Ghana: 21st Century IMF lending success story, should Zambia emulate them?

By Kalima Nkonde

I have written on Zambia’s possible International Monetary Fund (IMF) program for the past 5 years, even when it was not fashionable in the corridors of power to go for such a programme. I correctly diagnosed the problem that the Zambian economy was facing way back in 2015 and the proper treatment that it needed. A couple of weeks ago, I wrote comprehensively on the recent history between the IMF and Zambia. (From 2014 to 2020)

Dr. N’gandu’s frustration with delayed IMF bailout understandable, but who is to blame?

I vowed in my heart that I will never write about IMF and Zambia again. However, the recent hot debate that has ensued following the open letter to the President and the Finance Minister by some of Zambia’s respected economists with powerful resumes, experience and accomplishments, reduced me to avail more information to the public, as it appeared that most of the commentators did not seem to be privy to it. They did not seem to have read widely on the subject therefore current on the issues at hand.
The Ghanaian experience with the IMF- who even approached IMF well after Zambia did in 2014 – is an interesting case study to share. Ghana graduated from the programme in April, 2019 with a number of economic successes and social programmes including free education. Ghanaians can now do whatever they like with their economy without the IMF on their back but their economy is stable and growing.

Brief background

Ghana has been hailed as one of Sub Sahara’s success story, having been the first country to become independent in 1957 from the British imperialist colonial rule. The country went through decades of political upheaval but from the 1990s, it had built a thriving democracy with one the fiercest and freest private media and a robust economy fuelled by exports of cocoa, gold and recently oil which enabled it to cut the poverty rate from 53% in 1991 to 21% in 2012.

As was the case in Zambia, the wheels of the Ghanaian economy started going off after the demise of Professor John Atta Mills in July, 2012 and the takeover by his Vice President John Dramani Mahama who went on to win elections in December, 2012 to serve his full term as President. Dramani Mahama went on a borrowing and spending spree.
In Mid-2014, Ghana’s economy started suffering from rapid exchange rate depreciation, low external reserves, and high inflation. The economic crisis was mainly due to high debt service requirements and reckless expenditure that affected the budget and the balance of payments. The Ghanaian government’s home grown efforts at fiscal consolidation failed to have any impact.

By 2015, Ghana’s economy was in serious trouble with widening current account and budget deficits, out of control inflation, depreciation of the CEDI (Ghana’s currency) and drying up of credit to the private sector due to high interest costs. At the route of all these problems was out of control government spending largely to pay salaries of an overgrown civil service.

The IMF Programme

On 3rd April, 2015, the IMF approved a $918 million three year Extended Credit Facility (loan) arrangement with Ghana which was extended for a year and ended on 2 April, 2019 (The Ghanaian government wanted to end the programme as scheduled on 3rd April, 2018 but IMF was enjoying the success so much that it insisted on extending it by a year.) The program was aimed at the restoration of debt sustainability and macroeconomic stability to foster a return to high growth and job creation while protecting social spending.
IMF advisors working with the Ghanaian government, developed a three part program. The program entailed the following: restoration of debt sustainability, strengthening monetary policy and cleaning up the banking system. There were no Ghanaian national assets that were sold during the entire four year program like some uninformed prophets of doom are predicting will happen to Zambia’s assets, when the greatest threat to Zambia’s assets and resources are the billions of dollars borrowed from China on mostly vanity projects which cannot generate repayment cash flow.

Outcome of the Ghana IMF programme

The programme resulted in significant macroeconomic gains with rising growth, single-digit inflation, fiscal consolidation and banking sector clean-up. The pace of economic growth in 2019 was projected at 8.8% from 2.2% in 2015.The inflation rate was projected to fall to 8% from almost 19%. Cuts in wasteful spending made room for much needed social services such as free secondary education. All in all, the population at large benefited from higher income, better job opportunities and more purchasing power.

What was different from the 1980s and 90s?

The success of the Ghana’s programme is attributed to a number of factors which are different from those that obtained in the 1980s and 1990s. First, it was based on a combination (domestic and foreign) sources of finance to support the programme. Secondly, conditionalities attached to the programme were informed by home grown policies. This was unlike the previous programmes where conditionalities were based on the Washington consensus.

Lastly, Ghana has also made important changes. It passed a new law – to govern government spending. The Act seeks to ensure fiscal responsibility, macroeconomic stability, debt sustainability. A key provision gives parliament the power to censure the finance minister if spending excessively

Zambian situation: Should we emulate Ghana and learn from them?

There is no argument about the fact that no proud Zambian would want to have its economy supervised by the International Monetary Fund. However, Zambia at the moment, like in the 1980s has few choices, if any, apart from the IMF, having mismanaged the economy. It is a well-known fact by knowledgeable people that the IMF is a lender of last resort.

