Zam­bia’s fis­cal strides re­quire more ac­tion

Zambian Business Times - - FRONT PAGE - The writer is Chief Mar­ket An­a­lyst for the Zam­bian Busi­ness Times.

THE Min­istry of Fi­nance in Africa’s sec­ond largest cop­per hotspot Zam­bia is mak­ing the right fis­cal strides to ad­dress the high risk of debt dis­tress high­lighted by the World Bank and In­ter­na­tional Mon­e­tary Fund -IMF. How­ever, more ac­tion is re­quired to ac­tu­alise this no­ble cause. Zam­bia joins sev­eral other African coun­tries cited for high risk of debt dis­tress namely, Chad, Demo­cratic Repub­lic of Congo, Ethiopia, Eritrea, Mozam­bique, South Su­dan and Zim­babwe. These were judged to be in debt dis­tress at the end of last year (2017), the IMF said in May 2018. The Wash­ing­ton-based lender's rat­ings for Zam­bia and Ethiopia were changed from “mod­er­ate” to “high risk of debt dis­tress,” in May this year.

The IMF con­ceded that Africa’s enor­mous needs will con­tinue to de­mand heavy in­vest­ments to build in­fras­truc­ture and so­cial de­vel­op­ment. But to do so while avoid­ing the risk of a debt trap, the con­ti­nent - which cur­rently has the low­est rev­enue-to- GDP ra­tio in the world - will need to be­come more self-re­liant.

THE Min­istry of Fi­nance in Africa’s sec­ond largest cop­per hotspot Zam­bia is mak­ing the right fis­cal strides to ad­dress the high risk of debt dis­tress high­lighted by the World Bank and In­ter­na­tional Mon­e­tary Fund -IMF. How­ever, more ac­tion is re­quired to ac­tu­alise this no­ble cause. Zam­bia joins sev­eral other African coun­tries cited for high risk of debt dis­tress namely, Chad, Demo­cratic Repub­lic of Congo, Ethiopia, Eritrea, Mozam­bique, South Su­dan and Zim­babwe. These were judged to be in debt dis­tress at the end of last year (2017), the IMF said in May 2018. The Wash­ing­ton-based lender's rat­ings for Zam­bia and Ethiopia were changed from “mod­er­ate” to “high risk of debt dis­tress,” in May this year.

The IMF con­ceded that Africa’s enor­mous needs will con­tinue to de­mand heavy in­vest­ments to build in­fras­truc­ture and so­cial de­vel­op­ment. But to do so while avoid­ing the risk of a debt trap, the con­ti­nent - which cur­rently has the low­est rev­enue-to- GDP ra­tio in the world - will need to be­come more self-re­liant.

“Bor­row­ing to fi­nance spend­ing is part of the macroe­co­nomic pol­icy tool kits which all coun­tries use,” the IMF said. “But over the medium to long-term, they have to rely more on do­mes­tic rev­enues, tax rev­enues to ad­dress their de­vel­op­ment spend­ing needs.” More de­tailed ac­tion plans re­quired to ad­dress in­for­ma­tion asym­me­try

Zam­bia’s first half was char­ac­terised by multi-faceted pock­ets of news that priced into the in­ter­na­tional dol­lar debt mar­ket re­sult­ing in both as­sets sell off, Eurobond yield volatil­ity and widen­ing in credit de­fault spreads as off­shore play­ers demon­strated jit­ter­i­ness about what the true debt po­si­tion for the coun­try was. The pe­riod was also clouded by po­lit­i­cal over­tones and un­re­al­is­tic debt num­bers in­ferred from ca­sual orac­u­lar pro­nounce­ments by min­is­ters, which the Min­istry of Fi­nance has firmly ad­dressed through re­stric­tion of state­ments on fis­cal mat­ters to the min­istry it­self.

Ini­tially Zam­bia’s pre-IMF ne­go­ti­a­tions were twinned to Ghana be­cause of a sim­i­lar fre­quency of dol­lar debt is­sues, al­most iden­ti­cal fis­cal deficits, en­ergy - poverty and power util­ity op­er­a­tional in­ef­fi­cien­cies. How­ever, this changed in the first half of 2018 when the cop­per pro­ducer’s debt story grew stronger with risk of de­fault ris­ing. An­a­lysts be­gan to liken Zam­bia to Mozam­bique, a deja-vus ex­pe­ri­ence that sent the South­ern African na­tion’s spreads on its dol­lar bonds ma­tur­ing in 2027 to over 800bps. This then Zam­bia lead the emerg­ing mar­ket as­set chart of worst per­form­ers with yields of over 11.5%.

