Zambia approaching a debt point of no return under PF.

Public finances head south while the Patriotic Front clamps down
on dissent ahead of next year’s election.

The ruling Patriotic Front’s continued state of denial about the country’s dire debt situation sees the year begin with loan defaults, dwindling state revenues, disintegrating public services and unpaid civil service salaries. The government’s failure to make a €6 million loan repayment on its military transport aircraft – one of a raft of delayed loan payments, including to Chinese lenders – signals immense pressure on the state
coffers. Debt is expected to worsen this year and approach 100% of GDP.

The government has withheld all other payments, including public salaries, rather than miss a debt repayment. But the government now has to foot the bill for millions of dollars of unplanned payments after becoming embroiled in expensive litigation and trying to alleviate politically dangerous power shortages.

The ostensibly stable state of the country’s foreign reserves, though extremely low, paint a misleading picture. They remained at between US$1.3 and $1.4 billion last year, despite another year of heavy debt-service payments. This is in contrast to 2018, which saw the reserves decrease by $350m to $1.5bn after debt repayments of almost $1bn were made. But the apparent stability in 2019 was partly thanks to a change in the law which obliged mining companies to pay royalties in US dollars instead of kwacha, as well as a rise in
late and missed payments.

Royalty revenues were, in fact, lower than in previous years because copper production fell by more than 100,000 tonnes last year. The Chamber of Mines in December formally issued stark warnings of a continued drop in production as a result of what they see as an exceptionally aggressive tax regime. The International Monetary Fund expects growth to have slowed to just 2% in 2019 and for the slump to continue owing to ‘absent policy adjustments.’

Royalties paid in dollars means higher domestic borrowing and arrears to make up for the shortfall in kwacha revenues. Pressure on the reserves is likely to be heavy in 2020, as no obvious windfall is due this year and debt service will likely become more expensive as the kwacha continues to weaken. It begins the year at 14 to the US dollar, down from 11.9 at the start of last year. The reserves are too low for the Central Bank to
intervene to prevent further depreciation of the kwacha, should it come under further pressure, analysts say.
The currency is highly vulnerable to shocks, such as that which befell it in December when the government was forced to sell dollars to pay off a historical debt to South African power utility Eskom as part of a deal to secure emergency power after drought and management factors led to severe shortages. The drought has also contributed to serious food shortages.

Lenders lending

In this difficult economic climate, debt service could exceed 50% of the monthly budget, yet the government is still borrowing – as it has since 2017. Since then, official debt to GDP has risen sharply in line with the debt already contracted in 2017. Now, the IMF expects it to exceed 90% at the end of 2019 – up from 78% in 2018. Finance Minister Bwalya Ng’andu wrote to several lenders in November to cancel the disbursement of funds in an effort to honour a pledge to stop the debt ballooning further, Africa Confidential has been told. But the high interest rates secured by the lenders because of Zambia’s poor credit rating means their appetite for lending continues. After complaints to State House from lenders, Ng’andu has been forced to allow the disbursements to go ahead. Political pressure on the bank for disbursements to continue regardless of the bank’s advice is a historical problem that is likely to persist.

While disbursements on new projects continue, others, such as Chinese-built roads and airports, have stalled because of delayed payments to contractors and shortages of financing. Construction of the $2bn Kafue Gorge Lower hydropower station, which was expected to start generating power this year, is stalled after state power company Zesco failed to secure further financing. Zesco had created a special purpose vehicle through which to borrow for the project, with more than $1.2bn already disbursed. But Chinese insurer Sinosure has refused to underwrite a further loan, we understand, leaving the project in limbo. The contractor, Sinohydro, is also Chinese. Sources dealing closely with the Chinese companies say that Zambia’s financial predicament is causing tension between them and their insurers and lenders.

Such is the quantity of Chinese debt that financial analysts say it should be the priority for restructuring, but apart from vague talk within the ministry no progress has been made in this direction.
However, Eurobond holders expect this to be done before Zambia attempts to restructure its $3bn debt to them. The current economic outlook leaves little hope that Zambia will be able to pay the $750m due in September 2022 for its first of three Eurobonds, so a restructure is imperative although it could come at heavy cost. An IMF programme remains unlikely given the government’s determination to continue
borrowing.

Lungu’s spats.
The fragile economy leaves the PF’s electoral war chest vulnerable as the 2021 election draws nearer.
Commentators have remarked that President Edgar Lungu is being distracted by pointless quarrels, such as his spat with United States ambassador Daniel Foote over the latter’s publicly expressed dismay with the sentencing by the courts of two gay men to 15 years in prison. Lungu demanded Foote leave and he was recalled in late December. Foote also accused the PF of corruption, further raising the government’s ire. Even though the US provides $500m a year to Zambia in HIV/AIDS support, Foote did not go to attend ceremonies for World Aids Day on 1 December because of threats against him.
Foote said Lungu’s government ‘wants foreign diplomats to be compliant, with open pocketbooks and closed mouths’, and suggested that relations with the US were strained.

The Foote furore embodies the atmosphere of intimidation and intolerance that is becoming the hallmark of Lungu’s tenure, say local commentators. Support for the PF has been steadily declining since Lungu’s victory in 2015 and the PF has responded with efforts to force loyalty and silence dissent. Many have been disappointed with the failure of Hakainde Hichilema and his United Party for National Development to capitalise more effectively on the PF’s record, but oppositionists believe it will do much better this year.

Jet debt
Plans to change the constitution, which would give Lungu greater powers and a third term of office, remain on the table. The democratic space is narrowing and opposition politicians are frequently jailed and public protest firmly shut down. As feared by commentators at the time of the purchase of the C27J twin-engined military transports, the government has been using at least one of them in political campaigning, we hear, in
December and was used to transport Lungu’s wife Esther Lungu on one occasion. Payments for the planes remain in default.

Copyright © Africa Confidential 2020

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