Zambia Braces for IMF Crunch Talks

Zambian President Edgar Lungu at State House in Zambia on August 19, 2018.
8 February 2021
analysis

Zambia has been gearing up for talks with the IMF after becoming the first African nation to default on debt since the COVID-19 pandemic started. But analysts say an IMF loan is unlikely until after August elections.

Zambia is getting ready to hold virtual talks with the International Monetary Fund (IMF) from Thursday in the hope of securing a bailout loan. This latest round of negotiations will run until March 3.

The administration of President Edgar Lungu has accumulated massive debts in recent years, much of it for large-scale infrastructure projects.

The level of debt has now blown out to around $12 billion (€9.97 billion), half of which comes from private creditors.

Zambia failed to honor a $42.5 million (€35.3 million) payment on a $750 million Eurobond in November, becoming the first Africa country to default on its international debt payments since the beginning of the coronavirus pandemic. It has since missed a second bond payment of $56.1 million on January 30.

Difficult relationship

Zambia's government formally asked the IMF for a financing arrangement in December, according to Reuters news agency. The exact details of the request have not been revealed.

An IMF deal could include affordable financing, in the form of a zero- or low-interest loan, as well as technical support for economic reform.

Zambia under President Lungu has had a rocky relationship with the IMF.

His administration first requested a $1.6 billion aid package from the international fund back in 2016 -- an request the IMF never agreed to because of concerns over Zambia's commitment to economic reform.

But after Zambia hosted high-level discussions with the IMF in December 2020, Zambian economist Grieve Chelwa sees the relationship as improving.

"I think this is the first time that the talks have been fruitful enough to begin to think about an IMF program," said Chelwa, a postdoctoral fellow in economics at New York's New School.

He doubts, however, that the IMF will do an about-turn and agree to a new deal before presidential and parliamentary elections in August, when President Lungu and his Patriotic Front party will seek to stay in power.

Elections could delay any IMF deal

Lungu's administration presented an economic recovery plan in December, said Chelwa, but "even if you have a plan that says you are not going to spend frivolously or exorbitantly, what happens in an election year?"

"Budgeting goes out the window. You throw money at this thing. You want to splurge because if you want to return your seats and retain your power, you have to spend."

Because of this, Chelwa rated the chances of the IMF agreeing to a major program in the run-up to the election as "quite low."

International business consultant Trevor Simumba, who has written widely on Zambia's debt crisis, also believes the IMF will be "reluctant" to agree to a full program of support before elections.

He points to the "panicked, preelection" decision of Zambia's state mining company, ZCCM-IH, to buy Glencore's stake in the country's Mopani copper mine, which employs 15,000 people.

The Mopani takeover, announced in January, will see Zambia taking on an additional $1.5 billion in debt in what Simumba called a "terrible deal" with "no real economic value to the country apart from delaying the pain of the high cost of mining in Zambia."

But, Simumba said in a phone interview from Lusaka, the IMF may agree to emergency aid to soften the economic impact of COVID-19 on the condition that this flows to the underfunded health and education sectors.

Zambia's finance minister, Bwalya Ng'andu, told the financial news agency Bloomberg last week that the government wanted a deal before the August poll.

"There is absolutely no desire on our part that we delay things to election time, and we are hopeful that we'll be able to reach some agreement with the IMF," Bloomberg quoted Ng'andu as saying.

Zambia criticized for unsustainable debt

Zambia's government has taken out massive loans for infrastructure projects in the past decade.

According to Zambian economist Chelwa, the country's external debt has ballooned by 1,000% since 2011, when the ruling Patriotic Front came to power under Lungu's predecessor, Michael Sata.

Some of the loans were spent on practical infrastructure, like hospital and school upgrades, improved telecommunications and roads. But many projects have been criticized for costing more than was necessary.

"[The Patriotic Front] have certainly transformed the country in many parts in terms of infrastructure, but there is also the mismanagement, theft and pilferage that comes with these large-scale infrastructure projects," said economist Chelwa in a phone interview.

"I think we we've gotten less bang for the buck, but we've gotten something."

Before the coronavirus outbreak, Zambia's debt had already reached dangerous levels, with Zambian and international economists warning that Zambia had borrowed more than it could afford to pay back.

The pandemic triggered a worldwide slump in the demand for raw materials, slashing Zambia's resources revenues last year, particularly from copper, which is the country's biggest foreign exchange earner.

To make matter worse, Zambia's economy contracted by 4% because of the global COVID-19 downturn.

Zambia has little left over to help

Zambia's debt crisis coupled with the coronavirus pandemic is proving a double blow for the country's 17 million people.

Zambians have been hard hit by rising food prices and job losses during the pandemic. And the nation's debt crisis means the government has limited resources to help.

They are facing a sharp rise in prices for items such as bread, cereals, fish, dried foods and vegetables with annual inflation rising by 25%.

At the same time, the ongoing coronavirus pandemic is still disrupting supplies and slowing consumer demand, leaving many traders and businesses in the southern African country struggling.

But nearly half of Zambia's revenue currently goes towards paying off, or servicing, its loans. A large chunk -- some 40% -- is also earmarked to pay civil servant wages.

This means only 10% of the annual budget is available for all other services, such as agriculture, social protection, health and education.

"This debt crisis essentially revealed how fragile our current fiscal system is ... because it leaves the government with very little resources to provide service delivery, especially now that we are currently in the COVID-19 pandemic," said Kangwa Muyunda, a program officer at the consumer organization, CUTS International.

"We have cases of people [with COVID-19] dying because of lack of oxygen to support these patients because of the government's lack of resources to deal with this pandemic."

Zambia's schools reopened last week under a loosening of lockdown restrictions, she added.

"But you wonder if the government can even supply face masks and food for these children to actually go to school in this pandemic," Muyunda said.

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