Zambian President Lungu Faces Challenge to Repair Economy

LUSAKA, Capital Markets in Africa: Zambian President Edgar Lungu, who was inaugurated Tuesday after his narrow re-election last month, faces two immediate challenges: boosting an economy that’s expanding at the slowest pace in 17 years and reining in a ballooning budget shortfall.

“We will remain focused on facilitating a conducive business and investment environment,” Lungu, 59, said in his inauguration speech in front of an audience that packed the 60,000-seat National Heroes stadium in Lusaka, the capital of the southern African nation. “You will see me doing more in the fight against corruption going forward.”

Lungu’s job won’t be easy. He must quickly negotiate an aid package from the International Monetary Fund that could top $1.2 billion and will probably require cuts in energy and farm subsidies that helped push the budget deficit to nearly 10 percent of gross domestic product last year. Zambia, which depends on copper for more than 70 percent of its export earnings, is among a number of African countries that are struggling after commodity prices plunged, leading to weakened currencies and gaping budget shortfalls. Economic expansion slowed to 3.2 percent last year from 5 percent in 2014.

Government Borrowing
The government borrowed about $500 million from the central bank in bridge loans to plug the deficit this year, according to S&P Global Ratings. In March, the finance ministry said it would seek aid from the IMF, but formal talks were put off until after the elections.

“Definitely it’s going to be quite tough,” Irmgard Erasmus, an economist at NKC African Economics in Paarl, north of Cape Town, said by phone. “He’s looking at quite a difficult term. They need to do more than just talk the talk with regards to fiscal consolidation.”

Lungu was re-elected by a margin of 50.4 percent to 47.6 percent for Hakainde Hichilema in an Aug. 11 vote that the opposition has tried and failed to contest in the courts. Lungu first became president in January last year after winning the ballot to replace Michael Sata, who died in office.

“There is no time and latitude to settle scores,” Lungu said. “We’ve got work to do. Let us seize the opportunity to rise above the different points of view that divided us during campaigns.”

Currency Decline
The kwacha fell for an eighth day in nine on Tuesday and was 0.6 percent weaker at 10.085 per dollar by 11:16 a.m. in Lusaka. Yields on Zambia’s $1 billion of 2024 bonds fell for the first time in three days, dropping six basis points to 8.74 percent.

Foreign exchange reserves fell to $2.4 billion by the end of June, the lowest level in four years, from $3.9 billion in July last year. Interest payments on the $3 billion in Eurobonds Zambia has sold since 2012 have eroded the reserves, as have the energy and farm subsidies. Selling fuel and power for less than government buys it for could cost the country $660 million annually, according to the IMF.

In reducing subsidies, Lungu’s government will also need to take into account an inflation rate that’s hovering close to 20 percent.

“My administration will not leave anyone behind,” he said. “Every region in the country and all Zambians are entitled to receive the benefits of development.”

Source: Bloomberg Business News