In a note to investors shortly after President Edgar Lungu’s re-election, the bank said with the PF win, most of the groundwork has already been laid.
“In preliminary talks with the IMF, Zambian authorities indicated that a deal in the region of USD1.2bn was in the pipeline. Earlier in the year the IMF indicated that its discussions with Zambian authorities were “to lay the groundwork for rapid action toward a Fund program following the Aug elections.” We thus believe that an IMF deal could be sealed as early as Q4:16,” said Samantha Singh from the Bank’s Research Unit.
“Of course, it is worth recalling that the government initially aimed to reduce the fiscal deficit to 3.8% of GDP in 2016 from a deficit equivalent to 8.3% of GDP in 2015, without the help of an IMF program.”
She however noted that sticking with that commitment proved challenging arguably on account of the pending elections this year adding that the 2016 deficit is likely to be 9.3% of GDP.
Ms. Singh said the administration will probably become emboldened by the election results, making it likely that it would adopt an aggressive, yet credible, fiscal consolidation path.
“If we are correct, such an IMF programme should boost confidence in Zambia not least because it would most likely commit the authorities to fiscal consolidation at a time when monetary policy is already tight,” she said.
Ms. Singh said additionally, the combination of tight fiscal and monetary policy would probably restrain unproductive imports, engender a narrower current account deficit and provide some support to the Kwacha.
“USD/ZMW, which was around 10.5 levels this morning, is likely to test 10 soon, before a slow march to the 11 level resumes. Domestic yields to ultimately compress while Eurobonds should benefit from the prospects of an IMF programme,” she said.
“Fiscal restraint under such an IMF program should also slow down net domestic issuance of government paper, and probably pull down yields at the long-end of the curve, making duration attractive. However, the market is likely to wait for evidence of a sustainable cut back in domestic issuance before yields compress significantly.”
She however noted that the external sector looking brighter saying despite a challenging global environment and domestic electricity supply challenges at the start of the year, copper production has held up so far this year.
“Additionally, the mining tax regime has become relatively stable, and a further sustained decline in copper prices appears less likely. According to the Chamber of Mines’ data, Mopani Copper Mines produced 21.2k MT in H1:16, which represent a 58% y/y decline as most of its mines remain on care and maintenance.”
She said it is unlikely that this pause in production will dramatically affect 2016 output.
“For the country as a whole, the production losses in the large operations have been offset by increase in production at Kalumbila and there are other the expansion projects going on in some of the other large producers. Hence, we expect copper production to increase to about 760k MT this year from 711k MT in 2015.”
“On the electricity front, we expect better rainfall and additional capacity in H2:16. The120MW Itezhi Tezhi power station was commissioned back in Mar while 150MW of the 300MW coal fired Maamba project was commissioned this month. All these suggest that copper production and exports, both in volume and value terms, will rise further in 2017,” she said.