By Fr. Charlie Chilufya, S.J.
The stigma attached to seeking help from the International Monetary Fund means countries try to avoid it wherever possible. But currently there are still no better options for struggling emerging markets including Zambia.
First and foremost., what is Zambia’s problem? Zambia is facing a lot of pressure on foreign exchange and it is no wonder its currency, the Kwacha is spiralling down. Simply put Zambia does not have dollars, which it badly needs. Where have Zambia’s dollars gone? Zambia’s problems have mainly been caused by the impact of capital outflows through debt servicing obligations and the current account deficit (we imported more than we exported), which have resulted in the dwindling supply of dollars and ultimately depleted foreign reserves.
In some cases, the outflows have been caused by suspension of capital projects by investors. Thus, debt service is not the only source of pressure on foreign exchange and not just for Zambia. As hinted out, the other cause of diminished dollar inflow is simply because Zambia is not earning much from copper exports as both copper prices and output have gone down.
By 2016, Zambia began to experience a narrowing trade surplus. As a result, its current account deficit widened from 1.5% of gross domestic product (GDP) in 2017 to 2.6% in 2018. A current account deficit is not bad in itself; what makes it bad is its cause and how it is financed. Because of limited options, Zambia financed its overall balance of payments deficit with official reserves. By the end of 2019 Zambia’s gross official reserves therefore fell to $1.4 billion (roughly 1.5 months of imports) from $2.1 billion at end-June 2019. The current account deficit also reflected higher interest payments on public debt, which swallowed the trade surplus.
This outflow and scarcity of dollars has led to the depreciation of the Kwacha against the dollar. In order to prevent the fast depreciation of the Kwacha and maintain a relative exchange rate stability, the Bank of Zambia intervened and supplied dollars from its foreign exchange reserves but the supply of more dollars in the foreign exchange market got more Kwacha in return. As a result, the quantity of Kwacha that should be with banks as credit declined causing liquidity problems in the Zambian banking system. This is a problem in that it affects the flow of credit for the financing of working capital and therefore reduces business activity and ultimately levels of income and banks risk aversion. The banks’ risk aversion ultimately restricts the flow of cash to consumers who may want to buy cars or houses, or other goods and this therefore reduces consumption and economic activity.
These are not normal times: Zambia has no options!
When times are normal, Zambia would have looked for an alternative. The principal amounts would simply be refinanced in global capital markets or offset by new disbursements from existing lenders. But as we speak, according to the Financial Times, Zambia’s Bonds have dropped upon an initial request for debt restructuring at the end of last month. In addition, given the current scenario, credit markets have tightened and spreads have risen.
What should Zambia do? Go to the IMF Lender of the Last Resort
Zambia has no option and there really are no options out there. Already 90 countries have approached the IMF to access emergency financing instruments. The IMF has reported that this is unprecedented. Why is IMF better support for now? Zambia has no income and therefore needs to adjust. Adjustment can be painful and if not handled properly can lead to negative outcomes, including shortages of essential commodities as was the case at the end of the 80s and beginning of the 90s when Zambia severed its relations with the IMF. The IMF will give Zambia breathing room to implement adjustment policies and reforms that will restore conditions for strong and sustainable growth, employment, and social investment. The IMF will shelter Zambia with fast credit, which Zambia bad needs and will also help Zambia arrange for debt standstills, which again Zambia needs.
An image I could use here is that Zambia and many African countries are in ICU and need special care. So, Zambia needs emergency relief. I have heard others recommend that Zambia should just make reforms and take leadership rather than go to the IMF. Those are more medium term and long-term answers. Zambia needs fast relief. We can’t recommend long-term reforms to an ailing person in need of intensive care. Zambia needs first of all to be resuscitated. It needs intensive care. From the pain of the intensive care it will learn a lesson how to live better in future, not now.
IMF has conditionalities?
Yes, they are needed. Country reforms are crucial for Zambia. Zambia cannot and should not receive unconditional help. Before Zambia can receive a loan, Zambian authorities and the IMF must agree on a program of economic policies and sound financial management. Zambia must undertake certain policy actions as an integral part of IMF lending. Those policies will be designed to ensure that the funds will be used to resolve balance of payments problems. They would also help to restore or create access to support from other creditors and donors.
Like the 1980s debt restructurings, the conditionalities will help Zambia look to growth-enhancing structural reforms. Later debt restructurings, such as the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative, emphasized a link between debt relief and expanded public spending on pro-poor services. Both types of reforms will be needed this time round; structural reforms to avoid turning higher debt ratios into solvency problems, and properly prioritized public expenditure to persuade official creditors that tax-payer funded aid is not being wasted.
