Why Zambia’s New Leader Urgently Needs an IMF Loan
(Bloomberg) -- Zambia in November became the first African country to default on foreign debt during the coronavirus pandemic. At the time, it was discussing new financing with the International Monetary Fund, which hadn’t extended a loan to the nation since 2008. Presidential elections held on Aug. 12 complicated the talks because the IMF couldn’t be sure who it would be dealing with. Now Zambia has a new leader, who wants to pin down funding as quickly as possible.
1. Why is the country so cash-strapped?
The Patriotic Front party, which took power in 2011, embarked on a spending spree, building thousands of miles of new roads, airports and rural healthcare facilities. In the process, it amassed $13 billion of foreign debt. The government’s ability to meet its obligations was eroded because it discouraged investment with attempts to extract more revenue from the mining industry, the bedrock of the economy. The pandemic made the situation worse, with gross domestic product contracting 3% in 2020.
2. How did the crisis impact on the elections?
Opposition leader and businessman Hakainde Hichilema, who failed in five previous attempts to secure the presidency, beat incumbent Edgar Lungu by a landslide. His victory was widely seen as a backlash against surging inflation and falling living standards. Hichilema is targeting an economic growth rate of more than 10% within five years, mainly by expanding the mining, agriculture, construction and manufacturing industries. He’s also pledged to attract new investment by ensuring government policy is stable and predictable.
3. What does Hichilema want from the IMF?
He has said officials will immediately resume negotiations with the Washington-based lender and that he hopes to secure an extended-credit facility by the time of its 2022 Spring Meetings. He hasn’t specified how much money will be sought. Zambia can access about $1.3 billion. The president-elect also envisages simultaneous talks with foreign creditors, with a view to restructuring the nation’s debt. Lungu’s administration wanted as much as $12.7 billion of foreign debt to be restructured. The government will be transparent with creditors and is committed to repairing its reputation and raising creditworthiness, according to Hichilema.
4. What is the IMF’s view?
It has expressed willingness to help Zambia, but a loan is contingent on the government implementing several reforms. Those are likely to include scrapping or cutting fuel and farming subsidies -- two key sticking points in the talks so far. The IMF is also likely to pressure the government to adhere to fiscal targets, including reining in a budget deficit that reached 14.4% of GDP in 2020.
5. How confident are investors of a deal being struck?
Zambia’s Eurobonds and currency surged after Hichilema clinched his runaway election win, an indication that investors expect him to improve the country’s international standing, tame runaway debt and secure the long-sought IMF loan.
7. Does Zambia have options other than the IMF?
Its debt default will preclude it from tapping loans from multilateral lenders and other options are limited. One potential source of funding could be China, which is already one of the country’s largest creditors. It previously agreed to defer interest payments on loans to Zambia and delay principal repayments, but it hasn’t recently indicated any willingness to provide new money.
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