State admits Zambia is an economic basket case by calling the IMF!
By Kalima Nkonde
The Minister of Finance, Mr. Alexander Chikwanda asked Parliament to approve raising the debt ceiling in order to enable him to borrow more from both the domestic and external markets as required by Chapter 366 of the laws of Zambia- Guarantee (Authorisation) Act and the new Constitution. This is the third time in three years that Mr. Chikwanda has asked for the raise in the debt ceiling. The PF administration has increased the external debt ceiling by 800% from K20 billion in 2011 when they took over to K160 billion in 2016. The domestic debt ceiling has also been raised from K13 Billion to K30 billion or 131%.
This is an astronomic increase by any standards and is not normal in any properly managed economy!
The debt ceiling is the maximum amount the Executive( Government) is allowed to borrow by the law and it needs to be authorized by the legislature( Parliament) so as to avoid the Country falling into the debt trap and becoming a highly indebted nation like Greece recently and Argentina some years ago. It is to avoid over borrowing which results in the government spending the majority of resources on servicing of loans with little left for other sectors of the economy especially social sectors like health, education, poverty alleviation, water and sanitation
In 2014, the debt ceiling was increased from K20 billion to K35 billion. In 2015, it was further increased from K35 billion to K60 billion and now in 2016, it has been increased from K60 billion to K160 billion which is a 167% increase! It means parliament has authorized government and given them a blank cheque to contract external debt up to $14 billion at the exchange rate of K11.4 to a dollar.
This goes to support those of us who believe that we need more educated people in Parliament – even better than grade 12 Certificates – as the majority of members who voted in favour did not know or understand what they were approving and its implications.
Some of the impressive comments and reservations on the debt ceiling came from MMD Mafinga Member of Parliament, who really deserves to be called Honourable, Catherine Mugala! The majority of “Honourable” members did not even know that may be they were shooting themselves in the feet as their salaries and gratuities may be paid late as government may needs to service loans first before anything else. Also, they were consigning the country into the debt trap and few Zambians who they represent would have approved such a raise if it were properly explained to them- at least not an increase of 167%!
Suffice it to say that part of the increase in debt ceiling can be attributed to the depreciation of the kwacha. But by and large the increase is meant to facilitate borrowing to plug the huge budget deficit and finance election year related expenses.
The implication is that government intends and is preparing to borrow more both locally and externally as we approach August 11,2016. This will increase Zambia’s indebtedness further and slowly take the country over the cliff and into a debt trap sooner rather than later! It is no coincidence that Government is now calling on the IMF so that they borrow from them!
In one of my articles in 2015, entitled, “How Zambia’s excessive borrowing will affect you soon, take more money from your pocket and bring IMF back”, I predicted about the IMF coming back to run our economy and Finance Minister, Mr. Alexander Chikwanda just recently announced in a ministerial statement to Parliament that Cabinet had resolved to engage IMF on an economic programme.
“I wish to inform the August House that Cabinet at its meeting held on 15 February, 2016 approved that government engages the IMF on an economic programme within 2016. An IMF team is expected in March, 2016 to commence discussions in this regard,” Mr. Chikwanda said.
I also predicted that public sector salaries will be paid late as debt repayments will suffocate public finances and this has come to pass. These were among the several negative effects that I warned about in the light of the PF administration’s reckless and excessive borrowing in a very short space of time, all in the name of the so called development when in fact it is motivated by economic populism which is tied to the electoral cycle.
In recent months, Civil servants have been paid late and most of them do not understand why! The main reason is that the government has to prioritise in making payments. The first priority for the government is to service the billions of United States Dollars that Zambia has borrowed and not civil servants salaries. Governments are not expected to default on their loans and that is why loans to them, in financial management theory are referred to as risk free.
If a government defaults and fails to pay the loan when it is due, the market will interpret that, such a government is broke and this will have a devastating multiplier effects on the entire economy.
According to Mr. Chikwanda, Zambia’s external loan stands at $6.4billion. In June last year these loans were equivalent to K46.9 billion when the kwacha was at K7.33 to a dollar. At the moment in March, 2016, the same loans have ballooned in kwacha terms to K72.96 billion at the exchange rate of K11.4 merely by the depreciation of the kwacha.
The loans have grown by K26.06billion or 56% in less than a year. This simply means more kwacha is required to pay for the same amount of loans and therefore less money is left to pay for civil servants salaries and suppliers. A large chunk of government revenue is going to servicing of debts and there lies in the danger of excessive borrowing in foreign currency and continuous rising of the debt ceiling!
It is important for Zambians to appreciate that the state of government finances is dire. The Minister of Finance has admitted this in answering a question from UPND Member of parliament Jack Mwiimbu.
“Mr. Speaker, honourable Mwiimbu has said I have presented a very gloomy picture. I have presented a true picture of the economy, I do not want to embellish or glamourize things which are not there. Yes, things are not good. Things are not rosy and it will be dishonest for government to display a very rosy picture. There are challenges in the economy,” Mr. Chikwanda said.
The reality of Zambia’s public finances is that they are highly stressed because we have over committed ourselves with the ambitious massive infrastructure programme and have been grossly financially indisciplined.
We have been in denial about the economic problems for a long time and the situation has just become worse and we have no option but to call IMF to help us. IMF member countries go on their programme only when they have failed to run their economy otherwise IMF only do routine annual inspections on member states.
The other reason why Civil servants salaries are late is that the wage bill is too high and it is a struggle for government to raise revenue monthly to meet the bill.
Zambia’s public sector salaries make up over 52% of the budget instead of a sustainable percentage of about 20%. This huge public sector wage bill means that if Civil servant were to be paid first, the government will default on the loans and we will be another Greece.
As a way of background, in 2012/3, the PF government awarded between 100% – 200% wage increases and imposed a wage freeze for two years. In the current year, 2016 Civil servants will get salary increments ranging from 9% to 29% further increasing the wage bill. These salary increments are not related to any productivity increases.
There is no doubt that the public sector bill is straining the economy because one section of society is eating the bulk of the cake and leaving very little for social sectors like health, education, water and sanitation and productive sectors like energy, agriculture, tourism little money for investment. I can foresee the IMF targeting this apart from subsidies on fuel, energy, farming in their programme.
In conclusion, although 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 government should be commended for finally biting the bullet and asking the IMF for help.
Zambians should cautiously be optimistic about the IMF programme because our government have proved to be financially indiscipline, inconsistent and may be it needs a Captain to supervise them. In addition, we are told that the IMF of 21st Century is more humane is flexible with conditionalities and does not come with one size fits all and has greatly reformed.
The reality, though, 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.
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:
- Stabilize 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
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.