• For a third consecutive year, Zambia’s macroeconomic and financial indicators deteriorated
  • A period of low copper prices and high spending needs led to significant twin deficits
  • High liquidity pressure made the kwacha lose more than 60% of its value since 2015
  • External and public debt ratios rose rapidly
  • The financial system came under more pressure
  • Deficient disclosure on debt levels to the IMF and untenable government borrowing plans add to uncertainty on Zambia’s debt sustainability

In 2014-2015, a deep fall in international copper prices coincided with large public spending and lax fiscal policies. The impact was eventually shown in high twin deficits, shrinking liquidity levels and a sharp kwacha depreciation. Consequently, external and public debt ratios rose very rapidly, putting Zambia at ‘high risk of debt distress’ according to the IMF’s latest debt sustainability analysis. Domestic government borrowing crowded out private-sector borrowing while accumulating government arrears together with falling liquidity levels put the financial system under increased stress.

Since mid-2016, recovering copper prices and better rains improved growth projections and softened the current account deficit while growing foreign-investor participation in government securities supplied foreign exchange to the market and reduced liquidity constraints. However, these external government debts might overshoot Zambia’s capacity, while they expose the economy to capital flow reversals and exchange-rate risks. Moreover, the past months it became clear that the government is reluctant to increase transparency on outstanding debts or introduce reforms to bring government-debt dynamics back onto a sustainable trajectory.

Political unrest and instability have been flaring up since 2016 and are not likely to be soothed in the near term. In fact, President Lungu might get more isolated due to his authoritarian propensities and opaque public-debt management. Zambia’s long-term risk outlook mainly depends on movements in the international copper price, weather conditions, the government’s policy direction and borrowing behavior.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com