March 2, 2021

Africa

ZAMBIA: Might Zambia finally clinch an IMF deal?

BY Anne Frühauf

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( 5 mins)
  • Three weeks of talks with the International Monetary Fund (IMF) are due to conclude on 3 March.
  • Since Zambia plans to seek debt treatment under the G20’s ‘Common Framework for Debt Treatment beyond the DSSI,’ the latest talks might generate the most intense speculation yet that the country may finally clinch a deal with the Fund.
  • Zambia’s political fundamentals remain a tremendous obstacle ahead of the 12 August elections, though both sides could try to talk up the prospects for a deal even if it ultimately ends up being postponed past the polls.

While little has transpired about the ongoing talks, Zambia is making a renewed effort with the IMF. Hastened by Zambia’s recent default and debt restructuring talks with private creditors that thus far appear on a road to nowhere, Finance Minister Bwalya Ng’andu seems keen to conclude an Extended Credit Facility (ECF) agreement with the IMF before the elections due on 12 August. Central bank Governor Christopher Mvunga, albeit controversially appointed, has also sought to assure that talks with the IMF were “going on cordially,” citing slashed borrowing, cancelled construction projects and decreased spending as evidence of Zambia’s commitment. Recent signals include the December Economic Recovery Programme(ERP) aimed at achieving fiscal and debt sustainability, though its contents fell short and further revision might well be required. Moreover, Ng’andu’s 5 February statement that Zambia seeks to participate in the G20’s Common Framework appeared to bode well for the latest round of IMF talks that began on 11 February. Another recent signal is the Bank of Zambia (BoZ)’s recent interest rate hike to stem inflation which – mainly driven by food inflation and kwacha depreciation – has surged well outside the central bank’s 6–8% target range.

Nevertheless, Zambia has been at this juncture before. It has promised far-reaching reforms in the past only to fail to go the final mile. Even now, despite pressing financial need, there are counter signals which raise doubts over the authorities’ commitment to reaching, let alone implementing, any IMF arrangement. Like Ng’andu, his predecessors have attempted to secure IMF agreements for several years, but all have stumbled at the ultimate hurdle of gaining the support of their reluctant, recalcitrant President Edgar Lungu. Lungu’s make-or-break reelection bid remains a stumbling block to the government’s ability to rein in spending. A clear example of this was the 10 January removal of a 16% VAT on gasoline and diesel prices; another is the Farmer Input Support Program which is a thinly veiled attempt to secure rural votes for Lungu and his Patriotic Front (PF).

The IMF, for its part, may be under pressure to demonstrate its contribution to tackling Zambia’s debt crisis and its new point man, Alex Segura, could be just the person to help reach a fudged solution, given his track record in Mozambique. Yet even the Fund would surely benefit from having certainty about which government it will be dealing with before finalizing or implementing a deal. Lungu’s main challenger, Hakainde Hichilema of the United Party for National Development (UPND), should stand a decent chance of winning the August elections given the financial crisis. After all, he lost to Lungu by just 2.7 and 1.7 percentage points of the vote in the 2016 polls and the 2015 by-election, respectively. A Hichilema victory would widely be considered an upside given Hichilema’s business-friendly reputation and good relations with donors. Nevertheless, Lungu is increasingly expected to win by skewing the electoral playing field. This would not bode well for IMF relations, but it might still be preferable to finalize any deal if (or perhaps when) the PF’s tenure is confirmed.

Technically, the first step required to initiate the Common Framework process is the completion of a Debt Sustainability Analysis (DSA). Although Zambia completed its own DSA exercise last year, the lack of transparency regarding the full extent of its debt exposure, particularly regarding debts owed to Chinese entities, means that agreeing on the numbers could be anything but smooth and probably more difficult than in Ethiopia, which launched its Common Framework request under a pre-existing IMF program. Another constraining factor could be the government’s resource nationalist approach to the mining sector. Glencore’s recent USD 1.5bn deal to transfer its majority stake in the Mopani Copper Mines to state mining company ZCCM could raise concerns about yet another sovereign liability. This could drive the total public sector debt burden towards an estimated 130% of GDP, unless the government can convince that IMF that the deal – to be financed via future production – keeps the debt on Mopani’s balance sheet and that a strategic investor is in sight.

The composition of Zambia’s external debt may also complicate the sequencing of a debt workout. As has long been clear, commercial debt plays a larger role than in Ethiopia and Eurobond holders were the first to be targeted for restructuring, well ahead of the G20’s Debt Service Suspension Initiative (DSSI) and subsequent Common Framework plans. It remains highly uncertain how and when the complex jigsaw pieces of an IMF deal, DSA process and subsequent creditor negotiations may fall into place. However, it would be reasonable to assume that private creditor negotiations are unlikely to progress in the absence of advances in the Framework process and questions over liabilities to Chinese entities.

ZAMBIA: Might Zambia finally clinch an IMF deal? 1ZAMBIA: Might Zambia finally clinch an IMF deal? 2

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