A shrinking economy, violent escalations, and a possible IMF bailout have put Zambia’s President Lungu in a difficult position ahead of the August 2016 general election. Having to make a number of difficult decisions in the coming months, he risks triggering more public frustrations and violent outbursts, writes Global Risks Insights.
April started brightly for Zambia with news that Zambia’s currency, the kwacha, has gone from the world’s third-worst performance in 2015 to the best this year as copper prices recovered. However, the positive mood has quickly turned sour.
First there was the announcement that Zambia was seeking a bailout from the IMF for its increasing national debt, which will be negotiated after the general election of August 2016. Then, last week, ethnic violence against Rwandans escalated into looting of shops and houses and rioting in the streets of Zambia’s capital, Lusaka, with Rwandans taking the blame for the ritual killings that have been happening in the past month.
The escalating violence has forced the president to deploy the military to restore peace and security in Lusaka. Both incidents pose major challenges to sitting President Lungu, who is aiming to be re-elected in the upcoming elections.
Rwandans fear for their lives as houses and shops are attacked
While the Rwandans are being blamed for what appear to be ritualistic murders, poverty and inequality are the main drivers behind the recent riots aimed at Rwandans.
Whereas Zambians have not been profiting from government revenues from the copper and mining industry, the Rwandans, of which many are Hutu refugees who left their country after the Rwandan genocide, are doing reasonably well. Putting aside the ethnic grievances, it looks as though the violent outburst is a form of scapegoating. The main issue is that President Lungu, who has been in office since the passing away of president Sata in 2014, has failed to address pressing issues, primarily the increasing poverty, decreasing freedom of press, and rising prices of essential goods.
Increasingly, the general public is beginning to lose faith that the government will be able to address these issues, particularly with the budget deficit increasing and the economy facing intense pressure due to the falling copper price and the country’s current energy crisis.
IMF demands Zambia cut government expenditure
Although Zambia’s currency has had a strong performance this year, the fall of copper prices last year, mainly caused by the slowdown of China’s commodity market, has increased the government’s debt issues.
The copper market has recovered somewhat this year and Zambia’s economy certainly has benefitted. Nevertheless, however, the economy has been caught in a downward spiral. The country’s public debt was about 42.5 per cent of GDP in 2015, and is estimated to rise to 56 per cent in 2016 and up to 60 per cent by 2018. This has already caused Moody’s to downgrade Zambia’s issuer ratings.
The IMF is mainly concerned about the Zambian Eurobond borrowing and growing budget deficit. However, during the visit of the IMF to Zambia last week it has been become clear that negotiations about a potential bailout will not be finalized until after the elections.
This means that in the meantime President Lungu will have to take several austerity measures in order to meet the IMF’s requirements. A Zambian government spokesperson has told Reuters that this would include “the progressive removal of subsidies and drawing up plans to significantly reduce subsidies on electricity, fuel and fertiliser.”
However, less than a month ago the government announced a new funding scheme aiming to provide funds to boost local businesses, specifically in the energy and agriculture sector.
How much risk is Lungu willing to take?
Taking into consideration the upcoming elections, it is unavoidable that Lungu will have to make a strategic decision. The demands from the IMF and the Zambian people are conflicting and it would be unrealistic to keep up the local funding schemes while at the same time addressing the IMF’s concerns.
On the one hand, removing subsidies would massively affect Lungu’s popularity amongst the poorer Zambians, which has the potential of escalating into another outburst of violence. However, not dealing with the unsustainable debt issues and the shrinking economy would play into the hands of the opposition, who accuse the Lungu cabinet of financial mismanagement.
It is likely that Lungu will cut down government spending, but at the same time put into place new funding schemes to alleviate poverty, at least superficially. Since tensions are running high in Zambian society Lungu’s first priority will be to restore and maintain peace.
It is very plausible that Lungu will assume that the IMF negotiations will carry on either way and that the consequences of not immediately dealing with the budget deficit will be less detrimental to his position than ignoring the public’s demand to address poverty and stimulate the local economy.
Published by Global Risks Insights