By Kalima Nkonde
The Zambian Government and the IMF issued separate statements following the conclusion of the IMF mission to Zambia. It is apparent from the statements issued – which were rather vague, confusing to a layman, couched in economic jargon and spin – that no concrete road map was agreed as to how the Zambian economy was going to be rescued with the assistance of the IMF in the immediate future. This article will try to unpack the two statements for the readers to understand what the statements were not saying in a lay person’s language.
It is apparent from the IMF statement that they were not asked for any balance of payments support (money or loan) by the Zambian government and this inference can be made if one contrasts the statement that the Fund made in June, 2014 and the one they made on 20 November, 2015. In the June, 2014 statement, when Zambia was not even dire straits like now, the IMF issued a statement that was more upbeat, robust and with specifics. This is what the IMF said then,
“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.”
The IMF’s statement on 20 November, 2015 is as follows,
“It was agreed that the authorities and IMF staff remain closely engaged in the period ahead. The Zambian authorities undertook to conduct internal consultations based on the outcome of the mission, with a view to defining the forms and timing of engagement.”
It is apparent from the two statements that, whereas last year, the Government had committed itself to discussing a rescue package – although they subsequently chickened out and went for a Eurobond -currently, the Zambian Government is indecisive and clearly fearing the conditions that will come with IMF funding given their plans to spend big for the elections in 2016! But in absence of a bail out, the economy is likely to deteriorate further and will soon catch up with the government and they will have to bite the bullet and ask for cheaper IMF rescue package. The delay in agreeing to a rescue package will come at great cost to government in that IMF conditions are likely to be harsher for government than they are now. It would be very unwise for government to refuse the rescue plan now.
IMF assessment of Zambian economy
In its statement, the IMF was very categorical about the fact that economic mismanagement was the major cause of the problems that Zambia was facing, external shocks not withstanding. The Fund was clearly appalled by the fiscal indiscipline of the Zambian government when it observed,
“In recent months, the pressures on the economy have not only reflected the impact of external shocks but also waning market confidence. The fiscal discipline has been undermined by additional spending commitments that stand in contrast to lower than budgeted revenue.”
To put this in context, the IMF could as well been referring to the unbudgeted for expenditure like hiring jets costing over $300,000 as well as the creation of districts at the drop of a hat, the building of colleges and universities, starting national airlines, building roads leading to nowhere etc when we there is no money! The IMF’s expectation is that responsible economic managers are supposed to be cutting back expenditure and suspending certain projects in the light of reduced revenue but our government has not been behaving like that and it has been business as usual and this is the reason why the market has no confidence in it!
According to the Fund, the fiscal indiscipline is one of the major problems that the economy faces. In the IMF’s view, Zambia with all its endowments should not be having the current problems with better economic managers. The Fund feels, “Zambia with a record of peace and political stability and abundant natural resources remains a country with great potential to achieve strong and inclusive growth. The mission remains confident that with a resolute implementation of credible package of measures to lower the fiscal deficit will go a long way towards restoring market confidence, bringing stability to the economy, enabling speedy recovery in economic growth and ensuring debt sustainability.”
The IMF was, however, full of praise of the Bank of Zambia in as far as the management of the monetary policy of the country is concerned. According to the Fund, the Central Bank has tried its best to ensure that the Kwacha remains stable, inflation is kept in check and interest rates remain low but all these efforts are being undermined by the Government through reckless expenditure. In effect, what the Fund was saying in its statement is that as long as there is financial indiscipline, and the government engages in wasteful and unbudgeted for expenditure, Zambia should forget about a strong kwacha because measures by the Central Bank (monetary Policy) have to be complemented by fiscal discipline.
The Bank of Zambia Governor, Dr. Denny Kalyalya has been singing this song since he was appointed. He has stated from time to time that there is a limit to what the Bank of Zambia can do to protect the Kwacha without the assistance from the President or the Executive branch of government through fiscal measures! Nobody has listened to him. We have people in our current government who are so economically naïve like the late Idi Amin of Uganda, that they think Bank of Zambia can do some magic to protect the kwacha! They somehow do not understand the interdependency of economic policies and variables!
Zambia budget challenges as per IMF
The Government agreed with the IMF’s assessment of the economy and they shared the various policy measures required and their consequences. According to the IMF, the Zambian economy is in serious trouble and there is pressure on government with regard to the payment of bills in the light of reduced revenue and the continuous depreciation of the kwacha. The Fund noted “The mission and the Zambian authorities reached a shared understanding on the current economic challenges and the implications of alternative policy choices.”
In summary, below are the issues that are putting pressure on the government budget which are threatening to widen the budget deficit further and which both the Government and the IMF agreed on but although they must have differed on measures required to address them. The issues are:
- The fuel bill has increased tremendously due to the depreciation of the kwacha and the government has not passed on this cost to the consumer yet and so Government is currently subsidizing consumers. Some action will have to be done at some point as it is not sustainable.
- The importation of electricity is straining government coffers and the bill escalates with the depreciation of the kwacha. In the short term, there is very little that the government can be done about this
- There are other subsidies especially on maize and farmers input which are also putting pressure on government coffers
- Expenditure on infrastructure projects is also putting a strain on government revenue
- Increased debt servicing costs of foreign loans especially Euro bonds which have grown substantially in kwacha terms due to the depreciation of the kwacha.
Government economic strategy after IMF mission
The Zambian government largely agreed with the IMF’s assessment of the economy, but if we are to be brutally frank, there is nothing new that the IMF has said which this writer, other analysts, commentators, Bank of Zambia, ZIPAR and Opposition parties have not pointed out before. Government didn’t listen!
