- 2022 economic gains slowly reversing and thus threatening macroeconomic stability
- Final IMF Board approval of $1.3billion at risk as it is contingent upon the debt restructuring deal
- Rising debt burden with interest arrears and penalty charges escalating on defaulted loans
By Mwansa Chalwe Snr
The Monetary Policy Committee (MPC) of the Bank of Zambia in its Statement of 15 February, 2023, has confirmed beyond reasonable doubt that China’s latest demands at the debt restructuring talks, have started to adversely affect the Zambian economy. The Monetary Policy Statement demonstrated the adverse effects that the stalled debt restructuring talks were having on the economy, in terms of the exchange rate, interest rates, inflation and job creation, due to the uncertainty. The 2022 economic stabilisation gains are all at risk of reversal, if no urgent diplomatic action is taken by Zambia.
Rapid depreciation of the Kwacha
The demand by China that Zambia’s local currency government bonds held by foreign investors, should be included in the deal, and has particularly contributed to the rapid depreciation of the kwacha, which has resulted in the increase of fuel prices and public transport fares. The kwacha exchange rate, is Zambia’s most important economic metric as it affects all Zambians regardless of their status because Zambia is an import dependent country
The Bank of Zambia’s statement shows that the demands by China have contributed to the reversal of the gains that the Kwacha made in 2022, which earned it the title of the best performing currency in the world. The Kwacha has been depreciating against the dollar almost every day for two months now, and it is at its weakest in nearly a year, as talks drag on with no end in sight.
“After a cumulative appreciation of 10.0 percent in the previous two quarters, the Kwacha depreciated by 4.3 percent against the US dollar to an average of K16.71 in the fourth quarter of 2022. The depreciating trend in the Kwacha has persisted in 2023, with the Kwacha trading at K19.33 per US dollar as at February 14.
“Foreign financial institutions, that had typically been suppliers of foreign exchange, are now more pronounced on the demand side as they are divesting from the domestic market. This is principally due to tighter global financial conditions, negative sentiments associated with the protracted debt restructuring negotiations and uncertainty around the treatment of non-resident holders of Government securities,” the Bank of Zambia Statement said.
Higher inflation outlook for 2023
The Central Bank has also revised its inflation outlook for 2023.It has partially attributed the forecasted higher inflation to China’s demand to have Zambian foreign investors in local bonds to be included in the restructuring deal.
“Over the forecast horizon, inflation is projected to increase and remain above the 6 – 8 percent target range. Inflation is now projected to average 11.1 percent in 2023 compared to the November 2022 forecast of 8.5 percent,” The Bank of Zambia Governor, Dr. Denny Kalyalya said. “Negative sentiments arising from the protracted debt restructuring negotiations (and more so the uncertainty over the treatment of the non-resident holders of Government securities) are also projected to add to elevated inflationary pressures.”
Forecast Economic activity and job Creation
The Bank of Zambia has increased the benchmark monetary policy rate to 9.25% from 9.0%. And it recently increased the statutory reserve ratio to 11.5 percent on commercial banks’ deposit liabilities, in order to support the depreciating kwacha. These measures will negatively affect the economy. The cost of borrowing (interest rates) will go up, and there will be continued shortage of liquidity in the economy, which will result in lower economic activity like last year and fewer jobs created.
Geo-political dimension to the debt talks and China’s demands
There is something that most Zambians do not seem to understand about the restructuring talks. There is a chess game that is being played between the US and China, with Zambia being the pawn in the game – which I predicted in my book two years ago. There is clearly a stealth “war” going on between the West/US and China in these debt restructuring talks. And if anyone thinks geo-politics and economics is not at play in the current talks, they must be either quite naïve or have not been following geopolitics of the past twenty years. They are well advised to go research and read more.
China cannot be blamed for its current demands because it is merely pursuing its self-interest by using its economic power in negotiations. China, is in some way, leading other emerging economies in trying to reform the global system for restructuring sovereign debt, which currently excludes multilateral banks like the World Bank. In general, China wants respect and recognition commensurate with its current status as the number one bilateral lender, the number two world economy, and Zambia’s largest bilateral creditor, and the key to the restructuring deal.
The Chinese seem to be pursuing a two pronged strategy in the debt restructuring negotiations, in as far as their demands are concerned. This can only be deciphered by experts on the subject. One is aimed at the West, to pursue reforms in sovereign restructuring, and the other is aimed at the Zambian government so that China can protect its turf which is under some apparent threat.
China has made repeated calls at the restructuring talks and in press conferences, for the World Bank and other multilateral development banks to participate in debt reductions. This demand is clearly targeted at the Parish Club and G7 countries in the debt negotiations.
