The IMF has reached an agreement with the Zambian authorities on a crucial three-year lending programme worth around $1.4bn that will help the country to restructure its extensive debts.
The long-awaited agreement under the Extended Credit Facility, subject to the authorities’ plans to undertake “bold and ambitious reforms” – in IMF parlance, extensive austerity – is a major boost to President Hakainde Hichilema, who was elected this year on a promise of resuscitating the economy and building bridges with multilateral lenders after relations soured under predecessor Edgar Lungu.
The deal followed virtual meetings held throughout November and early December between IMF staff, finance minister Situmbeko Musokotwane and Bank of Zambia governor Denny Kalyalya.
“These reforms seek to remedy past weaknesses in economic governance and public financial management that led to an unsustainable debt overhang,” said Allison Holland, IMF mission chief for Zambia.
“Key elements of the authorities’ reform agenda aim to re-establish fiscal sustainability while reorienting public resources towards investment in people, particularly the youth. The expected large, upfront fiscal adjustment envisages an important shift in spending, away from inefficient public investment and poorly targeted subsidies, towards greater investment in health and education and the delivery of more social benefits.
“To entrench medium-term fiscal sustainability steps are also being taken to strengthen economic governance and public financial management, together with debt management and debt transparency. Spending will be more tightly controlled, with the determined implementation of public procurement rules and regulations central to ensuring value for money and the transparent use of public resources.”
Musokotwane has previously said that securing a deal with the IMF will be critical to reducing the country’s foreign debt pile of around $13bn, much of it accumulated under Lungu, because it would give creditors confidence and the government access to cheaper and longer financing.
“We have engaged in many months of rigorous discussions and consultations to agree on an economic and financial policy package that will help us restore debt sustainability, build a productive and resilient economy, and sustain the livelihoods of our people. The Staff-Level Agreement paves the way for debt restructuring talks with our creditors,” said Musokotwane.
Holland also confirmed the need for further debt talks.
“In light of unsustainable public debt, the authorities’ reform efforts will need to be supported by a comprehensive debt restructuring. We welcome the authorities’ request for a debt treatment under the G20 Common Framework and hope that official creditors can quickly form a committee and provide financing assurances. We support the authorities’ efforts to maintain a constructive engagement with private creditors to help secure a deal on comparable terms to official creditors. Sufficient progress on this front will be needed before the staff-level agreement can be presented to the IMF Executive Board for approval.”
Debt talks likely to prove challenging
In a research note released on Thursday, a day before the deal was struck, Virag Forizs, emerging markets economist at Capital Economics, said that debt talks with creditors could prove challenging even in the result of an IMF deal, arguing that “it will be a tall order to secure a large restructuring and stick to the fiscal consolidation that will be needed to leave the public debt ratio on an even keel.”
“There are two key considerations. The first is the scale of the debt restructuring that the authorities manage to secure…The second consideration is whether Zambia can stick to a fiscal consolidation plan that will be needed to ensure debt sustainability even after securing a debt write-down.
“An IMF programme would provide a framework for austerity over the coming years, which reports suggest will include cutting capital expenditure as well as farming and energy subsidies.”
Forizs said that a sustainable debt deal and the successful rollout of austerity measures depend on the broader economic and political climate, including copper prices and Covid-19.
“Falling copper prices that dampen government revenues and/or put pressure on the kwacha pose key risks, especially considering that more than 60% of total public debt is denominated in foreign currency.
“What’s more, undertaking fiscal austerity with the economy barely on the mend from the coronavirus crisis could erode the administration’s political capital and may prove unpalatable in the end. Zambian negotiators may find themselves back at debt restructuring talks before long.”