The newly elected government of President Hakainde Hichilema is hoping to agree an International Monetary Fund (IMF) package to stabilise foreign exchange reserves and enhance Zambia’s credibility as it seeks to renegotiate with lenders.
Elected on 12 August, Hichilema has promised to lower public debt, in part by renegotiating with existing lenders (AE 444/1). Finance minister Situmbeko Musokotwane in late August said an IMF package was also part of the plans. “I am hoping by October or November at least to get the board of the IMF to give us that package,” he said. “The IMF programme is important… This will be able to assure the creditors and even investors that we are now on track with what we are doing.”
There were distinct policy differences with the IMF under former President Edgar Lungu, whose government removed a 16% value-added tax on gasoline and diesel prices in January. That was an attempt to avoid a public backlash from any price increases at the pump. However, the IMF is expected to push for that to be reversed. “They have indicated that prices at the pump must be reflective of the true [cost] and with our fiscal deficit above double digits, this is one area the IMF wants reviewed,” treasury sources told African Energy.
The new regime has not publicly announced plans to increase fuel prices but there have been indications they will go up. Bank of Zambia (BoZ), the central bank, has kept the benchmark lending rate at 8.5% to help stem inflationary pressures. However, it said that it expected a “possible increase in domestic prices of fuel pump prices and electricity.”
Zambia is seeking to untangle itself from the $13bn foreign debt that is severely limiting the government’s fiscal space and its ability to fund public services. The true debt figure is thought by some observers to be higher, given the lack of transparency with Chinese debt. Both Musokotwane and Hichilema have confirmed foreign debt could be higher than the official figures. The Ministry of Finance is close to completing an assessment of the debt position; an announcement was due to be made as African Energy went to press.
Zambia defaulted on a $42.5m Eurobond coupon payment last November (AE 428/22). The full $750m Eurobond is due to be repaid in 2022 – a deadline that makes negotiations with the IMF and debt-holders a critical issue. “We don’t have the money to pay that [bond] and that is why it is important for us to get into an arrangement with the IMF because that will give them [bond holders] confidence that we are on track,” Musokotwane said.
Sources in Lusaka said the IMF also wants the government to reform state utility Zesco to make it commercially viable, as the company accounts for a large portion of the external debt. The state utility has often been used to fund political activities of ruling parties in the past. Zesco is carrying out an audit of its staff, amid reports that some supporters of the former ruling Patriotic Front were on the company’s payroll despite not being employees. “There are so many ways in which you can make Zesco efficient if it divorced from political capture and it’s going to run purely as a commercial entity,” said energy economist Andrew Kamanga.
The government is expected to seek an increase in electricity tariffs following the outcome of a much-delayed cost-of-service study, which is now expected to be completed by end-year. Kamanga said cost-reflective tariffs would help to increase the amount of private capital flowing into greenfield projects to boost generation. However, the government will need to be careful to manage public perception to avoid a backlash. “Tariffs will be high and for a citizen, their challenge will always be affordability. If a citizen cannot afford a high tariff, it is obviously a big issue politically,” Kamanga said.