Zambia IMF programme still likely but timing uncertain

PUBLISHED: Fri, 26 Aug 2016 13:58:49 GMT

The opposition’s decision to challenge the result of Zambia’s recent presidential elections will delay agreement on IMF support, although we think a programme is still likely after groundwork was laid earlier this year, Fitch Ratings says. If successfully implemented, an IMF programme would mitigate external financing risks and support FX reserves, reducing pressure on Zambia’s sovereign rating.

An IMF visit in March and preliminary discussions in April set the stage for formal programme negotiations after August’s elections. However, these may be on hold until a post-election government is firmly in place.

The Electoral Commission of Zambia said on 15 August that Edgar Lungu of the Patriotic Front had been re-elected with 50.4% of the vote. His closest opponent, Hakainde Hichilema of the United Party of National Development (UPND), disputed the outcome, and on Friday the UPND filed a petition asking the Constitutional Court to nullify the vote. This has delayed Lungu’s inauguration. According to Zambian law, the opposition’s petition must be settled within 15 days of its receipt. If the Constitutional Court nullified the result, a new election would have to be held within 30 days.

The run-up to polling had seen clashes between the two parties’ supporters and a 10-day suspension of campaigning in Lusaka, although EU observers said that election day was “generally well-administered and peaceful”. Any lasting deterioration in political stability as a result of disputes about the outcome would be negative for Zambia, where political stability has been much greater than in ‘B’ and ‘BB’ category peers.

The inauguration of the new government once the challenge to the results is resolved would pave the way for formal programme talks. Ultimately, an agreement looks likely whichever candidate emerges as president. The IMF said in March that there was “a shared understanding” of Zambia’s economic challenges, and the government subsequently indicated that it would pursue electricity and fuel tariff reform and amend the mineral royalty tax regime. Edgar Lungu said after the vote that “tough decisions will be made” to support growth and control expenditure. Hakainde Hichilema has said that the UPND and the IMF are “singing from the same hymn sheet”.

An IMF programme would provide balance of payments support and unlock other sources of external financing, easing the risks from falling export earnings as lower copper prices and falling copper production have pushed the current account into deficit. Subsidy and mining tax reform would contain fiscal deterioration caused by lower growth and mineral royalties and a failure to scale back capex.

An IMF programme would also provide an anchor for fiscal policy. The IMF has identified deficit reduction as a key priority, but previous consolidation efforts have been slow or (as with plans to raise electricity tariffs) reversed. We forecast the 2016 deficit to be 7.1% of GDP and financing options are limited.

Improving Zambia’s external and fiscal positions could ease pressure on the country’s ‘B’/Negative sovereign rating. Our revision of the Outlook to Negative in February reflected persistent and large fiscal deficits and a doubling of gross general government debt (GGGD) since 2012. Our sensitivity analysis shows that in the absence of fiscal consolidation that reduced the primary budget deficit, GGGD could eventually rise to 100% of GDP, which we would view as incompatible with the current rating.

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