By Kalima Nkonde
Is Zambia ditching the IMF deal for more expensive loans?
The IMF mission completed its latest mission to Zambia from 9th March to 24 March,2017 and against all previous expectations of a deal in the first quarter of 2017, all indications seem to suggest that Government has not agreed to a deal with the Fund due to a number of misgivings by the current administration especially the loss of control on spending decisions and the difficulty from the political point of view in selling it to the Zambian population given the traumatic experience that Zambia went through with IMF programs in the 1980s and 90s whose side effects are still being felt by the population today. The delay to the Aid programme should be understood in this context.
This article will unpack the latest IMF statement and analyse why the PF administration has not concluded a deal with the IMF in three years and keep kicking the can down the road. The article will also reason out why, purely from the technical economic point of view, the IMF aid package may just be the necessary evil for Zambia’s the path to economic recovery and job creation.
“ We have had fruitful discussions with the Zambian authorities and made progress towards reaching understanding on an economic program that could be supported by an IMF arrangement. There is broad agreement of key objectives, targets and policies, most of which are drawn from the Government’s economic program”, the Statement said. “ However, further engagement is needed on details of measures and reforms to achieve the fiscal consolidation targets while protecting social spending and clearing the large stock of arrears without accumulating new ones,” the Statement added.
The IMF statement is clearly silent on the time frame and what the next step is, apart from the fact that discussions will continue during the spring meetings of the IMF and world bank in spring which is this month- April,2017.
It is apparent to any discerning technical observer reading the above exit statement by the IMF mission, that it does imply that there is no deal yet on the table and nobody knows when the deal will be concluded as the next board meeting for the IMF which is supposed to approve the deal is in May,2017 and there is no way anything can be finalized before then.
The PF administration and the IMF
In order to put the delay in Zambia’s acceptance of the IMF aid programme in perspective, one needs to look at the recent history of the PF government’s engagement with the IMF which started almost three years ago. Zambia first approached the IMF for financial assistance in June,2014 after the Kwacha tanked and lost about 28% of its value due mainly to the collapse of copper prices and the ballooning budget deficit as a result of reckless expenditure of infrastructure projects.
According to the London Financial times of 9th June,2014, Zambia’s approach to the IMF stopped the bleeding for the kwacha as the market’s reaction to the Country’s approach to the IMF was said to be very positive.
“When Zambia last week approached the International Monetary Fund for financial help, another cash-strapped African country was surely watching: Ghana. Lusaka and Accra face similar problems: runaway fiscal deficits and swelling current account deficit that is pressuring the exchange rate”. The financial times said. “Zambia last week asked the IMF to discuss “an economic programme that could be supported by a fund arrangement.” The paper reported then.
Zambia did not follow through with the IMF programme as the currency temporarily recovered and the Finance Minister then Alexander Chikwanda, given his experience during the UNIP days, was not keen on the IMF programme.
“The IMF is not the best mechanism for helping countries which are down,” Chikwanda said in a speech in Lusaka, the capital as reported by Bloomberg News of September 7,2015. “In some cases it even compounds your difficulties.”
When the market determined that there will be no deal with the IMF, the kwacha currency went into free fall in 2015 and reached K14.50 and then the PF administration panicked and wanted to do a quick deal. Ghana had meanwhile concluded theirs in March,2015.
There is no doubt, therefore, that given the former Finance Minister is said to have a lot of sway in President Lungu’s decision making, especially regarding the economy, the current apparent impasse with the IMF may partially be attributed to the former Finance minister’s influence. Many observers think that President Lungu neither understands nor is interested in the way the economy works himself and would rather prefer to outsource anything economic. Mr. Chikwanda together with former President Rupiah Banda are said to be the closest informal economic advisers and confidantes of President Lungu. There are cynics and critics who even believe that Mr. Chikwanda together with former President Rupiah Banda are the “ Power behind the throne” because they were the major financiers of President Lungu’s 2015 and 2016 Presidential campaigns.
It is also believed that it is on the basis of the influence of the two godfathers that President Lungu himself, has all along not been enthusiastic about the IMF program and has maintained that Zambia will only access IMF funds if conditions are acceptable.
“ If we find that there are conditionalities which we find acceptable, we will work with them. If not, we will throw them out,” He was reported to have said by Bloomberg News on May13, 2016.
In spite of the stance and the apparent reluctance by President Lungu, government bureaucrats who feel the headaches of the day to day running an economy under stress and struggle to pay government bills have all along advised him that the deal needs to be finalized as quickly as possible in order to save the economy from further damage. The expectation was that an imminent deal was in the offing after the 2016 elections but nothing was forthcoming.
In October,2016, the Finance Minister gave a state of the economy address to Parliament and presented an Economic Recovery program dubbed “ Zambia Plus”, where he outlined the problems that the economy was facing and his proposed solutions which included a programme under the IMF whose conclusion was expected in the first quarter of 2017.
