THE run-up to the 2021 general elections will be characterised by economic and political turmoil with elections expected to be neither free nor fair, the Economist Intelligence Unit (EIU) has predicted.
And EIU says the International Monetary Fund (IMF) are not expected to give Zambia a loan as the country’s debt restructuring efforts are expected to last until after the 2021 elections.
According to the latest EIU Zambia report, the run-up to the general election is expected to be unstable with PF expected to rely more heavily on security forces to aggressively narrow the political space in the country and ensure their victory.
“The Economist Intelligence Unit expects the ruling Patriotic Front (PF), led by Zambia’s president, Edgar Lungu, to remain in power in 2021-25, despite tough economic, political and social challenges. The impact of the recession that has been caused by the coronavirus (Covid-19) pandemic, weaker foreign-exchange earnings and formal default on Zambia’s sovereign debt to its Eurobond holders in mid-November all represent large challenges to the survival of the regime… The run-up to the 2021 legislative and presidential elections will be a particularly unstable period. We expect that a vulnerable PF will be forced to rely more on Zambia’s partisan security forces to aggressively narrow the political space in its favour in the run-up to elections. This will aggravate pre-existing political tensions with opposition supporters dating back to the disputed 2016 elections, which supporters of the main opposition United Party for National Development believe were stolen. The possibility of election-related violence in 2021 is also high,” the report read.
“Zambia’s legislative and presidential elections are scheduled to take place on August 12th 2021. By the time that the elections are held, we expect Zambia to have endured months of political and economic turmoil, and economic contraction will limit the fiscal resources available for government patronage networks, forcing the PF into a more openly authoritarian position. We expect the upcoming elections to be neither free nor fair, with the opposition competing against a PF exploiting substantial incumbency advantages. These include a drive to create a new electoral roll to replace the 2005 voter register, which the opposition claims will bias the register in favour of voters living in government strongholds. This is likely to yield only a low turnout owing to the opposition’s diminished political capital and the risk of repression from state forces.”
The report stated that public hostility towards China’s growing influence over Zambia would trigger unrest if Chinese state backed companies seized assets as part of a restructuring arrangement.
“Public hostility towards the growing influence of China, Zambia’s main creditor, is high, with the perceived influence of China in Zambian policymaking widely resented (especially amid rising concerns about economic mismanagement under Mr Lungu). Anti-Chinese sentiment is likely to soar in 2021 if Chinese companies (many of them state-backed) seize assets as part of a restructuring arrangement, triggering unrest. Intensifying public frustrations, Zambia will inevitably need to embark on a course of painful fiscal austerity in the near term while the debt issue is being resolved and Zambia is cut off from external funds (which had been the driving force behind an infrastructure programme in recent years),” the report read.
And EIU predicted that the IMF rescue would only take place after the PF has won the August elections, and a bilateral debt restructuring with China has been agreed on.
“Since the IMF appointed a new resident representative to Zambia in October, the two sides have been locked in talks about a financial rescue package for months; the Fund remains concerned about the size and complexity of Zambia’s external debt, which it sees as unsustainable. We believe that a rescue deal could eventually be reached in 2022-25, but this is not yet our central forecast. Any such rescue will take place only after the PF has won the August elections, and after a bilateral debt restructuring with China has been agreed. Without these preconditions, we do not believe that the Fund would risk lending to such a politically unstable and indebted country. The IMF deal will provide a path out of the crisis, but it is increasingly clear that the government has few alternatives,” the report read.
It added that China and Zambia were in early 2021 expected announce a restructuring program, which would help to boost the PF’s chances of remaining in power and increase Chinese economic influence in Zambia.
“As Zambia is now in default, the country has lost access to international credit. This situation will continue until Zambia can convince its Eurobond creditors that they will be treated equally with its Chinese creditors. The Economist Intelligence Unit expects the stand-off to continue beyond the elections in August 2021. However, for geopolitical reasons we believe that China and Zambia will announce a restructuring programme for Zambia’s bilateral debt at some point ahead of the elections (probably in early 2021)— a development that will help to boost the PF’s chances of remaining in power and thereby increase Chinese economic influence in Zambia. Following any restructuring of Chinese debt, we expect Zambia’s Eurobond creditors eventually to accept a restructuring of their own no later than 2022, as most bondholders will wish to retain some cash flow during the 2021-25 forecast period. We ultimately expect the government to conclude an interim debt-restructuring arrangement during 2022 with most of its Chinese commercial creditors as well, especially as the Zambian government has pledged to treat all parties equally in order to address commercial investors’ concerns— particularly those of Eurobond investors—that any debt suspension granted would be used to meet payments to bilateral creditors),” it read.
Meanwhile, EIU stated that a post-default economic contraction was expected in 2021.
“We expect a post-default economic contraction in 2021 to persuade the BoZ to hold the rate at 8% in 2021, in an attempt to strike a balance between supporting the kwacha and stimulating the economy. Sustained pressure on the currency (which is in part why inflation is now in double digits) will prevent monetary easing in 2021, while recession will prevent monetary tightening, and the BoZ has already demonstrated a willingness to allow inflation to exceed the ceiling of its 6-8% inflation target. From 2022, as fiscal policy tightens and inflation edges down, the policy rate will be reduced gradually, to 6% in 2024. In 2025, with fears that accelerating growth will lead to overheating (and inflation beginning to edge up again), the policy stance will begin to tighten once more, with rates returning to 6.5%,” read the report.
The EIU further stated the currency would begin to appreciate slowly from 2022 as copper prices recover from their 2020 slump in 2021-22, broadly stabilise in 2023, then rise again, reaching US$310 per pound in 2025, and as economic growth returns and accelerates from 2022.
From an annual average of ZK21.11 to US$1 in 2022, the kwacha will appreciate against the US dollar to an average of ZK18:97 to US$1 in 2025.