This paper will discuss the problems associated with debt servicing and debt management in

Zambia. Debt service is the cash that is required to cover the repayment of interest and
principal on a debt for a particular period. If a country is taking out a loan, the borrower
needs to calculate the annual or monthly debt service required on each loan, and, in the same
way, companies must meet debt service requirements for loans and bonds issued to the
public. The ability to service debt is a factor when a company needs to raise additional capital
to operate the business (Mulay, 2018).

Although the problem of debt servicing has been somewhat neglected in the literature on
international capital movements, it is of central importance for the debtor countries. Debt
services which include payments for the floating of the loan abroad, interest, and
amortization flow in the direction opposite to the capital flow. These payments are not merely
monetary transactions, but transactions that ultimately require a corresponding transfer of
goods and services. Consequently, the “transfer problem” arises as in the case of the original
movement of capital (Valentino, Piano;, 2001).

Debt management is often referred to the amount, composition and refunding of the national
debt. But, in actuality, it is related to the composition (the types of securities sold) and the
refunding of the debt held by the public within a country. So far as the number of new
securities sold by the government is concerned, it falls within the jurisdiction of fiscal policy
(Akrani, 2011). The higher the cost of servicing the debt, the higher would be the level of
taxation and the greater the burden on taxpayers. The government should so work out the
pattern of interest rates that it conforms to the preference pattern of security holders. The
lower the interest rates on government securities, the smaller will be the transference of
resources from the taxpayers to bond holders (Lupupa, 2017).

In practice, most governments keep very low interest rates on short-term securities and
gradually increase the interest rates as the maturity period of the debt lengthens. This method
gives rise to wide spreads between the short-term and long-term interest rates. This induces
bond holders to switch over from short- term to long-term securities thereby increasing the
debt burden of the government and imposing a higher tax burden on the taxpayers (Moore,
2017).

The other strategy is changing the maturity Structure. One of the techniques of debt
management is to change the maturity structure of the debt as a device for economic
stabilisation. This is done by “swapping operations” by the central bank. During boom

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period, the central bank sells more long-term government securities in the open market and
purchases a corresponding amount of short-term government securities with the same amount
of money (Moore, 2017).

This lengthens the average maturity structure of the existing public debt which tends to raise
the interest rate. Since long-term securities are not good substitute for money, they increase
the liquidity preference. The rise in the long-term interest rate would curb private spending
by reducing availability of credit. The value of outstanding assets of financial institutions is
also reduced with the increase in interest rate. They, therefore, tend to hold more liquid short-
term government securities. This is likely to cause a rise in the short- term interest rate
(Mulay, 2018).

If the short-term interest rate rises slightly, financial institutions will tend to hold more short-
term government securities rather than cash. Thus, reduction in the availability of credit and
holding of more short-term securities will have a tendency to control a boom. On the other
hand, debt management requires the shortening of the average maturity structure of the
outstanding public debt through the sale of short-term government securities to replace them
by purchasing long-term government securities during a recession. This would tend to bring a
sharp fall in the long-term interest rate accompanied with a mild fall in the short- term
interest rate. Since short-term securities are a close substitute for money, the asset holders
tend to substitute them for money. Thus, debt management requires the manipulation of the
term structure of the debt to bring about economic stability (Valentino, Piano;, 2001).

Another method of lengthening the public debt is to advance refunding of securities. The
central bank offers the holders of a particular long-term government security, which still has
some years to mature, to exchange their securities for a new security with a longer maturity.
The new security carries a little higher yield and the holders of the old security do not realise
any capital loss or gain. This technique has the advantage over the other techniques described
above in that the central bank is not required to resort to open market operations for
managing the public debt (Akrani, 2011).

Debt management leads to a number of problems which should be tackled in co-ordination

with monetary and fiscal policy. A large size of public debt is likely to siphon off funds from
the capital market. This reduces the availability of credit in the capital market and raises the
interest rate. This is likely to increase the burden of public debt to the government and makes
investors feel that they would suffer a capital loss. Moreover, any holding of public debt by

2
the central bank correspondingly increases the cash holdings of commercial banks. The
banks, in turn, make a multiple expansion of their deposit liabilities which leads to
inflationary pressures in the economy. Further, fluctuations in the demand, supply and prices
of government securities during booms and recessions tend to increase the severity and
longevity of booms and recessions (Valentino, Piano;, 2001).

For this, the central bank of Zambia should be ready to purchase or sell government securities
in the open market in order to bring upward or downward pressure on interest rates for
economic stabilisation and to minimise the interest cost of the debt to the government.
Similarly, the government should resort to fiscal policy so as to manage the public debt
effectively. A budget surplus is used as a fiscal device during boom periods. A surplus budget
acts in a deflationary manner upon the money supply and bank reserves. A budget surplus
means that the government revenue is more than its expenditure. It involves reduction of
money in the hands of taxpayers who are levied heavy taxes (Word Bank, 2014).

This leads to a reduction in the deposits of the public with the commercial banks which, in
turn, reduces the reserves of commercial banks. As a result, their reserves with the central
bank are reduced. This leads to the reduction in the spendable money with the government.
This makes the retirement of public debt held by the central bank difficult. This goes against
the commonly held view that a budget surplus can be used for the retirement of public debt
held by the central bank (Lupupa, 2017).

Despite this, coordination between monetary and fiscal policies is essential on a regular basis
because of the frequent debt refunding operations of the central bank. When government
securities mature, it is the central bank which is required to refund them on behalf of the
government. At the same time, the government has to follow a surplus budgetary policy to
retire the public debt. But this policy is deflationary in nature and requires to be controlled by
an appropriate anti-deflationary monetary policy (Lupupa, 2017).

If the government adopts a deficit budgetary policy for debt retirement, it would be
inflationary in nature which is again required to be controlled by an appropriate anti-
inflationary monetary policy. Thus, for an effective debt management, there should be a close
coordination between monetary, fiscal and debt management policies (Lupupa, 2017).

In conclusion, debt management and servicing bring about inflationary pressures, and tax
increases that affect the consumers mostly. It is the burden on the consumers of a developing
country like Zambia that is the problem of debt servicing.

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