By Kalima Nkonde
The Announcement by Finance Minister, Mr. Felix Mutati that the IMF team will be coming at the end of October, 2016 may raise expectations in some quarters especially for those who think that the loan from the IMF is a panacea to the financial challenges that the Zambian government is facing.
IMF loans unlike Eurobonds are not easy and quick to arrange. There are procedures and conditions to be met before funds are disbursed. Zambia has not yet even formally engaged the IMF in negotiations as all issues were kept on hold due to the August 11, 2016 elections.
The IMF and the government have to agree formally on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities’ economic program and when both agree to a loan, the government will outline the details of its economic program in a “letter of intent” to the Managing Director of the IMF agreeing with the IMF conditions.
According to the IMF guidelines on conditionality, disbursements are only done on meeting certain conditions.
“Most IMF financing features disbursements made in installments that are linked to demonstrable policy actions. This aims to ensure progress in program implementation and to reduce risks to the IMF’s resources. Program reviews provide a framework for the IMF’s Executive Board to assess periodically whether the IMF-supported program is on track and whether modifications are necessary for achieving the program’s objectives. Disbursements under an IMF-supported program can take place only upon its approval, or completion of reviews, by the IMF’s Executive Board,” the Guidelines states.
The IMF has four broad categories of conditions: Prior actions, quantitative criteria, indicative targets and structural bench marks. Prior actions are measures that a country agrees to take before the IMF’s Executive Board approves financing.
Zambia will not receive a dollar from the IMF until it fulfills the Prior actions of the IMF which in our case are likely to include the following:
- Implementing full cost recovery on fuel and electricity by removing subsidies
- Implementing measures to reduce fiscal deficit
- Limiting public debt accumulation
- Ceiling on contracting external debt
- Ceiling on public sector wages and salaries and cleaning up public sector payroll
- Measures to fight corruption
- Removal or reform of agriculture subsidies
The implication is that Zambians will start feeling the effects of the austerity measures before the government receives a single dollar from the IMF. On the basis of the experiences of other countries, the IMF and Government may agree on prior actions to be implemented in their October meeting which will be reviewed after three months say in February, 2017 and thereafter a formal agreement may be entered into after approval by the IMF Board. The first installment of the IMF loan should be expected in March, 2017 or April, 2017.
Ghana received $114.8million installment of the approved US$918million which was 12.5% of the total facility whereas Kenya received 78% or $535million of its $688million facility. This discrepancy is difficult to explain.
There are those who believe that a country’s relationship with United States does influence how it is treated by the IMF as the old adage goes, “He who pays the piper, calls the tune.” The USA is the largest shareholders of the IMF with 16.5% voting rights and with veto power.
In theory, the IMF is independent and does not involve itself in politics as that is violating its Articles of Agreement that prevent it from considering non-economic factors. The IMF argues “ Loans are made strictly on the basis of the monetarist ‘Financial Programming’ model and a ‘Doctrine of Economic Neutrality’ that is blind to such factors as international politics and the nature of developing country regimes.”
However, this denies the interconnected realities of global economic and political policies – everything is closely interconnected and IMF programs do not operate in a vacuum. The IMF statement does not also explain how certain countries receive preferential treatment. It will be naïve for anyone to believe that politics do not play a role in IMF loan approvals and disbursements.
According to James Vreeland he argued that …”the Managing Director has been reported to rarely act against the will of the US since the US has veto power over his or her appointment and reappointment.”
In his research and analysis, Storm Thacker’s, concluded that “political friends of the US are more likely to receive loans than are its enemies… the more closely a country aligns with the US, the higher the probability it will receive a loan from the IMF.”
It is clear from the above and past experience that it is not smart politics to appear to take on the US or UK and appear to be Mr. tough and independent guy like Mugabe and KK found out to their countries economic detriment.
There is no doubt that for countries in economic crisis like Zambia, IMF loans provide only a small portion of the resources needed to finance the balance of payments. But an IMF program can help unlock other financing because the program can serve as a signal that the country has adopted sound policies, reinforcing policy credibility and increasing investors’ confidence. It is in this respect that concluding an agreement by the government with the IMF is very important even if the disbursements are slow and will just trickle in subject to meeting the IMF conditionality.
One of the major sources of funds that the IMF program can unlock is bilateral funding with the Western donor community. It is not a secret that bilateral aid comes with conditions that are tantamount to interference in the internal politics of the country but a beggar is not a chooser. Zambia should expect this even on current aid.
Zambia is expected to return to increased dependency on bilateral aid for budget and balance of payments support. The Government is warned that Donor aid is likely to come with tougher conditions on good governance, rule of law, press freedom, accountability and other democratic practices set by the international donor community and we better be ready.
It is hoped that Zambian authorities will take correct measures immediately to avoid the repeat of 1996 and 1997 when there was a fall out between the Chiluba regime and Donors due to good governance issues resulting in the cutting of Aid to Zambia. Good leaders are those who anticipate events and take corrective measures rather than wait until an event comes and merely react to it, when it is late. Forecasting and anticipating is part of risk management and is an imperative in a knowledge based society of the 21st century. There is no time for posturing.