By Kalima Nkonde
The International Monetary Fund (IMF) concluded its mission to Zambia on the 18th March, 2016 and it is apparent that there was no agreement on a deal again purely because of disagreement on the timing of the economic recovery programme. President Edgar Lungu fears that he would lose the August 11, 2016 elections if the tough austerity measures the IMF insists on are implemented before the elections.
At the end of the mission, the head of IMF mission, Mr. Tsidi Tsikata noted that the Zambian economy is in dire straits. The IMF is now waiting to hear the policy measures that the Government intends to put in place. They will evaluate those measures in Mid April, 2016 during the next meetings between the Zambian Government and IMF/World Bank.
“The Zambian economy is under intense pressure. Lower copper prices, electricity shortages, and poor rainfall have dampened the pace of economic activity. Moreover, inflation has increased, expenditure pressures have raised, and financing conditions have tightened substantially. The mission estimated that economic growth declined to about 3 percent in 2015. Resolute action is needed as quickly as possible to restore macroeconomic stability and pave the way for a return to high sustained growth.
“Government finances are under immense stress. Expenditure is running far above budget, in large part as a result of fuel subsidies and contracted emergency electricity imports that together are estimated to cost the treasury about US$660 million a year at the current pace (equivalent to 3.2 percent of GDP). At the same time, domestic and external financing options have become more limited along with rising interest rates. Mounting domestic arrears are adding to concerns about debt sustainability,” he said.
In view of the fact that Zambia is supposed to be an open society, the writer feels that Zambians need to be educated about the program that the IMF is most likely demanding from the Zambian government to implement and why President Lungu is reluctant to implement it before elections but rather after the elections.
Nobody has clearly explained to the public in simple terms what the costs and benefits of the IMF program are so that the public can make informed decisions in this elections year. Although I am not privy to the negotiations and the IMF’s positions, as a fairly knowledgeable, exposed and objective analyst, I believe the contents of this article are a reasonable reflection of what the final IMF deal will look like. This is because the options for Zambia’s economic recovery are very limited due to the delayed action by government and the weak negotiating position they are in at the moment!
Objectives of the IMF program
The IMF program will in general, aim to achieve the following objectives: fiscal consolidation which simply means measures meant to reduce government expenditure and increase revenue, restore macro economic stability which means stabilization of the kwacha exchange rate, reduction in inflation and reduction in interest rates, better debt public debt management and fostering the restoration of market confidence.
It is expected that the IMF will require the government to implement the following: strong front loaded expenditure cutting and revenue raising measures, structural reforms to strengthen public financial management in order to enhance fiscal discipline, enhance the monetary policy. There are also likely to insist on a comprehensive debt management strategy.
Budget deficit measures
With regard to budget deficit reduction, it is anticipated that the design of the IMF program will aim at the reduction in public expenditure and mobilization of additional revenue. On the expenditure side, we should expect measures aimed at the reduction of the public sector wage bill which is one of the causes of government expenditure overruns as it makes up over 52% of the government budget instead of a more sustainable 20%. This could be done through limiting or reduction of numbers or freezing of the hiring of civil servants hopefully apart from health and education. It also likely to involve the limiting of percentage wage awards to civil servants.
A number of measures such as cleaning up the public payroll by eliminating ghost workers and strengthening the control of the public wage bill should be expected. All in all, we should expect some reforms in the civil service aimed at reducing the size of the civil service and enhancing productivity
In addition, the subsidies on electricity and petroleum products are likely to be fully eliminated with devastating effects on the cost of doing business as well as the cost of living in the short term.
Capital expenditure in general, is likely to be cut drastically as it a major contributor to the deficit. Specifically, the ambitious, massive infrastructure projects, which are the flagship election campaign tool for the ruling party, will also go out of the window and fall victim to the IMF austerity measures.
The IMF will also certainly want to eliminate the current agriculture subsidies, especially the farmers input support programme(FISP).This may result in the reduction of food production as peasant farmers will not be able afford farm inputs. We should expect increased levels of poverty! In general, government goods and services (recurrent) budget will also be cut drastically with negative multiplier effects on private sector suppliers of goods and services to Government. More redundancies should be expected as a result.
