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December 18, 2020

Africa

ZAMBIA: Plan spells headline risk for miners, no clear upside for IMF deal

BY Anne Frühauf

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  • On 17 December, President Edgar Lungu launched Zambia’s new Economic Recovery Programme (ERP) 2020-2023.
  • If Lungu’s ERP was meant to please the International Monetary Fund (IMF), the immediate effect was to generate headline risk as Lungu signaled his intention to push for majority stakes for the state in mining operations.
  • Even on the macroeconomic front, it remains uncertain whether – beyond familiar rhetoric around debt sustainability and reforms – yet another plan materially improves the chances of a badly needed deal with the IMF.

Mining threats are mostly noise

Above all, Lungu’s seemingly off-the-cuff threats against miners highlight the continuing disconnect between the president and his technocrats. While scant on details, the actual ERP employs mostly the opposite rhetoric, promising predictability for the economically crucial sector.

One of the ERP’s promises is to “review the mining tax policy framework with a view to introducing a more stable mining tax regime.” However, given frequent and onerous changes under the Lungu administration, investors may doubt that any fresh tax review will bring any upside, particularly amid Zambia’s debt crisis and a desperate scramble for foreign currency (also highlighted by the Bank of Zambia’s recent gold purchasing push to bolster its reserves).

The question regarding mining stakes is whether Lungu’s latest comments signal a material change in mining policy. For now, the president still appears to be targeting specific assets rather than making a blanket push towards nationalization or local content. No Zimbabwe scenario, where a controversial ‘indigenisation’ law of 2008 tried to force foreign companies to cede 51% to indigenous Zimbabweans, appears to be on the horizon.

Rather, for now the government seems to be targeting two assets: Vedanta’s Konkola Copper Mines (KCM) and Glencore’s Mopani Copper Mines. The ERP specifically mentions both operations, saying the government wants to “[f]acilitate the acquisition of majority equity… by ZCCM-IH.” The modalities of this are unclear but the two cases appear very different. At KCM, the government and ZCCM-IH are already locked into a major dispute with Vedanta after they tried to force KCM’s liquidation in 2019, a move that smacked of asset seizure. Yet the Lungu government’s intentions of flipping the asset have been complicated by a protracted legal and arbitration battle, which is expected to stretch well into 2021-22. Vedanta’s press statement last week warning any potential buyer of lawsuits suggests that the Lungu administration is still pushing the sale, but its strategy has hardly been successful so far and it certainly generates no quick cash for the government, especially with production at KCM having plummeted. Potential Chinese investors are rumored to have been as reluctant as most others to purchase a disputed asset and any buyer would likely be of dubious reputation.

Mopani is a different case, where the state seems to be negotiating with Glencore and there is speculation that the company might be willing to sell down its majority stake for commercial reasons. The big question of course would still be how ZCCM-IH could possibly finance an acquisition of any size in the current default crisis and how it would generate revenue quickly, Lungu’s biggest concern.

Notwithstanding the generalized uncertainty generated by Lungu’s latest comments, the assets of First Quantum Mineral in Zambia do not appear to be a target for ZCCM-IH’s unrealistic acquisition gambit (even if the company has hardly escaped other types of interference and disputes).

Is the ERP enough to get the IMF on board?

The ERP is clearly the government’s biggest recent effort to improve its chances of securing an IMF deal. It sets out five broad and lofty goals of “restoring macroeconomic stability; attaining fiscal and debt stability; dismantling the backlog of domestic arrears; restoring growth and diversifying the economy; and safeguarding social protection programmes.”

The plan includes some (albeit not overly ambitious) plans for fiscal consolidation and debt reduction, including a debt restructuring process over the next couple of years. However, it is all too similar to past plans issued by one of Finance Minister Bwalya Ng’andu’s predecessors, Felix Mutati, the minister who probably came closest to achieving a deal with the IMF, but was failed by the Lungu administration on implementation.

The ERP does make references to fuel and electricity reforms, public enterprise restructuring, halting capex spending, and even reforms of the Farmer Input Support Program. But this is primarily a rehash of the largely failed Mutati plan and it fails to acknowledge the crucial difference that Zambia now finds itself in a default crisis. A particular problem is the plan’s lack of details and numbers, without which budget deficit and growth targets seem largely plucked out of thin air. Instead of issuing a plan replete with “implementation matrices,” a more convincing measure would have been to issue a detailed, updated Medium Term Expenditure Framework (MTEF).

It ought to be difficult for the IMF to consider the ERP a game changer from an administration that has long failed to get serious about reforms, particularly in light of Lungu’s re-election bid for 2021, though the G20’s “Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)” emphasizes the role of the IMF in conjunction with debt restructuring. Perhaps the only exogenous factors that could salvage the situation by bolstering Zambia’s macroeconomic and debt metrics would be rising copper prices and an agriculture sector buoyed by what is forecast to be decent rainfall this year.

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