The increase in Zambia’s rate of inflation into double digits to 14.3% signifies in my view, that we have crossed the last economic red line and goes to prove that the country is in deep economic problems as all economic indicators are now negative. It also proves that Zambia’s 2016 budget objectives will not be achieved as they are way too ambitious and do not address the main causes of the economic problems in Zambia which is the lack of confidence in economic management, excessive government expenditure resulting in excessive borrowing, higher interest rates, currency depreciation and consequently higher inflation.
The current stand of the government of solving the economic problems using home grown solutions will not work as there is no political will to stick to the budget and I believe it is now time for the PF administration to cross the rubicon and approach the IMF for a bailout. I will make my case for the IMF bail out in this article.
Who is the IMF?
The International Monetary Fund (IMF) is a specialized agency under the United Nations which has its own charter and a governing structure and provides financing and policy advice to countries in economic difficulties and helps them achieve macro economic stability. The IMF also does routine economic surveillance of its member countries – whether in economic difficulties or not – and it is the number one institution that multinationals, investors and donors rely on with regards to assessing the economic performance of a country.
I am not a fan of the IMF as a Zambian who is old enough, with fresh memories of the late 1970s and the 1980s when we were under the IMF’s inhuman Structural Adjustment Programme(SAP) that brought so much misery to ordinary Zambians.
The reality is that going for an IMF bail out means in some way that you have lost your national pride and self respect. When you go to the IMF, it is admitting to the whole world that you have mismanaged your economy , you are in a crisis and you need big brother to help you manage the economy as you cannot do it yourself! Unfortunately, the situation that Zambia finds itself in now, like in the late 1970s, is one where we have no option but to engage the IMF for an economic reform programme and bail out. It is a necessary evil and we asked for it by mismanaging the economy since 2011 when the PF took over.
You will never hear our neighbours like Botswana, Namibia, South Africa going for IMF bail outs, although the IMF does make routine economic surveillance of their economies. The only other economic pariah state in the region that went to the IMF and even defaulted on the loan is another country with a party called Patriotic Front – Zimbabwe’s ZANU PF! If the current administration had listened to the advice about prudent economic management, avoided populist economic policies and consulted the previous MMD administration, we would not be in this mess and I would not be advocating for an IMF programme. The reality is that the PF administration needs a supervisor in managing our economic affairs!
PF and IMF
Zambia’s recent approach to the IMF was under the PF administration in June 2014 under the late President, Mr. Michael Sata who was known for his brave and decisive decision making when in a crisis situation. The kwacha had lost over 18% of its value in the first six months of 2014. According to the IMF statement at that time, after a visit to Lusaka by a team of its experts, they said :
“The IMF is working closely with the Zambian authorities to develop a plan that will anchor macroeconomic stability. Recent steep depreciation of the kwacha is raising inflationary pressures and expansionary fiscal policy which has created large budgetary imbalances. The authorities have requested the IMF team to return in early September to discuss an economic programme that can be supported by a fund arrangement.”
It was a result of these talks and an impending IMF programme and the funding that resulted in the stabilization of the kwacha last year until it collapsed again 12 months later in 2015. It is not a secret in financial cycles that Finance Minister, Mr. Alexander Chikwanda must have influenced the decision not to go ahead with the IMF loan as he is not a fan of the IMF given his experience under the UNIP dictatorship. He believes that they can sometimes make things worse.
In addition, he may not have wanted to go on record as the one who brought back the dreaded IMF to Zambia! He, however, has no choice now as him and his colleagues have mismanaged the once vibrant economy as they did in the 1970s! The question is not whether to approach IMF but when to? The longer they delay the worse the situation will become.
For the record, it is Zambia’s approach to the IMF in June,2014, that put pressure on the Ghanaian Government who were also reluctant to go to IMF, to finally capitulate and approach the IMF in September, 2014 when their currency had depreciated by over 40%. Whereas the Ghanaians went all the way and until an agreement was reached- which resulted in them getting a loan of USD 918 million on 3 April, 2015 – the Zambian government, it appears, chose to abandon the programme and decided to go to the International bond market and got the expensive Eurobond of $1.25billion in July,2015 for fear of IMF conditionalities especially the control of government expenditure like the beloved infrastructure projects in an election year!
