How To View The Zambian Economy And Its IMF Bailout In This Election

Kurt Davis Jr.
Written by Kurt Davis Jr.

It is no surprise that Zambia’s election, scheduled for Aug. 11, will be a close race between President Edgar Lungu, of the Patriotic Front (PF), and Hakainde Hichilema, of the United Party for National Development (UPND).

Lungu defeated his rival Hichilema by just 1.7 percent of votes in the previous election held Jan. 20, 2015. Donors and economists are holding their pencils until the results are released for this election as the policy outlook is uncertain. The delay will only grow if the results are contested, as many suspect will be the case.

Lungu said he will continue discussions with the International Monetary Fund (IMF) over a bailout. Hichilema however has indicated he may be against the bailout.

It’s uncertain what effect a bailout could have on the economy. Requesting it caught some of the public by surprise. The country’s economy appeared to be heading upward back in April with news that the Zambian currency, the kwacha, had gone from the world’s third worst performing currency in 2015 to the world’s best performing currency in 2016 as copper prices recovered.

Then, as if a lesson on bad timing was needed, news broke that Zambia was seeking a bailout from the IMF for its ballooning national debt. And, to create more uncertainty, it was also announced that the bailout negotiation would not be finalized before the August general election.

How did Zambia get here?

 Copper and the economy

The economic struggles are nothing new. An incessantly low copper price and electricity shortages have slowed Zambia’s economic growth. All the recent statistics suggest that the Zambian Central Bank’s estimate for 3.7 percent growth in 2016 – a bump up from the 3.2 percent in 2015 – is very optimistic. Analysts, including those at the IMF, suggest that the growth forecast is closer to 3 percent with potential for a further drop.

Some mines in the copper sector have temporarily reduced production. Others have temporarily closed due to a challenging mix of low prices and electricity shortages. It is unclear whether production will increase or decrease following the election.

The government’s optimism stems from high expectations for the completion of the Kalumbila mine this year. Full production is expected to be about 300,000 tons per year but electricity shortage will be the mine’s downfall. Current production suggests Zambian copper production could fall below last year’s 708,000 tons. An unlikely boost to electricity could change the situation for positive.

 Fiscal challenges

Elections seemingly boost spending. The IMF bailout request surprised many members of the public. But the IMF said March 18 that the government finances are under “immense pressure” and “expenditure is running far above budget.”

Local banks have increased their lending to the government but are reaching their limits. External financing options are not as readily available in an election year, especially if the election is hotly contested, like this one. The reality is that interest rates were already growing because of the country’s debt load.

 Local strife

Ethnic violence in the capital Lusaka against Rwandans also creates a challenge for the candidates. President Lungu deployed the military to restore peace and security in the city after the violence elevated to rioting in the streets and looting of shops and houses. Local commentators suggest that the violence, thought to be a response to allegations of ritualistic murders linked to Rwandans in the capital, is more likely a result of growing anger over poverty and inequality. Those familiar with Lusaka know that some Rwandans have done well there but cannot assume the blame for the economic challenges or inequality of Lusaka and the greater Zambia.

 What to expect by the end of August

Who will win the election grows more uncertain as the economic situation has split the country. See our election prediction here. A Zambian downgrade will remain on the radar as national debt rises to 56 percent of gross domestic product in 2016. Bailout negotiations will continue with either candidate under that debt scenario. The IMF will push for serious austerity measures. It is unclear whether either candidate will be open to such measures, especially if they include removing subsidies on electricity, fuel and fertilizer, presidential spokesman Amos Chanda told Reuters in April.

The sad reality for the victor in this election is that IMF talks have progressed beyond the stage of easy exiting. The markets, in other words, will likely send some form of a response to Zambia if the talks fail. The response will likely include an increase in interest rates, kwacha depreciation, and tightening of available external financing options in the near term. Such a response will overshadow any election outcome.

Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at