Zambia responds to Fitch and Moody’s reports, clarifies eurobond refinance

Zambia last week received its rating assignment from Fitch Rating Agency that re-affirmed its rating at B/Negative Outlook and Moody’s Ratings that assigned a downgrade rating of Caa1 / Stable Outlook. The government has noted the ratings and has discussed the issues raised by the Agencies’ analysts.

For the reasons that have been raised in the rating reports, particularly the Moody’s Rating Agency’s report, stakeholders and investors may recall that government on 14th July, 2018 announced a number of measures. The measures are swiftly being implemented as part of our broader policy reform to tackle the challenges that relate to debt, liquidity, and the fiscal deficit. These measures will lead to slowing down the rate of debt accumulation in 2018 and over the medium term and tackling the fiscal deficit which we forecast to be below the 2017 announced deficit of 7.8% of GDP.

Addressing Liquidity Issues

Measures to address tight liquidity in the domestic and external sectors are progressing. These measures include limiting domestic financing of the budget, cutting expenditures particularly as they relate to project financing; the principle driver of fiscal deficits in Zambia, streamlining expenditure on personnel emoluments and reducing the cost of public sector operations. Further, the government is proceeding on its strategy to dismantle arrears in the different sectors. As a minimum, the arrears dismantling provision will be maintained at the current level as it is cardinal to fiscal sustainability and liquidity normalization.

The government has also started to implement the policy on completion of projects that are 80 percent and above. In this regard, the treasury has released more than K2 billion in two tranches, the latest being K1.3 billion released during the last two weeks, to finance domestically financed projects in this category. This will address the problem of incomplete projects, stop costs in standing time and curtail the accumulation of arrears to contractors that are triggered by partial work being done due to resource constraints.

On the external side, the government has begun to work on measures to define dedicated streams for reserve accumulation. This is being done side by side with the asset/liability management exercise on external debt and the cancellation and postponement of some pipeline loans. From the work we have done so far in implementing measures, Zambia’s debt accumulation will slowdown in the next 2 to 3 years. It is projected that we will attain a reduction in debt ratios after 2022. Given this scenario, fiscal slippages will recede and further, we do not see protracted debt because we will stand firm on our fiscal sustainability measures.

Public Finance and Subsidy Reforms

The government has progressed on reforms to different legislation that will anchor the fiscal management in law. Already the Public Financial Management Act was signed into law in April 2018. This law will tackle the recurring problems of fiscal mismanagement through strict sanctions for imprudent management of resources. The new law places personal responsibility for mismanagement on officers at an operative level, controlling officers and other policymakers. The new law also stipulates offences and severe consequences for mismanagement of public funds. Other legislation related to fiscal prudence will soon be progressed. These include the Planning and Budget Bill and the Public Procurement Law; pieces of legislation that are core to fiscal prudence and responsibility.

Regarding subsidy reform that was causing large fiscal slippages in the past, the government wishes to update the public that Zambia’s subsidy reform programme has helped to reign in on the structural challenges that impacted on the fiscal in the past. These reforms are helping in supporting better growth and attaining budget predictability going forward.

Reforms put in place in 2017 to address electricity, Agriculture and fuel subsidies have resulted in the government being able to address costs that resulted in arrears. So far the Government has through this reform addressed the accumulation of electricity arrears that were costing US$21 million per month. Arising from the reform, the mining sector is now paying 9.3 cents per kilowatt hour for electricity compared to the 5 cents that was being paid by sector players prior to subsidy reforms. In the agriculture sector, we attained a cost reduction in the last farming season of up to K1.7 billion as a result of the change in the facility transmission mechanism to electronic vouchers. We have also attained and sustained cost reflectivity in fuel prices since the third quarter of 2016. This means that we are no longer accumulating fuel arrears.

Asset/Liability Management

As directed by The Republican President, we are proactively undertaking a rigorous asset/liability management exercise. Specifically, the Government is advanced in preparing for discussions with the government of the People’s Republic of China to refinance portions of the Chinese debt, particularly those with a medium-term maturity profile. This will ultimately create positive and smooth cash flows. A high-level mission will travel to China in August 2018 to firm-up the discussions in order to create positive and smooth cash flows. I will lead the team to China.

Further, government wishes to shade more light on the statement made by the President of the Republic of Zambia, Mr. Edgar Chagwa Lungu regarding a Turkish Company that is being courted on refinancing the 2022 Eurobond. Whilst we are open to discussing financing of the eurobonds to achieve lower costs and longer maturities with potential investors, this exercise will be done in full consultation with the bond holders and in accordance with international market standards. If the offer from Turkey crystallizes, no unilateral action will be taken by the government. We stand by the commitments made to bond purchasers’ at the time of issuance of the eurobonds not to take any action without consulting holders of Zambia’s bonds.

Further, the government wishes to emphasize that such an operation is not in any way a signal of failure to repay the eurobonds. We remain fully committed to meeting all our liabilities on time and in full. In line with the foregoing, we have developed a redemption strategy for the three eurobonds. The strategy is currently undergoing integrity reviews prior to seeking cabinet approval. Further, the government is in the process of engaging financial advisors on implementation of the strategy. In so doing however, we are duty bound to interrogate any other asset/liability proposals that may come from other private and bilateral partners, with the proviso that it should be cheaper and procedural in terms of international capital markets operations.

Strengthening Implementation and Information Sharing and Transparency

Whilst rating agencies wait to take our actions into account in the medium term, it remains the firm resolve of the government that the impact of these measures begin to manifest in 2018 – hence the speed with which the implementation is progressing. Further, the Ministry of Finance has developed an implementation and progress dashboard on the fiscal prudence, economic stabilization, and growth measures. The dashboard is reviewed weekly by top management of the ministry and progress reports are submitted to cabinet to ensure that there are no slippages.

The Ministry of Finance will continue sharing with the public monthly reports on the performance of the economy and holding quarterly engagements with a cross-section of stakeholders in order to enhance information availability and exchange.

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