Zambia has been hit hard by falling copper prices. A loan from the IMF may help to alleviate problems, but the conditions are likely to be stringent
A debt crisis is looming in Zambia, a country whose commodities-based growth had until several years ago placed it among Africa's top economic performers.
Some have attributed the developing situation to the economic management of the Patriotic Front administration of President Edgar Lungu. Yet economists also argue that Zambia's debt issues are the result of fiscal policies enacted over the past two decades that have prioritised the commodity sector at the expense of genuine diversification. According to Barclay's Emerging Markets, no country's sovereign debt has performed as poorly as Zambia's this year. The fiscal deficit stands at 7.4%, with public debt having increased from 21% to 59% of GDP between 2011 and the end of 2017. As a result of this deterioration, Fitch downgraded Zambia's credit status to junk on 11 October and forecast that debt would reach 69% of GDP by the end of 2019. Debt repayment has reached a quarter of government expenditure, two thirds of which is held in foreign currency and as such, is vulnerable to negative currency moves.
Zambia's future was not always so uncertain. The noughties saw an economic boom, largely fuelled by rising copper prices. Growth averaged around 7% per year between 2000 and 2010. Consequently, foreign aid was reduced from 57% of government spending in 1995 to 5% in 2007. In 2000, Zambia was given a clean sheet on borrowing through IPEC debt relief measures, resulting in debt as proportion of GDP being slashed to almost 0%.
Anand Rajaram, country director of the IGC think tank, says that the reduced debt load should have allowed Zambia "to go forward without the burden of debt [and] manage their fiscal affairs better".
However, copper crashed from $4 a pound to $1.25 in 2011 amid a collapse in global demand. This decrease hit the country particularly hard, as copper accounts for a significant proportion of exports. The collapse in prices hit the fast growing construction and transport industries, which have long enjoyed a symbiotic relationship with rising commodities prices.
"The [growth] was still narrowly focused in small sectors," says Rajaram. "The quality of the growth was therefore not inclusive."
Furthermore, the commodity firms that were operating in Zambia were attracted by generous tax allowances. The Financial...