Zambia is beset with problems stemming from the commodities price drop, the effects of a severe drought and rampant public spending. But is an IMF loan the solution? Jason Mitchell reports.


Once one of the world’s fastest growing economies, Zambia faces some tough choices in a bid to avoid defaulting on its debts. Previously buoyed by rising demand for copper, the world’s seventh largest producer of the commodity has been hit by falling prices and an ill-advised infrastructure spending programme, with debts rising to near-unsustainable levels.

Falling foreign currency reserves, rising inflation and growing discomfort among foreign mining investors have all contributed to this economic unease. And while the Zambian government has so far resisted such a move, observers say the country could be forced into a fresh lending programme with the International Monetary Fund (IMF).

Between 2004 and 2014, Zambia’s gross domestic product (GDP) growth averaged 7.4% a year, thanks to surging copper prices. Since then, however, economic growth has slowed dramatically, caused by falling prices and increasing debt payments. The IMF predicts growth of just 2% in 2019, down from about 3.7% in 2018, reflecting the ongoing weakness of the mining sector, the impact of a severe drought on agricultural and hydro power production, and the worsening debt situation. 

Praying for rain

The south and western provinces of Zambia have been particularly impacted by the drought, resulting from a significant rainfall deficit from November 2018 to March 2019. The drought has reduced water levels at the Kariba Dam – the main source of power for Zambia and neighbouring Zimbabwe – to less than one-third of its capacity. 

Inflation rose to 8.1% in May 2019, just above Bank of Zambia’s target band of 6% to 8%, according to the IMF, which says foreign currency reserves are forecast to decline to 1.6 months of import cover by the end of 2019. 

At the end of May, Bank of Zambia raised its benchmark interest rate by 50 basis points to 10.25% from 9.75%, its first hike since December 2015. Bank governor Dr Denny Kalyalya says the step was crucial to control inflationary pressures and ensure sustained and higher economic growth.

“In the medium to long term, growth prospects remain positive,” he adds. “However, to actualise these prospects, there is a need for urgent implementation of other corrective policy measures that set the fiscal deficits, debt levels and debt service payments on a sustainable path.”

Zambia’s debt problems have been building since around 2011, when the newly elected Patriotic Front government began a debt-fuelled spending spree. As a result, the country’s debt-to-GDP ratio rose from 18.9% in 2010 to 68% at end-2018, according to IMF data. The country’s total external debt rose to $10.05bn at the end of 2018 from $8.74bn at the end of 2017, according to the Ministry of Finance. External debt servicing in 2018 reached $759.9m. Faced with such a situation, Moody’s downgraded Zambia’s credit rating to Caa2 from Caa1 in May 2019, and changed its outlook to 'negative' from 'stable'.

Deteriorating position

“Zambia’s public debt position has long been untenable but the situation is now deteriorating,” says John Ashbourne, senior emerging markets economist at Capital Economics. “The country faces the choice between fiscal tightening – possibly as part of an IMF-supported debt deal – or a more acute crisis. Recent market signals suggest that foreign investors are losing faith in Zambia’s public debt. With the country facing either painful fiscal consolidation or an acute debt crisis – or possibly both – the economy is in for a difficult few years,” he adds.

Zambia’s debt-to-GDP ratio is now at a similar level to that of Angola and Zimbabwe, with debt servicing costs gobbling up about 40% of the Zambian state’s revenues, according to Capital Economics. Mr Ashbourne says the only factor in Zambia’s favour is the fact that the country does not face any major maturities on its Eurobond debt until September 2022, when a $750m payment is due. 

In March, Zambia announced plans to swap its Chinese debt – which at $3.1bn accounts for about one-third of its total external debt – from US dollars to Chinese yuan in a bid to ease pressure on foreign reserves. 

“Our intention is to swap the dollar into yuan so that we can try to somewhat mitigate exposure to the dollar,” said Margaret Mwanakatwe, the country’s minister of finance at the time. “It makes sense to see how best we can take advantage of this kwacha-yuan position.”

China is the largest importer of copper from Zambia, while Chinese state-owned firms have been responsible for much of the infrastructure spending in the country. Such deals, involving huge mark-ups, have attracted controversy among local businesses, which complain of being locked out of major contracts. 

An IMF return?

While Zambia’s government has been in discussions with the IMF for a bailout of about $1.3bn since 2016, relations between the two parties have been rocky. In 2018, the IMF was forced to withdraw its resident representative to Zambia, Alfredo Baldini, after he openly criticised the country’s worsening external debt situation. In June 2018, the IMF reclassified Zambia from a country at ‘medium risk’ of debt distress to one at ‘high risk’.

Despite such a prognosis, president Edgar Lungu insisted in May 2019 that Zambia would be able to repay its debts and would soon emerge from an economic slump. “Zambia is not in a position of a crisis,” he said during a trip to Mozambique. “When you find that you are being strangled by debt, you hold back and see how you can realign your position so that in the end you continue being alive, you don’t suffocate. That’s where we are now.”

Experts note that an IMF programme would provide lending at zero or low interest so that Zambia could cover its debt servicing costs. Furthermore, foreign investors would see any successful engagement with the IMF as a seal of approval of the government’s macroeconomic and financial management. This would help it to attract foreign direct investment and donor funding, and pave the way for the country to refinance its debt at a lower cost.

“With regards to general public perception, a number of citizens have expressed scepticism on the government’s intention to get a bail-out from the IMF following experiences in the 1990s,” says Isaac Mwaipopo, executive director at the Centre for Trade Policy and Development, a Zambian think tank. “Under an IMF programme then, the 1990s saw the government cut spending, scrap subsidies, liberalise the exchange rate, and privatise more than 200 state-run firms,” he adds. “This ‘structural adjustment’ was painful for many to take. Employment shrivelled and, by the end of the decade, income per person had shrunk by 8%. While it is important to remember our past, there is a need to recognise that both Zambia and the IMF have changed in many ways.”

Developments in recent months suggest an improvement in relations between the government and the IMF may be on the cards. In mid-July, Mr Lungu abruptly sacked Ms Mwanakatwe as finance minister, replacing her with Bwalya Ng’andu, the widely respected deputy governor in charge of operations at Bank of Zambia. Shortly after taking office, Mr Ng’andu said he wanted to restart discussions with the IMF about a possible bailout loan.

Of perhaps equal importance was his announcement in August that the government would delay the introduction of a controversial sales tax until January 2020 to allow for further refinements to the law. The 9% tax on sales of goods and services, which was originally due for introduction in April 2019, is designed to replace the country’s value-added tax system. However, it has met with significant opposition from the business community – not least the mining sector, which has claimed the new levy would put further burdens on producers. 

Copper controversy

The sales tax is just one bone of contention between the government and the mining sector, exemplified by the dispute over Konkola Copper Mines (KCM). In May, the government put KCM, one of the country’s largest copper producers, into administration, sparking a bitter row with India’s Vedanta, which operates the mine and holds an 80% stake in the producer. 

The move – which the government says was made following breaches of KCM’s operating licence – has alarmed the international investment community, and has been challenged by Vedanta in the courts. 

At the end of July 2019, South Africa’s High Court ordered the Zambian government to halt the sale of KCM until a final decision is made through arbitration. However, the government says the ruling by a foreign court has no legal effect in the country unless it is backed by a local court. Such a posture, combined with ongoing debt issues, suggest that Zambia’s economic struggles are far from over. 


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