(Bloomberg) -- Zambian Finance Minister Bwalya Ng’andu’s job when presenting his maiden budget to lawmakers on Friday should be simple: he only has to show the plan for 10% of the government’s spend next year.
That’s because about 90% is already tied up with wages and paying debts, according to President Edgar Lungu. The hard part is figuring out how to spread the meager resources, while at the same time trying to raise revenues from the key copper mining sector without choking it.
Ng’andu took the post in July after Lungu fired his predecessor Margaret Mwanakatwe, and he needs to deal with a myriad of difficulties, from rising debt to fast falling foreign-exchange reserves, as these charts show:
Splurging on new roads, airports and farming and energy subsidies has sent Zambia’s debt skyward, along with the cost of servicing it. The International Monetary Fund warned in August that the growth in lending is unsustainable. The government is acutely aware of the financial strains caused by servicing these loans, and has repeated a pledge that it won’t take on new commercial debts. It needs to stick to its word, and Ng’andu’s budget will give a glimpse into how likely this is.
A severe drought and the debt burden have put the brakes on Zambia’s economic growth, which is now slower than population expansion for the first time this millennium. That means Zambians are getting poorer. Farm output has plunged and a power shortage is hurting almost every sector of the economy. Inflation has soared as a result, and hit an almost three-year high of 10.5% in September.
Last year, Ng’andu’s predecessor tried to raise much-needed revenue by ratcheting up royalties for Zambia’s copper industry, the second biggest in Africa. A lobby group for companies including First Quantum Minerals Ltd.’s and Glencore Plc’s local units have said this will lead to output plunging in 2019. Lower tax rates will boost government’s revenues from the industry because of increased output levels, according to the group. There may be little room for Ng’andu to roll back on royalty increases. Another key question is whether the new finance minister discards Mwanakatwe’s plan to replace value-added tax with a non-refundable sales tax, which mine operators have criticized strongly.
The clock is ticking for Zambia to get its finances on a more sustainable path. Yields on its dollar debt have topped 20% this year as investors fret over the government’s ability to repay when the first of its $3 billion in Eurobonds is due in 2022. With yields this high, refinancing, if possible, would be costly. And there’s an election due in 2021, making the necessary spending cuts politically more difficult after next year.
As debt-servicing costs grew, foreign-exchange reserves diminished. The IMF forecasts that Zambia’s dollar holdings will cover only 1.6 months worth of imports by the end of the year. Recommended levels are about double that. Because of a relative dearth of dollars, Zambia’s kwacha has weakened 10% against the greenback over the past 12 months.
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