Zambia's Potential IMF Deal May Face Further Delays


Monday, July 17, 2017/ 6:04PM /Fitch Ratings

Progress towards an IMF programme for Zambia remains slow and may be further delayed by domestic political events, Fitch Ratings says. Our expectation of an IMF programme is a key support to Zambia's 'B'/Negative sovereign rating.

The IMF's most recent mission to Zambia, which concluded last month, resulted in the Zambian authorities agreeing with the IMF on the "remaining actions needed to reach staff-level agreement". A request to the IMF Executive Board could be made in August if the two sides can "reach understandings in the coming weeks".

But the IMF's end-of-mission statement suggests that recent progress has been slower than expected, and that there are still obstacles to reaching a deal. It noted continuing revenue shortfalls and the possible emergence of new arrears, and highlighted the need for improved fiscal discipline. In May, Zambia's Finance Minister Felix Mutati said a deal for as much as USD1.6 billion would be concluded by the end of June.

Domestic political pressures could distract the authorities' focus from the economy. On 12 July, the Zambian Parliament approved the "enhanced security measures" that President Edgar Lungu instituted earlier in the month after a fire destroyed the country's biggest market. Tensions have been increasing since the main opposition leader Hakainde Hichilema was arrested and charged with treason in April, for supposedly obstructing President Lungu's motorcade. The opposition's legislators boycotted the vote on the security measures. Hichilema lost the August 2016 presidential election to Lungu, but claims that the result was fraudulent.

Political stability has been a rating strength for Zambia, which has experienced less political violence or election-related instability than many 'B' and 'BB' category sovereigns. The key rating drivers continue to be fiscal and external deficits and their effect on public sector debt and the economy's vulnerability to shocks. The key risk stemming from domestic political tension or uncertainty would be if it escalated to a point which jeopardised the IMF's and other lenders' willingness to provide Zambia with external financing.

Talks with the IMF began last year after falling copper prices and large fiscal deficits had seen the kwacha fall to record lows against the dollar. An IMF programme would help support the balance of payments, provide a policy anchor for fiscal and economic reforms, and unlock additional sources of external financing from multilateral and bilateral lenders.

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