The Zambian government’s statement through Cabinet Office stated that: “The Government shares the views of the mission and fully acknowledges that fiscal consolidation is paramount in ensuring the sustained macro economic stability, growth and poverty reduction.”
In order to simply the above statement for some readers who have no economic background, the term fiscal consolidation simply means putting measures for increased revenue generation as well as measures for cutting expenditure in order to reduce the budget deficit. In Zambia’s case, there is limited scope for revenue generation in the short term and so the focus should be on expenditure reduction.
We have all heard about this song of fiscal consolidation from government since the budget speech but unfortunately, our government will say one thing to day and do the opposite the following day! It follows that the pronouncements made by Mr. Fedson Yamba, the Secretary to the Treasury with regard to fiscal consolidation are hollow and nobody believes in them due to the government past record. There is no independent and objective technical expert including this writer who has any confidence in the PF administration implementing the fiscal consolidation policy measures.
The Government lacks credibility and neither the international investor nor the donors, let alone the IMF, believe there is political will to implement the policy. The credibility of fiscal consolidation will only come with an IMF supervised programme once the Government has obtained a loan from them like Ghana painfully found out. Ghana acknowledged that their home grown austerity measures lacked credibility among the international community and could not stop the free fall of their currency, the Cedi. International investors and Donors do not trust African governments to implement policies that are not politically expedient especially in an election year. The Zambian government may be thinking of trying to put in place some home grown austerity measures and avoid the IMF and look for funding elsewhere but their options are very limited.
If the government had agreed on a road map for a rescue plan, the following would have been the potential benefits of an IMF programme going forward once agreed upon:
- Stabilize the kwacha through the balance of payments support thereby save kwacha from further depreciation and consequently forestall further escalation of inflation
- Reduce or contain public expenditure resulting in the reduction of the budget deficit and thereby assist in the kwacha appreciation
- Restore investor confidence and help in foreign direct investment inflows which have almost dried up and therefore assist with the kwacha appreciation
- Facilitate the 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.
- 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 and recommendations
The IMF has just confirmed the view some of us have had all along; which is that, the kwacha is not depreciating purely because of external factors. The kwacha has depreciated more than other currencies due to incompetent economic management which has in turn induced the lack of confidence by the market and consequently resulted in a run on the currency! One wonders how our politicians cannot understand that one of the basic factors that determine the value of the currency, is market confidence and sentiment!
It is a true that other currencies have depreciated as well due to the strength of dollar and poor commodity prices but not by 50%! Those that have done badly have depreciated by a maximum of 20% or so! The kwacha could have been in that range if we had good managers but our currency has depreciated by over 50% year to date! Crudely, one can say there is a premium of about 30% depreciation over and above normal currency depreciation purely attributable to mismanagement. Economic mismanagement in our context entails among other things, poor planning and risk management, policy inconsistency, irresponsible pronouncements on nationalization, price controls, exchange controls and so on and so forth!
The jury is out, now that the IMF has spoken. The two problems that the IMF has identified and which we can do something about as a country with nothing external about it are: lack of confidence by the market and fiscal indiscipline. There are measures that can be implemented and which are within the President’s control and have nothing to do with external factors.
I would recommend, therefore, that once the President and Cabinet have discussed the IMF report, he should hold a press conference. In that press conference, he should announce some brave and bold decisions which are the signs of the time, in order for him to address the country’s economic problems in the short term. This should include the following:
Announce far reaching cost cutting measures that even affects the Presidency and Ministers so as to show his seriousness and commitment to fiscal consolidation and also send a positive signal to the market
Suspend and cancel some expensive infrastructure projects especially the roads which we cannot afford!
Announce that Zambia is carrying out consultations with stakeholders regarding the recent proposals by the IMF mission. He should add that the country will soon re-engage the IMF and ask them for short term balance of payments support to stabilize the Kwacha and bring policy credibility and confidence to the market with the international community.
Make changes at the Ministry of Finance by honorably retiring Mr. Alexander Bwalya Chikwanda who has been indirectly asking to be retired! He clearly said he is too old to work and wants to rest in 2016 but now is a better time for him and the country! He has shown his frustration regarding the financial indiscipline in government by criticizing all his colleagues for their obsession of wanting to go on foreign trips even for a day purely to earn $500 per diem per day! All in all, he cannot possibly have the energy and motivation to enforce financial discipline at his age for an economy in crisis! Please be kind to him and save him the stress of the job at that age! We have seen that the old man has sent signals including his apparent lack of interest in the job by not being very proactive in seeking short term economic solutions for the country.
It would be a disaster for the Kwacha and the Zambian economy as a whole if the market confirms the rumour that Zambia has out rightly rejected the IMF rescue package. The decision to reject the IMF in our desperate circumstances can only be hailed by those who do not understand our current economic malaise. It may even have the opposite effect that the PF government may be thinking – by resulting in losing them 2016 election. There are tangible and intangible benefits of the IMF rescue package. The Ghanaians are not stupid to accept the IMF package! If anything, they have more smart people and are richer than us by virtue of their resources, population, better education system and being the first black African independent state! We supposed to learn from them. The IMF of the 1970s and 1980s is not necessarily the same as the 2015 IMF as the institution has undergone some reforms due to the criticism they received regarding the infamous structural adjustment programmes (SAP).
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator. He has lived in the diaspora in England, South Africa and Botswana for over 25 years