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- The Zambian finance ministry removed a 16% value-added tax on gasoline and diesel prices from January 1, which it said was necessary to avoid increases at the pump.
- The IMF opposes subsidies and that could prove to be a stumbling block in the government’s talks for assistance
- Subsidy cuts and wage freezes will be a difficult sell to citizens as President Edgar Lungu seeks re-election in August
Zambia’s move this month to further subsidize fuel prices highlights the government’s balancing act of seeking to retain power while convincing the IMF to approve a bailout before an election scheduled for August.
The finance ministry removed a 16% value-added tax on gasoline and diesel prices from January 1, which it said was necessary to avoid increases at the pump. The IMF opposes subsidies and that could prove to be a stumbling block in the government’s talks for assistance from the Washington-based lender.
It could also hinder discussions with holders of $3 billion in Eurobonds as they have demanded an IMF deal as a condition for agreeing to a restructuring of the debt. The country became Africa’s first pandemic-era sovereign default after missing an interest payment for one of its dollar bonds in November.
Zambia’s $1 billion of Eurobonds due in April 2024 closed at 54.918 cents on the dollar in London on Friday, up 0.4% on the day and 2.1% stronger since the beginning of the year.
Zambia hasn’t changed its fuel pump prices since December 2019, even as its currency has since lost more than one-third of its value against the dollar, eclipsing the drop in oil prices over the same period. The government already owed suppliers $727 million in arrears by June.
The IMF declined to comment, and the finance ministry didn’t respond to requests for comment.
“The dire fiscal position suggests that the zero-rating may be a pre-election ploy, prone to reversal as government funding lines run dry,” Irmgard Erasmus, senior financial economist at NKC African Economics in Paarl, South Africa said of the ruling Patriotic Front’s decision.
The considerable concessions the IMF will require for a deal “run counter to its political survival strategy with some time still to go before the August poll.”
Cutting or removing subsidies and a wage freeze for government workers could be critical for successful talks with the IMF, according to Chibamba Kanyama, a Lusaka-based economist who was previously a communications adviser with the lender. Civil servants won an 8% pay rise effective this month.
“The IMF definitely will be concerned,” said Kanyama. “I know the IMF is already raising a flag — a red flag — right now.”
Subsidy cuts and wage freezes will be a difficult sell to citizens as President Edgar Lungu seeks re-election in August. He narrowly beat opposition leader Hakainde Hichilema in the last two polls.
Zambia has failed in numerous attempts since at least 2014 to win funding from the IMF, but Erasmus still thinks there’s a 60% chance the government can secure a deal by the end of the year.
“Securing a formal IMF program will play a central role in relieving tensions between creditors,” she said. “However, in the near term, this courting of the fund will come at a high political cost. The most salient risk to the timely agreement to a fund program is refusal by government to surrender its political agenda ahead of a tight electoral race.