Domestic Debt Crowding Out SME Growth
The biggest challenge confronting Zambia’s SME sector remains access to affordable capital stock and related resources.
The government’s growing reliance on domestic budget financing primarily through issuance of government securities poses a serious significant risk of credit market crowding out, where private sector borrowers, especially SMEs are displaced by government demand for funds.
As the Treasury increases its appetite for domestic borrowing, the prospects of lower interest rates become increasingly unrealistic.
Commercial banks, incentivized by safer and higher-yielding government paper, are less likely to lend to small businesses, leading to a deepening liquidity squeeze for the productive private sector.
Zambia urgently needs a coherent funding strategy that gradually unwinds government securities exposure and rebalances capital access between the public and private sectors.
The current trajectory of ballooning domestic debt carries a serious maturity risk, which is not receiving sufficient policy attention.
A potential domestic debt default would be far more catastrophic than the November 2024 external debt default.
While an external default damages reputation, a domestic default would cripple the banking system, erode savings and destabilize the local financial architecture triggering a chain reaction across every sector of the economy.
Zambia’s fiscal strategy must therefore shift toward debt discipline, capital market development and SME-centered credit policies. Only then can the economy escape the trap of crowding out and unlock sustainable, inclusive growth.
