Africa & World

Zambia’s new leader Hichilema needs urgent IMF loan

Newly-elected Zambian president, Hakainde Hichilema, says he plans to unveil a new set of economic policies after his official installation on August 24. He made the announcement at a news briefing at his home in the new Kanyama district in the capital, Lusaka.

Zambia’s first president, Kenneth Kaunda, who died in June, was an avid believer in African socialism and used the independent Zambian state to help the nation recover from nearly 80 years of British colonial rule. However, many of his policies were reversed by neoliberal economic reforms after he was overthrown in 1991.

Hichilema says his plans are aimed at jumpstarting the economy, tackling external debt, taming inflation, creating jobs for youth and inspiring the confidence of international investors.

“Bally will fix it” was a major election campaign slogan for Hakainde Hichilema, meaning “father will fix it”. Hichilema says his experience as a successful businessman – – and one of the richest men in the country – – uniquely places him to find solutions to the economic challenges facing the country.

Chibamba Kanyama, a prominent Zambian economist, says the president-elect will have to contend with a myriad of challenges including “crushing debt”, as he tries to jumpstart the slumping economy.

“The first is the debt. We call both the domestic debt and external debt as the elephant in the room. At the moment, this is a big problem because our debt to GDP ratio is in fact now over 100 percent. The second one is unemployment. Unemployment levels are significantly high. The third one has to do with the mines.”

Zambia, according to the Tricontinental Institute for Social Research, “is a rich country with a poor population.” With a poverty rate of between 40 and 60%, the country also holds enormous mineral wealth, making it the second-largest copper producer in Africa after the Democratic Republic of the Congo. 

However, much of that wealth flows out of the country. According to data collected by the Observatory of Economic Complexity, in 2019, 53.4% of Zambia’s exports were raw copper and another 19% were refined copper, and 28.7% of its exports went to Switzerland, while another 15.9% went to China.

However, Lungu’s government made a major move toward control over its own resources earlier this year when Zambia Consolidated Copper Mines, the state-owned mining firm, acquired a 90% stake in the Mopani Copper Mines for $1.5 billion from Glencore, an Anglo-Swiss multinational commodity trading and mining company that owns mineral extraction facilities across Africa.

In addition, the country is heavily indebted, including $2.2 billion owed to China, $3 billion in Eurobonds, $3.5 billion in bilateral debt, $2.1 billion to multilaterals and $2.9 billion to commercial lenders. Despite being a minority of its debt, Lusaka’s debt to China has been extensively attacked by the Western press as proof of Beijing’s “neocolonialism” in Africa and even called “debt slavery.” In fact, Zambia owes more to the European Union than to China.

In November 2020, Zambia became the first African nation to default in the COVID-19 pandemic, bailing on payments on a $1 billion Eurobond. As a result, Lungu’s government began talks with the IMF for a bailout, but his government’s refusal to accept the kind of stiff austerity measures the IMF demands of its borrowers has so far kept the deal off the table.

Looming IMF Deal

However, with the victory of a Western-oriented businessman, investors are salivating at the possibility of such a deal in the near future.

“Post-inauguration, an IMF program is on the cards for Zambia,” Gregory Smith, emerging markets strategist at ‎M&G Investments in London, told Bloomberg on Tuesday. “Once an economic plan is in place the IMF negotiations can finally step up a gear. An IMF program is feasible ahead of the April 2022 meetings.”

Aleix Montana, Africa analyst at risk intelligence company Verisk Maplecroft, told the outlet that “Hichilema’s first priority as president will be to implement economic reforms and to work towards an agreement with the IMF for financial assistance, which has become more likely following his victory.”

“An IMF bailout would facilitate the restructuring of Zambia’s debt and increase the likelihood of it being accepted in other debt assistance programs. Zambia’s commitment to reforming its public finances will be judged on the outcome of the negotiations with the IMF,” Montana added.

“Given his history in the private sector, we expect that a Hichilema presidency will implement more business-friendly policies, as opposed to Mr. Lungu, who has a track record of intimidating foreign mining companies,” Zaynab Mohamed, an analyst at South Africa-based NKC African Economics, told the Wall Street Journal after Hichilema’s victory.

Zambian analyst Neo Simutanyi told DW that Hichilema “will be in a better position to negotiate terms with international creditors and investors in mining operations and the economy,” adding that “until now, there has been a lack of confidence in the economy.”

At an IMF press briefing in May, communications director Gerry Rice noted that talks on an extended credit facility had yielded “broad agreement on the macroeconomic framework” and they had made “notable progress” in outlining the “key policy measures to address the imbalances currently facing Zambia and to enable a return to sustained growth with ‑ and this is important for us, enhanced fiscal space for social and development spending.”

