Africa’s second largest copper producer Zambia, has revealed an K11.8 billion (approximately $445 million) allocation as the impacts of drought intensify. Zambia’s Finance Minister, Dr. Situmbeko Musokotwane, plans to allocate 53% of the budget to cover the costs associated with domestic debt service. Meanwhile, 42% of the budget will be directed towards loans and investments aimed at addressing outstanding bills and facilitating debt swaps for state-owned enterprises Zamtel and Ndola Energy. The final 5% allocation comprises 2.4% designated for foreign affairs overseas allowances, 1.4% earmarked for digital acceleration initiatives under the Smart Zambia Institute, and 1.2% directed towards the funding of the skills development levy. Financing this budget will involve savings from multiple institutions achieved through expenditure reductions, taxation adjustments, and contributions from donors. The southern African nation is set to unveil its second supplementary budget, following the K41.4 billion (approximately $2.2 billion) allocation made in June of this year. The cumulative amount of additional funding now stands at K53.2 billion. Earlier this year, following the declaration of drought as an emergency and national disaster by Republican President Hakainde Hichilema in February, authorities revealed a significant funding gap of $940 million attributed to the impacts of El Niño.
Zambia has successfully augmented its 38-month International Monetary Fund Extended Credit Facility (ECF) by $388 million, bringing the total to $1.7 billion, a strategic move aimed at alleviating the impacts of ongoing drought conditions. Additional funding avenues comprise the Washington-based lender, the World Bank, which has extended over $271 million to mitigate the social sector repercussions of drought shocks. This financial support has prompted Zambia to enhance its allocations for social cash and cash-for-work disbursements. The copper producer also successfully raised K8.5 billion through the domestic money markets via statutory reserve bonds, which helped mitigate the effects of drought, alongside an increase in government security subscriptions in the latter half of 2024. Following September, Musokotwane unveiled a K271 billion projection for revenues and expenditures in 2025, reflecting a 22.3% increase from the prior year’s budget, with 80.3% of the funding sourced from domestic revenues.
Zambia’s second supplementary budget highlights the profound economic toll of the ongoing drought, which has led to extended power outages and a significant decline in agricultural output. The budget primarily reflects strategic reallocations within the fiscal framework, utilizing unspent allocations across various ministries to address pressing new expenditures. The budget deficit for 2024 should not deviate significantly from that 6.4% forecast.
The copper manufacturer faces a substantial gross power deficit of 1,474 MW, mitigated in part by import interventions and other strategies totaling 671 MW, leading to a net shortfall of 803 MW. The private sector’s health, as indicated by the purchasing managers index, continues to languish below the critical 50 threshold. (PMI Readings below 50 signal contraction while those above signal expansionary pulse).
Meanwhile, inflation persists in the double digits, significantly deviating from the desired 6-8% target range, registering at 16.5% for November. This inflationary pressure prompted the monetary policy committee to implement the final rate hike of the year, raising the benchmark interest rate to 14.0%. Escalating inflation, pervasive global uncertainty, and a declining Kwacha yield curve are shaping the economic landscape. Amid the prevailing economic challenges exacerbated by escalating inflation and the expanding impacts of drought, Zambia is witnessing a notable divergence of the consumer price index from the target band set by the Bank of Zambia. Inflation remains stubbornly high, currently at 16.5%.
This situation is compounded by an underwater treasury bill curve and a bond curve that has experienced a notable decline over recent months. The recent decline of the Kwacha curve raises concerns about the speed of its descent, suggesting that the current fiscal stance may be indicative of impending upward pressure. This situation could necessitate adjustments to account for inflation in order to maintain positive real yields. Furthermore, funding pressures may compel the state to turn to domestic money markets for financing, particularly if the fiscal landscape is strained by a downturn in tax revenues, exacerbated by credit risk factors stemming from drought-related impacts on business performance. In 2025, one can anticipate potential fluctuations in government security yields.
The global economy is currently navigating a landscape fraught with uncertainty, particularly in light of the policies implemented during Donald Trump’s administration. Concerns are mounting over potential tariff increases, possible retaliatory measures from China, and the implications of tax cuts and various other initiatives. Anticipated tax reductions are being factored into treasury markets, resulting in a scaling of yields. This development has the potential to alter the trajectory of liquidity flows into frontier markets, a trend that has characterised the latter half of 2024. This trend provides a reprieve from currency pressures, contributing positively to the volume of foreign exchange transactions.
Tariffs have the potential to foster inflation, which in turn may prompt a reversal of the current expansionary monetary policies employed by global central banks, including the Federal Reserve, the People’s Bank of China, and the Bank of England. This development may compel rate tightening, potentially invigorating interest rate bears and deterring offshore investors from engaging with the Kwacha and other African markets.
The copper-producing nation face significant risks, particularly from lingering drought conditions or the possibility of prolonged dry spells should precipitation patterns fail to stabilise by 2025. The potential impact on tax receipts may necessitate reliance on domestic money markets for funding, a scenario that could sustain elevated yields throughout 2025.
The Kwacha Arbitrageur