On the revenue side, the IMF is likely to require that revenue administration is strengthened by ensuring that the Zambia Revenue Authority (ZRA) introduces measures to combat tax avoidance and tax evasion. It will also not be surprising if IMF insist on far reaching Tax administration reforms to enhance revenue collection. The reforms could include a change in ZRA management in order to stem the alleged corruption culture in the institution which facilitates tax evasion and smuggling.
Public Financial Management
In order to address the weak public sector financial management, indiscipline and waste, measures to reform and strengthen the public financial management system will be required to be put in place. The measures will aim at establishing credibility, predictability and control over budget execution. We should also expect the IMF to review the administrative and legal frameworks so as to protect Public finances. This may require the revision of the existing legislation by the enactment of a new public financial management Act.
The purpose of the act would be to ensure among other things, that wasteful, fruitless, irregular, unbudgeted and over expenditure are treated as financial misconduct offences subject to disciplinary action. This will help restore budget credibility and avoid cost overruns and accumulation of expenditure arrears.
Public debt management
The IMF program is likely to require the Government to oversee the development of a detailed debt management strategy. The program is expected to call for a prudent borrowing strategy which will encourage concessional borrowing from multilateral and bilateral institutions rather than commercial borrowings from the capital markets. The IMF is likely to insist on the use of commercial borrowing only for highly productive development projects. Generally, the program will place strict borrowing limits on the government. The government will also be required to strengthen its risk management practices including the reduction of its exposure to contingent liabilities by minimizing government guarantees to State owned enterprises.
The Bank of Zambia has been lauded by the IMF in the past for having been carrying out its mandate of implementing a prudent monetary policy regime. The problem in the Zambian economy is that monetary policies have not been complimented by prudent fiscal policy resulting in the depreciation of the kwacha; high interest rates and the run away double digit inflation. We should expect the IMF to encourage the Bank of Zambia to continue with the current monetary policy strategies apart from the persistent interference in the foreign exchange market. The IMF program is likely to require that the kwacha exchange rate should be determined by the market with no intervention or minimum intervention from the Central bank.
Loan disbursement conditions
IMF programs come with a lot of conditionalities to which disbursements are tied. When the IMF says they will give you $1billion dollar loan, do not think you will get it all immediately, the same way that the Government used to get the EUROBONDS loans – within days of concluding negotiations! Before the Government can even get a cent, the Fund will give them a number of prior actions to implement.
It is after the fulfillment of those conditions that the first disbursement will be made. Ghana got $114.8 million or 12.5% as the first installment on the fulfillment of prior conditions of the total $918million loan package. The Fund will also set quantitative targets to be fulfilled before further disbursements are made.
Expected benefits of IMF program
The expected benefits from the IMF program will be that it will compel the Zambian government to be financially disciplined, bring macro economic stability in the economy and thereby help with the stabilization of the kwacha through the balance of payments support, reduce or contain public expenditure, restore investor confidence and help in foreign direct investment inflows, facilitate mobilizing additional revenue sources from multilateral institution and bilateral Donors.
As a patriotic Zambian, I would advice government to resist cutting subsidies on the productive sectors of the economy especially the agriculture sector to ensure food security because even developed countries like United States of America, European Union, China all subsidize their farmers and protect their infant industries! We have been able to be food sufficient for some time now and a net exporter of grain because of the progressive and common sense agriculture policies our late president – and probably the best President so far – Dr. Levy Mwanawasa implemented.
The government should also resist cutting budgets of social sectors like education and health. Lastly, the reduction in the public sector wage bill by way of rationalizing and reduction of the size of civil service should be done over a period of time and not in a big bang approach to avoid undue suffering for our people.
The road to economic recovery for Zambia may turn out to be long and challenging given the hole that the PF administration’s mismanagement of economy has put us in, external factors notwithstanding. The fiscal tightening that the IMF program may insist on may be politically difficult to implement. President Lungu is caught between a rock and a hard place.
Implementing the IMF austerity measures come with political risks on his side, in terms of re-election. On the other hand, if he delays implementing the economic recovery measures, the economy is likely to get worse and still reduce his chances of re-election! He is damned he does and damned he doesn’t! He has to choose the lesser of the two devils.
This is where rational, wise and statesmanship decision making is needed. My advice is for him to make a decision which is in the best interests of the country and not based on narrow personal and Party interests!
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 before returning home two years ago.