AFRICA Confidential (AC) says Zambia’s de facto default on Eurobond payments is getting in the way of PF’s plan to create a slush fund for its 2021 election campaign.
In its latest edition, AC says, “the government’s request on 22 September to holders of its US $3 billion of Eurobonds for a six-month
suspension of repayments will have political repercussions as well as the financial ones that are exercising the markets”.
“While state technocrats juggle with the figures, the ruling party fears that this sovereign default will hinder its plans to create a war chest for its August 2021 general election campaign. It hopes to fatten up a farm subsidy programme and skim from it to finance its political spending,” AC states in part. “The government has asked the International Monetary Fund for US $300 million under its Rapid Credit Facility to help mitigate the effects of the pandemic on the Zambian economy, according to our sources. But the lion’s share of those funds was intended to help finance a massive increase in the Farmer Input Support Programme (FISP), a subsidy to small and medium farmers, we hear.”
AC states that the ruling party has issued inflated procurement contracts under FISP.
It also reports that Zambia will not get any financing from the IMF.
“The PF has issued inflated procurement contracts under the FISP from which it hopes to divert funds, Africa Confidential understands. Although conditions under the RCF are much looser than conventional IMF finance, we understand Lusaka has next to no chance of getting the money,” AC states. “Lusaka was already in bad odour with the Fund over the dismissal of Central Bank of Zambia governor Denny Kalyalya (ACVol 61 No 17). Without that $300m the government will struggle to fund the FISP. Not only are the extra farm inputs – already in the process of distribution –
being employed to persuade small farmers to vote for the PF, but the contracts to supply the fertiliser and seeds were inflated so that the successful bidders could kick back portions of the contract price to the PF. The unusually timely arrival of inputs in large quantities is already proving popular among farmers, we hear.”
The UK based publication states that before government’s request for repayment suspension, one creditor was planning to call in the sovereign guarantee.
“Before Zambia asked to suspend bond repayments, Africa Confidential learned that at least one private creditor was planning to call in the sovereign guarantee after negotiations with the borrower, state electricity company Zesco, failed to secure overdue loan repayments. When the guarantee is called, the remaining balance of the entire loan becomes immediately payable, amounting to over $130m,” AC states. “Financial sources note that this one demand could cause many more loans to be called in their entirety because of cross-default clauses. Zambia’s extremely high debt exposure to private loans, especially to Chinese creditors, had long been noted before the current crisis over the Eurobonds arose (AC Vol 61 No 10).”
AC states that the country could only have rescued Zesco’s indebtedness by dipping into foreign reserves.
It statess that last year the government expanded this year’s FISP budget as a campaign tool.
“The only way Zambia could pay Zesco’s debt would be to dip into the already stretched foreign reserves – down to $1.43 billion in July. If it did not, then sovereign default would almost certainly follow. In late August the government expanded the FISP massively. FISP’s annual budget is usually about $50m but it has been increased to $500m, the sources say. The increase is because it is the last farming season before the election,” AC reports. “The FISP is designed to subsidise fertiliser and seed for small and medium farmers. Such programmes have been strongly criticised by both domestic and
foreign experts on public finances and on farming but they have proved highly popular with voters.”
The publication states that FISP has proved to be a vote winner for the ruling party, especially in rural areas.
“Critics say inputs often arrive too late to be useful, and can create dependency, rather than encouraging farmers to ‘graduate’ from the programme through increased yields and higher profits. However, it is an important vote-winner in rural areas,” AC reports. “In late July, the government announced that it had allocated K1.7 billion ($85m) to the FISP. This is listed in its Excess Expenditure budget amendment that is expected to be formally presented to Parliament on Friday. Ministry insiders say that the figure of $500m the FISP is said to cost was reached in August.”
Quoting agriculture experts, AC states that the increase in the FISP value remains unjustifiable.
It states that moistly PF aligned bidders have been awarded such contracts over the years, including a named fertilizer supplier.
“The increase in the value of the FISP is so great that experts say no agricultural policy or programme can justify it and points to kickbacks that will be expected to flow to the ruling party, in addition to supplying inputs for farmers. Tender documents from recent
years seen by Africa Confidential show bidders which have links to the PF winning contracts despite tendering at double the prices offered by their competitors,” AC states. “These companies have been accused of contributing to PF funds in return for the award of their government contracts in the local media on previous occasions, including contracts for agricultural inputs.”
On loans, AC says the country has still been borrowing recently to pay for the FISP.
“But increasing the size of the FISP needs finance. While the finance ministry seeks concessional funding, it has been taking out new loans in the past few weeks to pay for the FISP, we understand, including K700 million ($35m) from Barclays. A substantial amount of the FISP’s $500m cost has been disbursed already,” the publication states. “Insiders say the government is under pressure to reduce costs, but contracts have already been signed and contractors have already spent money on procurement. It is unclear if cuts can be made at this stage. Central bank insiders say that the marked depreciation of the kwacha in the second half of August was as a result of the government having to buy dollars to pay the FISP supply contracts.”
AC reports that Zambia’s arrears on fuel procurement have hit $600 million.
It states that the coronavirus pandemic has been used by government to solicit funds for PF election campaigns.
“In a statement on the foreign exchange market on 15 September, the Bank of Zambia admitted that demand for foreign exchange had increased because of imports of agricultural inputs. Other reasons included payment of arrears to fuel suppliers. Africa Confidential has been told these arrears are now well above $600m,” AC states. “The statement also described how debt service payments ‘presented the largest call on international reserves.’ Overall, many analysts studying Zambia’s public finances have been
concluding that the global pandemic is being used as a device to raise finance for the PF to fight the next election. In light of this, they doubt Zambia will be any better placed to pay its Eurobonds next April, and are using COVID-19 merely to buy time.”