Zambia: Fuel fears push Hichilema back to subsidies months

Zambia's government has quietly reinstated fuel subsidies just months before the 2025 general elections, marking a dramatic reversal of President Hakainde Hichilema's IMF-backed austerity programme. The move signals mounting political pressure to shield consumers from volatile global oil prices—but raises critical questions about fiscal discipline, currency stability, and debt sustainability for investors tracking the Southern African economy.

## Why is Zambia reversing its fuel subsidy removal?

Since Hichilema's 2021 election victory, his administration championed subsidy elimination as a cornerstone of IMF reforms, designed to reduce fiscal deficits and prevent the kwacha collapse that plagued the previous regime. Removing fuel subsidies was unpopular but necessary: subsidies drain state reserves, distort markets, and create artificial demand that fuels black markets. Yet with elections now 18 months away, political calculus has shifted. Rising transport costs ripple through the economy—pushing inflation higher, eroding real wages, and sparking public discontent. Hichilema's ruling UPND party fears electoral backlash if voters blame the administration for sustained pump price pain.

The reintroduction of subsidies is not framed as a full reversal but as a "temporary" intervention to stabilize prices. In practice, government is absorbing fuel distribution costs through the state oil company, NOCSAPE, effectively capping retail prices below global crude benchmarks. This buys political breathing room but at a measurable cost to public finances.

## What are the immediate market implications?

For the kwacha, the timing is precarious. Zambia's currency has stabilized under IMF supervision but remains vulnerable to capital flight if investors perceive policy reversals as a loss of reform credibility. Reintroducing subsidies signals that electoral cycles, not economic logic, drive fiscal decisions—exactly the pattern that triggered Zambia's 2020 debt default. The Central Bank will likely face pressure to defend the kwacha through higher interest rates, which would increase government debt servicing costs and crowd out private investment.

Inflation, which had begun moderating, risks re-acceleration. Fuel is a core input for transport, agriculture, and manufacturing. Cheaper fuel at the pump may temporarily suppress headline inflation, but suppressed prices discourage conservation and lock in structural inefficiencies. Once subsidies are eventually removed post-election, the inflationary rebound will be sharper.

## Will this derail Zambia's IMF programme?

The IMF has shown flexibility with Zambia's Extended Credit Facility, acknowledging that some fiscal adjustment is politically impossible. However, large-scale subsidy reintroduction crosses a red line: it directly contradicts programme conditionality and undermines the deficit targets underpinning the IMF's assessment of debt sustainability. Expect IMF pressure for offsetting expenditure cuts—likely in health or education—or explicit fuel price adjustment mechanisms that are politically harder to defend.

For foreign investors, this is a test of institutional credibility. Zambia is seeking Eurobond refinancing in 2025; a perceived policy reversal on subsidies could widen borrowing costs by 200–300 basis points, making new debt more expensive and commercial investment less attractive.

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