*This article was produced by the team at Signal Risk
On 04 November, talks between the government and the International Monetary Fund (IMF) began over Zambia’s sought after Extended Credit Facility (ECF). Engagements on the facility follow earlier “technical” discussions on Zambia’s fiscal policy which concluded on 01 October.
Great expectations
The talks come amid renewed confidence by both parties that a deal can be reached in the near future. In a webinar on 02 November, a bullish finance minister Situmbeko Musokotwane disclosed Zambia’s envisaged timeline with respect to the IMF deal and debt restructuring under the G20’s Common Framework. As per Musokotwane and other officials from his ministry, Zambia hopes to reach a staff-level or preliminary agreement with the IMF on a financing programme by the end of November, followed by a final approval of the programme by the IMF’s board by the second quarter of 2022. Thereafter, the government will proceed with debt restructuring, with a view to finalising an agreement with creditors by the third quarter of 2022.
Equally noteworthy, finance permanent secretary Mukuli Chikuba reassured investors on the same day that no creditors will be given preferential treatment – including domestic and Chinese lenders – easing long-standing concerns among bondholders and other multilateral and bilateral stakeholders.
Zambia’s bullishness was echoed by the IMF’s chief, Kristina Georgieva. Speaking on the sidelines of the COP26 summit in Glasgow, Scotland, on 03 November, Georgieva stated that she was “very optimistic” about reaching an agreement with Zambia. Underlying her optimism was Zambia’s “fantastic work in terms of debt transparency and engaging with creditors”. Nevertheless, the IMF official did stress that “we are not quite there yet” and that “more work was needed on financial assurances”.
Betting on the budget
Perceptions that Zambia has gone from kicking the proverbial can to picking it up are rooted in a directional shift by the administration of President Hakainde Hichilema. This was recently exemplified by the 2022 budget that was presented to parliament on 29 October by Musokotwane.
Central to the acceleration in growth and fiscal stabilisation forecasted by Musokotwane’s are cyclical factors and policy adjustments that the government has pledged to undertake. Key sectors such as tourism, retail, construction, agriculture and mining are set to rebound in the coming year following a coronavirus-induced slump and the reduction of constraints on internal and external economic activity.
This “organic” recovery will be supported by two crucial tax reforms: a reduction in the corporate income tax from 35 to 30 percent, and the reintroduction of the deductibility of mineral royalties from corporate income tax. The latter change has been long sought after by stakeholders in Zambia’s mainstay mining sector, which have complained of effective double taxation under previous regulations.
Finally, Musokotwane has pledged to restructure government subsidies – particularly in relation to fuel – however, a clear plan has yet to be presented. Nevertheless, the finance minister did note that factored into the budget and Zambia’s borrowing requirements is an impending USD 750 million Eurobond principal payment due in September.
The reactions
Unsurprisingly, reactions to the budget have been positive. In the financial markets, Zambia’s 2024 Eurobonds increased by 0.3 percent in price by the close of the day’s trade on 29 October. Shares for First Quantum Minerals – which is responsible for the bulk of Zambia’s copper output – also rose by 5.3 percent on the Toronto Stock Exchange according to the Bloomberg publication. In a media statement on 02 November, First Quantum expounded its bullishness on Zambia’s prospects. As per the company’s chief of government relations, Godwin Beene:
“this budget puts Zambia back on the global stage as a respected and competitive player in the mining sector. New and existing business will now need to be reassured of the security of long-term investments through further reform of the sliding scale of mineral royalties, VAT refund discipline and assurances of stability, that will result in increased investment, more jobs and more taxes through increased production.”
There was, however, some detraction of the budget by Zambia’s former ruling party, the Patriotic Front (PF). In a briefing on 03 November, PF vice president Given Lubinda dismissed the fiscal policy as a hoax, claiming that it is retrogressive, a breach of campaign promises, anti-poor and pro-capital.
