Troubled Times in the Zambian Economy

The Zambian economy is in the midst of a storm, brought on by strong headwinds. It feels eerily similar to the latter stage of the Patriotic Front regime. The dollar is breaching the K20 mark, the cost of fuel is at a record high (Nearly K30/litre) amongst other problems. Zambians are murmuring and questioning the efforts of the UPND, particularly against the lofty promises they made to fix the economy.

Things started well. In 2022, the Zambian Kwacha was stronger than the Russian Ruble, hailed as one of the best performing currencies in the world. The new government had clinched an IMF deal, the economy was growing amidst lofty policy statements, such as to ramp up copper production to 3 million metric tonnes by 2031. Momentum has fizzled out, however and the outlook is greyer than it was previously, with the Kwacha now being the 6th worst performing currency in the world.

I mentioned murmurings amongst the citizenry. I must hasten to add that unfortunately, some of these are ill informed. I do not say this in defence of the government, but listening in on conversations in public places, I realize most do not understand why the economy is struggling, highlighted by an inability to articulate root causes of the problem, rather going straight to lambast the government.

The root cause is delays in debt restructuring. This is something that is beyond the government and solely in the hands of our creditors, particularly China, its consortium of lenders, and the Eurobond holders. I talked of this in my earlier article on the Monetary Policy Committee statement. China seems hesitant to restructure Zambia’s debt under the auspices of Western multilateral institutions.

China has a mistrust for these institutions (IMF and the World Bank). It being a new power, China is not amongst the countries that developed these institutions. This is made all the more severe given tensions between itself and the US, the latter being a large shareholder in the Bretton Wood’s institutions. China is calling for the restructuring of debt held by multilateral institutions and Non-Resident Holders of Government debt, in Zambia. It appears they will not budge on this demand.

The IMF and WBG (World Bank Group) have argued this is not negotiable. The two institutions are lenders of last resort in the international finance framework, not to mention preferential lenders with AAA ratings. They also argue, which is true, that their loans are concessional, i.e. at low, rather, negligible rates. The restructuring of their debts would imply that there is a risk to their credit portfolio not being recouped. They would either have to raise their rates or becoming increasingly selective in the disbursements, thus defeating the purpose of their existence. This is the impasse over Zambia.

The result is uncertainty in markets. This is seen primarily through now perennial under-subscriptions of Treasury bill and Bond auctions. In the early days of the UPND administration the Central Bank was turning money down through these auctions, now they can’t seem to meet their auction amounts. As a result, the Kwacha depreciates and when it does fuel prices go up, spilling into prices in the whole economy.

Unfortunately, I cannot be as optimistic as I would like to. The government hopes to finalize debt restructuring by end of April. There is no assurance that China will join the multilateral institutions bandwagon by then, no matter how many reprimands come from the US, the IMF and the WBG. Thus, the Kwacha may continue to slide and unless the government begins subsidizing fuel, it is likely to continue increasing. I think subsidies are not even a question as state coffers are empty. We are thus in for a bumpy ride. IMF disbursements under the Extended Credit Facility will not be disbursed until debt restructuring is finalized.

This will be particularly damaging as the 2023 budget included receipts from the program. Could this be the reason why doctors were left out of civil servant’s salary increments and have since gone on go-slow? Could this also be the reason why progress has been slow on some of the budget’s pronouncements such as the operationalization of farming blocks? As well as other issues such as not disbursing full amounts to institutions such as the Rural Electrification Authority?

I would not be the Economist I am if I did not suggest solutions. Every problem has a solution. This is true at individual, family, societal and national levels. We just need to expend some energy thinking. I feel the government may need to look beyond the Common Framework. Since its inception by the IMF, it has not resulted in any noteworthy debt resolution. I dismiss that of Chad as it was unsatisfactory and the country found other ways of resolving their debt troubles, specifically through increased oil revenues at the height of the Russia-Ukraine war.

The whole concept of the framework seems a bit far-fetched. It is a mammoth task to bring together the Paris club, the Group of 20 and private creditors together and get them to agree to uniform debt treatment. It may even be unfair to expect this of creditors who come from completely different backgrounds. This may be why China is digging in its heels, in defiance of the system.

Could we try approaching each of these creditors individually, i.e. multilateral institutions, China and Eurobond holders, developing unique agreements with each of them? I feel this will be better. I do not think China will ever agree to a debt treatment that is organized by the West for Zambia. China does not always see eye to eye with the West. However, I also know that China and Zambia enjoy long and warm bilateral ties, from the early days of our sovereignty. It was China who built our TAZARA rail way after the UDI (Unilateral Declaration of Independence) of Southern Rhodesia in 1965. Even in providing us with $6 billion in debt, I assume they meant well and at a deeper level want to see Zambia develop. However, for so long as President Hichilema is bent on being the darling of the West, our relationship with China may not bear the fruits it should.

As I wrap this up, I reiterate my belief in the Zambian economy and its people. I believe strongly that our vision as espoused in the 8th National Development Plan will be met. What we are going through is temporary, from which we will navigate a way out. It may take time, but it will come. However, those who have been elected into power need to begin thinking outside the box to address these problems, whatever this will take. As we do this, I hope the government can be more independent in its policies and not relying solely on the West.

Till then. Au revoir.