Little cash, no credit
The Liquidity crisis continues while the exchequer has a different kind of problem with liquids to deals with
The government's chronic shortage of cash has resulted not only in late payment of salaries for public servants, but also in a four-week default on a large loan repayment for new equipment for the armed forces, Africa Confidential can exclusively report. Meanwhile, on 23 May the credit ratings agency Moody's downgraded Zambia to a Caa2 negative rating to reflect 'the probability of default over the near term'.
The government has been issuing reassurances and defiantly denying the existence of a crisis. At the same time, Finance Minister Margaret Mwanakatwe is being called into question over allegations that she is often drunk (See Box, Margaret and the margarita).
One response to the liquidity problem has been to suddenly raise new taxes on mining companies, and fears over nationalisation of foreign-owned assets are growing (See Box, Tapping up the miners). Neighbouring Congo-Kinshasa drew loud protests from its mining companies when it imposed new taxes early last year but despite threats of legal action and investment strikes, the companies eventually fell silent (AC Vol 59 No 4, Kabila squeezes the miners). President Edgar Lungu will be hoping for the same.
The kwacha has also rapidly declined in recent weeks to stand at around 14 to the US dollar, leading the Central Bank to raise its benchmark interest rate from 9.75% to 10.25% in a bid to stabilise the currency.
The latest loan repayment to be missed is €6 million to the Italian bank Intesa Sanpaolo which fell due on 30 April, according to financial sources in Lusaka. The payment represents the first instalment on €97m Zambia borrowed to buy two C-27J twin-engined military transport aircraft (AC Vol 59 No 20, A splurge before the squeeze). The aircraft have not yet arrived in Zambia, but almost all of the loan was disbursed in December directly to the manufacturer Leonardo, we have learned.
The government denies that such loans are a drain on its finances, often at the expense of vital public services and public servants' pay, but critics point to military equipment as a perfect example of expensive goods that can generate no economic returns.
Intesa Sanpaolo has not yet publicly declared the loan repayment in default, which would have serious consequences for other loans and the Eurobonds Zambia has issued. We understand that the Ministry of Finance is now processing the overdue payment, although it is taking an unusually long time for the funds to reach the bank.
Austerity measures
The government was already struggling to meet its debt service payments when the Italian loan was contracted, and it came as Mwanakatwe announced austerity measures that were meant to halt all but essential further borrowing. The test of that policy was supposed to become clear when the government published its Debt Sustainability Analysis, expected a year ago. But the paper failed to bear out the claim that the debts were sustainable in the short term, we hear, and it remained under wraps.
While the investment climate remains poor, confidence is not high among donors. The audit of over $50m in Ministry of Education funds suspected of being embezzled is testing the patience of those who provided the money. Of the $20m audited so far, indications are that around 90% was misappropriated, according to sources involved in the audit. The United Kingdom's Department for International Development is believed to be contemplating demanding repayment now of the funds already identified as missing because of the length of time it is taking to complete the audit.
Tapping up the miners
Zambia's ruling Patriotic Front (PF) has taken a drastic step in a power struggle with mining firms. State mining agency Zambia Consolidated Copper Mines – Investment Holdings (ZCCM-IH) obtained an order to liquidate Konkola Copper Mines (KCM) under the Company Insolvency Act on 21 May. KCM is owned by the UK-headquartered and Indian-owned Vedanta Resources.
ZCCM- IH's winding-up petition to the Lusaka High Court cited tax evasion and breach of operational agreements. ZCCM-IH owns 20% of KCM. Vedanta was not initially informed of the move. Vedanta has been in several serious arguments with the government over taxes dating back to the presidency of Michael Sata and before (AC Vol 55 No 12, Fury over Vedanta).
The latest move comes after a recent tax increase on mining operations which the government pushed through despite fierce industry opposition. The industry claims that the net effect of the new, non-refundable Sales Tax, which replaces VAT, will be to lower production and reduce the total in revenue the government receives (AC Vol 60 No 2, Debt and discontent). VAT was in theory refundable, though the government was heavily in arrears on its refunds to businesses including miners.
In a 23 May statement, Vedanta said it would challenge the liquidation order in court and that it had 'serious concerns about the intentions of the applicants and the procedures that were followed' in obtaining it. There has been widespread controversy over the appointment of a PF official, Milimo Lungu, as liquidator, and some local media accuse President Edgar Lungu of 'sending in his boys to take possession of the company's assets'. A court hearing is scheduled for 4 June.
Some sources say the government simply wishes to seize the asset in order to hand it to another investor in a bid to bring in windfall revenues – possibly even a deal with China as part of a debt restructuring (AC Vol 60 No 9, Treasury in the red). But documents seen by Africa Confidential indicate that the government has had concerns over KCM for some time. KCM has also been fighting hard to prevent the High Court in London hearing the case of over 1,800 Zambians claiming damages for harm caused by pollution. In April, the litigants were granted the right to proceed in London. The government is looking at alternative investors to take over Vedanta's interest in KCM, AC has learned.
Mining industry investors are increasingly nervous about Zambia and the growing popularity of resource-nationalist motivated tax grabs, such as the one ex-President Joseph Kabila imposed on miners in Congo-Kinshasa, and the demand for $190 billion in back-taxes from Acacia Mining, initially made by Tanzania's President John Magufuli (AC Vol 58 No 15, Magufuli's law). Lungu has also appeared to threaten the Mopani mine, which is owned by Glencore, with similar action. Industry sources say that Glencore may attempt to counter the move by closing its Zambian operations.
Margaret and the margarita
The severity of the economic problems Zambia is facing, especially in finance, is drawing unwelcome attention to the public behaviour of Finance Minister Margaret Mwanakatwe. Cynics are suggesting that President Edgar Lungu may throw her to the wolves as a scapegoat for the country's economic ills, in part because of her very public battle with alcohol.
Initially appointed as a compliant successor to Felix Mutati, who resigned the portfolio because he feared Lungu was damaging his future political prospects, Mwanakatwe is not generally held to be the author of the country's financial misfortunes, only a facilitator of them (AC Vol 57 No
25, Preparing for the worst). Sources who meet her say there is only a short window in the morning during which it is possible to have a productive discussion with her before she becomes inebriated.
Videos of Mwanakatwe acting drunk are circulating widely. In one, she speaks erratically about the Lusaka mayoral elections last July. In another, her head lolls backwards during a public ceremony. Local newspaper News Diggers has published a number of editorials, one entitled 'Minister for Beer' in which it has implored her to get help; they published another in mid-May. So far, no response has come from the minister.
Mwanakatwe gave an interview on Bloomberg TV in April in which she said that the depreciating kwacha and rising debt service posed 'no problem'. Suspicions arose about her sobriety and the interview was viewed by local observers as a disgrace.
