Zambia Sees Swift Subsidy Cuts in $1.2 Billion IMF Deal

Updated on
  • Government targeting conclusion to IMF talks this year
  • Election delayed negotiations that will begin after vote

Zambian President Edgar Lungu has pledged to remove or reduce energy and agricultural subsidies as part of a loan deal with the International Monetary Fund that could top $1.2 billion, his spokesman said.

“Straight away when the IMF program begins, subsidies will significantly go down in the energy sector,” Amos Chanda said in an interview on Wednesday. “The president has promised to move rapidly to either completely do away with subsidies or progressively reduce them.”

Zambians are voting in elections Thursday, where Lungu faces a strong challenge from opposition leader Hakainde Hichilema, who has said he’s also keen to pursue a deal with the IMF. Whoever wins will need to cut a budget deficit that widened to almost 10 percent of GDP last year, while growth slumped to 3 percent, the slowest pace since 1998. Fuel and power subsidies alone could cost the government $660 million this year, according to the Washington-based lender.

The Finance Ministry announced in April it would seek an aid program from the IMF that it hoped to have finalized by the end of the year. The fund may provide a loan of $1.2 billion dollars or more, Chanda said, citing preliminary talks that were put on hold until after the elections.

Cutting Deficit

While Lungu’s administration is committed to reducing the budget deficit, it won’t agree to job cuts or measures that push up health-care costs, Chanda said.

Although a bailout deal with the IMF appears likely regardless of who wins the election, it probably won’t be concluded before year-end, according to risk advisers Teneo Intelligence.

“Donors and multilateral institutions such as the African Development Bank do not foresee a government being in place in time for the budget period, which begins in October,” Teneo said in an e-mailed report on Aug. 5. “The best-case scenario for a deal to be secured remains the first quarter of 2017.”

Zambia’s kwacha has weakened about 26 percent against the dollar over the past 12 months, the fourth-worst performance in Africa, pushing the inflation rate to more than 20 percent. Yields on Zambia’s $1 billion of bonds due April 2024 dropped 13 basis points on Wednesday to 9.43 percent, the lowest on a closing basis in a year.

Lungu’s government is satisfied with a new mining tax system that came into force earlier this year in Africa’s second-biggest copper producer and will leave it unchanged for at least three years, Chanda said.

“When we were coming up with this mine tax regime within government, we were agreed that we need a stable, predictable tax regime and this is what we’ve got,” he said.