Zambia’s SOE Cleanup Sets Up Curve Compression

Zambia’s settlement of K38 million in legacy benefits for 104 former Zambia Railways Limited employees is a small cash outlay with a large governance signal. The transaction converts an off–balance sheet obligation into a budgeted expense inside a macro framework now stabilising under an IMF programme.

As of October 2025, the Bank of Zambia holds the policy rate at 14.50% to anchor expectations while annual inflation eased to 12.3% in September from 12.6% in August, still above the 6–8% target band and the IMF’s 2025 average projection of about 14.2%. The kwacha traded around ZMW23.6 per US dollar in mid-September, reflecting gradual disinflation and improving hard-currency inflows. In this context, paying verified arrears tightens fiscal transparency without imposing distortive yield or liquidity effects.

The arithmetic underscores the point. Using a 2025 nominal GDP baseline near US$30 billion and an average FX rate around ZMW23–24 per dollar, nominal GDP approximates ZMW700–720 billion. The K38 million payment therefore equals roughly 0.005% of GDP and well under 0.1% of the general government wage-and-pension envelope, making it immaterial to the fiscal stance but material to credibility.

Zambia’s public debt path published with the 2025 Article IV shows a projected decline from 123.9% of GDP in 2024 to 91.9% in 2025 as restructuring and primary balance gains take hold. Liability recognition at state-owned enterprises reduces contingent risks that widen spreads despite headline deficit improvements; unrecorded arrears create valuation uncertainty that investors price into both the local and hard-currency curves.

The policy mechanism operates through logistics and mining. Rail remains the lowest unit-cost mover of bulk ore and inputs; years of under-investment diverted volumes to roads, raising the diesel import bill and maintenance costs. With copper output targeted to exceed 1.0 million tonnes in 2026 and 1.3 million tonnes by 2028, rail reliability is a binding constraint. Settling labour liabilities removes a governance overhang that otherwise blocks concessional lines and deters private operators in potential freight PPPs. The cost of capital channel is explicit: arrear-free SOEs clear due-diligence thresholds for multilateral and DFI funding, lowering weighted average funding costs against commercial alternatives and enabling capex that reduces logistics inflation over the medium term.

Market prints are consistent with a slow normalisation. At the most recent fully published auction in September 2025, Treasury bill cut-off yields cleared at 11.50% (91-day), 12.75% (182-day), 13.50% (273-day) and 14.50% (364-day), mapping a modest term premium under a 14.50% policy anchor. While subsequent tenders may reflect episodic tightness, the signal for investors is behaviour, not rhetoric: arrears trending to zero at major parastatals compress uncertainty premia. On the hard-currency side, Zambia’s restructured curve remains sensitive to programme cadence and external liquidity; yet steady arrears reduction is precisely the micro evidence global allocators require before rotating from short bills into the belly of the local curve and adding duration risk.

Comparative history supports the strategy. Kenya’s rail workforce rationalisation preceded private-capital mobilisation; Ghana’s utility arrears netting preceded balance-sheet repair. In each case, headline cash numbers were small while the signal to creditors was large. Zambia is following the same playbook. The near-term macro impact on aggregate demand is marginal, but the supply-side effect is non-trivial: fewer labour disruptions, smoother procurement, improved timetables, and lower unit logistics costs—conditions that nudge non-food inflation lower and give the central bank latitude to shift from defence to data-contingent easing once headline CPI sustains a single-digit trajectory.

The forward test is measurable over the next four quarters. First, arrears across top SOEs should decline to de minimis levels on a rolling basis, validated by quarterly audit disclosures. Second, CPI should trend from 12–13% toward high single digits by late-2026 if logistics and food pressures ease. Third, local auction metrics should improve: bid-to-cover ratios rising and 364-day cut-offs holding in a 14–17% corridor with lower volatility relative to the policy rate.

Fourth, hard-currency risk premia should compress by 50–100 basis points versus EM peers as programme execution remains on track. Copper benchmarks will continue to drive the external account, but governance delivery—backed by actions like the ZRL settlement—determines whether Zambia is priced for reform promises or reform delivery.