How President Lungu’s loan ban and fiscal measures has averted a crisis and led Zambia to economic recovery

President Lungu speaking at the banquet hosted for Angolan President Joao Lourenco
President Lungu speaking at the banquet hosted for Angolan President Joao Lourenco

By Kalima Nkonde

President Lungu’s decision to stop debt contraction, cancel some existing loans, terminate projects below the 80% completion rate, accelerate payment of suppliers and contractors owed arrears and the implementation of expenditure reduction measures should be applauded by all patriotic Zambians-overdue as it may be-as it will avert the inevitable economic crisis similar to the one in 2015/16.

The measures announced by Finance Minister Margret Mwanakatwe, if strictly implemented, will set Zambia on a quick road to economic recovery as the monetary policy base is already in place and has been waiting for fiscal policy measures to complement them. The recent measures announced are what this writer and other experts have been calling for ad nauseam in the past three years.

It has been clear to those who keenly follow the Zambian economy, and those who read this writer’s articles and other experts’ comments , that the red flags for an impending economic crisis for Zambia was on the horizon and urgent action was needed.

The article gives the background to the President’s decision, and why it is the correct decision and how it is likely to lead Zambia’s to economic recovery within the next two to three years just like Ghana did, if strictly implemented.

In 2015/2016, Zambia went through an economic crisis which saw the kwacha tumble to $14.50 to a dollar, inflation sky rocket to 22.5%; bank interest rates go up to 45%, copper prices plummet to $4,858 per tonne which was a ten year low, and massive power shortage with incessant load shedding. These led to massive job losses being registered across all sectors of the economy with the mines retrenching over 12,000 miners. Zambia had to run to the IMF for talks on a rescue package and technical support.
As part of the negotiation process and preconditions for the IMF rescue package, the Zambian government put in place measures for stabilizing the economy; and admittedly there was overwhelming evidence in 2017, that the Zambian economy was on a recovery trajectory.

The rate of inflation dropped to 6.1%, commercial lending rates dropped to 25%, the kwacha stabilized below K9.5 on average and copper prices started recovering .As a result of the improved economy and the expected IMF deal, foreign investors’ confidence in the economy rose and inflows of foreign exchange through the purchase of Zambian government bonds and Treasury bills increased. The Zambian Eurobond was the best performing among emerging market economies. It appears that the Government applied some brakes to the measures as was evidenced by statements by the President and Minister for development planning to the effect that Zambia could do away with the IMF.

“Everything we do, we consult and I want to be remembered for just sticking to the law and doing things within the expectations of the people so if IMF want to go because of this, they can go and I am saying this openly, if IMF thinks we have gone beyond the norms of good governance and democracy, they are free to go,” said President Lungu, whilst declaring a State of emergency in July, 2017. “But I have made it very clear that if they think I have gone astray, let them go”, he added.

The President‘s view that Zambia did not need IMF was later supported by former Minister of Development planning, the now fired Lucky Mulusa.

”I will tell you this and tell you now that our worst time was between mid 2015 and mid 2016 just before the elections. That’s when the economic downturn had reached the bottom and during that time, we never ever defaulted on any of our international obligations, we never defaulted. Now the economy is picking up as a result of economic activities picking up in China and China is demanding more of our copper so we are able to export more copper and more revenues through taxes from that copper exports and also bringing in more hard currency in terms of also managing our exchange rate. What this means is that we can do away with the IMF and our economy will still be vibrant so people must not have this perception that maybe Zambia’s economy has gone berserk and we need bailout from the IMF, no. it is merely investment in perception in order to trickle down the interest costs that we are paying because the investors will be very comfortable with us engaging with the IMF,” Mulusa said.

On October 6, 2017, against all expectations, IMF dropped a bombshell that it was putting the Zambian deal on hold due to the country’s high level of indebtedness which increased Zambia’s chance of default. According to the IMF, their projections showed that the country’s debt levels could reach 90 per cent of GDP by 2021.

