Understanding Zambia’s IMF deal

Zambia, Africa’s 2^nd largest copper producer, bagged a $1.3 billion bailout package on 31^st August 2022 from the International Monetary Fund (IMF). This came 21 months after Zambia formally made a request for an IMF $1.4 billion bailout amidst unsustainable debt levels and a fragile economy; further impacted by the Covid-19 pandemic to the extent of becoming the first nation to default on a dollar bond in 2020. This IMF deal erupted a debate among analysts that on one end nodded in support while another section warned of incoming “harsh & retrogressive” conditionalities. This article will address the IMF deal and what implications it has to the nation and legal framework on debt management. The $17 Billion External and Internal Debt Burden: The first step in analyzing the IMF deal is addressing unsustainable debt. Zambia’s debt stock as of June 2022 is around $17.5 billion. This debt position has, over the years, affected the nation through the depreciation of the Kwacha against the US dollar, heightened inflation levels and reduced government spending on social and other essential sectors due to debt service obligations. Due to the unsustainable debt levels, the Zambian government, in 2020, engaged creditors & bond holders asking for a debt repayment holiday. The bondholders rejected the government's request to defer interest payments & issued a 30 days’ ultimatum. In October 2020, Zambia halted $42.5M semi-annual coupon payments on its $3bn Eurobond to become the first nation to default on its debt obligations. This affected the Country’s sovereign risk posture which manifested in expensive government bonds and treasury bills to as high as 34.5% for a 5year bond which was exacerbating the debt burden. Zambia applied for debt relief through the G20 Common Framework and the official creditors had now demanded a level of guarantee which is where IMF came in. The G20 Common Framework and the Official Creditors Committee for Zambia: The Common Framework for debt treatment beyond the Debt Service Suspension Initiative (DSSI) (Common Framework) is an initiative endorsed by a Group of 20 wealthy nations (G20), together with the Paris Club, in November 2020 to support, in a structural manner, Low Income Countries with unsustainable debt through restructuring. The Common Framework is largely guided by the Comparability of Treatment Principle. This principle is enshrined in the Paris Club Agreed minutes which ensures balanced treatment of the debtor country's debt by all external creditors. It insists that debt restructuring efforts with all creditors be transparent & favorable to all creditors with the ultimate objective of achieving debt sustainability for the debtor country. This is, however, flexible and the Paris Club does not demand equal treatment. In December 2021, Zambia’s newly elected Government reached an IMF Staff-Level Agreement that envisaged the provision of the $1.3 billion under the Extended Credit Facility (ECF). The IMF, however, demanded that Zambia engages official creditors for possible debt restructuring. On 18. 7. 2022, the Official Creditor Committee for Zambia comprised of 16 countries, co-chaired by France and China and vice-chaired by South Africa, met and provided the needed financial assurances to pave way for the IMF ECF. A Homegrown IMF Programme? The So-Called Conditionalities: In a tweet on 1. 9. 2022, the IMF Managing Director, Kristalina Georgieva said, “…We are proud to support Zambia’s homegrown reforms and actions to help build a better future for all Zambians.” This entails the 38-month programme agreed on with the IMF that was developed by the Zambian government and nodded by the IMF. The IMF on 6. 9. 2022 published the widely speculated conditionalities attached to the deal which can be downloaded here whose highlights include to:

1. Reinstate VAT and excise taxes on fuel, adjusting fuel prices accordingly so as to eliminate implicit fuel subsidies.
2. Implement the Public Debt Management Act, 2022 to improve debt management and transparency.

3       In consultation with Fund staff, submit to Parliament an amended PPP Act in order to strengthen the management of fiscal risks related to PPPs.

4. Undertake a comprehensive review of the health of the banking sector, including to assess the impact of the COVID-19 pandemic on bank balance sheets so as to strengthen financial stability.
5. To ensure sustained and continued protection of the poor and vulnerable, scaling up of social protection programmes which will be undertaken in 2022 and over the medium term.

What are Some of the Legal Implications for Zambia? As part of the efforts to restore fiscal credibility and implementation of actions in response to outlined risks in the IMF agreement, reform measures being considered include a complete review and amendment of relevant legislation including the following: The Public Debt Management Act, 2022 which was established to provide for raising of loans and grants, issuing of guarantees, approval of loans by the National Assembly, issuing of loans by or on behalf of the Government inter alia. The Revised Bank of Zambia Act, 2022 which gives the Central Bank more autonomy e.g. the Governor or Deputy Governor cannot be removed from office by the Republican President without investigation by a tribunal. This will reduce political interference. Pension Reforms: Public Service Pension Fund, Local Authorities Superannuation Fund and the Pension Scheme Regulation Act, are to be amended with the aim of providing adequate safeguards to retirees. What are the Next Steps? Zambia should continue putting its house in order to restore confidence and credibility with bondholders. Thereafter, it should engage the private and bilateral creditors for debt restructuring agreements in accordance with the G20 Common Framework’s Comparability of Treatment principle where all creditors should be fairly treated. The possible outcomes are to have a haircut on the debt, extend repayment periods or a combination of both, depending on how negotiations go. It is important to note that these creditors are representative of a large populace that entrusted them with their savings to invest and earn an interest in return. Author: Nchimunya Moonga Occupation: Analyst - Zambia National Commercial Bank Contact: Moonga.nchimunya@gmail.com