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The global pandemic can only partly explain Zambia’s recent economic misfortune. Energy insecurity in Zambia has constrained cyclical upswings, dampened industrialisation, and exposed the economy disproportionately to the impact of climate events. Before the withering blow of the pandemic, two severe droughts in five years, in an economy heavily dependent on hydroelectricity, had their part to play in setting the course towards fiscal crisis and default.

Last month, Zambia became the first African country to default on its foreign debt since the outbreak of the pandemic.

An outstanding coupon payment of US$42.5m on eurobonds was left unpaid for successive deadlines, triggering a technical default notice on November 14th. An update then followed, from Fitch Ratings, of an official downgrade on Zambia’s long- and short-term foreign currency notes, from C to ‘Restricted Default’ (RD).

Word of a potential default was in the wind back in 2018. Analysts alluded to an escalating pressure on sovereign liquidity and a series of downgrades were driving high debt-service commitments. Economic growth was at its lowest three-year average for a decade, while total external government debt as a percentage of GDP grew from 34 percent in 2017 to 48 percent in 2019. In September of 2020, before the Eurobond default, investors at the London Stock Exchange spoke to Finance Minister Bwalya Ng’andu to get to the bottom of the situation. The Minister cited ‘foreign currency arrears incurred by state-owned enterprises’ as among the big-ticket items. “The aggregate amount at the end of June 2020 was approximately US$1.29 billion” he said, nearly 6 percent of gross domestic product in 2019. This balance comprised of guaranteed and non-guaranteed sums, mostly incurred by the state-owned power company, ZESCO, through arrears on power purchase agreements.

Unfortunately, news of financial ill-health in one of Africa’s state-owned utilities comes as no surprise. Officials at ZESCO, like their regional counterparts, face pressure to cap consumer tariffs, while poor revenue collection processes undercut their ability to recover the cost of supplying electricity. Further out of reach are the funds to upgrade aging plants or install additional capacity to meet growing demand.

Only 31 percent of Zambia’s 7.2 million households enjoy access to electricity, according to data from the USAID’s ‘Power Africa’ programme.

The technical grid losses that occur with dilapidated transmission infrastructure only magnify the problem. Additional electricity generation is required to compensate for losses, increasing the likelihood of power outages, which disrupt economic activity and reduce industrial competitiveness.

A hard drought

A severe drought in 2015 shook Zambia’s fragile economy and threatened the financial sustainability of the energy sector.

In 2000, 95 percent of the country’s installed capacity was large hydro. That figure is closer to 75 percent now, with power being produced at one of the world’s largest dams, Kariba, which sits on the Zambezi basin and straddles the border with Zimbabwe.

During the worst of the drought, local reports had the electricity supply deficit at 1000 MW, more than half of peak demand. The government’s response was to reach out to neighbouring South Africa for emergency power imports. These cost the exchequer $6 million, and the country increased borrowing to cover commitments against its mounting liabilities. ZESCO’s debt levels grew by a staggering 47 percent between 2014 and 2015 and macroeconomic factors worsened the burden. The company’s financial accounts show that, in the same period, the local currency also depreciated by an average of 72 percent and inflation reached 21 percent, from 8 percent the year earlier. By 2017, with only marginally better hydrological conditions, Zambia’s state-owned power supplier, had breached seven loan agreements with banks including the Bank of China Ltd. and Standard Chartered Plc.

 

Zambia Graph 1

A worse drought hit in 2019 – one of the worst in three decades. ZESCO’s precarious finances made it more difficult to arrange an interim solution.

Large outstanding balances (circa US$ 70 million) with Mozambique’s state electricity supplier made overtures in that direction futile. This time, Eskom, South Africa’s integrated utility, demanded US$20.5 million for one month of power imports, in addition to $6.5 million in respect to the arrears for power supplied in 2015.

Caution to the water

The Zambian economy entered 2020 on unstable footing and still feeling the impacts of a prolonged drought. The pandemic dealt a blow its liquidity position has not been able to withstand. Bilateral debts to China are more than $3 billion, with a further $12 billion owed to international creditors, according to the Financial Times. Now, following its default, the outlook is likely one of painful fiscal consolidation if the country is to come in line with the IMF’s stringent debt-to-GDP thresholds (35 percent) and become eligible for the Fund’s official assistance. The austerity comes as governments around the world face added pressure to sustain their economies through the Covid-19 economic crisis. Fiscal policy has been a critical lever for many, but meanwhile Zambia’s finance ministry has identified total budget cuts worth 34 percent, next year versus this, and US$1.38 billion worth of capital projects to ‘re-scope’ or cancel. Neither of these measures are enough to bring the ratio (currently above 90 percent) down sufficiently.

Zambia’s experience should have alarm bells ringing. The nation’s structural challenges, of aging and poorly maintained power infrastructure combined with strained budgets unable to finance new capacity, recur across several of Africa’s developing economies.

Power outages are all too common in the region and limit industrial growth by disincentivising investment and reducing competitiveness. A 2016 study by the World Bank found that across electricity utilities in 39 sub-Saharan African countries, only the Seychelles and Uganda were achieving full operational and capital cost recovery, and only 19 countries were covering operational expenses.

The impact on growth and employment is a material one. In Zambia’s case, even before the 2015 drought, power outages accounted for 5.5 percent of revenue for a sample of manufacturing firms surveyed by the World Bank. Zambia’s lack of energy diversification has been an exacerbating factor, exposing the economy to climate-related weather shocks at a time when government finances have no buffer. This situation could well play out in a number of cases: Of the eleven sub-Saharan African countries with a more than 50 percent dependency on hydro (Fig 1), ten are classified as least developed economies, according to the United Nations Development Programme classification. Their average public external debt payments as a proportion of revenue is 17.5 percent, 3 points higher than the mean unweighted average for governments in the ‘global south’ (and the average among BRICS is 4.6 percent). Modelling shows that for a handful of hydro-dependent nations, use of emergency power due to drought – obtained by expensive short-term lease – can increase utility deficits by more than 1 percent of GDP in certain scenarios.

