As currency slumps, Zambia may have to seek solace in IMF arms, as president, money-men at odds

Country fast running out of options as kwacha in ‘freefall, and authorities differ mightily over what to do.

ZAMBIA president Edgar Lungu may consider imposing exchange controls to stem the kwacha’s “freefall” if other measures fail, his spokesman Amos Chanda said, even as analysts said the country may have to swallow the bitter pill of an IMF programme.

“The president cannot allow a national currency to collapse because of a false belief in a free-market economy fixing themselves even when things are clear that the market won’t fix itself,” Chanda said in an interview broadcast on state television in the capital, Lusaka, on Sunday.

“The president could intervene, through the Treasury of course, to allow the central bank to regulate if the markets don’t behave properly. There are exchange controls as a measure.”

Chanda’s remarks come after Finance Minister Alexander Chikwanda and Bank of Zambia Governor Denny Kalyalya both ruled out exchange controls last week, saying it would only exacerbate the situation.

“They don’t help, they actually accentuate the difficulties,” Chikwanda said in a September 3 interview. “Even the little forex we have would be taken out if we have control of capital movement. You create panic. It’s not a conducive environment. It’s a recipe for getting the country backward.”

READ: It’s a tough time to be a Zambian, as officials concede battered economy at mercy of global markets

Zambia will release $120 million kwacha into the market in the coming days to provide dollar liquidity, Chanda said Sunday. A further $140 million to pay contractors will be offloaded within two weeks, he said.

“The kwacha will not get any worse than it is,” Chanda said.

But while Chikwanda is no admirer of the International Monetary Fund, with the nation’s currency plunging to a record and yields on foreign bonds approaching 11%, he may soon have to change his mind, according to Rand Merchant Bank.

Fuel inflation threat
The kwacha has slumped 25% this quarter, the most among more than 150 currencies monitored by Bloomberg, driving up debt-service costs and threatening to fuel inflation and undermine efforts to cut the budget shortfall.

The nation’s dollar bonds lost 10% in the period, the most after Ecuador out of 31 emerging nations monitored by Bloomberg indexes, as yields on benchmark securities soared 251 basis points to 10.88 percent.

While Zambia’s Treasury has said it won’t need an IMF loan, Chikwanda is running out of options. Copper prices near six-year lows are weighing on the economy, which relies on the metal for more than 70% of exports. An electricity shortage due to low water levels at the Kariba Dam hydro-power station is reducing mining output at a time when slowing growth in China is cutting demand for commodities and the prospect of a Federal Reserve interest rate draws money away from emerging markets.

The Kariba dam has seen levels fall.

“They will probably have to turn to the external market at some stage and seek out multilateral assistance,” Nema Ramkhelawan-Bhana, an analyst at Johannesburg-based RMB, a unit of FirstRand Ltd., said by phone on Friday. “If we continue to see the downward trajectory in commodity prices, specifically base metals, then it would force the finance ministry’s hand.”

Zambia has ruled out foreign-exchange controls to halt the kwacha’s plunge, while stating that its intervention strategy to defend the currency has limitations. Chikwanda and central bank Governor Denny Kalyalya said separately on September 3 that currency restrictions would be a backward step. Chikwanda also rejected an approach to the IMF.

Not best mechanism
Lungu on Friday directed Chikwanda to work with the central bank to “assess additional market intervention measures to address the observed excessive volatility”.

“The IMF is not the best mechanism for helping countries which are down,” Chikwanda said in a speech in Lusaka, the capital. “In some cases it even compounds your difficulties.”

Zambia’s budget deficit will climb to 6.7% this year, wider than the targeted 4.6% according to the finance ministry. Standard & Poor’s, which downgraded Zambia’s credit rating to B on July 2, said the shortfall including debt payments may reach 14% of GDP.

“There is still major political resistance to seriously undertaking a formal aid request,” Gareth Brickman, a market analyst at ETM Analytics NA LLC in Stamford, Connecticut, said in a note on Friday. “It can only be assumed that shortfalls will continue being financed by excessive local debt issuance.”

Worsen debt profile
Higher debt levels would worsen Zambia’s credit profile, increasing the need for IMF assistance, Brickman said.

The last time the deficit significantly overshot the target, it prompted government to consider an IMF programme. The 2013 deficit was almost double government’s 3.1% target. In May 2014, Fredson Yamba, secretary to the treasury, said government would start formally engaging the IMF on an aid programme. That never happened.

A year later, Yamba signalled that government didn’t need the aid, and was already undertaking most of the fiscal measures an IMF programme would have required. With an election looming, fiscal prudence may be difficult to maintain, said Irmgard Erasmus, an economist at Paarl, South Africa-based NKC Economists.

Zambia sold $1.25 billion of Eurobonds due 2027 in July at a yield of 9.37%, the highest ever for an African issuer. Yields on the securities have climbed to 11%.

“With next year being another election year, there’s not much scope for an aggressive cut in expenditure right now,” she said by phone. “With the IMF you can get a more favourable debt. I don’t think that’ll be their first choice. I don’t think they like the strings attached.”

—Additional reporting by Xola Patelwa

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