AFRICA Confidential says the lavish spending and borrowing of President Edgar Lungu’s government is starting to catch up with his government.
In its May 3 report, AC states that the liquidity problems are getting worse and State asset sales are looking more likely as a last resort to avoid debt default.
It states that at a poll taken on April 24 at an IMF meeting in Lusaka with industry, almost half those in attendance believed the government would default on sovereign debt this year.
“The seriousness of the situation is finally dawning on the government, sources in Lusaka say, although it may be too late,” AC states. “Africa Confidential has learned that in March, it [government] had to raid the state pension fund, the National Pension Scheme Authority (NAPSA) to pay overdue February salaries for public service employees. While the ruling Patriotic Front continues to deny that its debt burden poses any problem, alarm has been growing in financial circles. Standard Bank, which trades as Stanbic in Zambia and is a significant lender, has warned in a report titled ‘Déjà vu’ that the government is facing an imminent liquidity crisis.”
AC states that of key concern are the foreign reserves.
It notes that the government began the year with a little over US$1.5 billion in reserves, only slightly more than the $1.4 billion of budgeted debt repayments.
AC states that Bank of Zambia data shows that last year, Zambia paid almost all its external debt service and some domestic debt from the reserves, totalling almost $1bn.
The last officially reported figure for the reserves, in January, was $1.45bn.
“Now, Standard Bank says further repayments could have brought that down to $1.1bn, potentially falling to $1bn by June, based on its conversations with the Central Bank,” it reports.
Finance ministry insiders told AC the government had again underestimated the cost of debt service, which has risen because of unexpected loan disbursements and a weakened currency.
The budget assumed an exchange rate of K10.50 to the dollar, but this is now K12.50 and is likely to rise further, making it more expensive to buy dollars needed to repay debts.
“At the same time, the government is struggling to raise credit domestically as market confidence plummets, leading to further shortfalls in budget funding,” AC reports. “Ministry insiders say the government was relying on $750m of external financing that is unlikely to materialise. Zambia’s recent failure to pay its $14.8m share of costs for the Kazungula bridge, which will link Botswana and Zambia, demonstrates the severity of the cash shortage.”
On March 18 contractor Daewoo suspended works, and after Botswana’s President Mokgweetsi Masisi visited President Lungu on April 2 “it appears Botswana may pay Zambia’s share.”
AC states that the government was also reportedly struggling to pay Chinese road contractors, leading to suspension of works.
AC understands the government has been quietly examining the possibility of borrowing up to $3.25 billion to fund roads, domestic debt repayments and the health service.
“Standard Bank’s team say that asset sales are now the most likely means of raising cash – something that the government has hitherto denied. ‘This was the first time that we heard policymakers raising the possibility of asset sales to repay maturing debts,’ reported Standard Bank. Standard Bank also said that little, if anything, was being done to restructure Chinese debt,” reads the AC report. “The same admission was made at the International Monetary Fund Spring meetings in Washington DC in April, say investors who were in attendance. Senior civil servants tell AC that some of the talks with China resulted from Exim Bank sending a delegation to Zambia two months ago to demand overdue payments to Chinese contractors. Insiders say that the 15 per cent down-payments Zambia was supposed to contribute to the capital for Chinese projects were borrowed but not always paid in full to contractors as intended. April has been awash with bad news, including the IMF’s forecast of lower growth of 2.9 per cent next year and rising inflation.”