EIU Expects Vulnerable PF To Aggressively Narrow Political Space
The Economist Intelligence Unit says fiscal policy in 2020-21 will be erratic.
It warns, in 2020, the cumulative impact of food, power tariffs and fuel hikes on consumers threatens to create widespread unrest, even if recession is avoided.
In its current report dated December 26, 2019, the EIU notes the latest World Bank data release shows that Zambia has accumulated a large build-up in the stock of principal arrears to private external creditors in 2018, from US$243m in 2017 to US$2.9bn.
“This is equal to 15 per cent of gross external debt. The Economist Intelligence Unit is making enquiries into this figure, which is linked to an abrupt jump in scheduled repayments due for the year. For now, we have been unable to corroborate the missed repayment, and continue to report an internal estimate for Zambia’s 2018 external debt series that excludes the arrears build-up,” it stated. “If accurate, the arrears would constitute just under 29 per cent of public and publicly guaranteed external debt, and around 37 per cent of Zambia’s private external debt. If the arrears are on public or publicly held debt, it would indicate a sovereign default on a scale not seen in Africa since heavily indebted poor countries (HIPC) were granted debt relief in the early 2000s. It would severely restrict Zambia’s access to international capital markets and make conventional re-financing of Zambia’s upcoming Eurobonds (in 2022 and 2024) extremely challenging, pushing Zambia towards a restructure or bailout from bilateral partners or, alternatively, leading to further defaults. Overall, the external picture for Zambia would be markedly more stressful than the current forecast envisages. The fallout from this would also have knock-on effects for Zambia’s fragile political stability in 2020, with potentially severe repercussions for businesses and the overall economy.”
On election watch, the EIU notes that the next legislative and presidential elections are due in August 2021, by which time the possibility of Zambia being caught in a debt trap – a loss of economic sovereignty to creditors – by China will be a key concern among voters. “With high debt-servicing costs, fiscal space will also have been tightened, causing salaries to be frozen and subsidies cut. This will damage government patronage networks, forcing it to take a more authoritarian direction, and we expect the upcoming elections to be neither free nor fair,” it states. “In 2020 the cumulative impact of food, power tariffs and fuel hikes on consumers threatens to create widespread unrest, even if recession is avoided. The run-up to the 2021 legislative and presidential elections will be another unstable period, during which a vulnerable PF will aggressively narrow the political space and escalate crackdowns. Such moves will undermine political stability by feeding into public fears that Zambia is staggering towards autocracy, exacerbating underlying social tensions.”
However, the EIU expects spending will remain unsustainably high in 2020-21, “and only following the election in 2022 will spending as a share of GDP decline, owing to financing constraints and the winding-down of a debt-financed infrastructure programme”.
The EIU does not expect a major mining recovery before 2021 due to on-going power issues.
“Overall, we expect mining revenue to decline marginally as a share of GDP in 2020. Further rises in the world copper price will encourage a gradual increase in mining output and, therefore, a broad increase in revenue over the remainder of the forecast period,” it stated. “The government’s current austerity pledges warrant continued scepticism, as numerous plans to address debt problems have been formulated, only to be neglected in practice. For example, proposals in the Constitutional Amendment Bill (currently being debated in Zambia’s parliament) would abolish parliamentary oversight on contracting debt and allow Mr Lungu to sign international agreements without the approval of the National Assembly. Official projections in the 2020 National Budget support our forecast that spending will rise that year (and in 2021, with elections due) – driven by foreigndebtfinanced capital outlays and debt servicing. Atypically, infrastructure spending – much of which is tied to Chinesefinanced projects that the government does not want to interrupt (possibly in hope of debt relief) – will work to squeeze out the recurrent budget on subsidies and wages. Expenditure will drop significantly from 2022 onwards, with foreign liquidity pressures mounting (and with elections over). Only then will capital spending be cut back, although high debt-servicing costs will continue to crowd out wage spending and subsidies.”
It estimated a fiscal deficit of 6.7 per cent in 2019 and 6.2 per cent in 2020.
The EIU stated that economic growth in 2020-24 would be considerably below Zambia’s long-term potential.
“Most significantly, disputed VAT rebates, a botched scrapping of VAT itself, and the forced liquidation of KCM will all hold back investment in the vital copper mining industry. Growth will be weighed down by a slow start in the copper mining industry (recovering fully in 2021) and a contraction in private consumption,” stated the EIU. “Unexpected increases in the cost of food production (driven by persistent power shortages that have forced food producers to rely on expensive diesel generators) have subsequently been passed on to consumers. Low water levels on the Zambezi River – where the country’s main Kariba hydroelectric dam is located – making a return to normal power supply unlikely in 2020. Overall growth is forecast to rise from an estimated 0.8 per cent of GDP in 2019 to just 1.3 per cent in 2020.”
Source: The Mast