Previous Quarterly Editions
Expropriation Risk: 63 63 64 55 ▼ Political Violence Risk: 48 48 49 39 ▼ Terrorism Risk: 20 20 20 20 ► Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 83 83 83 92 ▲
TREND ▼
The risk temperature increased significantly before the August general elections, as economic decline and the falling popularity of President Edgar Lungu drove voters towards the opposition United Party for National Development (UPND) and its leader, Hakainde Hichilema. As political violence escalated, President Lungu deployed the army in Lusaka (and eventually most provinces of the country) in a strategy that was justified on the basis of the need to maintain order, but which raised fears that the security forces would be used to repress post-election protests following a flawed vote.
Ultimately, Hichilema’s margin of victory (almost 1 million votes) guaranteed him a first-round victory with 59% of the ballot and made electoral manipulation impossible. As the scale of the Patriotic Front (PF) government’s defeat became clear, a growing number of influential political leaders, civil society groups and democratic institutions were emboldened to congratulate Hichilema as president, leaving Lungu with no option but to concede.
The fact that Hichilema increased his vote share in most constituencies demonstrates that Zambians of all ethnicities and regions had grown tired of the incompetence and economic failure of the PF. The UPND’s victory was also extremely popular with the international community and Western companies operating in Zambia. The new president has a reputation as a pro-market businessman, and he is therefore expected to strengthen the rule of law while boosting foreign direct investment and restoring the political rights and civil liberties that were eroded under Lungu.
Hichilema has also committed himself to reducing corruption and restoring the independence of key economic institutions such as the Central Bank of Zambia. In some ways, Hichilema has won power at an opportune moment, as it was recently announced that Zambia will receive Special Drawing Rights (SDR) equivalent to USD1.3bn from the International Monetary Fund (MF). The president is hoping to secure further funding for economic structural adjustment by finalising a long-delayed USD1.2bn economic rescue package with the IMF and increased foreign aid from the United States and the United Kingdom. The new finance minister, Situmbeko Musokotwane, is a well-respected economist who held the same position between 2008 and 2011 and oversaw Zambia’s last economic agreement with the IMF.
However, Hichilema also faces challenges. He has primarily been elected based on his promises to improve the economy, and he will be judged on his ability to reduce poverty and create jobs. Yet Zambia remains heavily indebted, with total debt of over USD12bn, and there are realistic fears that excessive government spending before the election means that efforts to reduce the budget deficit to 9.4% (from 11.7% in 2020) will fail.
The government must also generate fresh revenue given the collapse of tourism under COVID-19, and economic growth is expected to contract 4.1% in 2021, with the country entering recession for the first time in 22 years. Ultimately, balancing the budget and repaying Zambia’s creditors will require Hichilema to rein in public spending -- a move that could be very unpopular with the urban voters who were critical to his victory.
The new government has frequently committed itself to respecting contracts signed with multinational companies and creating a positive investment environment. Hichilema is also believed to have a much healthier relationship with key mining companies such as Glencore and Vedanta Resources. There appears to be a much better chance that the legal dispute between the government and Vedanta Resources, which contributed to the halting of production at Konkola Deep due to a lack of capital, will be quickly resolved.
Under Hichilema, and with Musokotwane as finance minister, there is a general expectation of a more stable policy environment, and a more consistent relationship with foreign investors. However, mine workers and many Zambian citizens continue to feel that foreign companies exploit Zambia’s natural resources without investing sufficiently in the country’s people and infrastructure. Consequently, if the economy does not improve then the new government, like its predecessor, will come under political pressure to take a more aggressive stance towards multinational companies.
Political risk increased significantly before the election. Growing violence between party cadres (‘foot soldiers’ or ‘gangs’) led to some serious clashes, including one incident in which two individuals lost their lives. The PF claimed that these individuals had been party members killed by those associated with the UPND, and used this to justify deploying the military. The UPND contradicted this, arguing that one of the deceased had been a UPND member and that the government had deployed the military to intimidate its supporters.
Reports on election day that the PF’s North Western Province chairman had been killed by a mob who suspected him of attempting to smuggle pre-marked ballots into a polling station led to fears that accusations of malpractice might trigger more widespread violence. However, Hichilema’s convincing victory reduced the prospect that the PF would seek to retain power through force and following election day there we no major incidents.
The prospects for political stability have also improved after the new UPND surprised many commentators by quickly issuing statements that encouraged the police to act against party cadres, including those of the ruling party, to remove them from public areas. The threat of political violence is therefore significantly reduced, at least for the duration of the new government’s honeymoon period.
TREND ►
There are no terrorist organisations known to be operating in Zambia, and the country has not experienced a major terrorist incident. However, any serious deterioration in the country’s stability would reduce the ability of the security services to monitor external threats.
As part of the efforts to stimulate the economy during the COVID-19 crisis, the central bank reduced its benchmark interest rate by 225 basis points to 9.25% in May 2020 and then again to 8% in September 2020, before increasing it to 8.5% in February, to combat inflationary pressures. A June report from the government’s statistics agency revealed that year-on-year the price of chicken had risen by 75%, with the price of many other staples such as cooking oil, going up 50%.
The kwacha gained slightly against the dollar ahead of the election, as the PF government enacted measures designed to create the false impression that the economy was significantly strengthening heading into the election day (August 12). Before this, the kwacha had slid from 20.84 to the dollar in December to 22.45 to the dollar at the end of April. However, once Hichilema’s victory was confirmed, rising investor confidence propelled the value of the kwacha to 17.92 to the dollar by the end of the week, making it the best performing currency in the world since Lungu’s defeat.
The price of copper, critical to Zambia’s economic prospects, has fallen slightly from a recent high of over USD10,000 per tonne in early May to USD9,338.
TREND ▲
The new government is in a much stronger basis to negotiate debt cancellation, or at the very least a generous debt restructuring process. First, Hichilema is a more credible figure and is likely to put forward a more credible economic recovery plan. Second, the UPND can argue that the debt was accrued under a past government that was corrupt and irresponsible.
Hichilema is also believed to be less tied to the Chinese government and business interests than Lungu, and so will be more willing to provide the details of Chinese loans and economic agreements that the IMF is believed to want to see before signing an economic recovery package. However, rescheduling the country’s debt remains a major challenge because at present Zambia cannot afford to pay. Therefore, it is unlikely that all investors will be able to recoup all of their investments, which may harm the country’s reputation.
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