On 29 February, Republican President in Africa’s second largest copper producer Zambia, His Excellency Hakainde Hichilema declared drought as a national disaster and emergency. The declaration follows erratic precipitation as a consequence of widening El – Nino effects earlier forecast by the Famine Early Warning Networks Systems in 2023. The wave of El – Nino is projected to persist to the end of 2024 into early 2025 and will likely have adverse impact on rainfall intensity in Southern Africa.
The Ministry of Agriculture estimates that of 2.2 million hectares of planted maize, 50% has thus far been destroyed and is expected to leave a million households affected in 2023/2024 farming season. This has adversely impacted 84 districts in Lusaka, Central, Copperbelt, Eastern, North-Western and Southern Provinces. The Southern African nations maize production is 93% driven by small scale farmers who are sharply exposed to drought effects. The forecast prolonged dry spell will impact water availability, power and livestock diseases.
Earlier in 2023 the Minister of Finance Dr. Situmbeko Musokotwane announced as part of the 2024 budget a shift in agriculture policy from the traditional – demand side – characterized by price interventions to the – supply side – aimed at stimulating productivity and wealth creation. The shift is earmarked to be enabled by a cocktail of technology methods in precision farming, increased investments in road, storage and power line access, Agri – finance credit extension and above all insurance cover. As a consequence of the drought effects Zambia’s 2024 budget allocation will see potential alterations to cater of emergency interventions in the area of precision irrigation to mitigate the threats of lack of rain.
Being a twin quagmire, drought impacts will extend to power generation capacity given Zambia’s 85% dependency on hydro for electricity production which is expected to take a negative cue of between 430 – 520 MW by end of 2024. The last acute drought Zambia recorded was in the 2014/2015 period that saw deficits widen to as high as 650 MW. The state power utility ZESCO has announced commencement of power rationing which analysts forecast will range anywhere between 6-12 hours of black outs. Power instability in supply is an inhibitor to manufacturing and business pulse. As measured by purchasing managers index factory pulse has for the last three months headlined below 50. February PMI readings were 47.3 from 49.2 in January as inflationary pressure weighs on currency woes and lack of liquidity. Readings below 50 signal contraction while those above 50 are a sign of expansion. Dam levels at the Kariba remain alarmingly low and will trigger further rationing of water allocation between Zambia and Zimbabwe to impact generation in the two nations according to the Zambezi River Authority. As at 26th Feb 2024 dam levels at the Kariba were 15.71% compared to 13.38% a year ago.
The Zambian authorities has outlined immediate, medium and long term measures to intervene. These include importation of power from the Southern African Power Pool specifically Mozambique, which is an additional strain on fiscal resources especially at a time the copper producer is rationalizing its public finance purse. Currently in the labyrinth of a debt restructure whose negotiations have protracted, the MinFin targets to reach an agreement by end of 1H24. Most recently Zambia signed a debt revamp deal with China and India as part of the Official Creditor Committee bilateral deal. The red metal producer is on the cusp of a breakthrough in the faculty of debt restructure where it is hoped that the authorities will soon get past comparability of treatment for the bilateral and private creditors. Republican President Hakainde Hichilema in his speech to the nation urged creditors to help Zambia with expediting of the negotiation process to allow for effective cushioning of debt effects at such a time as this.
Zambian authorities will explore the option of using defense forces to help with irrigation capacity to help boost food production while the Food Reserve Agency (FRA) will enhance community sales of maize to the vulnerable communities working in conjunction with the Disaster Management and Mitigation Unit (DMMU) on provision of purchasable corn in the communities. Hichilema extended its call for assistance to both the local and international communities to support in any way the can.
In the long term water harvesting and investments in precision irrigation remains critical while development of alternative energy sources such as solar wind and geothermal cannot be overemphasized. Zambia is exploring winter crop to hedge effects of drought with commercial farmers.
The energy bottleneck and food security predicament is a manifestation of environmental and climate threats that will give the 2024 growth forecast a likely haircut. The copper producer currently grapples with rising double digit inflation, monetary tightening and foreign exchange woes amidst muted mining productivity.
DROUGHT COULD EXARCABATE CREDIT RISKS
Drought could potentially breed counterparty credit risk concerns from agribusiness portfolio through cashflow strains leading to potential debt service hurdles. Whether primary or secondary agriculture exposures, the effects will transmit. This comes at a time sovereign vulnerabilities and exchange rate volatility is breeding transfer and convertibility burdens onto counterparties. Food price effects coupled with energy woes could exacerbate inflationary pressures which could be a potential driver of further monetary policy tightening. Currently industry non-performing loans average 4.4% against a 10% prudential limit which is currently under threat.
Power scarcity is counter intuitive to the mining boom and coincides with the era of geopolitics of crude fueling elevated petroleum prices which are a cost driver for most manufacturers that will pass costs to consumers in higher selling prices.
Zambia was graced with the presence of two key dignitaries namely the Assistant Secretary General of the United Nations Ms. Ahunna Eziakonwa and Saudi Arabia’s agriculture, environment and water minister His Excellency Eng. Abdurahaman Abdulmohsen who courted President Hichilema. Discussed with the UN delegation were climate change effects and the need for assistance in the area of irrigation while the Saudi team will seek to partner with Zambia in the areas of critical minerals, capital mobilization and investments in agribusiness. Saudi Arabia’s corn yields are currently between 6-10 tons per planted hectare which Zambia will seek to learn from.
President Hichilema has assured the nation that despite the drought disaster announced, no Zambian will starve as the authorities will do all they can to mitigate effects.
The Kwacha Arbitrageur