“Public debt has been rising at an unsustainable pace and has crowded out lending to the private sector and increased the vulnerability of the economy. The outstanding public and publicly guaranteed debt rose sharply from 36 percent of GDP at end-2014 to 60 percent at end-2016,” The Fund noted in statement announcing the suspension of talks.

“Against this background, any future programme discussions can only take place once Zambian authorities implement credible measures that ensure debt contraction is consistent with a key programme objective of stabilizing debt dynamics and putting them on a declining trend in the medium term,” The IMF added.

There is overwhelming evidence that since the IMF suspended talks with Zambia, nine months ago, the improved signs of recovery that were apparent in 2017 have started reversing. Since the beginning of 2018, inflation has gone up four months in row to 7.8%; the exchange rate of the kwacha has gone above the K10 to a dollar and trading about K13 as on 15 June, 2018, compared to a low of $8.90 in 2017.
Zambia’s foreign exchange reserves are down to an all time low of $1.8billion or two months import cover instead of the target of 4 months and well below SADC’s 6 months cover. In regard to the debt situation, Zambia’s foreign debt has increased from $7.2billion in 2017 to $9.1billion; the fiscal deficit for 2018 is likely to be higher than the 6.1 percent projected in the budget. Zambia currently spends 22% of its revenue on debt servicing.

The performance of Zambia’s Eurobond, which is one way of measuring investor confidence, is now the worst performing in the World. Investor’s confidence in the economy seems to have been lost. In 2017, Zambia’s Eurobond was the best demanded but its value has lost 11% in 2018 and its yield is above 10%.
According to Stuart Culverhouse, Head of Sovereign and Fixed Income Research at Exotix, investors’ confidence in Zambia is low.

“Market yields that have now reached 11.5% show the market has lost faith in Zambia and, if there was any confidence back in October that an IMF programme was still possible, this has now all but disappeared,” He said.

It is in the light of the above negative trends in 2018, that President Lungu’s decision should be viewed. He should ,however, be commended for having bitten the bullet and ignored political expediency by making a bold decision which is likely to avoid the country relapsing into a full blown economic crisis.

The IMF Country Director, Dr. Baldini, had warned that if no corrective measures were done, especially with regard to debt and fiscal discipline, Zambia risked relapsing into an economic crisis.
“The shock scenario [for Zambia] reflects a nearly full blown crisis similar to the one experienced back in 2015 when the REER (Real Effect Exchange Rate) exchange rate depreciated by 30 percent, copper prices fell by 20 percent, and growth slowed down from nearly 5 percent in 2014 to 2.9 percent in 2015”, He said.

Zambians may wonder how the measures announced by government will help the economy recover. There is no doubt that if strictly implemented, the measures will lead to increased economic activity, stabilization of the kwacha, creation of more jobs and improvement of the standard of living for the population.
First and foremost, as a result of the measures, talks with the IMF should be back on track and the $1.3 billion deal is likely to be concluded this year. The benefits of such a programme which have been pointed out before, include the following: help the stabilization of the kwacha through the balance of payments support, restore investor confidence and help the performance of Zambia’s Eurobonds by reducing interest rates on the loans, facilitate mobilizing additional revenue sources from multilateral institution and bilateral Donors and strengthen public financial management and restore budget credibility. On the political front, IMF programs have been correlated and credited with an increase in free and fairer elections, free speech, and good governance, rule of law, control of corruption, freedom of the press, strong and independent governance institutions.

The Government’s cancellation and suspension of foreign loans will reduce the country’s debt risk of default as well as reduce the money to be spent on servicing loans thereby leave funds for health, education and other social services.

The reduction in the cost of running government by reducing wasteful expenditure will reduce the need for government to borrow from the domestic market and therefore lead to bankers having excess liquidity and a drop in bank interest rates. Banks will be forced to lend to private sector at affordable rates and in the process help the private sector expand and new businesses set to create jobs.
Government has been a job killer in Zambia due to excessive domestic borrowing which has kept commercial bank interest high and has for so many years overcrowded the private sector. This assertion has been supported by the institution that understands the Zambian economy better than anyone else, Bank of Zambia.