Zambia has Multiple Creditors:
The IMF Has Muscle to Call All Creditors to participate in Debt Relief. On its own Zambia doesn’t have that muscle. Zambia owes other bilateral and commercial creditors who are not part of the currently proposed IMF/World Bank debt relief plan. Currently, there are two groups of potential free-rider creditors who are quantitatively important but who do not participate in any formal debt restructuring processes like the Paris or London clubs. These are private holders of bonds without collective action clauses, and official lenders from China and other non-OECD countries. However, for both political and financial reasons, it would be hard to have an effective response today without including these two groups of creditors. The IMF together with the G7 may have the muscle to call them to the table. In addition, with the leadership and support of the IMF, Zambia debt sustainability analyses can be undertaken jointly between Zambia and the IMF/World Bank, to determine if, and by how much, debt write-offs or reschedulings are needed. The debt sustainability analysis would form the basis of negotiations by the Paris and London clubs, and by debtor governments with commercial and official creditors who are not participating in those forums.
Fr. Charlie Chilufya, S.J. is an international economic policy analyst
This is the reason why we hardly progress. We undervalue ourselves. Always desperate. Always looking for the easy way out. Like a heroin addict who is more satisfied with one more jab than to get off the hook. This kind of desperation is deadly because you will end up selling out the whole country and it’s people to the IMF.
Countries like India, Brazil and Namibia were able to achieve economic growth without being hooked on the IMF and World Bank, why can’t Zambia do it? Why can’t we our heads and find solutions within ourselves?
why can’t we use our heads..
Zambia has been given a little breathing room by creditors due to covid-19.However the problems ahead will be much harder due to lockdown stoppage of the economy .
Whether good option or not, IMF are not releasing a dime because the !mbeciles in power will never adhere to IMF conditions. The same !mbeciles that damaged the economy forcing us to have to run back to IMF.
Firstly Zambia should have done enough to ensure that we never go back to IMF again after being on their program last time out. Our fiscal indiscipline has led us back to a situation where they may now seem a viable prospect albeit the cost. However we cant look at the current problems in light of the past solutions to a similar problem because things have evolved. What Zambia needs to do is identify different options and weigh which is is better and would yield long term benefits. Looking at the current problems using a kneejerk reaction method of responding the imminent crisis may not yield the kind of results we may require. what we need is a cure and not a relief, so what things must Zambia do to cure us from excessive debt dependency and what must we do to become self sustaining and…
so what things must Zambia do to cure us from excessive debt dependency and what must we do to become self sustaining and financially stable. We need a corrective measure in responding to the crisis as well as a developmental and growth measure.
@Nine Chale
Its you who is not using his head or brains.
People like you will continue building a house even when the foundation is clearly crumbling. Hoping that a national day of prayers will miraculously fix the foundation.
Be realistic. You want Zambia to end up like Zimbabwe.
The late Levy Mwanawasa managed to get over $6billion in debt forgiveness.The fact that Zambia can not even get the $131 million IMF covid-19 debt relief says a lot about where the country now stands.
Failures will always blame others or other factors benown to everyone. How come Rwanda a country that was ravaged with genocide has one of the best economies in Africa today. What natural resources do they have compared to us? What is have is a leadership void not the nonsense that you havev spewed here. Mwanawasa was on course to redeem this country then came these morons, cadres, kaponyas and you expect miracles? Yaba.
What course was Mwanawasa taking us on naiwe? Havent you read Julian Assange’s revelations and how Mwanawasa plundered our money? Mwanawasa in conjunction with Josephine Mapoma now Prime TV enemy number one as IBA chief looted K838 billion from the Zambian National Oil Company, Just go to WikiLeaks.
Everyone is now an economist. Sometimes best to leave economic governance to those given the responsibility for it. There is a reason we have specialists in these fields. I know my lane. I know for instance that my specialisms lie in reading the political mood and strategizing accordingly wit the end result of winning elections.
What elections have you helped anyone win tarino? Unless you mean your demigod HH winning Facebook elections? Don’t be silly.
All those asking for IMF ECONOMIC RESTRUCTURING are old schools.
Why borrowing Kaloba to pay back nkhongole…? What reasoning is this…? IMF has vilest economic policies on sub Saharan countries.
No need to go back to debt deals especially with this ugliest thing called IMF.In fact Zambia is partially affected by the advice given by IMF/World Bank.They deceived MMD regime to sell all the national assets at chicken change prices.Now Zambians still want love with this ruthless vampire found in the street of Washington D.C?
Look at this above …this is how sick he is he posts using my alias then responds using Kz to respond to his own post. This is how low this simpleton can go…the sad thing he carries on like this with any bloggers alias and LT dont do nothing. To him the contents of the article mean nothing just comes here to troll and clone…really sad boyo!!