Assessment
The 2022 budget is the latest affirmation of the incumbent administration’s commitment to economic and broader governance reform. It builds on several signals of intent made by President Hakainde Hichilema in his first two months in power, which have significantly bolstered confidence in his government and its ability to rescue Zambia from crisis, bridge the credibility gap with economic and political stakeholders, and ultimately steer the country towards a more stable and prosperous economic path. On the governance front, Hichilema has placed highly competent and respected figures in key economic portfolios, in the form of finance minister Situmbeko Musokotwane and central bank governor Denny Kalyalya. Hichilema has also facilitated the return of former finance minister Felix Mutati to the executive fold, who will oversee the increasingly important science and technology portfolio, and in effect, Zambia’s modernisation and digital transition. Policy wise, Hichilema has largely delivered on his pledge of transparency regarding the country’s debt profile by way of upward revisions to the debt stockpile, while the stipulated debt target – although ambitious – demonstrates his understanding of the need for consolidation. Particularly noteworthy in this regard is the apparent commitment to market-led growth (and consolidation). This is evident in a reduction in corporate taxes and the reintroduction of the deductibility of mining royalties. At face value, these measures may appear to shift the burden of consolidation away from companies and contribute to the widening of the deficit in the immediate term; however, investment and growth gains in the longer term may offset the direct revenue losses.
Despite the clear directional shift by the Hichilema administration, there is a greater chance that Zambia will only acquire its envisaged programme from the International Monetary Fund (IMF) in the first quarter of 2022. As stipulated by Zambian officials, the country is seeking a staff-level agreement. This will outline policy reforms and a medium-term economic framework in the ensuing discussions. Zambia’s commitment to the tenets of the accord will then precipitate a full agreement by the IMF board, which will then allow the country to pursue restructuring under the G20’s Common Framework. Sentiment that Zambia will only acquire a programme in early 2022 is further reinforced by remarks made by the IMF chief, who noted that “there still is work to be done”. Key shortcomings include a clear plan and commitment by Zambia to moderating subsidies and reducing its debt stockpile which – according to the fund – stood at nearly 120 percent of GDP in 2021. Zambia may also be pressured to undertake further tax reform, including a repeal of the sliding scale royalty regime – where rates fluctuate in accordance with market prices – and VAT. Contentions have also been raised over the size of Zambia’s deficit target, with some commentators noting that it is disproportionately low given spending and revenue projections. Nevertheless, current indications are that Zambia is willing and able to undertake the necessary changes that would ultimately result in the extension of an IMF programme. To assist in making the requisite policy adjustments, the IMF may grant Zambia a Staff Monitored Programme, a technical assistance scheme aimed at remedying policy shortcomings and realigning objectives with actual economic realities.
In the broader economy, Zambia is expected to continue to pursue reforms that stimulate inclusive growth. A focal point for this will remain the mining sector, where the government is expected to broaden reforms with the goal of unlocking a mooted USD 2 billion in investment, and repositioning Zambia as a choice investment destination; a mantle that it lost due to the policy mishaps of the former administration. Besides the above-mentioned tax changes, the Hichilema government may seek an amicable agreement in ongoing disputes, such as the long-standing tussle with Vedanta Resources, in the hopes of sending a positive signal to investors. Outside of mining, the new government is expected to promote investment and growth in sectors with a high employment yield, such as agriculture, construction, manufacturing, energy and tourism through various incentives. Such changes and generally pro-market orientation should maintain positive sentiment among portfolio and direct investors. This, in turn, is likely to lend to a generally stable Kwacha, modest performance in government securities, and modest capital inflows.
Despite objections by the Patriotic Front (PF), there are no tangible risks to the administration’s economic trajectory; nor is there any credible reason to suggest that Hichilema will shift from his reformist stance. The fact that the United Party for National Development (UNDP) does not have an absolute majority is a tail risk to Hichilema’s policy trajectory due to the fact that it its policy promulgation is vulnerable to being countered by the PF. However, the PF is itself divided, with several members calling for reform of the party to better compete with the UPND and to prevent it from becoming redundant. The UPND can also count on the endorsement of independent candidates, many of whom are ideologically aligned with the ruling cohort. Finally, the likelihood that Hichilema abandons his reform agenda appears slim at present. For one, the new president has maintained the same policy positions for the past decade, and simply refined them (and their framing) after losing to former president Edgar Lungu on two occasions. His persecution under Lungu may also dissuade the new president from pursuing a similar heavy-handed approach to governance. But most importantly, he appears cognisant of the small margin for error due to Zambia’s plight, and limited patience among expectant Zambians, foreign investors, and multilateral partners that have all backed his promise of fundamental change. If anything, Hichilema may opt for a consolidation path that limits the burden on consumers in order to avoid popular backlash. However, he appears unlikely to revert to the economic populism and authoritarianism that characterised former regimes in Zambia.
