Zambia Implements Austerity Measures in Quest for IMF Deal
Africa’s second largest copper producer Zambia introduced austerity measures in a quest for an IMF bail out deal. These were introduced in an effort to curb rising debt that has been cited as the causer of a deal breaker in negotiations with the Washington based lender. In the last two (2) weeks starting 06 June the copper producer has introduced austerity measures dubbed as operationalization of a strengthened Public Finance Management Act to thicken accountability of resources in the public sector. .....
This is an ask the IMF and World Bank have been waiting for in a long time especially that Zambia has had several reports such as the Auditor Generals that has cited wastage and lack of accountability in the public service. This has cost the state, financial resources. The Honorable Minister of Finance in a treasury note announced the strengthening of the bill on 07th June.
A few days later on the 14th June the Minister of Finance – Honorable Margaret Mwanakatwe announced some long overdue austerity measures which are targeted at arresting debt contraction, controlling the dissemination of information whose asymmetry has caused a blow out in credit default spreads in the dollar debt market with Eurobonds maturing 2027 yielding 11.32% ( Z-spreads of 789bps) the worst emerging market performers. The importance of accurate information cannot be over emphasized and is very key in bond markets because it prices into these liquid assets that investors offshore use as proxies for sentiment about Zambia. The value of perfect information as it is cited in financial market parlance. Zambia has been masked by a dark of cloud of negative sentiment pushing it to the verge of credit rating downgrade by the international rating agencies such as Fitch, Standards and Poor’s and Moody’s. The negative sentiment has caused an asset sell - off in both Dollar and Kwacha denominated assets exerting undue pressure on the exchange rate which has shaved value of close to 8% to date. The Kwacha weakened to ZMW10.4/USD at some point but reversed some of the losses to stabilize at ZMW10/USD from ZMW9.45/USD levels a few months ago.
“These measures couldn’t have come at a better time, The Lead Analyst said. But the results of these are what will determine the direction negotiations with the IMF will take. It gives Zambia stronger leverage to resume discussions with the Washington based lender.
See below a Bloomberg extract of credit default spreads for Zambia’s 2022, 2024 and 2027 dollar (Eurobonds) in the year 2018. However, on the positive side, credit spreads narrowed 35 -93bps between the 06 and 15 June when the austerity developments were implemented and announced. Arguably the market reaction is positive but offshores want to see more than just announcements. The results of these stringent measures will set the tone of the IMF discussions for a bailout package over the next few months. This is Zambia’s best bet for a deal closure.
Zambia has for over two years been in discussions with the IMF for a $1.3billion bailout package which is supposed to be for balance of support purposes.
The outcome of the debt sustainability analysis - DSA has revealed that Zambia’s public external debt as at march was USD9.3bn with domestic debt stock in government securities at ZMW53.5bn (from ZMW48.4bn). The Minister of Finance confirmed that the DSA revealed that Zambia has to tame its debt risk to ‘moderate’ from ‘high risk’. This aligns well with the IMF classification for 7 African countries Zambia inclusive in the high debt risk bracket. The Ministry of Finance will cancel some of the contracted debt not yet disbursed and postpone contraction of pipeline debt. The MOF will also cease issuance of guarantees and letters of credit on state owned enterprises (SOEs) that are not technically solvent. Key to these measures includes the drive to dismantle arrears of ZMW12.7bn that have had a ripple effect on the economy especially the banking sector that has been laden with high non-performing loan stocks in breach of the 10% prudential limit at 12.65%.
“It is a positive step in the right direction. The president gave a directive earlier in April that the Public Finance Management Act be strengthened by June. This was then adhered to this month. Zambia Business Times Lead Analyst said in a note on June.