“The prevailing high real lending rates continued to constrain access to credit by productive sectors of the economy as reflected in the sustained contraction of credit to the private sector. Most sectors continued to experience limited access to credit mainly due to banks’ preference for government securities, high lending rates, and prohibitive collateral requirements”, observed Bank Zambia Governor, Dr. Denny Kalyalya, in one of his quarterly Monetary Policy press briefing in 2017.

The Government’s decision to accelerate the payment of suppliers and contractors will also have massive multiplier effects on the economy. One of the major constraints to economic activity in Zambia has been the lack of liquidity. If Government pays suppliers, they will also be able to pay their creditors including banks thereby reduce the percentage of non performing loans. This measure will also make more money available for productive activities and in the process create more jobs.

There is cause for optimism for Zambia’s economic recovery because the measures announced will be building on some of the current positive indicators in the economy such as the monetary policy measures that have seen monetary policy rate reduce to 9.5%, the statutory reserve ratio of 5%, the continued improvement of copper prices to over $7,200 per tonne.

In addition, Zambia’s power generation capacity has increased to 1901MW which is almost what the nation needs at its peak. This is due to increases in generation by ZESCO to 1493MW while Independent power producers (IPPS) like Lunsemfwa Hydro and Maamba Thermal Coal Plant are producing about 493MW.
Although there is need for optimism, there is more that the Government needs to do, including following up issues raised in the Financial Intelligence Centre reports on tax evasion. The Zambian government should stop focusing on small fish like Zambian workers and Small business owners for domestic revenue mobilisation but rather find a way of focusing on multinationals tax evasion ploys including the Chinese. It is apparent that tax evasion and corruption is now being exported to Zambia and African countries by the Chinese while they are getting rid of it in their home country by punitive punishment to offenders which includes the death penalties because they know its threat to their economy.
The issue of corruption needs to be addressed head on as it is now Zambia’s biggest elephant in the economic room. The Zambian government is well advised to go and learn about reduction of government expenditure and corruption by visiting countries like Botswana and Mauritius, instead of Kenya.


    • The headline is misleading and incorrect with regards actual content. Economic recovery is not achieved by a magic wand it takes serious effort and effort is foreign to Lungu and friends ..this is the second austerity announced by this government and they haven’t even reviewed how the first announced by Mutati last year has failed. PF need to ditch the populist approach if the austerity is to work and face reality already the start is discouraging Presido is already on a private visit at state expense.

    • I am afraid all these measures are a bit too late.

      This government is trying to shut the gates after the horse has bolted. Pointless.

      The only reason Lungu has banned getting loans is because no one will lend Zambia any money anymore. Not even at inflated interest rates.

      Lungu & co. need to account for the loans that they have already taken out.

      This will not simply go away.

    • it’s TOO LITTLE, TOO LATE. The irrepairable damage has already been done. The last, last hope is IMF loan later in September.

      Guys, even if IMF give us this loan (which comes with tough conditions), expect Armageddon with the Kwacha bleeding exercise, galloping inflation high interest rates, cash shortage, fuel shortage etc. Euro-bond maturity & declining copper prices will be the final blow to a comatose economy.

      Years of PF00L economic damage & Looting cannot be fixed in a day.

  1. But Ba Edgar dissapoints himself. He just announced something good to control entwenokane.
    Then takes useless trip to a useless country Kenya…
    Seriously what’s wrong with that man?? He should have stayed to burry his minister or go shock Tongas at Munkombwe funeral.

