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Vol 59 No 19

Published 28th September 2018


Zambia

Bonds crash as donors cut funding

Cuts in aid payments are compounding the debt crisis as the government loses credibility after bogus denials

President Edgar Lungu's sacking on 19 September of Minister of Community Development and Social Services Emerine Kabanshi – at the centre of the row over the fraud in payments for the country's poorest families – will do nothing to lessen the deepening crisis in the country. A bigger corruption scandal in the education ministry involving potentially tens of millions of dollars is under investigation, we hear.

Officials, requesting anonymity, have told Africa Confidential that President Lungu was informed about six months ago about corruption in the system of payments – known as social cash transfers (SCTs) – to hundreds of thousands of poor people. Kabanshi, with the support of Lungu, had overruled civil servants who had wanted to end the Zampost contract, our sources say.

Contradictory government statements, sometimes demonstrably false, and revelations of wasteful spending and of hugely over-priced contracts have hit major companies' investment plans (AC Vol 59 No 18, Graft worsens cash squeeze).

The yields on US$1 billion Zambian-issued Eurobonds nearly hit 18% over 18 and 19 September as government denials of any debt crisis or bad relations with donors took their toll of investor confidence.

Since we reported on 14 September that Zampost, the agency contracted to deliver the SCTs, had misappropriated US$4.7 million from them, more details have emerged.

On 18 September Lungu issued a statement claiming that he had already ordered an enquiry into the transfer system. This report, he said, had come into his hands on 14 September – the same day Africa Confidential published its report on the fraud and its costs, later confirmed as accurate by the government.

The statement added that the President wanted 'a speedy and decisive investigation'. In fact, Lungu and senior officials had known about the fraud for several months. Donors had already voiced their concerns to the government after of discoveries by the Auditor-General.

The government's failure to act despite knowing about the Zampost fraud exacerbated Britain's anger over the fraud, and the UK demanded $4 mn. in payments from the Department for International Development be returned.

Britain's actions remained secret until Africa Confidential's report, and Information Minister Dora Siliya denied that any suspension of aid had taken place. Then, in a tweet, British High Commissioner Fergus Cochrane-Dyet confirmed the aid been suspended, publicly contradicting the minister's version of events.

Lungu has not commented on Africa Confidential's reports that massive fraud has taken place in the Ministry of Education after a manipulation of the internal payments and procurements system. A government-led audit has been taking place in secret.

This is another reason for DfID's suspension of bilateral aid. The total amount embezzled is not yet known but sources in the investigation say it is on a far greater scale than the other frauds uncovered.

The row over the departmental frauds has drawn attention to the debt crisis, about which government officials are also in denial. Africa Confidential has reported that some $489 mn. had been set aside for debt repayment in the first half of 2018, but a government statement claimed this was false, citing $342 mn. as the true figure (AC Vol 59 No 18, Bonds, bills and ever bigger debts). The government figure, however, only included interest, not interest plus repayments of principal, which was the figure we used.

In June, the government promised to cut public spending and stop new borrowing.  The government currently estimates its foreign debt at $9.3 bn. However, project loans with Chinese companies not included in that figure total as much as $5 bn., many of them governed by contracts that do not allow government to hold up disbursements.

After the June pledge, however, came the news of Zambia's purchase of two military transport aircraft for over $95 mn. with a commercial loan. Zambia also contracted provisional loans for Israeli electronics worth $400 mn.

One of the most serious payments shortfalls is hitting drugs suppliers to the health ministry, to which donors have also suspended payments. Because of government non-payment, 'health kits', packages of essential and commonly-prescribed drugs which are distributed to the remote countryside, have all but disappeared from view, said a senior doctor. Hospitals and doctors' surgeries suffer a chronic shortage of supplies. 



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