Zambia’s decision to allow citizens to cash out part of their pensions early is having an unintended consequence: it’s hitting a key source of government financing as the squeeze from a long-delayed debt restructuring continues to tighten.

New legislation enabling people to access 20% of their pension savings has seen the National Pension Scheme Authority, or Napsa, so far pay out 5.8 billion kwacha ($300 million) since it was signed into law April 17, spokesman Cephas Sinyangwe said on state TV on Sunday. That’s curbed its ability to lend money to the government, S&P Global Ratings analysts including Max McGraw said.

“If relief on external debt and a subsequent resumption of some foreign financing is not agreed in the near future, the government’s ability to remain current on domestic currency obligations could weaken,” McGraw said in a report published May 26.

“Napsa has not participated in the last three local-currency bond auctions, while domestic banks’ exposure to the government is already large and it remains unclear how much additional debt issuances they will be able to absorb.”

Restructuring deal

Zambia is waiting for official creditors to agree to a restructuring deal that it’s been trying to achieve since 2020, when it became Africa’s first pandemic-era sovereign defaulter. The International Monetary Fund is withholding a $188 million payment to the country until they reach a deal.

Foreign buyers of local-currency debt have mostly shunned auctions this year, fearing the securities will face restructuring too, even though the government has repeatedly said they won’t.
Napsa expects to pay out 11 billion kwacha in total to people partially cashing in their pensions, Sinyangwe said in reply to questions May 8.

Zambia continues to largely depend on the domestic market to fund its elevated general government deficit, that’s set to reach 7.7% of gross domestic product this year, S&P said. Bonds and Treasury bills account for more than one-third of pension fund investments in Zambia, according to government data.

Hope for improvement

At the last government bond auction May 26, the central bank only raised 391 million kwacha out of the 2.6 billion kwacha on offer. Still, the Napsa withdrawals aren’t having an out-sized effect on government-security auctions, Bank of Zambia Governor Denny Kalyalya told reporters May 17.

“At a broader level, we don’t really see that tipping the scale,” Kalyalya said. “Obviously, Napsa has been preparing for this coming. It will settle at some point.”

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