Zambia risks ruining economic growth and credit downgrade in government ruling party controversy
International credit rating agency Fitch has warned Zambia that its decision to de-register the country’s biggest opposition party could place additional strain on its public finances and negatively affect its “B-” ranking.
Zambia, a copper mining giant and one of the very few countries on the continent to peacefully hold elections, this year seeks to issue its $500 million-worth of sovereign bonds on the international capital market to raise funds for major infrastructure projects.
A credit rating is an affirmation of the country’s consistency in the implementation of positive economic policies and growth prospects. It is a mark of confidence. It is the green light to foreign investments (the major players in creating jobs) and it attests to a country’s willingness and ability to meet current and future debt obligations on time and in full.
Without a positive rating Zambia will fail to access the international capital markets for its development financing. Some of the planned projects include the improvement of the road networks and increasing the country's hydro-electricity generation capacity, which will help reduce the power deficit in Zambia and five other neighboring countries. But most importantly, should the capital projects take off; a lot more youths will leave their current status of being unemployed as many jobs will be created throughout the country.
The success of the issuance of the country’s first Eurobond largely depends on the ranking from rating agencies.
Standard & Poor’s has given Zambia a “B+” rating while Fitch, who last year issued the same ranking to the country, revised the decision on March 1 to a “B-”rank.
Nineteen days after that revision, the rating agency says things could get worse for Zambia with the news of the de-registration of the opposition political party the Movement for Multiparty democracy (MMD), which ruled the country for 20 years before peacefully losing power to the Patriotic Front (PF) in September last year.
The Zambian government through the office of the Registrar of Societies’ on March 14 announced that the MMD would cease to exist as a political party due to non-payment of dues for over 20 years.
The Registrar called for by-elections for the 53 parliamentary seats that the MMD holds.
In Fitch’s view, it is too early to tell if this is simply the action of an overzealous government official or whether the decision was politically motivated.
The agency warns that the move will have negative consequences for country’s democracy and governance, factors which Fitch has traditionally regarded as among Zambia’s rating strengths.
However the agency’s revision of Zambia’s outlook to negative reflected its concerns about some of the government’s early actions and announcements, which have brought into question the direction of government policy.
Among the infamous actions carried out by the ruling Patriotic Front (PF) government was the nationalization of Zamtel, the country’s largest telecommunications company, which was owned by Lap Green of Libya.
This latest development only increases the agency’s concerns over policy direction and governance quality.
It is not obligatory under the Societies Act for the Registrar to suspend a society, in this case a political party, which has not paid its dues. Furthermore, a society should be given at least 21 days to respond to any allegations. In addition, the Registrar does not have authority to dismiss elected members of parliament.
The Registrar may therefore have overstepped his mandate. The High Court has subsequently halted the suspension and ruled that by-elections to fill the party seats in parliament must await the outcome of legal challenge.
However if the decision is overturned by the courts, Fitch highlights again the risks associated with sending a negative message on matters relating to economic policy, property rights, and respect for rule of law.
If the decision to de-register the MMD is upheld and elections are called, there will be adverse fiscal consequences. Holding elections will put pressure on the budget as funds may have to be diverted from other projects. If donors believe governance is deteriorating, they could decide to suspend aid, which make up 7% of government revenue.
It also risks sparking political instability, particularly given the support the MMD still garners in rural areas.
Fitch says it will continue to monitor the issue closely and the government’s actions and policy announcements more generally over the coming few months.
Evidence that the fiscal position is being damaged and growth eroded through a weaker investment environment would have negative implications for the rating.