At crossroads between China and the IMF

File: Zambia's Finance Minister. Margaret Mwanakatwe.
  • Chinese involvement in Africa’s copper producer has widened from manufacturing and textile to mining
  • For the time being, it seems as if the government is still leaning more towards the IMF; the restructuring with China was initially framed in a context of winning over the Fund

On the orders of the president, Edgar Lungu, Zambian ministers have been meeting officials in China to discuss a restructuring of sovereign obligations owed to financiers there. At the same time, the IMF is currently in Zambia to be briefed on the country’s debt-reduction plans, which the government hopes will form the prologue to a loan deal. It would seem that the government is at a perilous juncture; satisfying one party will impair relations with the other.

In June 2018 the government announced a sweeping set of measures designed to slow the rapid accumulation of foreign public debt. Part of this involved halting work on capital projects that are less than 80% complete and suspending loans for others in the pipeline. As Chinese companies (mostly parastatals) are involved in the finance and construction of around 83% of all public capital projects, the plan will be an unwelcome prospect for the government in Beijing.

However, the contractors that stand to be affected have considerable leverage, as much of the Chinese debt taken on by Zambia has been sourced though them (rather than conventional lenders) and on taxing terms; short maturities and high servicing costs are precisely what the ministerial delegation is trying to renegotiate. Cancelling the projects may mean a bad deal on the restructure, or it falling through entirely.

Reflecting the sensitivity of the situation, Mr Lungu issued a caveat on the austerity plan while his ministers were away by assuring the country’s ambassador to Zambia that Chinese projects would not be disrupted. Honoring this pledge would, in effect, oblige Zambia to continue to borrow heavily, albeit at a potentially lower cost than at present. Adding to the dilemma, taking on a load of new debt stands to upend the chances of a loan deal with the IMF, which Zambia’s other non-Chinese creditors are demanding. This could translate into capital outflows as foreign participants evacuate the local debt market, or even a default on Zambia’s Eurobond repayments further down the line, if refinancing becomes unfeasible. All in all, Zambia is faced with a severe choice, and the risk that Mr Lungu will choose China over the IMF is distinctly real.

Growing Chinese influence in Zambia

Ties between Zambia and China have been deep since Zambian independence in 1973. Over the decades the Chinese government has pumped unknown billions of US dollars into grants and soft loans to fund projects. These include the 1,860‑km Tanzania-Zambia Railway (Tazara) line, which links Kapiri Mposhi to Dar-Es-Salaam, as well as football stadiums and the country’s main Government Complex, which houses several ministries.

There is also direct investment. Until 1998, Chinese commercial involvement in Zambia was mainly concentrated in agriculture and textiles. The large Mulungushi Textiles factory in the city of Kabwe, a joint-venture between the government and a Chinese firm, is an example. More recently the focus has been on raw materials, especially copper, cobalt and manganese to support China’s industrialization. This began in a small way at the Chambishi and Luanshya copper mines in the late 1990s, but now state-owned Chinese companies own major operations in both quarrying and beneficiation, with the key Chambishi copper smelter being owned by the China Nonferrous Metal Mining Corporation. As The Economist Intelligence Unit forecasts that demand for copper will continue to rise, taking prices from an average of US$3.15/lb in 2018 to US$3.55/lb in 2022, these interests will only become more important.

If Zambia is important to China, then the reverse is even more true

After being elected in a general election in late 2016, Mr Lungu immediately announced a programme of deep austerity; copper prices were low at the time, and the budget deficit was then officially estimated at 10% of GDP. Substantial budget cuts never materialized, however, and public external debt has risen from US$6.9bn at end-2016 to US$9.4bn in April 2018. One explanation for this backtrack is that a rebound in copper prices opened up ways for the government to borrow excessively—particularly from partners in China—and so shelve the idea of unpopular fiscal adjustment. Hence, not only has over-lending continued despite lax fiscal policy, but it has been allowed to deepen.

It is precisely out of concern over this heavy borrowing that Zambia has been at loggerheads with the IMF since 2017, as well as with other creditors that are keen to see a clearer commitment to fiscal rationalisation. These include the holders of US$3bn in Eurobond debt, of which a first US$750m bullet repayment is due in 2022. At present there is no alternative for meeting it besides refinancing, but for this to happen on manageable terms international investors need to be kept onside. This is partially why the notion of austerity is again being touted. However, a major risk is that with 2022 seeming far away, inexhaustible (and less conditional) Chinese credit lines will prove just too tempting—especially as an IMF programme, and the painful reform measures it implies, would probably overlap with a general election in 2021. Moreover, with copper prices set to increase over the coming years, Chinese stakeholders (and the government there more broadly) will indeed be keen to facilitate lending should Mr Lungu’s administration want to dodge fiscal tightening.

For now, the IMF still seems to be the end-goal

For the time being, it seems as if the government is still leaning more towards the IMF; the restructuring with China was initially framed in a context of winning over the Fund, and—despite contradictions since its inception—the austerity plan was obviously going to trouble Chinese contractors but still went public. The IMF being invited to Zambia to peruse the results of a recent debt audit and to offer advice on what to do next suggests that the prospect of a loan is still seen as important.

Furthermore, some politically painful austerity measures aimed at securing a deal with the IMF have already been introduced, such as the partial liberalization of electricity tariffs, which demonstrates some concrete political will. The problem is that this will is inconsistent, as Mr Lungu’s assurances to the Chinese ambassador made all too clear. So while we continue to expect a loan deal with the IMF to be reached, the downside risks to this are growing.

Source: Economist Intelligence Unit (This article first featured on the Economist Intelligence Unit on 27 July)

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