Zambia's widening budget deficit will be too costly to finance: Fitch

International rating agency Fitch said Zambia's increasingly large budget deficit may prove too costly to finance, it said in a Tuesday statement.

Fitch said the new external financing could push government debt toward 40 percent of Gross Domestic Product (GDP) by the end of the year.

Last week, lawmakers approved a motion by the country's finance minister to increase the loan contraction ceiling from 35 billion Zambian Kwacha to 60 billion Kwacha.

"Tapping external sources of financing can expand an emerging market sovereign's investor base. But we have previously highlighted the risks of greater reliance on more expensive non- concessionary external financing to fund large budget deficits, particularly current expenditure. These include refinancing risk (although the Zambian authorities' announcement of a sinking fund to repay the sovereign's two Eurobonds mitigate this) and the risk that debt servicing costs rise due to currency depreciation," the statement said.

While the government has projected that the fiscal deficit will be above 4.6 percent announced in the 2015 budget, the International Monetary Fund (IMF) said the fiscal deficit could hit 7.7 percent.

According to the statement, increased domestic borrowing in the 2015 budget and a shortage of liquidity have already pushed up financing costs while demand for domestic securities have fallen short of supply so far this year.

"The build-up in arrears as well as higher-than-budgeted fiscal deficits will push government debt-to-GDP higher, beyond Fitch's previous forecast peak of 34.2 percent of GDP in 2017. A rising debt burden will see interest costs rise sharply. This reduces fiscal flexibility and will complicate consolidation efforts," the statement said.

A sustained deterioration in fiscal discipline would be negative for Zambia's sovereign credit profile, it added. Endi