In the current Zambian poisoned environment of partisanship, full of ignoramuses holding the upper hand, we should applaud our patriots like Dr. Caleb Fundanga, Dr. Moses Banda, Mr. Ng’andu Magande, Mr. Dipak Patel and Mr.Felix Mutati to have been brave enough to pen a letter of advice to our President and Finance minister. They knew they were going to be insulted by the beneficiaries of the status quo but they decided to take the risk of giving public advice to the President.

There is no argument about the fact that the structural adjustment programme (SAP) of the IMF in the 1980s/90s was a dismal failure and created more economic problems for recipient countries including Zambia than it solved. The programme was not successful as it failed to create growth. The IMF SAP programme led to inequality, hampered long term growth and led to widespread misery and death. The institution has learnt its lessons and reformed in the 21st Century following member countries boycotting its programmes. It now does place more emphasis on home grown solutions, good governance and social concerns. The Fund had to change, partly because it faced competition from China and the Capital markets as a source of funds for governments.

It is important for the public and decision makers in Zambia to know that some of the best managed and performing economies in Africa in recent years are either on an IMF funded or are on technically supported programme of some sort or both. In 2019, some of these countries achieved economic growth rates above 6%. Rwanda – 8.4%, Ethiopia -7.4%, Ivory Coast-7.3%, Ghana – 7.1% and Senegal – 6.0% and yet Zambia‘s growth rate in 2019 was a meagre 2%.

What are the IMF programme critics’ alternatives?

The recent high profile critics of the IMF programme include Ambassador to the Africa Union Emmanuel Mwamba, Politician, Chartered Accountant and leader of the Opposition, Patriots for Economic Progress, Sean Tembo and former Deputy Finance Minister Dr. Mbita Chitala.

The writer holds the trio in high esteem and respects their views but disagrees with their solutions and their total opposition to the IMF programme, purely on economic merits. He would recommend that they read his analytical article of almost three and half years ago regarding on how IMF has changed and operates in the 21st Century.

How the IMF of the 80s/90s has ‘changed’ in the 21st Century.

Dr. Mbita Chitala’s solution is, for example: “We need to have our own developmental state as the Asian dragons and China have demonstrated. We can still go to international capital markets or bilateral partners to contract long term debt.”

The above proposed solution is rather theoretical and cannot work in practice in the short term for two reasons. The first is, nice as it may sound, emulating the Asian Tigers is an aspirational solution and long term in nature and not applicable in short term and medium term. Secondly, Zambia is unlikely to succeed in accessing Capital market as its credit worthiness is in tatters as we have been downgraded by credit agency and there is low confidence in government economic management. The market sentiment is very negative. Also, no bilateral partners will give Zambia money unless it is on an IMF programme. At the moment, what Zambia needs, is the restoration of confidence in economic management of the country, we need inflow of forex to stop the free fall kwacha, we need liquidity in the economy etc. We need solutions that should solve our immediate problems and the IMF programme provides this.

Professor Oliver Saasa has challenged the critics to come out with options. He told an online publication, the Daily Revelation that Zambia has no choice. He asked the critics of the IMF program to clearly state and advice government what it should do immediately.
“We are at stage where, we are desperate and to even say no we can do it on our own without IMF, I don’t know what that means to be honest. Because what are your options? Someone says no we can go and borrow bilateral, which bilateral are you taking about? China? You know challenges we are having with China, right now. Meaning someone doesn’t even know what is happening”, Professor Saasa told the Daily revelation.

There is no problem with having a home grown programme but the problem is that we have borrowed from the international capital market and our economy is intertwined with the world economy and so our programme, however good it may be, would have no credibility to inspire confidence in investors, both local and foreign. Besides, the current administration has a poor financial management record.

“Investors have lost faith in promises to get spending under control. China might be willing to offer some support on the debt front, but it too, wants to see credible proposals,” Charlie Robertson, the Chief economist of Global Renaissance Capital was quoted by CNBC.

The common thread of the IMF critics is based on Zambia’s experience in the 1980/90s and the need to maintain national pride and dignity by not allowing a foreign institution to manage our economy. It is doubtful whether the critics are aware of the extent of the dire straits that the Zambian economy is in. They may not also aware that Chinese State Companies are playing hard ball in the loan restructuring negotiations with Zambia as reported by CNBC and South China Morning Post. It has been reported that China remains reluctant to engage in formal agreements on debt restructuring as evidence by lack of visibility on the progress of negotiations. They may even be insisting on collateral.
In regard to the home grown solution without an IMF programme, people should be reminded about what happened 33 years ago. In May, 1987, Zambia had $5.1 billion foreign debt which was weighing down on the economy and President Kaunda refused to take an additional loan of $300million from the IMF and pulled out of their programme agreement due to strict conditions. He embarked on a home grown economic recovery programme.

