A market of more than 100 million inhabitants, where only one-third of those over 25 have a bank or mobile finance account (compared to an average ... of 58.5% in sub-Saharan Africa and 79.5% in neighbouring Kenya). An economy where one public institution, Commercial Bank of Ethiopia (CBE), alone manages 55% of outstanding credit. A banking industry so inefficient that its costs absorb 56% of its revenues, but where the return on assets is four times higher than that of Moroccan banks…
State-owned Zambia Consolidated Copper Mines Limited (ZCCM) this week agreed to take on $1.5bn of debt and pay a nominal $1 to take over a 73% stake in Mopani Copper Mines from Swiss commodities trader and mining company Glencore.
The agreement adds to the debt liabilities of a country that in November became the first African country to default during the COVID-19 pandemic. ZCCM will repay the loan by giving Glencore creditors 3% of Mopani’s revenue to 2023, which then rises to between 10% and 17.5%.
That’s on top of quarterly interest of LIBOR plus 3%, and a requirement for ZCCM to pay 33.3% of earnings before interest, taxes, depreciation and amortization (EBITDA), less some deductions.
Glencore will retain rights to copper produced at Mopani until the debt is repaid, which Zambia to take between 10 and 17 years, depending on copper prices.
So Glencore keeps the upside if production and copper prices are strong. For Zambia, the deal “owes more to short-term political calculations than long-term sound economic reasoning,” says Nick Branson, director at Gondwana Risk in London. “Additional liabilities will merely add to the gross public debt, undermining Zambia’s chances of convincing the IMF that its debt can be put back on a sustainable footing.” That will delay access to concessional lending, he adds.
President Edgar Lungu “no doubt views the deal as an opportunity to secure votes on the Copperbelt, where the ruling Patriotic Front was born but has seen its support waning,” says Branson. “The government will be able to boast that Mopani’s “nationalisation” represents both a victory against supposedly exploitative foreign mining companies and guarantees jobs for Zambian workers.”
The truth is that Glencore has simply been able to offload debt to a government that has both eyes fixed on elections in August.
- Glencore temporarily halted copper mining Mopani in April 2020, prompting a threat by the Zambian government to suspend Glencore’s mining license.
- Zambia will now seek a new investor in Mopani, and will need about $300m to complete expansion projects started by Glencore. The official timeline for that shows how difficult it will be: ZCCM hopes to identify a new investor by the end of this year.
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“Zambia not only added a sizeable chunk of debt to its already unsustainable public debt burden but took on responsibility for a larger share of the mining labour force that it can ill-afford,” Irmgard Erasmus, senior financial economist at NKC African Economics in Cape Town, writes in a research note. Mines Minister Richard Musukwa has said that 15,000 job were at risk.
“In stark contrast to the expected behaviour of a country seeking IMF support and a recipient of debt service suspension relief from Paris Club creditors, the government’s recent actions rather speak of a blatant courting of the popular vote ahead of the August national poll,” argues Erasmus.
The IMF was not consulted on the Glencore agreement.
The move sets the stage for “a more acrimonious debt restructuring process and increases the probability of a protracted economic contraction,” writes Erasmus. “A more nationalist approach to production will weigh unfavourably on efforts to improve the non-interest current account and structural primary fiscal balance, both being critical to placing Zambia on a more sustainable debt path.”
Zambia’s politicians will only listen once the electorate sends a message on public finance sustainability.
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