Financial Times of UK reports

EDGAR LUNGU-THE MAKINGS OF AN AFRICAN DICTATOR
Ever since the 2016 controversial elections in Zambia, it was a huge question mark whether President Edgar Lungu could still be considered a ruler of a democratic country or not. However, events of the last week in which a hurriedly convened constitution altering sitting dubbed a “National Dialogue Forum” and the recent run-in with Vedanta’s Konkola Copper Mines (KCM) and the surrounding events have the international community guessing whether Edgar Lungu is in fact still a democrat, or rather is an emerging African dictator whose concept of leadership more closely resembles that of former ousted Zimbabwean leader, Robert Mugabe with shades of Uganda’s Yoweri Museveni clearly visible.

LUNGU’S DIVORCE

The Zambian head of state recently shocked the business world when he announced that he wished for Zambia to “divorce” itself from Konkola Copper Mines, the company controlled by metals tycoon Anil Agarwal’s Vedanta Resources due to some unnamed, alleged breaches.

Merely a day following President Edgar Lungu’s announcement that he would strip KCM of its mining licence and bring in a new investor, the state-backed ZCCM-IH which controls 20.6 per cent of KCM applied for provisional liquidation of the unit. KCM is 79.4 per cent owned by Vedanta

According to court documents seen by the Financial Times. Zambia’s High Court duly appointed a law firm called Lungu Simwanza & Company to act as provisional liquidator under the country’s corporate insolvency Act. Although contrary to sound legal practice, this order was granted ex-parte.

This move has already racked up concerns that Zambia, Africa’s second-largest copper producer, is looking to nationalise KCM and other assets owned by international mining companies. President Lungu earlier also threatened to “divorce” Glencore, which owns Mopani Copper Mines.

On 23 May 2019, Vedanta Resources issued a statement on the situation affecting its Konkola Copper Mines (KCM) operations in Zambia.

Vedanta confirmed that it is” seeking to formally challenge the decision of the Lusaka High Court to grant an ex parte order appointing a provisional liquidator for KCM. The liquidation application was brought against KCM by ZCCM-IH, a company which sits with Vedanta and is party to, and privy to the situation that surrounds the operation of KCM.

“President Lungu’s aggressive targeting of global commodity firms also hints at Zambia’s increasing reliance on China, its largest bilateral creditor. The biggest question on people’s minds is why KCM seems to have been singled out for this treatment despite Zambia having other mining operations?

Critical voices such as the opposition firebrand Elias Chipimo accuses Edgar Lungu’s government of “trying to use KCM business operations to settle Chinese debt” The Zambian government has allegedly been contracting mysterious Chinese debt burden secretly to finance the ambitious infrastructure drive.

For its part, Vedanta says it has invested more than $3bn in KCM, employs nearly 13,000 at its sit.es and has yet to receive a positive return on its investment. Could it be that the over $ 3bn investment which is well documented is so attractive to the government as a makeweight in any negotiation with potential investors?

In a statement Vedanta said it was seeking an urgent meeting with Mr Lungu over the future of KCM and the “impact that the current onerous situation is having on the company”.

“The Zambian government owes the company more than $180m in value added tax refunds which has made the situation even more challenging.”

The move to appoint a provisional liquidator came shortly after Vedanta, which was taken private last year by Mr Agarwal, reported annual results. These showed KCM has recorded a loss of $165m for the year to March on production of 91,000 tonnes of copper.
Vedanta blamed the increased losses on import taxes, the significant depreciation of Kwacha as well as higher costs.

KCM’s cost of production, excluding royalties paid to the government, rose 16 per cent to 276.2 cents per pound over the year. To put that figure in perspective the current copper price is 274 cents a pound.

“Earnings before interest tax, depreciation and amortisation for the year stood at $63m compared with $73m in 2018. This was mainly due to incremental process improvement cost, significant depreciation of the Kwacha against the US dollar lower cobalt credits,” the company said in its earnings statement.

Vedanta has been dogged by problems in Zambia. Last month, the UK’s Supreme Court ruled thousands of Zambian villagers could bring a legal challenge against Vedanta over alleged pollution.

“President Lungu is unlikely to backdown against Vedanta, but KCM could yet reconcile with the government, perhaps by offering a windfall payment or an increased share of profits to ZCCM-IH. With hard currency scarce, and ongoing Eurobond repayments due, the prospect of greater liquidity might prompt a rethink,” said Mr Branson.

