June 6, 2014 7:09 pm

Zambia asks IMF for help after currency slides

Workers produce copper at Verdanta's KCM smelting plant in Kitwe, in the Copperbelt, Zambia.

Workers produce copper at Verdanta's KCM smelting plant in Kitwe, in the Copperbelt, Zambia

Zambia, Africa’s second-largest copper producer, has requested help from the International Monetary Fund after a slump in copper prices that has triggered a slide in its currency, the kwacha.

The IMF said on Friday that the nation’s government had asked an IMF team to return in early September “to discuss an economic programme that could be supported by a fund arrangement”.

Byung Jang, who led the IMF’s mission to Zambia, said: “The recent steep depreciation of the kwacha is raising inflationary pressures, and expansionary fiscal policy has created large budgetary imbalances.

“The IMF is working closely with the Zambian authorities to develop a plan that will anchor macroeconomic stability.”

The request for IMF assistance comes two months after it raised $1bn through an international bond sale.

The announcement sent the yield on Zambia’s hard currency sovereign bond maturing in 2024 to a record low of 6.93 per cent – down 52 basis points on the day. Yields move in inverse direction to bond prices.

The kwacha, which has been Africa’s worst-performing currency this year, appreciated 2.4 per cent against the dollar. But it is still down 14 per cent against the greenback this year.

The weakness of the kwacha was sparked by the drop in copper prices. But it has been exacerbated by a widening fiscal deficit and investor unease with some policies of the government, led by President Michael Sata, a tough-talking populist.

Since taking office in 2011, Mr Sata’s administration has significantly raised public sector wages and put in foreign currency regulations deemed unfriendly to business, which it eventually repealed earlier this year as the kwacha plummeted.

In an effort to stem the kwacha’s decline, the central bank raised its benchmark interest rate to a record high of 12 per cent in March – up from 10.25 per cent.


The budget deficit has also widened dramatically, but the IMF said the government had “indicated strong determination” to ensure it did not go beyond the budgeted 5.2 per cent of gross domestic product in 2014.

Zambia has been one of Africa’s fastest-growing economies, with annual GDP growth averaging about 6.4 per cent during the past decade, and copper accounts for about 70 per cent of its export earnings. But the metal’s price has dipped to $6,670 a tonne, down 9 per cent this year, amid concerns over a slowdown in China, which accounts for more than half of Zambia’s exports.

Razia Khan, an economist at Standard Chartered, said: “Although Zambia is not seen to be in need of a balance of payments support necessarily, it’s just that the IMF programme will give investors that much more comfort that fiscal consolidation will happen. It’s one thing for the government to say it will, and to promise a two-year pay freeze, but the feeling is with an IMF programme in place it’s an additional stamp of approval.”

Zambia’s decision to start talks to the IMF could convince cash-strapped Ghana to follow suit. Until now, the authorities in Accra, who are fighting a double-digit fiscal deficit, have insisted they will avoid the IMF route and instead focus on a homegrown solution, including raising up to $1.5bn through a sovereign bond.

But analyst believe that Ghana would struggle to narrow its fiscal deficit after the country lifted the salaries of public sector workers more than 75 per cent over the past two-and-a-half years.

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