Zambia: Fuel price hikes loom large as Hichilema clinches IMF deal

By Chiwoyu Sinyangwe
Posted on Wednesday, 7 September 2022 12:06

United Party for National Development (UPND) presidential candidate Hakainde Hichilema smiles during a rally in Lusaka January 18, 2015. Zambians go to the polls on January 20 following the death of President Michael Sata in October 2014. REUTERS/Rogan Ward

The decision of the International Monetary Fund (IMF) board to approve a $1.3bn bailout for Zambia on August 31 should have come as a great relief to the country – but the threat of high oil and electricity prices continues to mire celebrations.

Zambia’s 38-month arrangement under the Extended Credit Facility (ECF) is based on the country’s “homegrown economic reform plan that aims to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth,” according to the official statement by the IMF made on September 1, 2022.

The IMF stated that the programme will also “catalyse much-needed financial support from development partners,” enabling an immediate disbursement equivalent to about $185m. Indeed, for Zambia, the IMF programme provided endorsement to restructure over $17bn of external debt from other creditors.

Past engagement

Zambia became the continent’s first pandemic-era sovereign defaulter in 2020 and has another Eurobond of $750m due to mature this month. According to finance minister Situmbeko Musokotwane, it won’t be possible for Zambia to meet its obligation to Eurobond holders.

Zambia has been seeking an agreement with the IMF since 2017, but a lack of clarity on the amount of the country’s debt and the collapse of its relationship with the Washington-based lender jeopardized the deal.

Alfredo Baldin, then IMF Resident Representative to Zambia angered former president Edgar Lungu after he publicly criticised continued excessive borrowing and the government demanded the IMF remove him from the post in 2018.

An IMF representative was only reinstated following the election of Hakainde Hichilema and his United Party for National Development (UPND) in August 2022.

Economic reforms

The focus of Hichilema has been to achieve broad economic reform by restoring macroeconomic stability through renegotiating Zambia’s foreign debt and increasing copper output.

Indeed, since coming into power last year, Zambia’s macroeconomic environment has drastically improved. Zambia’s inflation rate slowed down to 9.8% in August 2022 after reaching a three-year high in July 2021 at 24.6%, and while the economy contracted by -2.6% in 2020 and grew by 1% in 2021, it is this year projected to grow by 3.5%. Meanwhile, the kwacha has appreciated by around 31% so far this year.

A lot of people in Zambia support the IMF deal as they expect it to bolster the current positive economic trajectory, which has seen increased social spending by the government. The government this year hired 41,000 new teachers and health workers to shore up social spending after the IMF at a staff level and approved a plan to cancel some subsidies in the energy and agriculture sectors. Zambia last hired public workers in 2017.

Last February, Zambia halted fuel refining at its 49-year-old Indeni Petroleum Refinery and also stopped importing refined oil for retailing – a move aimed at reducing the government spending on energy and transferring the burden to private fuel importers.

Zambia also planned to scrap all fuel subsidies by January this year but has delayed its plans to reintroduce taxes on imported fuel to September after global oil prices soared following the war in Ukraine.

A recent Cost of Service study by UK-based Energy Market and Regulatory Consultants (EMRC) was rejected by the government after it recommended cutting tariffs for mining companies while raising them for domestic customers. The study funded by the African Development Bank (AfDB) was to determine the cost of electricity supply and the appropriate tariffs based on efficient operating costs. However, the government is pushing forward with plans to increase electricity tariffs in the country to cost-reflective tariff levels by 2026.

Previous attempts to increase power tariffs were abandoned after backlash. But during a special interview with the national broadcaster on 4 September, Musokotwane said that the government will proceed with “broad reforms” to correct the energy pricing in the country to avoid “wastage subsidies.”

Poor farmers depend on government support for growing the country’s staple crop – maize. The government says the programme to help almost 1 million rural Zambian farmers had been prone to revenue leakages and abuse. The government is planning a review of the policy.

Scepticism about the IMF

Previous IMF structural and economic reforms have been blamed for fuelling economic distress about 30 years ago when over 200 poorly-functioning government companies were shut down.

Following the latest round of IMF funding, there are concerns that State power utility Zesco and communications company Zamtel could be targeted for stringent reforms, which could include privatisation.

Musokotwane said as part of fulfilling the five-year IMF programme, some parastatals could be privatized. “The last thing I want to see is us failing to hire teachers and health workers because we must put money in the company that is failing,” Musokotwane said in the interview.

Hichilema says the government is putting in a law that requires Parliament’s approval of fresh loans. “We have gagged ourselves that we should not borrow rampantly without Parliamentary approval,” he says.

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