More than green, sustainable

Experts have noted for a while that electricity supply among a cluster of southern African nations is over-exposed to the variation in water levels in the Zambezi basin. More troubling, is the forecast published in 2014, that large parts of southwestern Africa can expect harsher and more frequent droughts in the coming decades. Adapting vulnerable economies to the risks of climate change must involve addressing over-dependence on singular energy sources for generation, particularly hydroelectricity. Current evidence would suggest that these warnings are not being heeded, as in eastern and southern Africa, more than 40 large-scale (> 50 MW) hydropower projects are planned up to 2030. Significantly, 89 percent of southern Africa’s new hydro capacity is planned for the Zambezi basin, according to a policy brief from the Grantham Institute. One hopes policymakers and investors might reconsider.

If Zambia’s experience can inform a number of better regional policy choices in the coming years, it will not have been in vain. For the energy sector, it demonstrates the electricity-security risk arising from climate change, hydropower-dependency, and weak fiscal balances, which is multiplied to devastating effect when these factors co-occur.

Zambian health minister Chitalu Chilufya
Chitalu Chilufya

Nearly a month after his arrest, Zambian health minister Chitalu Chilufya appeared before a Lusaka magistrate, where he pleaded not guilty to four counts of corruption. Chilufya, who was appointed as health minister in 2016 by President Edgar Lungu, is accused of using funds suspected to be the proceeds of criminal activity to buy business shares, property, and a speedboat from the United Arab Emirates between 2016 and 2018.

Zambia opposition parties have called for Chilufya’s removal while the case was in court, whereas members of the ruling Patriotic Front party have rallied around the health minister, with some even accusing the opposition of using the country’s Anti-Corruption Commission  to attack the presidency. Chilufya’s case highlights Zambia’s ongoing struggles to fight corruption, a key pillar of Lungu’s successful 2016 presidential campaign.

 

Graft and cronyism have become much more common

 

The Southern African nation, heavily dependent on its mining industry, has incurred a debt-to-GDP ratio of more than 60 percent, as it still has high-interest Eurobonds to pay off on top of Chinese-sourced loans for mega infrastructure projects. Graft and cronyism have become much more common at the local as well as federal levels of government.

 

 

This picture taken on February 13, 2014 shows lorries blocked in Kasumbalesa, a Congolese town at the border between the Democratic Republic of Congo (DRC) and Zambia. After border incidents on February 6, the traffic has been heavily disrupted for more than a week in this town which is the main exit gate for minerals extracted in the South-Eastern part of the DRC
Lorries blocked in Kasumbalesa, a Congolese town at the border between the Democratic Republic of Congo (DRC) and Zambia. 

 

Christian Mwando, a representative from the province of Tanganyika, a territory of the Democratic Republic of the Congo located on the shores of Lake Tanganyika and bordering Zambia, has called on the Southern African Development Community (SADC) and the African Union (AU) to resolve a dispute regarding the occupation of southern Tanganyika by Zambian troops.

Zambian forces have been present in the area since late March, the result of an altercation that began with an attempted arrest of Congolese fishermen who were using prohibited gill netting. Congolese police from Moliro, a town right across the Zambian border, attempted to apprehend the fishermen, who managed to escape into Zambian waters. Zambian forces then moved to chase out the Congolese from their territorial waters and continued across the border, seizing a flag of the DRC, according to Mwando.

 

This region of the DRC also faces one of the world’s largest refugee crises.

 

In response, Congolese forces fired on the Zambian troops, killing one. Mwando was quoted by La Libre Belgique as saying he does not desire any “war with our sister republic of Zambia”, but fears Zambia’s presence is an attempt to seize a portion of the territory, which has the world’s largest deposit of hard rock lithium, used in batteries for electric vehicles.

This region of the DRC also faces one of the world’s largest refugee crises, impacting Twa and Bantu ethnic groups in particular. Persistent violence and insecurity in the region has stretched thin the DRC’s capacity to manage the conflict, let alone address the presence of foreign troops, which is why Mwando insists that President Félix Tshisekedi’s administration appeal to international bodies like the AU and SADC.

 

 

life in Tanzania amid covid
Life in Tanzania goes on as normal despite a spike of cases of Covid-19. Tanzanian president John Magufuli has expressed skepticism about the seriousness of the pandemic

 

Zambia closed off its border with neighboring Tanzania on Monday, May 10, following the highest surge yet in COVID-19 cases in a single day. Zambian health minister Chitalu Chilufya was quoted in the Tanzanian daily The Citizen saying, “No traffic will be allowed in or out of the district,” referring to Nakonde District on the border. No timetable was set for reopening the border post.

 

A Contrary Approach Across the Border

Zambian health officials recorded 85 more cases on Saturday, 76 of which were from Nakonde. The Zambian response is in stark contrast to how the Tanzanian authorities are handling the pandemic; they relaxed restrictions on international flights on the same day as the border closure. To date, Tanzania has reported 509 cases and 21 deaths, and Zambia 267 cases and 7 deaths, according to Worldometers.

Tanzania president John Magufuli has also expressed skepticism over the severity of the virus, alleging earlier in May that diagnostic tests were flawed and recently importing Madagascar’s Covid-Organics herbal tea remedy as a viral treatment despite no clear evidence proving the drink’s efficacy, putting him and Tanzania at odds with World Health Organization scientists.

 

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