(Bloomberg) -- Zambia plans to supplement its 2024 spending plan by 41.9 billion kwacha ($1.6 billion) to deal with a severe drought and to start servicing its now restructured external loans.

“The stance and resolve of this government is that no Zambian should die of hunger,” Finance Minister Situmbeko Musokotwane told lawmakers Friday in Lusaka, the capital. The dry spell this year was “arguably the worst in nearly 60 years of the country’s existence,” he said.

The harvest of the staple corn fell by 54% to a 16-year low, while hydropower generation that accounts for about 85% of Zambia’s electricity supplies has plunged, leading to rolling blackouts lasting at least 12 hours daily.

The extreme weather is a major setback for Zambia, just as the government nears the end of a slow and painful debt-restructuring process, after it became Africa’s first pandemic-era sovereign defaulter in 2020. The nation last week exchanged three defaulted eurobonds — on which it owed almost $3.9 billion — for two new instruments totaling $3.08 billion. 

Supplementary Budget

Under the supplementary budget, the government has allocated 8.3 billion kwacha for drought response initiatives, including social cash transfers and a “cash for work” program in affected areas, Musokotwane said. He set aside 14.6 billion kwacha for external debt servicing and 15.2 billion kwacha to dismantle arrears the government owes to fuel suppliers

Zambian President Hakainde Hichilema in February declared the drought a national disaster and appealed for international aid two months later, with the nation facing a $900 million shortfall this year because of the severe weather. 

The drought has fueled already high inflation, which accelerated to 14.7% in May, the highest rate in more than two years. The economy is expected to grow 2.3% this year — less than half the initial forecast — and the current account will post a deficit of 0.2% of gross domestic product from a previous estimate of a 3.7% surplus, according to Musokotwane.

Zambia will finance the supplementary spending plan through a combination of measures, he said. Of this, 17.2 billion kwacha will be from cost cutting measures and 4.2 billion kwacha will come from cooperating partners, including the World Bank and European Union. A bigger than expected dividend from the central bank and asset seizures will contribute 3.8 billion kwacha and the balance will come from concessional financing, including about $194.5 million in additional lending form the International Monetary Fund, Musokotwane said.

Fitch Ratings and S&P Global Ratings gave Zambia’s new dollar bonds a CCC+ assessment, while maintaining a default rating more broadly on Zambia’s external debt. That’s because the government has yet to conclude restructuring on about $3.3 billion it owes to non-bondholder commercial lenders.

Moody’s Ratings last week upgraded Zambia’s long-term foreign-currency issuer rating to Caa2 from Ca. The government’s strong performance to-date under its IMF program anchors the agency’s expectations of continuing gradual institutional improvement, it said.

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