  2. Case by case would be a viable policy option. The current policy measure is too drastic and needs some expeditions other than the 80% completion point alone. For each project, there are proponents and opponents. The PF manifesto is an expression of the demand by Zambians to build and maintain basic infrastructure in the country. There are some good votes to be won by maintaining a robust infrastructure development strategy as the key to medium and long term job creation and economic growth and economic take off. Each project employment workers who will be laid off abruptly. Each project was a catalyst to wealth creation. The loud voice from opposition critics of the robust infrastructure development policy strategy are wasting time. Sooner or later, the cost of the same development…

    • The loud voices from opposition critics of the robust infrastructure development policy strategy are wasting time. Sooner or later, the cost of the same development projects will rise. Forward with road development, forward with rail development, forward with hospital development, forward with university development, forward with airport development, forward with airline development! Who is going to pay for it? What a question. The funding agencies and lenders have confidence in the country’s capacity o brave it and deliver positive results. Remember the cost of importing electric power? Remember the costs of cholera? Remember the cost of maize parasites? These factors call for further sacrifice and refinement to achieve robust infrastructure development for economic growth and job…

  3. “terminate projects below the 80% completion rate, accelerate payment of suppliers and contractors owed arrears and the implementation of expenditure reduction measures should be applauded by all patriotic Zambians-overdue as it may be-as it will avert the inevitable economic crisis similar to the one in 2015/16”

    What one should ask himself or herself is who caused this economic mess!!! Why applaud reckless people like him, who in the first place should have taken measures to avoid the current economic disaster Zambia is facing. People talked about this and he sweetly ignored the warnings. Taking these austerics measures at this time is rather late and a clear indication that he has got all the milk in his bucket and the cow is dry.

  4. This Kalima Nkonde chap is bloody useless and foolish to say the least!
    How do you praise Lungu when he is the very person that brought us the same huge debt?
    The same action he is taking is what he was advised to take earlier but dimissed it telling the opposition to get out!
    So to see this Kalima whatever praising Lungu is so disgusting and hypocritical.

  5. Hate the man or system. At the centre of it all are found you and me and we and the next generation may suffer untold misery for letting things go in unchecked and worse still for just criticising for the sake of it. Let us all continue speaking and contributing objectively without fear or favour because reality has a way of exonerating those who stand for truth, no matter how long it takes. We should not be judged by posterity.


  7. When one said majority zambians are fools, some readers rubbished him. After a man claims no vision, u force him to lead. He leads u into chimugodi and suggests he has magic to rescue u. Before u have seen his magic work, u praise him. Foolishness. Look at the world cup strategists. Player not performing, out. To announce austerity measure is one thing. To sustain them is the litmus test. But from what we have seen, neither leader nor followers have the capacity to stay the course!

  8. He’s made his money and now wants to repent let him be honest enough we are fed up of him and his friends Valdin findlay and the drug cartels he associates himself with what nonesense yet Ye goes to Kenya to do another deal …

  9. I think preoccupation of staying in power prior to 2016 general elections & massive looting of our meager resources in recent past have contributed to the state we are in.There is need for more moral responsible responsibility by our leadership than paying lip service to it.Its time political leaders stopped gracing churches for political mileage without taking heed to the teaching of God’s word in order to solve mammoth challenges of moral corruption, poverty,pauperism and political violence.The onus is on our leadership to take note & listen to the cry of its people.

  10. Chin what? If you meant ‘Chinese’, then you can go to hell. There is no need for xenophobia. African criminals are just as good as Asian criminals. The Chinese are human beings like everyone else. They are hard working. But like all human beings, the Chinese are not gods. They can even cry like all children do. Let us focus on the fight against corruption. The ACC and other relevant state agencies will continue to soldier on in the relent fight against corruption. Remember, capital knows no color. Remember, capital knows no national boundary. Remember, capital knows no gender. Investors will direct investments into sectors that are profitable. Investors will only come after Government has completed clearing the ground.

  11. The damage is already done, sanganu tuwe! Mutu winyelezi kale ni linzi ki nu fa sinuko kona ali ubata ku matela kwa simbuzi kipeto wena ki kumu lumba kuli wile kwa simbuzi. Bukuba!

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