“If no deal can be reached, then a Chinese mining company would be the most likely investor in KCM. There is a good prospect of new terms being negotiated in exchange for debt forgiveness from Beijing. Zambia is already the number one African recipient of Chinese debt cancellation,” he added.

In fact, political opponents have all been unequivocal about Lungu not persuing the Chinese route as it would only yield catastrophic results in future.

The Partriotic government is still grappling with the non payment of over $380m owed to Libya’s Lap Green following a similar hostile takeover which landed them in court with the petitioners, Lap Green eventually winning the matter in a London Court. This action by the Zambian Government had initially placed them on a red list akin to Robert Mugabe’s infamous grabbing of land from white Zimbabwean farmers earlier on.

It is this desperate trend to try and resolve issues of financial misjudgements and political pressure by resorting to illegal and populist asset grabbing from legitimate investors in order to obtain quick access to financial spoils that makes Edgar Lungu and Zambia an interesting and emerging case study on the makings of an African dictatorship.

LOCAL, SOCIAL IMPACT

It’s imperative that the government plainly informs the over 13,000 KCM members of staff that their jobs are on the line because it’s unquestionably clear that the liquidation process indicates definite closure of the mine.

Either way that the KCM saga pans out, the miners in Chingola better prepare themselves for harsh times because from the options available their jobs are definitely not guaranteed.

If the Liquidation process is seen through, KCM will be stripped of its assets, assets will be sold; monies raised will be paid to creditors and members of staff. After this, KCM will be formally dissolved. There will be no KCM and all its 13,000 employees will be rendered unemployed. A buyer might be found after this, but the buyer will have to re-employ.

Of course, Vedanta might watch and sit but will definitely seek legal recourse. I know they have formally indicated that they will challenge the decision of the Lusaka high court to grant an ex parte order appointing a provisional liquidator for KCM.

The legal route might take a long haul and run for months to years. This will reduce the mines productivity or possibly bring them to a halt until the matter is conclusively resolved. When production is reduced there will subsequently be no money to run the mine and pay off its workers. The end result; Job losses.

Aside the Job losses, Schools and health facilities that are direct recipients of the KCM corporate social responsibility program will also be adversely affected. The people of Chingola must brace themselves for a very torrid and turbulent time.

When Zambia Airways was liquidated, lives were destroyed, families separated and dreams shattered. It’s important the Government takes cognizant of this glaring element and brace the people of Chingola for the hard times to come.

POLITICAL PRESSURE

Edgar Lungu’s ruling Patrotic Front’s Recent loss in a parliamentary by election in the copperbelt, a political stronghold has further increased pressure on a party that only narrowly won a disputed election against opposition leader Hakainde Hichilema of the UPND in 2016.

According to reports, the political fortunes of the ruling party seem to be in decline mainly due to a widespread perception of graft and a harsh economic outlook. The resignation of key alies particularly from the powerful northern block ,and members of President Lungu’s cabinet citing rampant corruption and the increasing in fighting as the remaining chuff battle it out in what is fast becoming a succession wrangle within the PF threatens to breach the unity.

Recent instances of unpaid civil servants, unpaid suppliers unpaid statutory obligations and unpaid financial institutions which offer credit to civil servants have all conspired to spike political pressure for the self styled “pro-poor” ruling party.
In addition, recent salaries for some sections of government workers are reported to have been paid out of the national Pension scheme, effectively stealing from the workers’ own future to pay them arrears.

LOOMING FUEL CRISIS

The run- away exchange rate has continued to threaten the fuel pump price. In fact, it is open secret that the government is heavily subsidising the commodity and with a receding import cover of only one month, it was just a matter of days before Zambia is rocked with a serious fuel crisis.

This will inevitably set off price hikes and fuel inflation in the already economically depressed southern African peace haven.

Lungu needs a solution and he needs it fast. Perhaps the motivation of fingering KCM making them the villain and scapegoat presents the most easy way out for the popular “humble leader”.

A FAILING ECONOMY

The IMF in March 2019 completed its mission to Zambia and concluded that growth is expected to slow to 2.3% in 2019 (from 3.7% in 2018) and inflation to rise. Reserves are woefully low at only 1 months import cover (as at end of April 2019).There’s no sign that the IMF will agree a funded programme for Zambia anytime soon, which the country desperately needs. Interest costs on foreign debt have continued to climb with the depreciation of the Kwacha. Debt servicing payments are now regularly larger than FX inflows according to RenCap. The Zambian Govt must now be hoping it can restructure its significant debt profile with Chinese lenders to avoid a crisis.

