Zambia battered but refuses IMF loan


Zambia’s Finance Minister Alexander Chikwanda is no admirer of the International Monetary Fund (IMF). But with the nation’s currency plunging to a record and yields on foreign bonds approaching 11%, he might soon have to change his mind, according to Rand Merchant Bank.



The kwacha slumped 27% this quarter, the most among more than 150 currencies monitored by Bloomberg, driving up debt-service costs and threatening to fuel inflation and undermine efforts to cut the budget shortfall. The nation’s dollar bonds lost 10% in the period — the most after Ecuador out of 31 emerging nations monitored by Bloomberg indices — as yields on benchmark securities soared 251 basis points to 10.88%.



While Zambia’s treasury has said it will not need an IMF loan, Mr Chikwanda is running out of options. Copper prices near six-year lows are weighing on the economy, which relies on the metal for more than 70% of exports. An electricity shortage owing to low water levels at the Kariba Dam hydropower station is reducing mining output at a time when slowing growth in China is cutting demand for commodities and the prospect of a Federal Reserve interest rate draws money away from emerging markets.

“They will probably have to turn to the external market at some stage and seek out multilateral assistance,”Nema Ramkhelawan-Bhana, an analyst at Johannesburg-based RMB, a unit of FirstRand, says.



“If we continue to see the downward trajectory in commodity prices, specifically base metals, then it would force the finance ministry’s hand.”

President Edgar Lungu would consider exchange controls to arrest the kwacha’s “freefall,”his spokesman, Amos Chanda, says.

That comes after Mr Chikwanda and central bank governor Denny Kalyalya said last week that currency restrictions would be a backward step.



Mr Lungu directed Mr Chikwanda last week to work with the IMF to “assess additional market intervention measures to address the observed excessive volatility”, the presidency said.

But “the IMF is not the best mechanism for helping countries which are down”, Mr Chikwanda said in a speech in Lusaka. “In some cases it even compounds your difficulties.”

Zambia’s budget deficit will climb to 6.7% this year, wider than the targeted 4.6%, according to the finance ministry.


Standard & Poor’s, which downgraded Zambia’s credit rating to B on July 2, says the shortfall including debt payments could reach 14% of gross domestic product.

The government should focus on ensuring the targets to cut the deficit, outlined in its medium-term expenditure framework for 2016 to 2018, were achieved, IMF resident representative Tobias Rasmussen says.

“There is still major political resistance to seriously undertaking a formal aid request,” Gareth Brickman, a market analyst at ETM Analytics in Stamford, Connecticut, said last week. “It can only be assumed that shortfalls will continue being financed by excessive local debt issuance.”



Higher debt levels would worsen Zambia’s credit profile, increasing the need for IMF assistance, Mr Brickman said.

The last time the deficit significantly overshot the target, it prompted the government to consider an IMF programme. The 2013 deficit was almost double the government’s 3.1% target. In May last year Fredson Yamba, secretary to the treasury, said the government would start formally engaging the IMF on an aid programme. A year later he said the government did not need the aid and was already undertaking most of the fiscal measures an IMF programme would have required.

The IMF had not received an approach from the government and would move quickly if it did, Mr Rasmussen said.



“A staff team would visit Zambia to work with the authorities to develop policies and measures needed to stabilise the situation and put the country on a path of sustained and inclusive growth,” he said.

With an election looming, fiscal prudence might be difficult to maintain, says Irmgard Erasmus, an economist at Cape firm NKC African Economics.

Zambia sold $1.25bn of Eurobonds due 2027 in July at a yield of 9.37%, the highest yet for an African issuer. Yields on the securities have risen to 11%. The kwacha weakened to a record low of 10.28/$ on Monday before paring losses to trade 1.2% down at 10.11/$ in Lusaka.

“With next year being an election year, there’s not much scope for an aggressive cut in expenditure now,” Mr Erasmus says. “With the IMF you can get a more favourable debt. I don’t think that’ll be their first choice. I don’t think they like the strings attached.”