PREVIEW
The finance minister starts crisis talks with the IMF after the government fails to convince creditors
As leaders of the 53 Commonwealth member states gathered in London for the 15-17 April summit, one African head of state was conspicuously absent. Amid growing concern that Zambia's debt has ballooned to unmanageable levels on his watch, President Edgar Lungu keeps out of the international spotlight (AC Vol 59 No 7, Into the valley of debt). His country is on the brink of crisis and the slide in the economy is damaging the copper-rich nation's bargaining power.
Under fire from opponents – and, increasingly, from members of his own governing Patriotic Front – Lungu chose to avoid tough questions over both the debt debacle and his failure to begin dialogue on political reforms with opposition leaders, as previously agreed with the Commonwealth Secretary General, Baroness Scotland (AC Vol 58 No 22, Hichilema pushes for Commonwealth talks).
After a difficult few weeks in which more news broke about Zambia's rising debt levels, Ministry of Finance officials met with investors in London on 16 April to assuage anxieties. Finance Minister Margaret Mwanakatwe was absent; recent medical problems severely restrict how much travel she does. Instead she flew to Washington DC for the International Monetary Fund's spring meetings.
Mwanakatwe is trying to convince the Fund that the government has the situation under control, in an effort to rebuild trust and secure an IMF-funded programme. Her task is not easy. Confidence in the government's competence and integrity has hit an all-time low, and opposition claims that Zambian external debt could be as much as twice the level reported by the government are now being taken seriously by investors and analysts.
The last issue of Africa Confidential published further evidence that Zambia is teetering on the brink of debt distress, with the country's real debt probably around 100% of GDP (AC Vol 59 No 7, Into the valley of debt). Following the AC report and worries voiced by investors in other media, that other debts are yet to be reported, Zambia's Eurobonds fell further to a par with Congo-Brazzaville. Congo-B is officially in debt distress after the discovery of undeclared loans last year sent its debt-to-GDP levels rocketing to 120% (AC Vol 58 No 19, False start to IMF talks).
Although Zambia's situation is not yet so woeful, the market reaction reflects deep uncertainty over its debts and a severe loss of confidence in the government. The Nomura International investment fund was in negotiations last year with the Lusaka government to provide an urgent loan of $500 million to refinance existing government debts; we now hear that these are not the Eurobonds. Nomura has been outspoken about the crisis, downgrading its assessment of the risk of investing in Zambia from 'neutral' to 'cautious'.
No restraints
The lack of clarity is damaging Zambia's reputation and fueling suspicions over notional 'hidden loans'. Rather than the government actively concealing entire projects funded by already contracted loans, as happened in Mozambique, the confusion here is over the government's methods for reporting debt and the consistency with which it has done so. It is thought that Zambian under-reporting has resulted in artificially low figures (AC Vol 58 No 14, Rock and Kroll & Vol 58 No 25, Stumbling into a debt crisis).
It is also beyond doubt that Zambia is continuing to contract and plan new loans at an unsustainable rate without assessment of value for money. It can ill afford the billions of dollars of external commercial loans that are already in the pipeline.
So cash-strapped is the Zambian government that it cannot pay suppliers for vital goods such as medicines and fertiliser, yet it continues to press ahead with grandiose and overpriced projects on credit. Executing the budget is difficult, some critics describing it as a mere 'paper budget'. They report that, in practice, more than 60% goes on officials' pay and perks. With almost another 30% needed for debt service, that leaves 10% for everything else.
The fiscal squeeze has led to problems with paying suppliers and VAT rebates. Domestic arrears – which the government says stood at 12.7 billion kwacha (US$1.3 bn.) at the end of 2017 – are fast piling up. This is now coupled with an aggressive drive by the government to increase tax revenues. The result is an increasingly antagonised business community and basic services in jeopardy (see Box, Robbing Pierre to pay Lazarus).
Aside from its rebuttals of some of the unfounded allegations that have emerged in the growing panic – that the government has defaulted on its Chinese debt, for instance – a statement issued by Mwanakatwe this month on the debt stock and 'perception of hidden loans' holds little water. If anything, it confirmed the scale of the problem and how anxious the government is to calm the markets, particularly as Zambia will soon need to refinance its $3 bn. Eurobonds.
Government sources say that Mwanakatwe's claim that all government debt is accurately declared in the proper manner is far from the truth. AC's own investigations show that, without proper central control or consistent reporting, debt management has broken down.
