Oxford group foresees instability in Zambia

THE NKC African Economics says Zambia faces hard times ahead and the growing risks to political stability inherent in its current economic and financial challenges imply a downgrade in overall political risk profile during this quarter.

In its Zambia quarterly update yesterday, the Oxford Economics company indicates that the threat of instability in the short to medium term was relatively high and when electoral pressures are added, the “political environment would become even more toxic”.

NKC African Economics notes that Zambia’s public debt remains a concern with external debt standing at $9.4bn by end-June.

“In turn, the domestic public debt stock stood at ZK51.9bn by end-June (19.2 per cent of GDP) while the domestic arrears stock was measured at ZK13.9bn by end-March. We project that public debt will equate to just over 66 per cent of GDP by end-2018, which captures our pessimistic revision for the kwacha at year-end (seen at ZK12.1/$). This is above the consensus projection both in terms of the nominal value of debt and currency valuation. Public debt is expected to increase to just under 69per cent of GDP next year, before easing to 67 per cent of GDP in 2020,” it states.

It noted that finance minister Margaret Mwanakatwe delivered vocal commitment, in her maiden budget address, towards fiscal consolidation via expenditure streamlining and increased revenue mobilisation, underwhelmed in terms of details on how the government plans to achieve the goals.

“Our critique of the recent budget spans multiple layers, but at the core rests upon the notion that a sense of urgency to address investors’ loss of confidence severely lacks,” according to the update.

“While Zambia is hopeful that discussions with the IMF will resume in October, we attach a low probability to a fruitful end this quarter as the pace of consolidation – albeit more realistic than in previous budgets – signals a discounted view of external risks to fragile economic recovery…Critically, Zambia missed an opportunity to appease investors’ and analysts’ concerns by failing to provide deeper insight into the current public debt position, raising questions as to the reasons behind the delay.”

It states that it does not anticipate an IMF deal before the second half of 2019.

“Informed by this projection, we remain cautious of Zambia’s ability to raise external public debt in 2019 as set out in the latest budget, unless investor confidence can be restored,” it states. “The latter will require a policy anchor, which does not seem to be forthcoming.”

The NKC African Economics feared foreign investment in Zambia could be negatively affected by tax measures in next year’s budget.

“Changes to the mining tax regime include an increase in mineral royalty rates by 1.5 percentage points at all levels of the sliding

scale. A fourth-tier rate (at 10 per cent) has been introduced to the sliding scale and will apply at a copper price above $7,500/tonne,” it notes. “In addition, VAT is being replaced by a non-refundable sales tax, which ends the current system whereby generous rebates are given by the State as a fiscal incentive. The government has stated that it remains open to dialogue with mining companies to discuss the transition to the new mining tax regime. Still, risk perceptions will be negatively affected by the proposed tax measures, and we expect FDI to drop from just over $1bn in 2017 to just over $500m this year. The recovery in growth will encourage increased foreign investment, but FDI is only expected to breach the $1bn level again over the medium term.”

On Zambia’s reserves position, the NKC African Economics says these are still under pressure.

It doubts whether the BoZ had the firepower to intervene in forex markets given the weak reserve buffer and ongoing need to meet external debt obligations with forex holdings. And the NKC African Economics notes that Zambia’s political environment has continued to deteriorate amid a series of crises that include suspension of aid by some donors as well as a growing debt crisis that had the potential to stoke political unrest in the longer term.

“Repression, paranoia, and the continuing decay of democratic principle now characterise the political scene,” it states.

However, it considers political risk in the country to be low to moderate with the overall trend negative.

It states that the government itself was doing a “wonderful job undermining people’s confidence in its ability to govern”.

“Regional sources close to developments in Zambia suggest that the government’s lack of concern over the debt issue is based on a belief that when the chips are down, China will provide. While that expectation may or may not carry any weight, it is a concern to civil society groups who believe that any deepening financial commitments to China could be disastrous,” according to the report.

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