Zam­bia’s fi­nance min­is­ter Mar­garet Mwanakatwe can be lauded for trans­parency in an­nounc­ing eco­nomic per­for­mance of the na­tion on a quar­terly ba­sis as has been ob­served in the first half of the year. We liken the na­tion to a listed en­tity on the stock ex­change whose share­hold­ers re­quire per­for­mance in­for­ma­tion that then re­flects in the stock price. So far Mwanakatwe has done two key per­for­mance re­ports for both quar­ters of the first half of 2018.

How­ever, the MOF should con­sider a more delved ap­proach to re­port­ing pro­vid­ing req­ui­site de­tails and time­lines to im­ple­ment­ing mea­sures such as ar­rears dis­man­tling. It is wor­ri­some that the do­mes­tic ar­rears num­ber con­tin­ues to widen to ZMW13.7bil­lion (from ZMW12.6bn) but what needs to be ad­vised and com­mu­ni­cated is how this dis­man­tling will be achieved split by short, medium to long term time frames. Do­mes­tic ar­rears are a very big is­sue as it has im­mensely im­pacted the com­mer­cial bank­ing sec­tor push­ing the non-per­form­ing loan – NPL num­ber higher to 12.7% to breach the in­dus­try thresh­old. Us­ing dol­lar bond spreads as a proxy for in­vestor, off­shore or bond­holder sen­ti­ment the rally af­ter such in­for­ma­tion is re­leased is very mar­ginal sig­nalling that the cash mar­ket needs more than just re­ports but re­sults of im­ple­men­ta­tion of aus­ter­ity pro­grammes.

Some ex­tracts of the na­tion’s half year per­for­mance that need more clar­i­fi­ca­tion in­clude the fol­low­ing:

Bor­row­ing less from the Kwacha cash mar­kets

The fi­nance min­is­ter al­luded to the gov­ern­ment’s pri­or­ity in scal­ing back do­mes­tic bor­row­ing to help im­prove mon­e­tary con­di­tions and low­er­ing the cost of bor­row­ing. How­ever, it is a dry point of con­struc­tion that the 2018 bud­get pre­sen­ta­tion by for­mer fi­nance min­is­ter Felix Mu­tati was tar­geted at achiev­ing a 60% ( lo­cal cur­rency): 40% (for­eign cur­rency) debt mix to fi­nance gov­ern­ment pro­grammes with the aim of op­ti­mis­ing fi­nanc­ing costs. The Bank of Zam­bia was on a road­show ear­lier in the year sen­si­tis­ing the pub­lic on trea­sury bills and bonds in its quest to widen the do­mes­tic debt fi­nanc­ing net for the gov­ern­ment.

The min­ster was how­ever not clear on how then the Min­istry of Fi­nance will ac­tu­alise the scal­ing back on do­mes­tic bor­row­ing and what it will be sub­sti­tuted with. The do­mes­tic money mar­kets have al­ready seen a plum­met in sub­scrip­tion ap­petite for trea­sury bills in the fort­night auc­tions. The in­ten­tion is ap­pre­ci­ated but the mar­kets will need a more de­tailed ex­pla­na­tion of

A weak for­eign ex­change re­serve po­si­tion

The na­tion’s for­eign ex­change re­serve po­si­tion as at end June 2018 was re­ported at US$1.82 bil­lion. How­ever very lit­tle in­for­ma­tion was shared as to how this lower than 3-months im­port cover will be ad­dressed at all. It is im­per­a­tive that the MOF and BOZ share what in­ter­ven­tions will be in place to lev­i­tate this level which is very alarm­ing. Low im­port cover means very lim­ited am­mu­ni­tion for a coun­try to weather ad­ver­sity, let alone sta­bilise cur­rency volatil­ity. The cop­per pro­ducer has for a while re­lied on higher than usual red metal prices which of­fer a nat­u­ral hedge for risks to eco­nomic growth. It is ev­i­dent that even in the last Fitch rat­ings re­view, healthy cop­per prices off­set the risks posed to the econ­omy by debt dis­tress. It is im­per­a­tive that fis­cal man­agers of the econ­omy state clearly how the re­serve level is be­ing ad­dressed to im­prove im­port cover and within a de­fined time pe­riod. Very lit­tle was said about this very crit­i­cal point. An­other ob­ser­va­tion is the slow pace at which the for­eign ex­change re­serve num­ber is up­dated on the cen­tral bank web­site as part of its fort­night statis­tics. Such crit­i­cal in­for­ma­tion needs to be timely up­dated.

