On Wednesday, the government published a document addressing the questions posed during its virtual investor presentation on 29 September (see here for all relevant documents and here for our initial take). Although it did provide some useful information, it remained disappointingly vague on key questions regarding fiscal consolidation plans and progress on IMF and debt restructuring negotiations.
We outline some of the key takeaways, in our view, below:
The government is committed to do whatever is necessary to achieve a staff-level agreement on a funded IMF facility, and restoration of debt sustainability is the only practical path to reach an agreement. The restructuring and IMF negotiations are a “parallel path”, with progress on one necessary to facilitate progress on the other. However, guidance on progress towards a program was vague, and it seems likely that negotiations are still at an early stage. We reiterate our view that the government’s timeline of completing both the restructuring and program negotiations by April is overly optimistic.
The government was not willing to elaborate on whether the restructuring will focus on principal haircuts or cashflow relief, or whether it would include any recovery mechanisms (such as one tied to copper prices). The debt sustainability threshold of 35% in NPV terms is not an absolute ceiling, but will inform the overall debt strategy. The government expects to make its initial offer to creditors by the end of the suspension period in April, but it did not provide details on what would happen if the consent solicitation was rejected.
Commercial creditor participation is on a voluntary basis and, while Zambia cannot confirm that it will be NPV neutral, it intends to stick as closely as possible to the terms set out in the Paris Club memorandum of understanding signed in August. Meanwhile, the government has told Chinese creditors that they will be asked to participate in any potential debt restructuring, and intends to share the burden equitably across official and commercial creditors (except for multilateral like the IMF, which will be asked to participate with fresh financing).
China has agreed to grant relief on all government-to-government and concessional debt on the same terms as the debt service suspension initiative (DSSI), but discussions are pending on commercial facilities. Central government debt service on Chinese loans amounts to US$426.3mn in 2020 and US$428mn in 2021, which would result in maximum relief of US$225.3mn under DSSI (although Zambia is also lobbying for US$201mn of pre-April arrears to be included). Zambia hopes to finalise these negotiations by year-end.
As of June, FX-denominated arrears of the central government had reached US$485m (including US$46mn plurilateral, US$183mn bilateral and US$256m commercial), while FX arrears of state-owned enterprises (SOEs) had reached US$1.29bn (largely from ZESCO to domestic creditors). Meanwhile, domestic arrears amounted to ZMW25.4bn at end-March (including ZMW4bn of VAT refunds). This compares with ZMW27.7bn and ZMW6.9bn, respectively, at end-19, implying material VAT refund clearance in Q1, but it is likely that new arrears have accumulated since March.
The government will rely on concessional and quasi-concessional funding from bilateral and multilateral sources over the medium term, with non-concessional financing used only for priority projects (as defined by the government) totalling US$2.87bn from 2020-23 (53% o/w on concessional terms). It may include a ceiling on the accumulation of non-concessional external borrowing as part of an IMF program. So far, two commercial facilities have been restructured and eight projects cancelled, with savings totalling US$1.38bn, while savings from cancelling and re-scoping projects are projected to reach US$2.8bn from 2020-23:
Revenue measures will be aimed at increasing government revenue on average by 0.5% of GDP over the medium term. In our view, the measures are quite vague and not overly ambitious. They include:
Broadening the tax base by widening the excise basket, reducing exemptions, limiting transfer pricing and valuing properties for taxation;
Modernising administration by introducing a range of technology, including the continued rollout of electronic fiscal devices for VAT collection; and
Automatic non-tax revenue to minimise revenue leakages associated with manual processes.
Expenditure measures will aim to refocus spending towards priority growth areas and social protection. They are also not very ambitious, and include:
Keeping the wage bill below 40% of revenue by ensuring biannual wage agreements reflect available resources. This is still quite high and above the 30% threshold we view as being a red flag;
Reducing capex from ZMW26.4bn in 2020 to ZMW17.5bn in 2021. Although much lower than the 9.5% of GDP out-turn in 2019, this still exceeds 5% of GDP and, in our view, is not ambitious enough;
Streamlining farming subsidies by moving FISP to the e-voucher system. This has long been promised and could be a sticking point with the IMF, which has advocated the removal of these subsidies;
Holding the cost of government operations to c2% of GDP over the medium term by limiting spending increases to the rate of inflation; and
General improvements to public procurement and the PFM framework, which are expected to be passed by year-end.
On 1 October, the creditor committee said in an emailed statement that it was “unable to provide a positive response to the consent solicitation request at this time given the absence of clarity on a number of issues”. Although the Q&A document is a positive step towards greater transparency, it leaves more questions than answers and creditors are unlikely to be placated by its release.
It remains to be seen whether the government will pay its upcoming US$42.5bn eurobond coupon on 14 October given the bondholder rejection to avoid default and allow more time for discussions, or whether they will dig in and default, which could portend a more acrimonious negotiation.