Washington based lender the International Monetary Fund – IMF in the coming weeks is set to approve an increase in Special Drawing Rights – SDRs for its members totalling an additional $650 billion. This comes a few weeks after the worlds richest nations, the G7 recently met at their annual summit where deliberations concerning how to assist developing nations fight COVID19 and global combating of climate change were key agenda items. France stood out to drive reallocation of $100 billion of the new reserves from the SDR which it committed to channel $33 billion of its quota (SDR) to Africa and further requested other rich nations to emulate so as to levitate the amount to $100 billion. The decision by the IMF to widen the allocations has been motivated by a deepening pandemic situation globally and as such proceeds are to be used to fund the fight against corona virus spread and its associated economic induced hurdles such as liquidity bottlenecks.
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“Africa is now facing the world’s fastest growth rate for new COVID cases. On current trajectory the wave will likely surpass previous peaks. But only 0.6% of Africa’s adult population is fully vaccinated. This is a human tragedy and an economic calamity. WE MUST ACT — FAST! We are at a critical moment for Africa. As COVID cases rapidly rise in Africa, international cooperation is urgently needed to help Africa end the pandemic, deal with debt, and strengthen Africa’s recovery and resilience,”
IMF Managing Director Kristalina Georgieva at the Africa Development Bank Annual meeting on June 23.
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For Africa’s second largest copper producer Zambia, the development once approved does spell hope for an opportunity to shore up decade low foreign exchange reserves with an additional $1.3 billion accounting for 0.02% the Southern African nations SDR quota. Being the first African nation to default on its coupon payments on dollar bonds in COVID period 2020, an injection of that magnitude will cushion the copper producer from the acute dollar liquidity bottlenecks it has faced manifesting in foreign exchange scarcity and widening backlogs that have adversely impacted the ease of doing business. Foreign exchange reserves were officially last reported at $1.2 billion (March) translating to 2.1 months of import cover whose build up has been buffered by dollarisation of mining taxes. SDR allocation are ‘cost-free’ with a very infinitesimal interest charge in some cases.
L-R: Zambia’s Secretary to the Treasury Fredson Yamba, IMF Mission Chief for Zambia – Alex Segura – Ubiergo, Zambia’s Republican President Dr. Edgar Lungu, Director of the IMF’s African Department and Bank of Zambia Governor Christopher Mvunga at state house on December 7, 2020.
SDR SEPARATE FROM EXTENDED CREDIT FACILITY
Over and above the SDR allocation Zambia still seeks bailout assistance through an Extended Credit Facility – ECF for which its authorities have been in talks with the Washington based lender. Earlier in the year, hopes lingered for deal closure ahead of the August polls more specifically with focus on likelihood of cabinet approval before dissolution of parliament on May 14 which did not happen. The Washington based lender had earlier reported that it had agreed a macroeconomic framework with the Zambian authorities and that positive strides had been made. This continued optimism in the offshore space attracting more flows into Zambia especially with increased interest in government securities. Many analysts forecast a package to be concluded post the August polls.
ENERGY AND AGRICULTURE REFORMS STILL PEND
In the meantime, energy prices remain non-cost reflective for electricity and fuel caught in the labyrinth of a Cost of Service Study – CSS whose conclusion was extended to August for the second time and rising crude prices on international markets which coupled with a currency slide points to pump price hike. It is evident that energy and agriculture subsidies have continued in the red metal producer evidenced by a Farmer Input Support Program which on one end addresses food security but deal structure exacerbates exchange rate pressure on the market.
GLOBAL INFRA DRIVEN COPPER BULLS GOOD FOR ZAMBIA BUT COVID RISKS WEIGH
Copper has in 2Q21 improved Zambia’s revenue earning capacity through higher metal prices on the London Metal Exchange – LME to decade highs. This is another booster of foreign exchange reserves and cashflows for debt service capacity. The red metal is likely going to get a further boost after the US finally agreed an infrastructure program of $579 billion while the European Unions $280 billion green transformation program and the $600 billion Chinese infrastructure stimulus. An IMF ECF remain a key precursor for successful debt restructure for which Zambia is in the middle of with the help of its advisors Lazard Freres. Zambia’s economy expanded 0.7% for 1Q21 as reported by the Zambia Statistics Agency – ZSA but remains under threat from a deepening pandemic as the copper producer grapples with a third wave of the corona virus pandemic under the shadow of a constrained vaccination rollout that is homogenous to Africa. Default rated for its Long Tern Issuer Ratings -LTIR on foreign currency denominated debt, rating changes by agencies Fitch/Moodys/S&P will only likely change after defaulted debt portion is serviced.
The Kwacha Arbitrageur