the-IMF1By Kalima Nkonde

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

Conclusion

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.

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23 COMMENTS

  1. I dont think this Author did the research from pluto. IMF in general, has had ver little success. Secondly, that will just mean more long term problems for Zambia. Lastly , the deficit in Zambia has not yet reached the sort of levels to render such radicle steps, it would just be a share waste of time and brains.

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    • Waste of brains? Whose brains? Chikwanda’s?
      Please stop dreaming and accept stark reality that Zambian economy is already drifting without any control or policy from the Government.

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    • First things first:
      It’s very embarrassing that a professed “Chartered Accountant” does not understand the IMF. Your shameless allusion that we have crossed the last economic red line and goes to prove that the country is in deep economic problems, is proof enough that either your reasoning is flawed or you are not competent in the area of expertise you claim to reside. It only tells you don’t know the meaning of the phrase “crossing the red line”. Funny that you choose to cite the IMF only in the UNIP era and NO mention whatsoever of IMF during the MMD regime where the effects were drastic. I will not stand to give you a lecture on the IMF but would suggest that maybe you should spend less time in “Chartered Accounting” meanwhile and instead learn more about the…

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    • Australian dollar is now K9 from k5.5 when Australian dollar is also losing against USA dollar. So this tells you that although almost all currencies are losing value against the dollar, Kwacha is losing at a very high rate.
      Maybe it would be great for Government to promote tourism as a lot of Americans, Europeans would want to travel to Zed looking at the exchange rate.

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    • Sorry bwana author, you have asked too much from the current regime as this is beyond their understanding. In that they thought they can easy borrow their way out of poverty. We need advise them not to borrow without a proper plan on two fronts, i.e. without a plan were to spend the money and 2. how they will pay back. How can anyone who could have done a proper business plan can invest in Zambia Railways and pay heavily a director without clear benchmarks to be met. PF has been a bad experiment for this nation.

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  2. We all know what needs to be done. Somehow, we will only listen if it comes from some academician from the IMF. The rapid expansion of Govt under the PF has been the main cause of inflation and the budget deficit being experienced. What, exactly, did we expect when we went on this spending binge? And given that an election is coming up next year, there is no way the PF will cut back expenditure. Prepare for even worse times ahead

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  3. Its a pretty interesting article. I, however, dont think that we should go for an IMF bail out. We must rather change governments. This PF government is mismanaging the economy. Its over spending.

    To answer the author, let use his own article: “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!”

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    • The first step to fixing any problem is to recognize and admit there IS a problem.

      Lungu and this PF Government have not yet reached that stage. It seems they are too dull to see the VERY LARGE writing on the wall.

      Unfortunately history shows that riots and bloodshed inevitably follow in a case like this, so their ostrich approach will destroy more than just Zambias economy, it will also demolish peace as it did in Zimbabwe.

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  4. Our goverments economic management is atrocious. If you want to know the definition of incompetence step into Zambia and watch a clueless president squander the meagre public purse like there’s no tomorrow then look at the sycophants content to keep singing the government praises because they have sold their birth right for a morsel. Zambia needs a change in pedigree of leadership in a very sphere question is will we rise to the challenge?

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  5. while the article is interesting to read, it is about borrowing in order to spend,we have been through this before and it does not work, may be this time around consider introducing new taxes, so that you increase your income from local revenue, inheritance tax is one of them; lifetime donations, gifts and donations to political parties should all be taxed.

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  6. Its a well known fact that IMF support comes with conditions, currently the western world is pushing for Lesbian, Gay, Bisexual and Transgender (LGBT) rights and are using countries in our situation to achieve that end. Malawi is a typical example. Currently we are still able to get bailout from countries like China, and if resources are prudently applied, we are able to get out of this economic situation without engaging the IMF.

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  7. Another brilliant piece from Nkonde! An absolute masterpiece for any MBA candidate or any interested person objective enough to understand why/what the crisis we face as a country. It would be a great relief if the PF government pull it off and bring back key economic indicators down/up and keep them stabilized in mid to long-term fiscal cycles. Otherwise, whichever party wind the 2016 elections, there is an Economic Mt Everest to climb!

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  8. IMF does not support. It invests. It is a private bank and functions like one, profit oriented. It is not a charity. When they give those loans and those conditions, they have been designed to protect short and long term interests of the banks, not the nations they provide servicers to. When you owe them enough and can not meet their deadline, after they have of course devalued your currency against the dollar, they then start to demand natural resources for much lower prices, and a country sells away their infrastructure, schools hospitals, to private, often American enterprise. Be careful guys. Natural resources are a wasting asset. One day there will be nothing left. Look at the copperbelt. If we do not build anything sustainable while we still we will be forever phucked…

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  9. incidentally one question the writer and many political pundits will avoid to adress is why doom spellers such as the imf option and economic mismanagement should only resurface when there’s a fall in commodity prices and other global inevitabilities. rather than these I beliv the answer lies more in growing a sustainable GDP which unfortunately is not possible with copper being the main driver. writer need not be so selfish as to believ that good economic managers ‘ll only come after him but be

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  10. be sincere and patriotic enough to acknowlege we already have them and their failures (theft,corruption,tribal inclines,etc) are also ours as a nation and only ours to correct

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  11. Great article but I am not sure that the conclusion is right. What Zambia, like Greece, needs is growth in the economy, which at the moment is contracting. Zambia’s chief export has collapsed and the government needs to be brave and admit it. Secondly, the administration is power needs to curb its unnecessary expenditures and instead encourage growth in the private sector. In other words, the government needs to implement austerity measures. Unfortunately, that will imply reducing the size of the state, eg civil service. In simple terms lay off workers, and cut on some state services and programmes. This is going to be painful but necessary to hold the free falling economy. Let him that has ears listen!

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  12. The problem we have is we lack prudence in financial matters, we spend as if there is no tomorrow. We cannot continue with the attitude of ‘business as usual ‘. We need to be serious with the way we handle affairs, IMF has long started sounding the warning about recklessness in our spending by government, but all we have been getting from psychophants is that IMF is bitter about blah blah. Eish! Argentina had a crisis worse than we have, but they had to bite the bullet, they took a bailout from IMF, the rest is history. What we are failing to acknowledge is that we have a serious wound loosing a lot of blood, which require urgent measure to stem the flow. If there are plans to increase the cabinet without regard to controlling expenditure, then we can never get…

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