SUNDAY TIMES - Struggling Zambia faces bitter IMF pill
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Sunday Times Business By NICKY SMITH, 2016-04-17 00:01:00.0

Struggling Zambia faces bitter IMF pill

A charcoal market in central Lusaka. Many Zambians use charcoal for cooking
Image: GETTY IMAGES

The faded beach umbrella flaps above Alice Tembo's head, slapping against her forehead as she sells her wares at a taxi rank on the main road through central Lusaka.

Tembo offers samoosas - "I make them in the morning, potato, black pepper and potato spice" - along with cucumbers, airtime and cold drinks.

A widow, she has been trying to make ends meet as a hawker since 2009, when she had to give up a full-time job to care for her three children.

Tembo is typical of Zambians who are struggling in an economy crippled by electricity supply problems, a collapse in the copper price (the metal accounts for 70% of Zambia's foreign exchange earnings), and the volatility of the kwacha.

Once the envy of some of its regional neighbours with GDP growth clipping along between 5% and 6.5%, Zambia managed only 3% growth last year, the worst performance in 17 years. It is not expected to do better than that this year, according to estimates by Bloomberg's Economic Intelligence Unit.

Inflation hit 22.9% in February this year and the central bank set interest rates at a record 15.5%.

Government finances are under immense stress. Expenditure is running far above budget

Asked how life has changed in Lusaka over the past year, Tembo, who lives in Ngo'mbe township on the outskirts of the capital, said: "Everything is so expensive."

She said finding the money for school fees, transport, rent and food had become harder. Her eldest son, now 23, has not been able to find work since dropping out of high school a year ago.

She used to make between 750 and 1,000 kwacha (R117 - R156) a day, but now on a good day she makes only 250 kwacha. Her business has shrunk and she cannot afford to maintain her stock levels.

The regional drought has reduced the level of the Kariba Dam on the Zambezi River, affecting hydroelectric power generation. The result has been power cuts of eight to 12 hours a day.

With the prospect of a general election in August, Zambia's government approached the IMF for help and the body sent a team to the country last month.

Team leader Tsidi Tsikata said Zambia needed to take "resolute action as quickly as possible ... to restore macroeconomic stability. Government finances are under immense stress . Expenditure is running far above budget, in large part as a result of fuel subsidies and contracted emergency electricity imports."

Tsikata said these two items were estimated to cost the Treasury $660-million (R9.56-billion) a year.

Across the road from Tembo's stall is Arcades shopping mall, built 12 years ago.

Among the tenants is Ndanji Fashions, whose owner, Eva Mwango, said business had been "very slow".

A steep fall in the kwacha forced Mwango to close an outlet in Lusaka's Manda Hill Mall because her rental agreements are priced in dollars. Rent for her Manda Hills branch doubled last year in kwacha terms. "It has become very, very difficult to manage the volatility."

At one point last year the kwacha lost as much as 97% of its value to the dollar, touching K14.25/$ in October, contributing to the central bank's decision to raise rates in February. The exchange rate has stabilised recently and the local currency has been trading at about K9.2/$.

"People don't have money to spend on clothes; for the past two or three years it has been slower," Mwango said.

"I have been in this business a long time; we'll just have to hang in there and see what happens ... and give it another year."

Mwango said the government should stick to its strategy to diversify the economy away from over-reliance on copper and stimulate investment in power, manufacturing and agriculture.

George Nicholls, senior MD for southern Africa at Control Risks, said everything in Zambia revolved around the mining sector, and this was likely to remain the case despite the government's "bold steps" to try to diversify the economy.

"In addition to a low manufacturing base, Zambia is also facing severe electricity constraints - they have put in place practical plans to fix it, to build new generation capacity, but there are budgetary constraints," Nicholls said.

He said the government, which would have to implement austerity measures to obtain IMF funding, was unlikely to do so until after the election in August.

"They seem reluctant to reduce any social spending, which would be conditional for the support of the IMF," Nicholls said.

"The government knows what it must do, but the status quo will remain until after elections."

All sectors of the economy are struggling, affecting even companies doing contracting work with state enterprises such as Zesco, the power utility, and Zamtel, the telecoms provider.

Noel Nkomo, a director of Better Finance Now, which finances small and medium enterprises, said advances on their loan book had fallen dramatically and unrecoverable debt had quadrupled to 20%.

Nkomo said the government had to accept some of the blame for the position the country was in.

"We are beginning to see signs that economic conditions are beginning to recover, but we still remain with challenges that require a lot of political will to resolve."

Roads are being rebuilt, which never used to happen. They have built new schools and clinics

He said the government had been slow to deregulate the power sector and had for too long relied on copper to keep the economy growing.

"In the energy sector what we are lacking is political will. The government cannot continue to subsidise this resource.

"Let people pay a cost-reflective tariff which would spur investment," said Nkomo.

"With the IMF knocking on our doors I see a situation where I think the energy issue will be at the very top of the agenda. I suspect that they may demand Zesco is privatised."

Francis Kabonga, a pensioner waiting for a bus near Arcades mall, said life had "become a bit expensive" but the government was doing a good job.

"They have done a lot of work on infrastructure," he said. "Roads are being rebuilt, which never used to happen. They have built new schools and clinics. It is unbelievable, actually."

In the coming years, Nicholls said, Zambia stood to benefit from foreign investment from regional investors.

The constitutional crisis in the Democratic Republic of the Congo and the continued regulatory uncertainty in Zimbabwe would push investment to Zambia, which was more politically stable.

But the government would have to take some tough decisions if the economy was to be pulled back from the brink.

smithn@bdlive.co.za

The writer visited Zambia as a guest of Massey Ferguson