Mr KZ ,I think mu chiuze chi “Tarino.. “an .i.dio.t is full bastardized chap.
Mr p most of these boys in diaspora are very upset because they thought their lives would be like heaven on earth abroad. Unfortunately most of them have come to realise that life is not as easy there as they thought. It is even worse when you are not considered an equal human being to the rest of the population . Their skin colour and mannerisms means that they are second class citizens. I have friend there who have told me how bananas were throw at them. How old women will refuse to enter the same lift as them. So do not blame people like tarino. They are just a by product of segregation. We hope they return home before it’s too late. I know a friend who went mentally retarded and now thinks he is president of Zambia
@Independent My realism is that I want to be proud to say “I am a Zambian” by reason of what I am and not by my status as a citizen of a borrowing nation. I refuse to define myself by a standard set to me by the western money-lenders. Zambia cannot end up like Zimbabwe because we have a very different political and economic set up from them. My conviction is that we hold the keys to our future and not IMF. We own the resources for our wealth and not IMF. So why can’t we find the means to secure the future and prosperity of our people?
People keep yapping about Zambia’ s huge debt, please can you tell us what this debt is? Someone please tell us what this so called huge debt which will take over 100 years for Zambia to pay back? Advocating for IMF is the same as saying give us your 100 trillion dollars assets in exchange of a loan for 20 billion dollars. Think about it for a minute. That’s what banks do, they offer you sweeteners in exchange for huge profits and a country like Zambia with vast amounts of natural resources offers untold riches for these loan sharks. Look at what’s happened to WHO. When you join IMF, the next thing will be forced immunization or the coronavirus based on your borrowing. Free access to vaccine testing…and yes the same people who control the IMF have a vested interest in big…
pharmaceuticals companies who are preparing the coronavirus vaccine and use it as a new debt recovery method.
These PF guys will never understand how the global economy works. They think they can endlessly borrow money.
Debt accumulation has a limit. If they had managed the economy well there would be no need to talk to the IMF. We would be in strong position.
Breaking News: IMF just approved a new lending package for short term Emergency liquidity with no conditionality.
Zambia can not be attended to by IMF in its current form because of transparency, it would be difficult for Zambia under this administration to truly review the exact debt stock to IMF which is one of the conditions for any assistance. I am Zambian but I honestly do not believe the fluctuating figure being thrown around as true Zambian debt because in the first place I do not know how that debt was contracted.
Zambia cannot and should not receive unconditional Financial assitance.
Thats my take from this article.
Surely, at this point, we should all agree that PF government cannot simply be given money without monitoring. A very sad situation seeing as we should be able to handle this by ourselves.
Zambia has the best weather in Africa, the best water supply in Africa and most fertile land in Africa…..one should just be focused (Mandela like) and inspire to make it a top 10 country in Africa!
Greetings mwe Fipolopolo! IMF OR NO IMFmwe fipolopolo you need to survive. Those saying we desperately need IMF, I agree with you. We need IMF but what should we do since IMF is reluctant? You are not telling us what IMF exactly wants that abena Lungu has failed to do. Those who say we does not want IMF, yes IMF is not good, according to your analysis. so what do we do? you are also not offering the solutions.
My suggestion! let us think out of the box. Ba father imwe ba Jesuit; talk to your fellow Jesuits who have links with IMF. The former ministers talk to IMF since you know them as fimofimo friends. Ba lungu tell us what is it that IMF is asking you to do that is very difficult? did they ask you to resign? if that is the case, tell the zambian people. ifwe mu market kabunga fye ba…
KK we bite the bullet. Let our currency fall to the market value desired by the imperialists. In the mean time Exploit our excess manpower to restructure our economy so that mining has competitors like the agriculture industry. In five years time we should have diversified enough to have a fully recovered Kwacha
What option? .. How can it be an option when they refused to assist with a loan ? ..Citing focal indiscipline/ mismanagement?
..I don’t understand.
We’ve been doing the same thing with the IMF for the past 40+ years and yet no improvement. Just degradation.
Fiscal , not focal
Sound analysis and factually correct article. Thank you ba father.
IMF coming after rigging 2021 elections.
“Simply put Zambia does not have dollars, which it badly needs. Where have Zambia’s dollars gone? Zambia’s problems have mainly been caused by the impact of capital outflows through debt servicing obligations and the current account deficit (we imported more than we exported),”
Neoliberal compliance with the IMF/WB and their structural adjustment programs and hidden agendas is what has depleted the government’s resources. A copper exporting country like Zambia should never, ever ‘run out of dollars’. Dollars are what copper is traded in internationally. The answer is that because of the thieving neoliberal ideology, Zambia’s mines are no longer Zambian.
Instead daring to tax the mines, the gvt taxed the people instead, with Eurobonds, at high interest rates, which led to…