- Freshly inaugurated President Hakainde Hichilema is riding a wave of goodwill.
- Yet the reform process ahead will undoubtedly be politically painful and administratively challenging; it will be measured by the next budget, IMF talks and debt restructuring efforts.
- The new administration also needs to quickly address legacy issues in mining if it wants to improve the possibility of doubling copper production over five years.
A new “CFO”
The president’s appointment of Dr. Situmbeko Musokotwane as finance minister has redoubled expectations that the new administration will fast-track a long- planned IMF deal and begin the arduous task of fixing Zambia’s debt crisis. There is little doubt that Musokotwane is considered a stellar appointment given his background as a respected economist (with a PhD in monetary economics), former finance minister (2008-2011, under President Rupiah Banda’s administration) and deputy central bank governor.
Musokotwane’s daunting first task is to determine the true value of Zambia’s debt. The only good thing is that Hichilema’s administration – unlike its predecessor – has a political incentive to come clean about debt incurred during the Patriotic Front (PF) era. Yet, the amounts to be revealed could become even more daunting. Hichilema already warned in a 31 August interview that the new administration expects the true amount of borrowing to exceed official figures. Under ex-president Edgar Lungu’s government, external debt was last reported at USD 12.7bn. Back in 2018, Musokotwane, then a parliamentarian, estimated Zambia’s total external debt stock as approaching USD 24bn.
A key steppingstone on the road to an IMF program will be the next budget, which Musokotwane has promised to present to parliament by late October. This will provide the first test of how the Hichilema government plans to balance voter expectations with IMF demands, for example thorny issues such as fuel and farm subsidies. While the August election delivered a record mandate for Hichilema, expectations of economic improvement seem extremely high and might increasingly come into conflict with tough future fiscal adjustments.
For now, at least on the monetary policy side, the Kwacha rally – and the IMF SDR allocation that boosted Zambia’s reserves to USD 2.9bn at end-August – have afforded the authorities a little breathing room. This was evinced by today’s Bank of Zambia (BoZ)’s decision to hold the repo rate at 8.50% and expectations are that inflation will moderate faster than anticipated (even if it is expected to exceed the bank’s 6%-8% target range for the next two years). One relationship to watch will be that between BoZ Governor Christopher Mvunga and Musokotwane, who opposed Lungu’s 2020 dismissal of central bank governor Denny Kalyalya and questioned Mvunga’s appointment for lacking macroeconomic expertise.
Musokotwane’s next major task will be to deliver a long-awaited IMF deal. His past record of overseeing the 2008-2011 IMF Extended Credit Facility (ECF) should stand him in good stead. Musokotwane’s stated goal is to seal an IMF deal by November. The first meeting between the finance minister and IMF representative Preya Sharma already took place on 31 August, even if it was only reported to have discussed vague “aspects of strengthening the partnership between Zambia and the Fund.” Clinching an IMF deal is all the more pressing in light of Zambia’s default and its urgent need to make headway in debt restructuring talks as the deadline for the principal repayment on Zambia’s USD 750mn Eurobond looms in 2022.
A mining renaissance?
Musokotwane has signaled that the government hopes to double Zambia’s copper output over five years. The new government can count on goodwill from mining companies and might be able to unlock investment withheld during Lungu’s latter years. Musokotwane in particular is remembered for his pragmatism in the Banda administration, when he scrapped a windfall tax for miners. To what extent the new administration may adjust the fiscal regime for miners in an environment of financial crisis is still very uncertain. Energy reform and the supply outlook will be other major policy and technical issues.
Even with much goodwill, the Hichilema government faces the daunting task of addressing legacy issues in mining, including the protracted ownership dispute over Konkola Copper Mines (KCM) between Vedanta and state-owned ZCCM. Keen to open a dialogue with the new administration, Vedanta on 1 September offered to reinvest USD 1.5bn into KCM, including USD 200mn to pay local suppliers and USD 400mn to spend on health, safety and working conditions. This should suit the new government given the financial challenges facing ZCCM, though it is uncertain whether or how quickly the new administration can simply make the dispute go away, which has been stuck in lengthy legal proceedings.
Not only will the handling of these legacy issues have a bearing on the production outlook, but they may also have immediate implications for public finances. Hichilema already hinted on 31 August that the KCM issue as well as ZCCM’s 2021 acquisition of the majority stake in Mopani Copper Mines under the Lungu administration could further increase public debt levels.