“Zambia has not abandoned the restructuring program,” Dr. Kaunda said. “That program will continue, but not on the lines of the IMF, which were too demanding on the economy”.
It was clear that the decision was influenced by politics rather than economics because of the elections that were due the following year in 1988. The 100% home grown program continued but the economy continued deteriorating with souring prices and massive shortages of essential commodities which led to political instability like food riots in Kitwe and an attempted coup by Lt.Mwamba Luchembe in 1990. Dr. Kaunda was forced to reintroduce Multi-Party democracy due to political and economic pressure. He also had to cut his term of office by two years by seeking a fresh mandate from Zambians people in 1991. Like the saying goes, the rest is history.

Cost and benefits of the IMF programme

The IMF programme that Zambia may be on will not be a replica of those of the 1980s and people should not be misled by scare mongering as things have changed. At the same time, like all lenders, including the Chinese, the IMF facility will come with short term conditions. The Chinese’s loan conditions, on the other hand are long term, opaque, hidden and quite suspect, but it appears African leaders cannot discern this. Strategic thinkers know that Chinese conditions are premised on the hidden stick of access to natural resources and assets, access to markets and in the very long term the possible access to the vast unoccupied land to settle their people in the event that we fail to pay loans on the some of the vanity projects. They, however, have been coming with the carrot of not interfering in the internal economic and political affairs of recipients.
The costs of the IMF programme which are largely short term, are worth bearing. They may include elimination of any remaining petroleum and electricity subsidies, Cancellation and postponement of most of the ambitious massive infrastructure projects, possible elimination of subsidies to small scale farmers (Zambia should resist this for food security and poverty alleviation purposes), the freezing of civil servants wages, the reduction of numbers and elimination of ghost workers from government payroll, recurrent expenditure budget cuts for goods and services. Generally, they will be loss of jobs but they may be replaced by private sector jobs resulting in reduction of government domestic borrowing. When one looks at the costs, most of them have already been implemented by the Zambia government through austerity measures.

The benefits of the programme include increase in local and foreign investor confidence which is likely to lead to increased inflows of foreign exchange from FDI and portfolio investors like happened in 2017/2018. There is likely to be improvement in balance of payments and increase in foreign reserves. There will be some strengthening and stability of the kwacha resulting in reduction in cost of living as imported inflation will be contained. There will be improved good governance with containment of corruption. The programme will open up opportunities for the government to get more revenue sources from bi lateral and multilateral partners through concessionary loans. The IMF will instil financial discipline in our government through better control of expenditure. Vanity projects like the National airline. The overpriced Lusaka to copper belt carriage could be renegotiated. There will be a reduction in the amount that Zambia will be spending on servicing its foreign debt as the interest will reduce as the kwacha is likely to appreciate due to inflow of foreign exchange and the yields on Euro bonds will drop. All in all, there should be more money available for social sectors like health, education, FISP, Social cash transfer and even Covid- 19.

There is recent evidence of the positive impact the IMF deal can have on the Zambia economy. In 2015/16, the economy was in serious trouble and an IMF technical assistance programme was started in earnest after the August 2016 elections, pending a loan deal. The Zambia economy started recovering in 2017 with the kwacha being stable for close to over 18 months at below K10 to a dollar, inflation dropped from 22% to 6.5%, monetary policy rate dropping to a low of 9.5%, commercial bank interests dropped, portfolio investments and Foreign direct investments flowed in the country in droves, the Treasury bills and government bonds were oversubscribed. The Zambia Euro bonds were among the best performing. The aforementioned are facts and are well documented. Immediately, the IMF pulled out of the talks, the economy has been a downward spiral.

Conclusion

In the meantime, it may be useful for the Finance Minister and his team to consider taking a visit to Ghana and consult them about how they handled their programme. It may also be a smart move to consider engaging the retired former IMF team leader, Mr. Tsidi Tsikati as consultant/advisor, if he is not bound by some post retirement employment restraints by IMF.

As I stated in one of my recent articles, the top priority for Zambia is to lobby the IMF for the appointment of a new Country Representative. There cannot be a deal without a country representative. And sending a team of credible economic emissaries to Washington may just be the right thing to do. The recent statement by Finance Minister Dr. Bwalya Ng’andu that they had virtual conference talks with IMF with a view to program talks appears promising. This is an encouraging sign.

This is also a time when our Chinese friends should proof they mean well for our economy. The government should aggressively push for the restructuring of their loans which should include swapping our debts to them from dollar to Yuan. China holds one of the keys to Zambia’s economic recovery in many respects including unlocking the IMF bailout deal

The bottom line is, in the short to medium term, given the state of the Zambian economy, if it fails to secure the IMF credit facility, it is unlikely to be able to meet its domestic and international loan repayments and a full blown debt crisis will ensue which will lead to the accelerated depreciation of the kwacha, spike in inflation, slower growth, high cost of living and higher risk of political instability as was the case in 1990.

The writer is a Chartered Accountant by profession. He is an independent, non- partisan finance and economic commentator/analyst and a genuine Patriot.