Yields on sovereign bonds and the budget deficit are useful measures of debt sustainability
and investor confidence. Both indicators in the case of Zambia make depressing reading. Zambia’s deficit has reached a remarkable 10% of GDP (South Africa is 4.5%, while Kenya is between 5 and 6% at my last count). Zambia’s eurobonds have been the worst performing in emerging markets over the past year. Those due for repayment in 2022 (after the elections in 2021) have a staggering yield of 17.45%. This is Venezuela territory. No other country that is not in default has yields as high.

The immediate past Bank of Zambia Governor, Dr Caleb Fundanga says Zambia is headed for a sovereign debt crisis as it is most likely going to default on the first US $750 million Eurobond payment when maturity date falls due.

A sovereign debt crisis occurs when a country fails to pay its external debts and is blocked from accessing more money from official lenders.
Meanwhile, Lusaka businessman Muna Hantuba says the government’s insatiable appetite for borrowing is no longer just starving private investments but also hurting spending on education and health.

What does this portend for companies and investors in Zambia? First, domestic expenditure arrears will hurt households, hurt industry and may represent a risk to the financial sector. Nobody is immune, and for those companies who have been waiting years in some cases, to be refunded VAT by Government, there’s no prospect of receiving those refunds any time soon. The nation’s big mining companies are owed refunds worth hundreds of millions of dollars between them.

These arrears are already manifesting themselves at the end of each month with civil servants regularly being paid late. There’s simply not enough money in the budget. The obvious challenge this poses for civil servants and their extended families is made worse by the very poor harvest this year. There will be a lot of hungry people in Zambia if the situation is not addressed soon.

In an effort to increase state revenues, government is determined to introduce a Sales Tax which would replace VAT. This pronouncement was made before National Assembly by the Minister of Finance Margaret Mwanakatwe during her budget presentation last year on 28 September 2018, even though at the time it was scheduled for 1 April 2019. The Commissioner General of the Zambia Revenue Authority (ZRA) has been the principal proponent of this. The scope and mechanics for administering a Sales tax remain unclear.
Under the terms of the proposed Bill, imports would attract a higher a higher rate of tax than domestically produced goods, which of course contravenes WTO rules. Zambia can expect lots of legal challenges from industry if this is the case.

Government had wanted to introduce the Sales Tax from last month, but it’s clear that there’s still a lot of work to do to clarify the scope and application of the tax. It would seem prudent for Government to at least conduct a risk assessment of the impact of replacing VAT with a Sales Tax and perhaps to defer the application of the tax to manufacturing sectors until the economic impact is better understood and industry has been given the time to modify their accounting mechanisms and business processes to cater for the changes. But prudence doesn’t always win out when you are contending with a crisis. What is clear, is that there’s no scope for Zambia to get this wrong. The nation’s finances are too weak, and the country’s debt is too great to withstand any measures which might further harm her very fragile economy.

CONCLUSION

But what will all this mean for politics in the country? Opposition leader Hichilema remains a diehard foe, whose numbers, in terms of support are showing no sign of dwindling. But with the new legislation being pushed through the recent National dialogue Forum allowing the formation of a coalition government to avoid a costly run off in the event that no candidate meets the 50%plus one threshold, new figures will most likely enter the fray in 2021.

The Patriotic Front and Lungu are struggling. The decisive by-election defeat which Lungu’s party fell to a shortly before the IMF World Bank meeting cast the spotlight on the issues which the Zambian electorate are currently facing..How will Lungu, deal with a powerful new challenge in the form of uncertainty in the copperbelt – especially if elsewhere, he is still struggling to deal with unpaid salaries, the newly re-introduced power load shedding, and it becomes clear to the electorate that debt will force a post-election crisis?

The last thing that Zambia needs is an unstable copperbelt, as this has been the Achilles’ heel for previous ruling parties that has caused regime change. The callous disregard for morality and procedure in the handling of Vedanta’s KCM saga could be the last trigger that sets the country off on a long and perilous path to dilapidation.
Indeed, the hard lessons to be learned from these developments is in fact, a warning; that financial recklessness has a price

What remains to be seen, however, is whether or not Edgar can defy logic and pass the final test on his way to establish the latest edition, in a long line of African authoritarian leaders, who stop at nothing, are neither moved nor shaken by the sufferings of their people that their decisions bring, and are hell bent on clinging on to power by whatever means and at whatever cost.
Welcome to Edgar Lungu’s Zambia, The Real Africa.
At this stage, it is not clear who such a challenger might be, or if anyone can mobilise national support to take on an incumbent prepared to use state resources in his campaign.

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