing 9.8%. General stability in the prices of goods, services, and services has been observed to positively impact the demand for insurance products, particularly life insurance products (Hussels, Ward, & Zurbruegg, 2005).

Moreover, debt restructuring instils confidence in the economy and creates a favourable environment for investment. As Zambia demonstrates its fiscal responsibility commitment, domestic and foreign investors are more likely to enter the insurance market, fuelling its growth. Increased investment translates into the expansion of insurance companies, the creation of new jobs, and the development of local expertise. The insurance sector drives the nation’s economic development, contributing to stability, resilience, and prosperity. According to the World Bank, at the end of 2022, it is worth noting that the net FDI inflow in Zambia was at $115.9 million.

The debt restructuring deal is set to uplift Zambia’s fiscal stance. Utilising this additional funding for budgetary purposes holds the potential to generate significant socio-economic benefits. Possibilities include expanding employment opportunities for educators and healthcare professionals and allocating increased resources to the Constituency Development Fund (CDF) in the 2024 National Budget. The injection of these funds will not only bolster public service sectors but also foster the overall well-being and progress of the nation. The potential increase in disposable income is likely to prop up demand for insurance, thus increasing market growth. Finally, the imminent infrastructure development will likely stimulate demand for specific types of insurance like contractors’ all risks, erection all risks, sureties and guarantees and a wide array of project-related insurances. Therefore, the insurance industry will likely be impacted positively by the country’s debt restructuring, and we commend the government for striking this deal.

Article co-authored by Kunda Katumbo and Webster Twaambo, Jr.