Zambia’s makes an attempt to stabilise its funds within the wake of Africa’s first pandemic-era bond default have been jeopardised by a pre-election push to take management of its copper mines and tackle new debt.
After a November default and with additional funds due within the coming months, Africa’s second-biggest copper producer had hoped to strike a cope with the IMF and collectors to restructure $12bn of exterior debt earlier than August’s presidential election.
However regardless of stress by the fund and bondholders on the federal government to cease accumulating new money owed, a state mining firm took on $1.5bn of loans final week to take over Glencore’s Mopani Copper Mines operation. This follows a pledge by President Edgar Lungu in December to amass “strategic” stakes within the nation’s mineral wealth. Lusaka additionally plans to spice up home borrowing to maintain the financial system ticking over and fund election spending.
Zambia was already battling ballooning debt earlier than the Covid-19 disaster and its makes an attempt to restructure had been seen as an important take a look at case for poorer nations looking for debt aid in the course of the pandemic.
Whereas final week’s deal is “a dream deal for Glencore” for Zambia’s different collectors and the IMF, “it does ship a reasonably clear sign that the federal government’s fiscal priorities are a operate of what is going to get it elected”, mentioned Connor Vasey, an analyst for Eurasia Group.
Bailout talks with the IMF will resume subsequent month, in accordance with Zambia’s finance ministry. However buyers have doubted there shall be a breakthrough earlier than the August election, given political reluctance to decide to tough reforms. With out IMF oversight in place bondholders are unlikely to comply with a restructuring.
Mr Lungu is “filling the financial system with extra debt, costly debt” with offers such because the Mopani takeover, Hakainde Hichilema, Zambia’s primary opposition chief mentioned.
The Glencore deal in itself is not going to affect bondholder discussions or an IMF deal “although it can end in a rise in public sector debt, one thing the fund will flag”, mentioned Kevin Daly, a fund supervisor at Aberdeen Commonplace Investments and who’s on a committee of Zambian bond buyers.
Final yr offers had been struck with main Chinese language collectors to delay debt funds, however analysts say that Zambia might want to search additional deferrals this yr earlier than the election. Deferred curiosity on borrowings from the China Growth Financial institution is due in April. The federal government can be nonetheless having to service debt connected to precedence initiatives.
Analysts say that Mr Lungu’s authorities is prone to lean additional on native banks to borrow in its personal forex — together with the Financial institution of Zambia, which has raised holdings of presidency bonds within the final yr.
“There’ll all the time be somebody to play ball with,” if Zambia wanted to show to exterior loans within the midst of default, however it must pay up for them due to the danger of additional default, Mr Vasey mentioned.
Final yr, Mr Lungu abruptly fired a technocrat as central financial institution governor and changed him with a former deputy finance minister, prompting a warning from the IMF in regards to the significance of central financial institution independence.
The federal government’s finances for this yr allowed for an virtually fivefold enhance in home borrowings to simply beneath 15 per cent of the finances — a price of enhance that may need to be backstopped by the central financial institution’s purchases of presidency bonds, Mr Vasey mentioned. “They’ve choices.”
Zambia’s copper belt mining heartland shall be a serious battleground for a re-election battle by Mr Lungu who has portrayed himself as defending 1000’s of mining jobs. “The Zambian authorities justifies the takeover of Mopani as a result of mining jobs had been beneath risk,” mentioned Situmbeko Musokotwane, an opposition politician and former finance minister. However “mining jobs are beneath better risk beneath authorities possession” due to the burden of repaying the debt, he mentioned.