Press play to listen
- It is difficult to view the badly timed removal of Bank of Zambia governor Denny Kalyalya as anything other than an assault against the central bank’s independence.
- A terse IMF statement “noting” the leadership change suggests that relations with the Fund – tentative at best – may nosedive once again precisely at a point when Zambia’s financial crunch is intensifying.
- Other than temporary relief from the Paris Club under the G20’s debt suspension initiative, all big questions around Zambia’s mounting debt troubles have not even begun to be addressed.
Breaking the bank?
On 22 August, President Edgar Lungu unexpectedly dismissed the respected Bank of Zambia governor Denny Kalyalya with immediate effect, even though his contract was due to run until 2023. Throughout recent years and amid a revolving door at the finance ministry, Kalyalya has been an anchor of confidence and the steadiest advocate for fiscal adjustment and International Monetary Fund (IMF) support. He is widely agreed to have done a sterling job on the monetary front, in a steadily worsening fiscal context.
However, Zambia’s sharpening debt crisis, combined with rising inflation and currency depreciation, may have strained relations between Lungu and Kalyalya to breaking point, especially ahead of elections next year. Under Kalyalya, the Bank of Zambia (BoZ) had recently adopted a more dovish stance in response to the Covid-19 crisis, despite double-digit inflation. However, the depreciating kwanza and the government’s growing dependence on the BoZ for financing could have been the source of tensions between Kalyalya and State House. BoZ holdings of government bonds had already increased from some ZMW 2bn at the start of 2019 to nearly ZMW 20bn (USD 1bn) in July. But Lungu may need more from the Bank, particularly after the government failed to pass a constitutional amendment that would have removed the responsibility for printing currency from the BoZ. Lungu could increasingly try to force the BoZ to resort to money printing, not least because the coffers of the Treasury – the traditional piggy bank for election campaign funding, which in the past has dished out procurement contracts on condition that contractors render campaign donations to his party – are basically empty.
The appointment of Kalyalya’s replacement, Christopher Mvunga, is still subject to validation by parliament but inspires little confidence, as the market reaction has made amply clear. Mvunga, a trained accountant turned banker, has previously served as deputy finance minister and most recently deputy secretary to cabinet’s finance and economic development department. He has no central banking experience and is widely considered a Lungu ally. Such a political appointment will do little to instill confidence in the independence of the BoZ leadership. Even South African Finance Minister Tito Mboweni roundly criticized Kalyalya’s removal via his Twitter account, triggering a minor diplomatic spat – a fire that the South African presidency quickly tried to put out yesterday.
All key issues unresolved
If Zambia’s accelerating fiscal and debt crisis had raised hopes in recent months that the Lungu administration could be forced to reluctantly embrace the IMF, his BoZ intervention suggests that the president could be turning in the opposite direction.
The economic situation has deteriorated further, with the economy now expected to shrink by about 5% in 2020, the first recession since 1998. Yet all the big questions around Zambia’s deepening debt crisis remain unaddressed. One question arising from the BoZ intervention is how it will affect Zambia’s relations with the IMF – long strained and only recently tentatively rekindled via Zambia’s request for emergency support under the Rapid Credit Facility (RCF). Just last month, the IMF ended a virtual mission as part of talks around RCF support for the government’s Covid-19 pandemic response, but its frosty, public response to the BoZ leadership change on 24 August will raise questions about any rapprochement and the possibility of a longer-term funded program which Finance Minister Bwalya Ng’andu has quietly tried to push past Lungu.
The broader dept picture remains as clear as mud. This month the Paris Club of creditor countries confirmed that Zambia will benefit from temporary debt relief under the G20 Debt Service Suspension Initiative (DSSI) from May to December 2020. However, looking beyond the Paris Club, the treatment of Zambian loans with Chinese entities remains shrouded in uncertainty. In July, Lungu’s government asked the Chinese government for “debt relief and cancellation” but if recent history is a guide, a quick, comprehensive and transparent solution would be surprising. More broadly, the government’s Lazard-led effort to restructure USD 11.2bn worth of external debt can be expected to be long and arduous; talks with bondholders do not seem to have gotten off the ground since April, when the move was first announced. All this suggests that efforts to resolve Zambia’s mounting debt crisis will drag into 2021 and beyond, which will be terrible timing given the high-stakes election facing Lungu.