In the labyrinth of a delayed restructure, Africa’s second largest red metal hotspot Zambia, on December 21 of 2022 was granted $100 million concessional credit through the World Bank’s International Development Association (IDA). It is 3 years now that Zambia commenced the debt restructure journey and barely four months since the International Monetary Fund (IMF) approved the Southern African nation and Extended Credit Facility (ECF) of $1.3 billion to aid balance of payment support in the quest to assist the copper producer restore fiscal fitness. The IMF financial support was precursor to successful debt restructure which has seemingly delayed given complexities in creditor classes ranging from bilateral to private classifications but expected to agree under the G20 common framework. It is about a dry point of construction that the external environment has evolved given the chaotic state of markets weighed by geopolitics and inflation risks that have hiked interest rates that remain key to hair cut discussions and bond valuations.
Zambia’s political transformation and governance shift continues to earn the land linked nation economic dividends through a confidence boost. This has kept multilaterals open to supporting the country’s fiscal journey given the strong political will seen over the last one year post August 2021 when Hakainde Hichilema triumphed over his opponent Edgar Lungu. Hichilema becomes the first Zambian head of state to court two multilateral chiefs in Washington namely David Malpass of the World Bank and Kristalina Georgeiva of the IMF. This gesture set the tone and reassured political commitment towards curating Zambia’s economic malaise position in 2021 after which Hichilema met with Eurobond creditors in London.
“Zambia urgently needs debt relief to restore medium-term debt sustainability and attract the new investment needed for growth and jobs. Yet as Zambia enters its third year working toward a debt restructuring under the G20’s Common Framework, its debt burden continues to rise, with interest arrears, late interest charges, and penalty charges accumulating during the prolonged delays,” said World Bank Group President David Malpass.
“The World Bank’s $740 million of concessional disbursements to Zambia in 2022 are providing strong support, recognizing the remarkable leadership by Zambian authorities to reduce the fiscal deficit and implement difficult reforms. I remain deeply concerned by the slow pace of the creditors’ committee and the impact of the delays on growth and poverty,” the press release carried.
Delays in debt restructure has delayed the climb down in the Kwacha yield curve keeping interest rates higher than expected while the foreign exchange market remains pressured. This is an autopsy of market weariness whose complexity is weighed in part by asset sell off pressure from offshore players seeking safe haven in dollar assets as the global landscape remains chaotic. Zambia’s central bank is nonetheless armed with significant foreign exchange reserves taking a positive cue from the $1.3 billion Special Drawing Right windfall and cash build ups supported by healthier copper prices. This has allowed the central bank to cautiously reign in any volatilities for price stability purposes. The red metal producers still remains one of the most resilient African economies that amidst fiscal vulnerabilities, has managed to tame inflation to single digit which has in turn kept its benchmark interest rate unchanged at 9% for a year straight.
“During the visit we discussed recent macroeconomic and financial sector developments. Against an increasingly challenging global economic backdrop, the Zambian economy appears to have remained relatively resilient and inflation has remained in single digits for longer than expected,” Allison Holland IMF Mission Chief for Zambia.
Upside risks to the consumer price index will be likely from projected energy deficit that could potentially breed pricing speculation and currency pressure could widen input costs affecting manufacturing costs.
Zambia is set to be reviewed and assessed in the Spring of 2023 before the second ECF tranche can be disbursed. Attainment of timely restructuring agreements with external creditors is essential to secure the expected benefits of the Fund-supported program. Other African nations in similar positions include Ghana that is slipping into default following an announcement to suspend debt repayments amidst worsening debt burdens.
The Kwacha Arbitrageur
