Zambia: Independent debt office is key to Hichilema’s reforms

By David Whitehouse
Posted on Friday, 27 August 2021 13:54

Zambia's new president Hakainde Hichilema. (AP/Tsvangirayi Mukwazhi)

Creation of a debt office with genuine independence will be crucial to the success of reforms by Zambia's new President Hakainde Hichilema, analysts say.

Hichilema’s United Party for National Development (UPND) has promised to create a national debt management office as an independent agency responsible for debt management policy. Such a move is likely to go down well with the IMF, from whom Zambia is attempting to secure an extended credit facility.

Zambia has a debt office embedded in its finance ministry, and whether or not it is a separate entity is unimportant, says Gregory Smith, an expert on Zambia and author of ‘Where Credit is Due: How Africa’s Debt Can Be a Benefit, Not a Burden‘, published in June by Hurst & Co.

Key to Smith’s argument is that Zambia, like many African governments, needs better systems to invest its borrowings. “By building a system for managing public investment, the government will be able to achieve much better value for money and reduce the avenues for corruption,” he says. “Zambia needs to begin on a path of smarter borrowing with greater purpose.”

Smith has no doubt that Zambia has the necessary expertise. The country has many skilled economists whose warnings on debt were ignored by the political leadership over the past six years, he says.

  • “The most important thing for the debt office is that there is political will for it to succeed,” Smith says.
  • The government needs to be “supportive of its debt office’s warnings and reporting, and ensure it has the skills for success in managing a modern debt portfolio.”
  • “A good starting point would be for the publication of regular comprehensive debt reports that could help rebuild people’s trust in the numbers,” Smith says. “This transparency would also […] support […] a timely and fair debt restructuring.”

‘Reality realignment’

Hichilema’s challenge is to pivot the growth model away from government capital expenditure towards private-sector consumption and investment, ideally via foreign investment in the non-mining sector, according to Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town. He [Hichilema] also needs to lower the burden on households to lift consumption growth, she says.

Results are unlikely to come fast. Assuming the administration takes a pragmatic policymaking approach, dialogue with the IMF is likely to lead to a technical and financial support package in the first half of 2022, Erasmus says. However, she expects a process of “realignment with reality” as the initial positive reaction of the Zambian election fades and the reality of the protracted recovery process sets in.

  • The short term may see disappointment in terms of foreign direct investment (FDI) as miners take time to reassess the tax environment amid fiscal consolidation pressures, Erasmus says.
  • She expects that a pick-up in FDI may take until 2023-24 as bond swap negotiations arising from the country’s debt default under former President Edgar Lungu may have been resolved by then.

Near-term growth prospects rely heavily on the external sector with domestic consumers still struggling with high inflation, Erasmus says. She notes that commodity prices have suffered as a result of China’s plans, announced in June, to sell down reserves of aluminium, copper and zinc.

That creates the prospect of “moderate but sustained copper price compression” which will be compounded by lower-than-expected Zambian copper output in the first half of this year, adding to the downside risks to growth, Erasmus says.

Bottom line

Pressure on commodity prices means that Hichilema’s window of opportunity for reform may be small.

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