Amidst a debt and COVID pandemic labyrinth, Africa’s second largest copper producer, Zambia, has its fingers crossed on hopes of a Rapid Credit Facility (RCF) following discussions with the Washington based lender, the International Monetary Fund (IMF). Following virtual talks that ran from the February 11 to March 03, the IMF’s Davison Robinson led team conversed with various stakeholders in the Zambia economy key of which included the finance ministry and central bank on matters concerning fiscal and monetary policy.
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According to a press release on the IMF website, the team acknowledged Zambia’s balance sheet vulnerabilities which despite having being know for a while have been amplified by the COVID pandemic. The release cited Zambia for not hiking its energy prices for both fuel and electricity with intent to cushion its citizens from extreme shock in economic hardship times. Currency depreciation and spiraling inflation where highlighted as key drivers of price escalation while the recent rally in red metal prices on the London Metal Exchange (LME) to 10 year highs is expected to offer revenue earning reprieve to the Southern African nation. Zambia’s tax revenues have been constrained by COVID19 autopsy effects through business shut downs and generally suppressed activity.
Macroeconomic and social outcomes deteriorated in 2020 as underlying macroeconomic imbalances were compounded by the COVID-19 shock. The economy is forecast to have contracted by 2.9 percent, while the exchange rate depreciated significantly, and inflation increased sharply. With a weak economy and increased spending—both on emergency COVID related needs as well as agricultural subsidies—the fiscal deficit widened further largely financed from domestic sources. The authorities chose not to adjust fuel prices or electricity tariffs in order to support the population and enterprises during the difficult economic downturn contributing to further increases in domestic arrears and adding to the burden on ZESCO, the state-owned electricity company. Zambia received support under the G20 Debt Service Standstill Initiative, which provides some debt relief in 2020 and the first half of 2021, but with debt already unsustainable prior to the COVID-19 shock, Zambia has sought a comprehensive debt treatment under the G-20 Common Framework.” (The press release carried)
However the IMF acknowledged that significant progress has been made and discussions are expected to continue in the next few weeks, following additional technical work on the appropriate policy package. Zambia is currently in an election year with barely 5-months to the polls. There is a chance that the copper producer could be granted a Rapid Credit Facility (RCF) in the coming weeks while graduation to a fully funded Extended Credit Facility (ECF) is likely post August 2021.
An IMF package will be a sentiment booster and could spell hope for quicker economic recovery. Credit spreads on Zambia’s dollar bonds remain the widest of all emerging and frontier market assets. The red metal producer is in the middle of a debt restructure and has skipped two coupon payments on its 2022 and 2024 eurobonds. The cost of living has widened sharply as foreign currency shortages persist pushing consumer price index to 59month highs.
The Kwacha Arbitrageur