In other words, the Brussels-based lender has prepared the ground for Lusaka to accept austerity measures and limit its control over banking and investment as its economic situation worsens.

An African Development Bank report shows the economy fell into a deep recession due to the global coronavirus pandemic, contracting nearly five percent. It also warned the government to stop accumulating external debt and curb sharply rising public spending to attain debt sustainability.

The warning came after Zambia became the first African country to miss interest payments of $42.5 million on $3 billion worth of bonds. Kanyama says the external debt of $12 billion is unsustainable.

Hichilema says the debt is choking development. At the news conference, he said his administration’s economic policies will encourage foreign investors to do business in Zambia. He plans to hold negotiations with lenders as part of the effort to ease some of the economic pressure from the debt.

“Today is the day I can say to the debt stockholders that we have a new administration that will take debt seriously…come to the table, we will discuss options that are available. We will ensure that there is equity in the treatment of your debt…We will do an arrangement with you that will allow us the headroom to release resources and apply those resources on the equation side of investment, revenue generation and not consumption.”

The prevailing economic conditions, economists say, do not inspire investor confidence. The president-elect agrees, and promises to reverse that perception.

“Once we restore the rule of law and order, it’s an ingredient to economic development. Once we restore the rule of law, you will see more investments, you will see more economic activity. We will start from there.”

Kanyama says the new administration must find solutions to the recent nationalization of under-performing copper mines by the outgoing administration. He says the government has had a poor record of managing mining companies over the years.

Kanyama also says agriculture is one of the sectors of the economy that can give Hichilema a quick win if his policies help farmers and attract youth to agriculture to reduce unemployment.

“It’s about agriculture which has really not done as well as we anticipated. So, he has to address that. The other one is to inspire confidence and promote national unity. The country has been divided on tribal [and] regional lines.”

Hichilema — a farmer who routinely describes himself as a little “cattle boy” — says his administration plans to boost agriculture with new economic incentives. There also will be support for youth, he says, to become entrepreneurs and business owners to reduce unemployment.

Zambians say they look forward to the new president fulfilling his promise to create jobs, reducing the inflation rate of nearly 18 percent and improving living conditions.

1. Why is the country so cash-strapped?

The Patriotic Front party, which took power in 2011, embarked on a spending spree, building thousands of miles of new roads, airports and rural healthcare facilities. In the process, it amassed $13 billion of foreign debt. The government’s ability to meet its obligations was eroded because it discouraged investment with attempts to extract more revenue from the mining industry, the bedrock of the economy. The pandemic made the situation worse, with gross domestic product contracting 3% in 2020.

2. How did the crisis impact on the elections?

Opposition leader and businessman Hakainde Hichilema, who failed in five previous attempts to secure the presidency, beat incumbent Edgar Lungu by a landslide. His victory was widely seen as a backlash against surging inflation and falling living standards. Hichilema is targeting an economic growth rate of more than 10% within five years, mainly by expanding the mining, agriculture, construction and manufacturing industries. He’s also pledged to attract new investment by ensuring government policy is stable and predictable.

3. What does Hichilema want from the IMF?

He has said officials will immediately resume negotiations with the Washington-based lender and that he hopes to secure an extended-credit facility by the time of its 2022 Spring Meetings. He hasn’t specified how much money will be sought. Zambia can access about $1.3 billion. The president-elect also envisages simultaneous talks with foreign creditors, with a view to restructuring the nation’s debt. Lungu’s administration wanted as much as $12.7 billion of foreign debt to be restructured. The government will be transparent with creditors and is committed to repairing its reputation and raising creditworthiness, according to Hichilema.

4. What is the IMF’s view?

It has expressed willingness to help Zambia, but a loan is contingent on the government implementing several reforms. Those are likely to include scrapping or cutting fuel and farming subsidies — two key sticking points in the talks so far. The IMF is also likely to pressure the government to adhere to fiscal targets, including reining in a budget deficit that reached 14.4% of GDP in 2020.

5. How confident are investors of a deal being struck?

Zambia’s Eurobonds and currency surged after Hichilema clinched his runaway election win, an indication that investors expect him to improve the country’s international standing, tame runaway debt and secure the long-sought IMF loan.

7. Does Zambia have options other than the IMF?

Its debt default will preclude it from tapping loans from multilateral lenders and other options are limited. One potential source of funding could be China, which is already one of the country’s largest creditors. It previously agreed to defer interest payments on loans to Zambia and delay principal repayments, but it hasn’t recently indicated any willingness to provide new money.

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