Previous Quarterly Editions
Expropriation Risk: 69 67 64 67 Political Violence Risk: 66 67 68 68 Terrorism Risk: 20 20 20 20 Exchange Transfer and Trade Sanction Risk: 70 67 64 65 Sovereign Default Risk: 81 82 82 82
TREND ► OUTLOOK ▲
The government’s failure to agree an economic recovery package with the IMF after requesting a loan of 1.3 billion dollars continues to undermine the prospects for growth and stability. Any deal with the Fund would entail deep spending cuts and these would increase popular frustration with President Edgar Lungu's government and complicate his efforts to stay in power. Although it has suggested that a new proposal is being readied, IMF officials say that they have not received any new plans for dealing with the country’s debt. According to the government’s own figures, total public debt now exceeds 14.5 billion dollars, with around three billion of that owed in the form of Eurobonds. At the same time, economic growth is a serious concern. At just 2.6%, growth in the first quarter of 2018 was down from 3.2% a year earlier, making it the lowest quarterly figure since 2015. Taken together, these developments have further undermined domestic and international confidence in the government’s ability to cope with the country’s economic difficulties. International financial institutions remain concerned about the government’s questionable commitment to fiscal discipline. Although President Lungu’s administration has succeeded in rescheduling Chinese debt, which is estimated to represent around 30% of the overall debt stock, government claims that a consortium of South African banks was set to unveil a 1.2 billion dollar rescue package backed by the South African government have not been borne out. Moreover, the use of some Eurobond income to finance recurrent expenditure has led to serious questions both within the country and abroad about whether borrowed funds are being put to good use. At the same time, President Lungu’s physical fitness for the job has once again become the topic of speculation, with opposition leaders making pointed comments about his health after the president fell asleep during a number of public events. The government was also widely criticised for refusing to allow Zimbabwean opposition leader Tendai Biti either asylum or safe passage to a third country after he sought to flee Zimbabwe following a government crackdown after the presidential election there in July. However, there was some positive economic news in late August when Ethiopian Airlines announced that it will take a 45% stake worth 30 million dollars in the relaunched Zambian Airlines, with the government keeping 55%. Although there has been some scepticism about reintroducing a national carrier given the high costs and relatively small nature of the Zambian market, the partnership with Ethiopian Airlines, the largest on the continent by both revenue and profit, has given credibility to the plans.
TREND ▲ OUTLOOK ▼
At the start of the year, the Zambia Revenue Authority (ZRA) was pursuing several mining companies for alleged underpayment of taxes in an apparent attempt to squeeze the sector for much-needed revenue to meet the cost of debt-financed infrastructure projects. The ZRA appeared to step back as the rising price of copper in the first half of the year increased revenues, but a fall of more than 20% in the value of copper since June has been a major concern for the government. President Lungu may choose to revive corporate tax receipts as a political issue ahead of the 2021 election but any serious and sustained downturn in the sector, including cuts in employment, may see a return of government threats for stricter regulation and more taxes. This is despite the fact that Zambia’s mining sector is already among the most highly taxed in the world and it has undergone eight major policy changes in the last decade. The continuing failure to agree a rescue package with the IMF also increases the general risk of expropriation in the absence of alternative sources of revenue and investment.
A deteriorating economy, confrontations between the government and opposition, and the president’s continuing plans to seek a constitutionally questionable third term in office have all raised the risk of conflict in a country that is not known for political violence. The strength of the main opposition United Party for National Development (UPND), which almost won the 2016 presidential elections, and the growing fragmentation of his own Patriotic Front (PF) have placed President Lungu in an increasingly vulnerable position. In this context, an economic recovery plan that requires significant austerity and pushes urban Zambians further into poverty could trigger public protests and unrest.
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 detract from the ability of the security services to monitor external threats.
TREND ▲ OUTLOOK ▲
Inflation remains below the government target of 6-8% until August, when it reached 8.1%. It looks to set to continue rising. The volatility of the kwacha reflects concerns about the government’s reluctance to accept the conditions associated with help from the IMF, and these are likely to affect the currency more directly the longer doubts about government policy persist. About 70% of Zambia's foreign exchange is earned from copper mining, so the recent price shifts have been significant. Reports in September that several donors, including the UK and Finland, were suspending aid because of concerns about fraud and misuse will reduce confidence further.
Zambia continues to contract external and domestic debt at an unsustainable rate, and there is general consensus that the government’s own figures do not reflect the severity of the situation. External debt reached 9.4 billion dollars at the end of June, equivalent to more than a third of GDP, from 8.7 billion at the end of 2017. A former finance minister recently suggested that by the end of 2018 the annual cost of debt servicing will have reached a billion dollars, while the IMF expects Zambian debt to exceed 60% of GDP by early 2019. The central bank’s total reserves continue to fall and are now just above two billion dollars, providing less than three months of import cover.
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