On the other hand, China is demanding the almost impractical condition, of foreign investors in Zambia’s local currency bonds, to be part of the restructuring deal. This demand is clearly aimed at the Zambian government. It is the clearest sign yet to Zambia that it should directly engage with China at the highest level in order to allay the perception that Zambia has outsourced negotiations to Western countries and institutions. It is designed to put economic pressure on Zambia to act.
This week, Zambians will be on the edge watching the proceedings of the G20 finance ministers central bank governors meetings in Bengaluru, India, from Feb. 23-25.They will be waiting for the outcome of the talks. The meeting’s agenda will include a debt round table discussion on Feb. 25, which China is part of. This has been organized by the host India, the IMF and the World Bank. It will discuss broader issues that are creating roadblocks to debt relief deals for Zambia, Sri Lanka and other countries.
During the G20 meetings in India, the US Secretary of Treasury, Janet Yellen, is expected to focus on unblocking debt restructuring talks and press China to speed up its debt relief for Zambia. The US government’s expectation is to see a deal struck on Zambian debt at these meetings. And the US embassy in Lusaka has echoed the same sentiments: “As Zambia’s largest bilateral creditor and as a co-chair of Zambia’s official creditor committee under the G20 Framework, China has excellent opportunity to follow through on its announced commitment by moving expeditiously to restructure Zambia’s debt so all Zambians can begin benefiting from inclusive economic growth without delay.”
How to unlock the debt restructuring talks
On the basis of past experience, and knowing how the Chinese operate, it is unlikely that they will be swayed and greatly influenced by appeals from their geopolitical rival, the US or the Bretton Woods institutions-International Monetary Fund and World Bank in making their decisions on the deal.
Last year, the new Chinese Ambassador to Zambia Du Xiaohui disclosed that China never wanted to join the G20 Creditors Committee because it believes that friendly bilateral cooperation is the best way to deal with debt between friends. It had to take a direct phone call from Zambian President Hakainde Hichilema on 31 May, 2022 to Chinese President Xi Jinping to unlock the stalemate. And within two weeks, on the 16th June, 2022, the first Official Creditors Committee (OCC) meeting was held after over six months of failure, following the provisional approval of Zambia’s $1.3billion IMF deal on 3 December, 2021.
And following the aforementioned phone call, the Chinese Foreign Affairs Ministry released a statement about what President Xi Jinping had told President Hichilema. The contents of the statement gives a cue of what Zambia needs to do, to unlock the debt restructuring deal.
“The two sides should strengthen strategic communication and policy synergy, fully implement the nine programs of the Forum on China-Africa Cooperation (FOCAC), deepen mutually beneficial cooperation in various fields, promote more Zambian goods, especially quality agricultural products, to enter the Chinese market, and strengthen anti-pandemic cooperation. Both sides should carry forward the Tanzania-Zambia Railway (Tazara) spirit, keep it updated in accordance with the trend of the times, and make Tazara an important transportation channel in the region. The two sides should adhere to independent foreign policy, firmly safeguard international fairness and justice, and uphold the international system with the United Nations at its core and the international order underpinned by international law,” The Statement said.
Conclusion
President HH should find it easy to arrange a meeting to unlock the deal with China for a number of reasons. First, he did not publicly criticise China during the 2021 general elections campaign, unlike some other previous Zambian Presidential candidates. Two, he must have established some good rapport with President Xi Jinping through last year’s telephone conversation. And in general, there has been no express antagonism between Zambia and China since he became President. The deadlocked debt restructuring talks provides him with a great opportunity to recalibrate Zambia’s relationship with China. READ MORE:https://www.lusakatimes.com/2021/07/27/zambia-china-economic-ties-need-recalibration/
President Hakainde Hichilema, has repeatedly stated that his administration intends to continue with the tradition long-established by his predecessors of upholding the all-weather friendship between Zambia and China, and so it should not be too difficult to engage China at Presidential level.
China is Zambia’s big “brother”. The two’s relationship dates back to Zambia’s pre-independence. It is a sixty eight (68) year old relationship, dating back to 1955.The deal is so easy to unlock, if Zambia directly approaches China at the highest level. And this is the appropriate timing for which nobody would be faulted.
The writer is a Chartered Accountant, Author and an independent financial commentator and analyst. He is also an Op-Ed Contributor to the Hong Kong based, South China Morning Post (SCMP) and Author of: “China-West Battleground in Africa: Debt Ridden Zambia”(2021), which is available on Amazon.com (Contact: [email protected]).
