The Zambian Government recently reached a staff-level agreement with the International Monetary Fund (IMF) team on a new arrangement under the Extended Credit Facility (ECF) for 2022-2025 to help it restore its macroeconomic stability and provide the foundation for an inclusive economic recovery. The Staff-Level Agreement between the IMF and the Government of Zambia stipulates the economic policies, financial policies and reforms which the Government will take up over time. This three-year extended credit facility is worth about SDR 980 million or $1.4 billion and it brings Zambia one step closer to a comprehensive debt overhaul. We should all bear in mind that this ECF is yet to be approved by the IMF’s management and Executive Board.
Even though the staff-level agreement is yet to be approved, it is already bearing fruits for Zambia and this can be seen in the Zambian kwacha (ZMW) appreciating against the United States (US) dollar. Following the announcement of the staff-level agreement, the Zambian kwacha appreciated to K16.0000 per dollar on 9th December, 2021, from a close of K17.8078 on 2nd December, 2021. Entities or individuals holding foreign exchange are likely to start converting to the Zambian Kwacha to avoid further foreign exchange losses. The current high US dollar supply and sudden inflows into Zambia of US dollars is coming from off-shore market players and corporations closing off their dollar positions. The Zambian kwacha (ZMW) is expected to continue making further gains against the US dollar due to positive sentiment from the staff-level agreement reached between the IMF and the Zambian Government for a bailout. Market fundamentals have remained largely unchanged and this means that the current appreciation in the Zambian kwacha against the dollar is only being driven by investor sentiment.
As long as the Zambian kwacha’s appreciation is sustained, it could contribute to fighting current high inflation levels and compliment the Bank of Zambia’s Monetary Policy Rate adjustment by 50 basis points to 9%. This means that fewer Zambian kwachas will be needed to buy US dollars.
Zambia is a highly indebted country and most of the debt was accumulated in the last decade by the previous Patriotic Front (PF) Government. It was the previous PF Government’s expansionary fiscal policies that contributed to Zambia’s debt problems. The PF Government’s expansionary fiscal policies for public investments, despite falling revenues, contributed to widening fiscal deficits (8.3% of GDP in 2019 and 11% of GDP in 2020). The PF Government’s expansionary fiscal policies, which were mainly financed by external and local borrowing, led to Zambia’s public and publicly guaranteed debt to rise to 91.6% of GDP in 2019 and 104% of GDP in 2020. In the medium term, Zambia’s debt to GDP ratio is expected to remain high. On 3rd November 2020, Zambia became the first African country to default on its international debt since the outbreak of Covid-19, as it couldn’t make the $42.5 million in interest payments on its three Eurobonds in mid-October and it also couldn’t honour payments at the end of the grace period given by the investors. Read more