ZAMBIAN Finance Minister Alexander Chikwanda said his target to almost halve the budget deficit next year is “sacrosanct” even as analysts raised doubts because of sliding copper revenue and looming elections.
“It’s a reasonable target,” Chikwanda, 76, said in an interview on Monday at his office in Lusaka, the capital. “We will work towards that, because if we breach that target then we will send the economy into a spin.”
Zambia is struggling to cope with the world’s worst performing currency and record borrowing costs following a plunge in commodity prices and rising debt. Instead of boosting confidence, Chikwanda’s pledge in his October 9 budget to cut the deficit to 3.8% of gross domestic product next year has been met with skepticism by analysts questioning the government’s plan to raise revenue, rather than cut spending.
“We are not convinced that the fiscal deficit target is achievable, given the ambitious assumptions with regard to revenue mobilisation,” Irmgard Erasmus, an analyst at NKC Africa Economics in Paarl, near Cape Town, said in a note to clients. “Our own forecast sees the deficit at a substantial 8.7% of GDP in 2016.”
Chikwanda outlined plans in his budget last week to narrow the deficit despite a 14% boost in spending in an election year. He forecast a rebound in economic growth next year to 5% from 4.6% in 2015 and a 20% jump in tax revenue.
Zambia Finance minister Chikwanda (Photo/AFP)
“It’s realistic to the extent that revenue mobilisation measures we put in place are implemented to the full,” he said on Monday. “We need fiscal discipline in order to get the economy to not deteriorate to levels where it will be very difficult to arrest. We are not and we will never get to those levels.”
Fitch Ratings, which has a B rating on Zambian debt, said the fiscal targets will “prove challenging” because it’s based on optimistic revenue projections. Fitch estimates the deficit will exceed 6% of GDP next year.
‘As realistic as you can get’
The kwacha has plummeted 46% against the dollar this year and was trading as low as 11.9804 on Monday.
Zambia sold its third Eurobond in three years in July, raising $1.25 billion to help plug the budget deficit. Chikwanda said the government will seek to raise 6 billion kwacha ($511 million) on international markets in 2016, possibly through bank loans with a tenure of 15 to 20 years, rather than a Eurobond.
“We will borrow at an interest factor not exceeding maybe 8 percent or 9 percent, let’s just say single-digit rates,” he said. “That’s as realistic as you can be given the exigencies in the international financial markets.”
Yields on the 2027 bond sold in July have increased 264 basis points to 12.01% since its auction.
Chikwanda also softened his stance on seeking emergency aid from the International Monetary Fund. While the government will avoid approaching the IMF for now, it won’t rule out the possibility, he said.
“In the event where it became necessary to, we will do so,” he said. “If it becomes necessary there will be no question of any embarrassment whatsoever. It’s not a taboo to go to the IMF.”
On September 3, Chikwanda said the IMF isn’t the best approach in assisting countries under pressure and “in some cases, it even compounds your difficulties.”
Zambia’s economic woes have been worsened by the most severe electricity shortage on record caused by low water levels at hydropower dams that supplies most of the nation’s power. The government is struggling to meet half of its peak demand, resulting in electricity cuts of as long as 14 hours a day.
“This is a very big crisis,” Chikwanda said. “We have to vigorously address the power deficit. Government is trying to do everything possible to make power available” to the mining companies that account for 70 percent of exports, he said.