In­fla­tion­ary pres­sure from ris­ing crude prices

“In­fla­tion re­mained within the tar­get range of 6-8%, clos­ing the pe­riod at 7.4% down from the May rate of 7.8%. For the rest of the year, the ex­pec­ta­tion is that in­fla­tion will re­main within the pro­grammed tar­get,” the min­is­ter said. Fo­cus on tam­ing in­fla­tion within the 6-8% bound has been both BOZ and MOF’s tar­get but the re­al­ity is that the ex­ter­nal en­vi­ron­ment does not sup­port range. In­ter­na­tional crude prices are on the rise as OPEC mem­ber states are de­ter­mined to push oil to­wards US$100 a bar­rel. This will in turn ex­ert pres­sure on pump prices for Zam­bia as a net im­porter. The cop­per pro­ducer is yet to re­flect crude cur­rent crude pric­ing in the pump prices charged to end users. Na­tions in South­ern Africa such as South Africa have ad­justed prices more than thrice while the en­ergy reg­u­la­tion board de­cided not to on ac­count of volatil­ity in the crude and cur­rency price which most an­a­lysts found naïve. How­ever, the con­cern around non-re­flec­tive pump prices raises ques­tions around whether sub­sidy’s have been re­ally lifted or should the na­tion ex­pect a sig­nif­i­cant jump in the level of in­fla­tion when, crude prices fi­nally price in. It may be a lit­tle too am­bi­tious to state that in­fla­tion will be main­tained through a 6-8% band in light of the up­side risks from ris­ing crude.

The right fis­cal strides, but im­ple­men­ta­tion is key

Fi­nance min­is­ter Mwanakatwe in June an­nounced aus­ter­ity mea­sures that would curb the rapid pace at which debt was ac­cu­mu­lat­ing. This move was seen as long over­due but would then ad­dress the un­cer­tainty around a sus­tain­able path Zam­bia needed to take to re­align the coun­try to medium to low risk of debt dis­tress. All this was at a time the cop­per pro­ducer was ne­go­ti­at­ing for a US$1.3bil­lion bailout sup­port pack­age. This co­in­ci­dence has made it look like all strides are be­ing made to skew to­wards an IMF pack­age rather than to ad­dress the anaemic in­ti­macy be­tween fis­cal and mon­e­tary pol­icy that should grow the econ­omy. Debts con­tracted yet not dis­bursed will be put on hold and the state will fo­cus on pro­jects that are very crit­i­cal in the quest to tame the ele­phant in the room - debt. The strides can be lauded, but what re­mains key is the po­lit­i­cal will to im­ple­ment these mea­sures.

For a long time, the dis­cus­sion be­tween the IMF and Zam­bia has grav­i­tated around a more sus­tain­able debt path which in our opin­ion stalled con­clu­sion of a US$1.3bil­lion deal pack­age. Zam­bia can pick a leaf from what made the IMF ex­tend US$50bil­lion sup­port to Ar­gentina, yet the cop­per pro­ducer still grap­ples to draw on a US$1.3bil­lion ex­tended credit fa­cil­ity. MOF hired an in­de­pen­dent con­sul­tant that run Zam­bia’s num­bers in a debt sus­tain­abil­ity anal­y­sis ex­er­cise that clar­i­fied the coun­try’s ex­ter­nal debt po­si­tion as be­ing US$9.3bil­lion as at end of Quar­ter 1 of 2018. This is one step that Mwankatwe can be lauded for, as it has al­layed all in­for­ma­tion asym­me­tries in debt num­ber as­sump­tions that caused some macroe­co­nomic vari­able in­sta­bil­ity man­i­fest­ing in cur­rency weak­ness, as­set sell-off and gen­eral damp­ened con­fi­dence in Zam­bia.

The min­is­ter in her state­ment com­mit­ted to align­ing the 2019 bud­get to the aus­ter­ity an­nounced in June, which is one event mul­ti­lat­er­als and de­vel­op­ment fi­nance in­sti­tu­tions look for­ward to, as it will spell the jour­ney and path Zam­bia will take go­ing for­ward. Op­er­a­tional­i­sa­tion of the Pub­lic Fi­nance Man­age­ment Act is one an­other key de­liv­er­able the Min­istry of Fi­nance will be mea­sured against to curb fi­nan­cial leak­ages which has cost the gov­ern­ment huge sums. This will en­force and strengthen the Au­di­tor Gen­eral’s re­port which has for a long time been seem­ingly un­der­mined by per­pe­tra­tors of fi­nan­cial man­age­ment.