The Debt Management Office figures have tended to fluctuate, we understand. And, unusually, individual ministries are able to issue debt without consulting the Ministry of Finance – a practice that we hear the former Finance Minister Felix Mutati was trying to change.
Loans pile up
As pressure mounts on the government over under-reporting of loans, Mwanakatwe has increased the external debt figure for 2017 from $7.9 bn. to $8.7bn.
In her State of the Economy presentation for the first quarter of 2018, published on 6 April, she said that the increase resulted mainly from the 'reclassification' of a '$500 mn. fuel debt' as external. The 2017 annual economic report, finally published on 12 April, shows that she is in fact referring to a $590 mn. loan to finance fuel imports.
AC's own information shows this was contracted from the Trade and Development Bank – the financial arm of the Common Market for Eastern and Southern Africa (Comesa) formerly known as PTA Bank – in March 2016. It is not clear why the government failed to register this in its external debt stock for two years running, or how it was classified if not regarded as external, nor if it was reported correctly to the IMF. The Fund noted in 2017 that the government owed $420 mn. in arrears to PTA Bank which were omitted without explanation from the total debt stock.
There are clear discrepancies between the IMF's annual external debt figures, and its estimates of the total numbers and value of loans contracted, and those of the government (see chart). The IMF's external debt figure for end 2016 is $7.9 bn.; if one adds the $1.75 bn. contracted in 2017, plus the $590 mn. fuel debt, the total is $10.24 bn. Compounding the confusion, the IMF's own tables indicate cumulative loans by end 2016 of over $11 bn.
The lower figure cannot be explained by debts having been paid off. The Fund has not responded with an explanation since AC raised this problem in December. AC's own calculation of external debt remains at roughly $13 bn., with $2 bn. imminently in the pipeline.
Though it has issued firm warnings that Zambia runs great risk of debt distress, the IMF has not yet publicly presented the numbers it recently shared with donors, which covered parastatal debts that the government usually omits. We hear that the Fund is unsure if it has fully understood the extent of Zambia's debt with China, which sources at the Ministry of Finance say is not reliably reported.
Worryingly, the government's 2017 report also notes that the 2017 figures are 'preliminary' – though the report was published at the end of the first quarter of 2018 – and suggests that they could yet be revised.
A debt sustainability analysis (DSA) is under way and behind closed doors officials are frantically trying to add up the numbers. But this process is not complete as yet. Many feel the situation has become so bad that, without some form of external audit, the results of the DSA cannot be considered reliable – and the existing government figures even less so.
Robbing Pierre to pay Lazarus
Zambia's cash-strapped government is trying to muddle through the financial strain of managing a fast-growing pile of debt using a combination of aggressive taxation and not paying suppliers. The strategy is driving up domestic arrears and antagonising business at a time when investors are already thinking twice about putting money into the country.
In March, the government apparently tried to solve the impending crisis by publicly demanding that the Canadian mining company First Quantum Minerals pay Zambia US$8 billion. The Zambia Revenue Authority (ZRA), which owes FQM
$160 million in overdue VAT rebates, told FQM it had five days to pay roughly $142 mn. in duties plus billions in fines and interest, levied at 5% since 2012.
FQM maintains that the demand is unfounded and the firm has been granted three months to conduct its own audit. Insiders tell AC that the ZRA's claim of missed duty payments is mistaken and that tax-exempt goods have been wrongly reclassified in a whirlwind audit. The ZRA sees duty payments as a fast way to raise cash and the mines as easy targets, but even sources close to the government are privately critical of the ZRA's assault on FQM. Although no other mine has been hit with a bill of the magnitude of the one presented to FQM – the government's biggest taxpayer – the mining companies are now subject to aggressive auditing.
Meanwhile, the three biggest pharmaceutical suppliers have stopped providing basic drugs and equipment because the government owes them $25 mn. On the brink of a nationwide shortage of medicines, Health Minister Chitalu Chilufya has asked donors to reinstate basket funding – a request met without enthusiasm, we hear. He has also written to President Edgar Lungu to request emergency funding, which is likely to come from toll-gate revenues.
Meanwhile, the Ministry of Health is pursuing an ambitious expansion programme that includes borrowing hundreds of millions of dollars for new hospitals, as well as suspiciously expensive procurement through politically connected middlemen, including 50 ambulances at the cost of $288,000 each. Toyota, the manufacturer of the ambulances, reports that each was worth just $60,000.
The price inflation, suspected to be for the purposes of skimming commissions, could have paid off almost half of all the outstanding debts to health suppliers and ensured that public hospitals remain stocked with vital medicines.
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