“ Mr. Speaker, economic growth in 2015 slowed to around 3% and is currently projected just above 3% for 2016.This is far below the 7% level required to reduce poverty and drive this country’s development,” he said. “ As a member of the IMF we welcome their financial and technical support and we will engage with the visiting IMF team in discussions on how best IMF financing could help strengthen our economic programme”, he added.
Why PF administration has resisted IMF package
The question analysts and experts are asking is: why is the Government reluctant and delaying signing the deal when they have created the impression to the public and the market that the deal was fait compli in the first quarter of 2017? The answer partly lies in the recent superficial improvements in the Zambian economy and the administration’s reluctance to give the check book to the IMF thereby lose the freedom to borrow and spend freely.
Zambia’s economy is currently showing some signs of stabilization as demonstrated by the drop in inflation from the high of 22.9% to single digit of 6.8% in February,2017. The stabilization of the kwacha at below K10 to the United States dollar, the easy of borrowing by government from the domestic market as evidenced the oversubscription of government securities unlike last year when it was difficult for government to raise funds. The recent more than normal rain fall with the attendant expectation of good agriculture output and the reported improvement in electricity supply to 1900MW all give confidence that country is out of the economic woods. There is also the assessment by some analysts that Zambia’s future economic prospects appear much brighter in the light of continued improvement in copper prices which were recently quoted at $5,804 per tonne on 10 April,2017 and should this continue to reach $6,500,government revenue will swell. These are all positive indicators which may mislead lay people that the economy is on the mend and the government needs to put its guard down.
These improved indicators – inflation and kwacha stabilization being the key ones – are not based on a solid foundation and do not provide a sustainable path to economic recovery. They are as a result of the tremendous job performed by the competent Bank of Zambia Governor, Dr. Denny Kalyalya and his team who implemented stringent monetary policies. The measures have come at a great cost to the economy especially in terms of unemployment and were just meant for the short term to stabilise economy while fiscal measures like reducing government expenditure and increasing government revenue(technically referred as fiscal consolidation) were being put in place. There were not meant to be permanent. The positive indicators are, therefore, not supported by any economic activity and the house of cards can easily collapse if prudent economic policies in the 2017 budget are not implemented and confidence gained in anticipation of an IMF supported programme is lost. Zambia may just revert back to square one. This is not the time for complacency but to cease the opportunity and follow through the budget targets.
The combination of the above factors especially the expected increase in copper prices has led those in Government who are against the IMF programme, led by President Lungu, to argue that more revenue will be generated in the not distance future from domestic sources and it is better to seek other sources of external loan finance, even if expensive this year, which are not as restrictive as IMF.
Most experts find this kind of strategy as risky and short sighted and is likely to lead to a melt down sooner rather than later given Zambia’s current burden of servicing foreign loans .There is no doubt that once the market losses confidence in capacity of government for prudent economic management in the absence of IMF supervision, the run on the kwacha as in 2015 cannot be rule out.
The IMF’s exit statement warns about this same eventuality in its latest statement.
“The mission welcomed the fiscal consolidation plans outlined in the 2017 budget speech by Minister of finance, which aims at putting public finances on sustainable path. However, in the first two months of the year, expenditures outpaced revenues substantially with deficit financed by domestic borrowing,” the statement said. “ The mission advised the Government to steadfastly implement measures needed to achieve the 2017 budget targets; this will reassure markets and reduce risk of souring sentiments and associated outflow of funds”, It added.
The view of most independent observers is that the Lungu administration’s reluctance to sign on the IMF programme is also due to fear of the spending cuts restrictions that the Fund insists on. The critics argue that the government wants to be free to borrow willy nilly to finance populist and non viable projects projects like creating districts, setting up national airlines, undertaking frivolous local and foreign trips to satisfy its patronage network, creating non value adding ministries and generally creating big government.
The other major alleged fear of the PF administration is the expected insistence of the Fund for government to take action on corruption. Although the IMF’s mandate is not to interfere in the politics of the country, one major governance issue it insists on is corruption. President Lungu is on record to have said some his officials in government are having money in bank accounts which they cannot account for from their salaries and he was going to take action but nothing has happened apart from one case where a minister was fired and is still being investigated. It is therefore an open secret as the President has publicly admitted through his utterances that corruption is rampant in the PF administration.
The curbing of Corruption is one area where the Fund does insist on as it directly affects the economy. Majority of critics of the Lungu administration argue that the fear of pressure from IMF do take action on the alleged endemic corruption in the PF administration is one of the the main reason for resisting the IMF aid package not to safeguard Zambians’ education, health, agriculture and social services.
( TO BE CONTINUED)
The next part of the article will deal with why Zambians hate the IMF and the need for a well thought out communication strategy by government to sell it to Zambians by outlining the benefits. The second and final part of the article will also give reasons why Government bureaucrats and experts believe that the IMF aid package is the answer to Zambia’s economic recovery programme or else the Zambia Plus programme will fail.