Fast forward, one year on, July 2015, the currency crisis came back vigorously to haunt the country resulting in the kwacha losing close to 50% of its value in the first six months of the year and becoming the worse performing currency in the World. The kwacha depreciation has resulted in price increases of almost everything and has now been reflected in the double digit inflation rate of 14.3% for the first time in over 10 years!
Economic outlook in 2016 without IMF
Zambia’s economic situation in 2016 is very bleak if no drastic action is taken now. In my view, the most likely scenario is that copper prices and demand for copper will not substantially increase, the PF will go on a spending binge especially in the light of the 2016 election and the President has gone on record as having said that he will spend big in order to win the election.
Foreign direct investments will be suspended pending results of the elections; the revenue projections in the budget will not be met. The combination of all these will result in a bigger budget deficit than the 6.9% forecast for 2015 and could go into double digit above 10%.
The inflation rate will continue into double digits and may even reach 20%; our foreign reserves may be lower than two months of import cover, the trade deficit will continue to be higher; the kwacha will continue depreciating and may go as high as K20 to a dollar making the servicing of the country’s foreign debt more costly for government and resulting in the debt servicing to revenue ratio dramatically increasing.The cost of living will continue going up and government will run short of funds and start failing to meet its short term obligation when they fall due.
The civil servants will start getting their salaries late, government suppliers for recurrent and Capital expenditure will not be paid in time or may not be paid at all! The scenario is the most likely scenario. The Government may not be able to control the consequences of the economic armageddon that lies ahead if they decide to take the risk of doing nothing in good time as they seem to be now by waiting for God to change things.
It is this bleak and almost inevitable economic outlook that persuades me, as a rational thinker, to advice Government to take a preemptive action of engaging with the IMF as a last resort and follow Ghana’s example who faced similar circumstances. Waiting, doing nothing apart from building churches, visiting provinces, concentrating on campaigning for 2016 and praying for Jesus to come and solve our economic problems will not help but make things worse!
Benefits of IMF bail out
There have been complaints by the President and PF officials for critics to come up with solutions. In the Post Newspaper of November 2,2015, the President challenged those with short term solutions to economic problems to come forward. He was quoted as saying, “ I have only been in office nine months. They are busy telling me I have no vision but they cannot offer solutions. Let them come forward because I am a good listener.”
I would like to stick my neck out that the all encompassing short term solution to our economic problems is to go for an IMF programme with a view to get further funding. He has no excuses whatsoever to claim that there are no short term solutions. He just have to be brave and decisive like Dr. Kenneth Kaunda, Late Mr.Frederick Chiluba and late Mr. Michael Sata before him in similar circumstances and make the difficult decisions which are in the best interests of the country and not the one which is politically expedient. He has so far not made any brave decisions to write home about.
The IMF programme will bring policy credibility and confidence to the market and the international community and stop the bleeding. The IMF will bring into government financial discipline and thereby achieve the following objectives:
- Stabilise the kwacha through the balance of payments support thereby save kwacha from further depreciation therefore forestall further inflation and cost of living increases
- Reduce or contain public expenditure
- Restore investor confidence and help in Foreign direct investment inflows whish have almost dried up and therefore assist with kwacha depreciation
- Facilitate mobilizing additional revenue sources from multilateral institution and bilateral Donors. It is common knowledge that most donor countries will only deal with you when your economy in shambles if you are on an IMF programme as they do not want their money to be wasted. It will be difficult to get grants or loans that are in the budget if we do not go on IMF programme.
- Bring in better Public debt Management by carrying out credible debt sustainability analysis and strengthen risk management practices
- Reduce exposure to contingent liabilities by minimizing the use of sovereign guarantees
- Strengthen public financial management and restore budget credibility and avoid significant cost overruns
I would like to appeal to the President to start assembling a team of credible and respected Zambian economists and financial experts who should start negotiations with the IMF. The delay in engaging the IMF for whatever reasons, may have dire consequences for the country as well as the Party in power. IMF negotiations do take long and so it is better that the negotiations start now so as to send a signal to the market that we are serious about economic reforms and in the process change the current negative sentiment that the country has and therefore save our currency from further depreciation.
It is the ad hoc, reactive and fire fighting type of management rather than an analytical, futuristic, forward looking and risk management style of management that has put us in this mess. The Government has no excuse about the lack of short term solutions to our economic problems; the IMF is one of the main solution to the currency crisis and the negative economic sentiment, period.
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator.