Africa’s second largest red metal hotspot Zambia on September 01, woke up to a breakthrough after an International Monetary Fund board sitting on August 31, resolved to approve the Southern African nations application for financial assistance to the tune of $1.3billion with a 38-month extended credit facility. This breakthrough comes exactly 21-months after the Zambian government formally reached out to the Washington based lender in December 2020 after economic conditions deteriorated significantly. Months to closing the deal, many economists and analysts were caught up in the labyrinth of whether or not a deal with the lender was a precursor to successful debt restructure. The answer to the chicken – egg question is now vivid.
READ ALSO: Zambia back in the champions league as IMF grants ‘long awaited’ $1.3billion Extended Credit Facility
Conditionalities versus self prescribed initiatives
There appears to be a lacuna among citizenry as to what conditionalities exactly underly the 38-month program despite clarity provided by the lender that allowed the authorities to commit to their own homegrown program which is characterized by an array of interventions that seek to optimize resource utilization through effective reorganization of its own fiscal purse. This includes gradual phasing of petroleum and electricity subsidies while simultaneously widening social safety nets and increasing employment in critical sectors such as health and education. These sectors are directly linked to factors of production that should improve growth prospects.
Modern day IMF deals have human faces
Many, in the copper producer are still blinded folded by the old IMF structural adjustment programs administered in the 80-90’s. marred by stringency and candidly did not have a human face. The COVID 19 pandemic’s impact on humanity, has metamorphasised the IMF’s posture in easing restrictions that allow for humanity to take precedence. As such the Washington based lender shocked the world with the largest special drawing rights intervention in 2021 to many nations to help cushion against external shocks post pandemic for Zambia was credited with $1.3billion in reserves. Other nations that have been offered financial assistance recently include Chile that got an $18.5billion loan, Sri Lanka $2.9billion, Egypt $20billion and Kenya had a credit line extended of circa $327million.
Markets still eager on debt restructure road map
Markets remain sanguinely eager as to when the crating agencies will upgrade Zambia’s current foreign currency credit posture which has been default after skipping coupon payments from September 2020 to date. Until graded or rated debt can be restructured successfully agencies are very unlikely to upgrade Zambia’s credit assessment. The MinFin earlier in the week hinted on the form that debt restructure will take – a cocktail of lengthened maturities and likely haircuts. However, the biggest risk to the haircut and maturity extension discussion is the chaotic state of the global environment in the midst of tightening monetary conditions in the wake of excessive inflationary Eastern Europeans war autopsy. This has dislocated energy, grain and base metal markets. Top money managers like Black Rock and others exposed to Zambian dollar bonds have suffered mark to market losses after credit default spreads blew out in the wake of worsening fiscal vulnerabilities exacerbated by a global health crisis.
Could private creditors be the stickiest portion?
Dollar bonds and other private creditors may be a small portion of the overall debt obligations but remain the stickiest portion of the restructure quagmire compared to the bilateral portion which can with more ease, be renegotiated with jurisdictions. Already nations like China have committed to writing off close to $10billion of its $170billion exposure to Africa. Zambia could be one of the nations set to benefit from this debt hive by the world’s second largest economy.
READ ALSO: Post IMF Bailout, Zambian Kwacha Posts Day One Gains of 3.5%
The week of the bailout loan announcement was met with expected day one hype in the currency market that saw the Kwacha sprint 3.5% to the lower bounds of the 15 zone as players ran the market short taking profit to hedge against flows that could surge into the economy while offshore players still seek safe haven in the dollar given global uncertainty fueled by prolonged Russo – Ukrainian war. Markets will seek clarity around a debt redemption strategy plan which could in part be addressed by the debt sustainability analysis results to be published in the week beginning September 04 as the IMF resident representative Preya Sharma jointly with Zambia’s MinFin release this long awaited data.
The ECF is conditional on successful negotiation of debt with various creditor classes. Until obligations are fully restructured, Zambia’s foreign currency credit rating will remain in default.
The Kwacha Arbitrageur
