Commentary, 24th - 31st July, 09

The rise in the interest rates in Zambia has negatively affected gearing ratios in most corporate entities towards debt, and as this happens, some companies will in the medium term not be viable. A number of companies seeking to exploit the COMESA Customs Union are presently expanding operations through debt instruments. The rise in debt, obtained at high cost, will have the following implications:

• There will be a further rise in interest rates towards the end of the year. This will happen against a drop in inflation to about 10 percent as projected by authorities.

• Many companies will be moving towards margins of insolvency, especially if there is a lag between acquisition of capital equipment and commencement of operations. A number of companies undergoing receiverships at the moment under-estimated the lead time and as such, they had no cash flows to support debt repayments. One cement company is behind schedule on commencement of operations and yet owing substantial sums of money to its financiers.

• The cost of capital will for most companies result in the increase in prices of goods and services and this will continue to render most Zambian companies uncompetitive. The Minister of Finance and National Planning Dr. Situmbeko Musokotwane should focus on the rising interests rates as the most serious threat on the attainment of a single digit inflation rate.

• Because of the high gearing ratios, the projection in terms of corporate performance for most companies in Zambia is no longer dictated by the internal rate of return or what the business generates through its activities but by external circumstances such as the cost of capital. The problem is that this will make it difficult to project the viability of most businesses.