MR [Edgar] Lungu’s hold over the PF is not total, says the Economist Intelligence Unit.
The EIU also expects the coronavirus outbreak to have a severe impact on macroeconomic and political stability in 2020.
The EIU notes that legislative and presidential elections are scheduled for August 2021, by which time it expects Zambia to have undergone considerable political and economic turmoil.
“This will limit the fiscal space available for government patronage networks, forcing the ruling party into a more openly authoritarian position. We expect the upcoming elections to be neither free nor fair, with Zambia’s opposition (including the main opposition party, the United Party for National Development) competing against a government benefiting from significant incumbency advantages,” the EIU stated. “Our baseline forecast remains that Mr Lungu and the PF will win in 2021, but the possibility of a balance-of-payments crisis (followed by a sovereign default on bilateral debt to China) represents a downside risk to this forecast, in that the crisis could split the ruling party into pro- and anti- Lungu factions. (Mr Lungu’s hold over the PF is not total.)”
The unit recalled that Zambia announced its first confirmed case of the coronavirus in mid-March.
By yesterday, Zambia had gone six days consecutively without recording a COVID-19 positive case. So far Zambia’s cases stand at 39 with one death and 31 still in quarantine.
“We expect the outbreak to have a severe impact on macroeconomic and political stability in 2020.We have revised down growth for 2020 from growth of 0.6 per cent to a contraction of 3.4 per cent, to reflect the negative impact of the coronavirus on Chinese demand for Zambian mineral exports (such as copper) and the demand-side shock of the virus domestically,” the EIU stated. “Owing to a decline in copper revenues and the likelihood that domestic businesses will struggle to meet their tax obligations, we have revised our fiscal deficit forecast for 2020 from 5.3 per cent of GDP to 6.8 per cent of GDP. This will have a knock-on impact for 2021-24. We have revised down our oil forecast for 2020 to an average of US$32.1/barrel (from US$60.4/b previously), owing to a Russia-Saudi price war and the global fall in demand for oil following the outbreak of the coronavirus. This will lower imports and inflation.”
The EIU stated that the knock-on effect of a contraction in the mining sector (combined with a still-high import bill for capital goods) “has prompted us to still further increase our forecast for the current-account deficit for 2020, from 4.5 per cent of GDP previously to five per cent of GDP”.
“The fall in global oil prices (which will cut costs for important sectors like transport or construction) has led us to revise down our inflation forecast for 2020, from 10.9 per cent previously to nine per cent now,” the EIU stated.
On policy trends, the Unit stated that Zambia was about to enter a period of rapid policy change owing to the global recession caused by the coronavirus.
“Given unsustainably high debts, policy erraticism and growing risk aversion across the world, we expect Zambia’s Seventh National Development Plan (NDP7—covering 2017 21) to flounder. It envisages the domestic private sector becoming an engine of development, but high procurement costs, delays in execution, the government’s use of foreign contractors in capital projects and severe fiscal stresses (which invite the risk of sudden and swinging emergency tax increases) will continue to hinder the business environment and development progress,” it stated. “On March 25th the IMF and the World Bank issued a joint call to bilateral creditors of International Development Association (IDA) countries to suspend debt payments from debtor countries that ask for forbearance and invited G20 leaders to task them with doing an assessment of the financing need for IDA states in need of liquidity. It is uncertain if China (Zambia’s biggest bilateral creditor) will accept this outcome, and our forecast is for a debt trap to continue to deepen. Zambia may invite the IMF to conduct an assessment of its funding needs in 2020, but domestic political considerations will impede the PF from accepting the Fund’s terms for a full financial package following emergency relief funds; we believe the PF would rather try and negotiate with China in the hopes of receiving some form of concessional loans. Zambia will probably also turn to China for funds to repay or refinance US$3bn in outstanding Eurobond debt due later in the forecast period. A first US$750m bullet repayment is due in 2022, and there is no obvious way for Zambia to meet the commitment. Severe fiscal risk makes refinancing unfeasible, and a wide budget deficit makes a sinking fund appear a far-fetched solution. We have not factored in a default on this Eurobond because a bilateral loan from China sufficient to cover the repayment could be forthcoming by 2022, likely in exchange for preferential mining rights, but the downside risk of a sovereign repayment crisis is substantial.”/SM