Africa’s red metal hotspot Zambia, is looking beyond 2025 as it continues on its path to restoration of fiscal fitness. Down memory lane, on August 30, 2022, the International Monetary Fund (IMF) Board approved Zambia’s request for $1.3 billion in financing, a decision that followed an application submitted in November 2020. This request came as the global COVID-19 pandemic severely impacted Zambia, exacerbating its already fragile fiscal position. The country saw its credit rating downgraded to default, inflation surged to 23%, and the exchange rate deteriorated at an alarming rate. While Zambia had considered seeking IMF support, no formal application had been made until late 2020.
The political shift with the new administration under the “New Dawn” government played a critical role in this decision. Since then, Zambia has been subject to half-year reviews by the IMF staff, evaluating progress on a range of economic and policy issues. These reviews influence whether the IMF Board will authorise disbursements under the arrangement. In June of 2024, hamstrung by severe drought effects, the IMF approved an augmentation to the current ECF allowing for an additional $367 million increasing the facility limit to $1.7 billion.
With just 8 – months remaining in the 38-month program, it is crucial for Zambia to urgently secure a second IMF facility. Here’s why:
Fiscal Recovery Still Fragile
Zambia has made progress, bolstered by IMF support, which has helped build foreign exchange reserves to $4.15 billion, equivalent to 4.6 months of import cover. Despite some periods of dollar scarcity caused by weak inflows from mining and other sectors, IMF and other multilateral such as the World Bank disbursements have mitigated potential economic damage through social sector funding initiatives. In 2024 when drought was declared a natural disaster and emergency and the economy was adversely impacted, the IMF approved additional funding under the Extended Credit Facility (ECF) to absorb potential shocks. Half of these funds were allocated to the supplementary budget, ensuring continued economic operations. Zambia issued a K41.9 billion supplementary budget in July 2024, a significant portion targeted towards addressing national drought
Debt Restructuring at Risk
Zambia’s external debt restructuring, particularly the US$3 billion in private dollar bonds delayed seemingly pointing to the IMF deal as precursor to successful debt reorganisation. The IMF arrangement acts as a de facto guarantee, providing creditors with the confidence needed to reorganise Zambia’s debt. It is likely that in the absence of a second deal, investor concerns about Zambia’s ability to meet its debt obligations could escalate. This would likely lead to higher credit spreads, increased borrowing costs, and diminished value for Zambia’s Eurobonds, further discouraging foreign direct investment. Beyond disbursements, the IMF plays a vital role in ensuring fiscal discipline, reinforcing investor confidence, and enforcing debt-related covenants.
High Debt Risk and Default Concerns
Zambia remains classified as being at high risk of debt distress. Its fiscal cashflows have not yet sufficiently strengthened to move the country out of this precarious position. The most recent IMF review indicated that Zambia may not graduate to a medium-risk category until 2027, assuming a full recovery in mining production and a substantial increase in mineral royalties to address its significant debt obligations.
Political Risks Ahead of the 2026 Polls
Zambia is one year away from its 2026 elections, heightening political risks. Pre-election years often lead to increased government spending to fulfil electoral promises, which can exacerbate fiscal pressures. Additional concerns include whether Zambian authorities will remain committed to fiscal reforms, including power sector reforms, electricity tariff adjustments, and efforts to stabilise the currency. These reforms, while crucial, may be delayed or undermined by the need to address political and social pressures.
Bilateral Debt Agreement Delays
The Ministry of Finance has indicated potential discussions with the IMF regarding the second facility, but the progress on bilateral debt agreements remains uncertain. To date, Zambia has signed agreements with only a few countries, Saudi Arabia and France. Progress in securing agreements with other creditors, especially those within the official creditor committee, is essential for Zambia to meet the conditions for the second IMF deal. With only eight months to finalise these agreements, time is of the essence.
In conclusion, Zambia’s fiscal recovery and access to additional IMF support are contingent on securing the second facility by October 31. The urgency is clear—delays could undermine investor confidence, prolong fiscal instability, and hinder Zambia’s recovery trajectory.
To date Zambia has drawn $1.3 billion of the ECF and will remain with $367million in the next 8 months.
The Market Brain, The Kwacha Arbitrageur