Ex­ter­nal debt po­si­tion

Zam­bia’s stock of ex­ter­nal debt as at end of first quar­ter was US$9.37bil­lion with the slight in­crease in the debt stock at­trib­uted to dis­burse­ments dur­ing the re­view pe­riod. How­ever, it is dis­ap­point­ing that the fi­nance min­istry could not re­port a more up­dated fis­cal po­si­tion as at half year which most stake­hold­ers would have ex­pected. Even an es­ti­mate fig­ure would suf­fice for the sake of trans­parency.

With the re­cently an­nounced aus­ter­ity mea­sures, econ­o­mists ex­pected at the least that the fi­nance min­istry has a more up­dated es­ti­mated ex­ter­nal debt po­si­tion. In line with this ex­pec­ta­tion, this would have been the op­por­tune mo­ment for the min­istry to ad­vise what the re­vised fis­cal deficit is com­pared to the 6.33% re­ported in the year pre-debt sus­tain­abil­ity anal­y­sis.

Con­tin­u­a­tion of Zam­bia Plus or IMF bailout?

With the aus­ter­ity mea­sures in place, there is ur­gent need for im­ple­men­ta­tion as a demon­stra­tion of po­lit­i­cal will to re­align the fis­cals in the right di­rec­tion. The ques­tion re­mains should Zam­bia pur­sue an IMF deal or merely con­tinue with the Zam­bia Plus eco­nomic home-grown pro­gramme? The cop­per pro­ducer has for over eight quar­ters ne­go­ti­ated for a bal­ance of pay­ment sup­port pack­age that has not ma­te­ri­alised to date. A de­layed pro­gramme wore out in­vestors that took po­si­tions on Zam­bia. As a re­sult, the mar­kets ex­pe­ri­enced as­set sell-offs that then caused cur­rency pres­sure and damp­ened con­fi­dence.

Does Zam­bia re­ally need an IMF pro­gramme? Some naïve econ­o­mists have dis­pelled the need for an IMF deal, cit­ing the na­tion’s abil­ity to weather the eco­nomic storm with­out ex­ter­nal as­sis­tance. How­ever, an­a­lysts need to be mind­ful that mon­e­tary ben­e­fit is not the core rea­son why an IMF pack­age is be­ing sought. It is more on the ben­e­fits of a pro­gramme with the IMF as the Wash­ing­ton-based lender is more like a de facto guar­an­tor to Zam­bia on many eco­nomic pro­jects and will make the na­tion at­trac­tive to ex­ter­nal in­vestors that could have shied away dur­ing this 2-year pe­riod of wait.

The co­coa pro­duc­ing na­tion of Ghana had a Eurobond is­suance 50% guar­an­teed by the IMF, a move that helped aid pric­ing of the bor­row­ing. The IMF or World Bank could also guar­an­tee credit ex­ten­sion to key sec­tor util­i­ties such as power. Suf­fice to say a pro­gramme opens doors that come with im­mense eco­nomic ben­e­fits. Yes, the na­tion can weather a storm with IMF as­sis­tance, but this would take decades. The ben­e­fits of an IMF deal out­weigh the US$1.3bil­lion. How­ever, for Zam­bia’s pro­gramme to make it to the IMF board, more ac­tion is re­quired.

A night pic­ture of Lusaka, the cap­i­tal of Zam­bia.

Ray Wash­burne, Pres­i­dent and Chief Ex­ec­u­tive of the Over­seas Pri­vate In­vest­ment Cor­po­ra­tion (OPIC), a United States of Amer­ica Gov­ern­ment De­vel­op­ment Fi­nance In­sti­tu­tion paid a cour­tesy call on the Min­is­ter of Fi­nance Hon­or­able Mar­garet Mwanakatwe in Lusaka last week. He said his del­e­ga­tion was in Zam­bia to ex­plore in­vest­ment prospects in en­ergy, agri­cul­ture pro­cess­ing, trans­port and lo­gis­tics, tourism, in­for­ma­tion and com­mu­ni­ca­tion tech­nol­ogy, value chains, and women driven en­trepreneur­ship ini­tia­tives.

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