By Mwansa P. Chalwe snr
Zambians have debated the merits and demerits of the IMF program ad nauseam for the past seven years. And one would have thought that the issue was long settled. This is so because the previous PF administration were already implementing what is called prior actions of the IMF program bail out process. The PF were within a few weeks of getting the deal if it was not for the August 12, elections. However, since the new UPND administration came into power, the issue has been resurrected for debate mainly by three known and more or less brief case Opposition Parties leaders.
The Opponents of the IMF programme have made some misleading and uninformed statements based on antiquated knowledge about the IMF. These statements need to be countered, and corrected with facts so as to prevent the unsuspecting public from being misled. The ignorance exhibited by some of our political leaders on the issue is mind boggling. This article, therefore, is purely an educational piece on the IMF and the impact of its anticipated program will have on the economy and ordinary Zambians.
One of the major weaknesses of the arguments by the opponents of the IMF bailout, is the fact that it is based on the 1980s and 1990s IMF financing structure and the structural adjustment programme (SAP), which have since been discredited and discarded. The 21st Century IMF is not the same as that of 1980s and 90s. The critics seem to be stuck in that era because of the poor reading culture in our country. It is, therefore, vital to start by updating readers briefly about the IMF reforms.
As a way of background, the IMF experienced a decline in lending towards the end of the 1990s and the beginning of 2000. The institution was almost becoming irrelevant as most countries did not want to borrow from it. And as a result, it accumulated huge unutilized financial resources. Its brand was badly damaged. The design and implementation of IMF programs at that time, were insensitive to individual countries’ situations. Consequently, the IMF was accused of making economic and social conditions worse for countries than improving them because of its Structural Adjustment Programme.
Reformed IMF has 86 countries on its programmes
There are two major issues that compelled the IMF to change its operational model. The failures of the Structural Adjustment Programmes (SAP) in the 1980s/90s and the Asian Crisis of 1997/8. The two experiences taught the IMF a lesson about how to best engage with countries when designing a programme support. The Fund decided that there was a need for reforms. In 2001, the IMF created an Independent Evaluation Office (IEO).The IEO was to conduct independent and objective evaluations of IMF programs. The IMF carried out a wide-ranging review of its lending facilities and terms on which it provided loans. In March 2009, the Fund announced a major overhaul of its lending framework, including modernizing conditionality, introducing a new flexible credit line, enhancing the flexibility of the Fund’s regular stand-by lending arrangement, doubling access limits on loans etc. The other reforms included changes in shareholding and making the institution more transparent than before.
The IMF has changed from imposing a program on the country to being consultative. The Fund now asks the host country to design its own economic reform program which of course should address issues that caused the economic problems in the first place. Following the IMF reforms, more countries started trickling back to the IMF. The advent of the financial crisis of 2008 thrust the IMF into a central position of lending to the developed and developing countries. The IMF currently has programs with more than 86 countries around the world, out of which 33 are in Africa. The African countries on some form of IMF financial assistance programmes include the following: Angola, Benin, Burkina Faso, Cape Verde, Cameroon, Central African Republic, Democratic Republic of Congo, Ivory Coast, Ethiopia, Gabon, Gambia, Guinea, Togo, Uganda, Namibia, Niger, Nigeria, Sierra Leone, South Sudan, Sudan, Senegal, South Africa, Rwanda, Kenya, Mali, Mozambique, Malawi and many more.
Zambia’s recent history with IMF
Zambia’s recent experience with the IMF dates back to June, 2014 when the country approached IMF after the kwacha depreciated badly. In 2015, the currency and economy continued deteriorating and haemorrhaging. The IMF started providing Zambia with technical support with a view to programme support. In November, 2015, Zambia was offered a deal of about $1billion which was similar to the one that Ghana got. The former President, Edgar Lungu, rejected it for fear of losing the August 2016 elections. The technical support and programme talks only restarted after the August, 2016 elections. And as a result of being assisted by the IMF in the management of the economy, the economy started picking up in 2017. The IMF acknowledged the improvement in the Zambian economy in 2017 compared to the near-crisis of the fourth quarter of 2015 and most of 2016. The market confidence by both local and foreign investors rose and Zambia’s Euro bonds were among the best performing. Foreign direct investments and portfolio investments started flowing into the country in droves during the whole of 2017 with treasury bills and government bonds being oversubscribed and the economy was showing signs of recovery. The Kwacha stabilized below K10 to a dollar, inflation reduced from the high of 22.9 per cent to single digit of 6.8 per cent. But as was typical with former President Lungu’s administration, they were soon to score an own goal or commit an unforced error. And indeed, they did.
In July 2017, President Lungu declared the State of Emergency and subsequently arrested main Opposition leader Hakainde Hichilema for “treason”, and dared the IMF to pull out if they wanted to. In August, 2017, the IMF cancelled talks with Zambia citing the country’s excessive borrowing plans. In 2018, Zambia forced the IMF to recall Dr. Alfredo Baldini, the Country representative. The relations between IMF and Zambia soured badly. And guess what? From then on, the country’s economy has been on the downward economic spiral. This has resulted in the foreign debt of $12.7 billion by December 2019, depletion of foreign reserves to as low as $1.37 billion or 1.8 months import cover. The Kwacha depreciation to about K23 to a US Dollar and inflation was 24.4 per cent in August 2021.
Zambia’s number one economic problem is the debt crisis and how to restructure. Zambia owes Eurobond holders, Multilateral lending institutions, bilateral countries the debt, Commercial banks and China. It is very clear from the debt composition, that Zambia owes multiple creditors and therefore, its debt restructuring is quite complex. It is also apparent that the lion’s share of Zambia’s external debt stock is owed to Western and Western allied institutions. And according to the World Bank data, about 70 per cent of Zambia’s external debt at the end of 2019 was owed to Western allied institutions. Western commercial banks and hedge funds together held about $6 billion which is over 50 per cent of Zambia’s external debt. In the light of this, anybody saying Zambia has no debt crisis should not be taken serious and their economic expertise and credentials questioned.
The International Monetary Fund (IMF) is at the centre of the resolution of the debt crisis and anybody who thinks otherwise must be living in cuckoo land. Zambian Western creditors have expressly stated that they can only agree to a debt restructuring if the country was on an IMF program. Bloomberg report of April, 2021 confirmed this status.
“External commercial creditors, including those holding the nation’s $3 billion of Eurobonds, want the government to reach a deal with the IMF, which they will then base their restructuring talks on,” The Financial Media Company reported. “The International Monetary Fund still hopes to reach a deal with Zambia before elections in August on an economic program that will form the basis of the nation’s planned debt restructuring. Talks that began last year are continuing, and the Washington-based lender aims to conclude them in the next few weeks,” The paper added quoting IMF Africa Director Abebe Aemro.
The facts on the ground, therefore, show that Zambia does not really have a choice on how to get out of the debt crisis apart from being on an IMF programme. The PF administration started the IMF negotiations and the new UPND administration is simply continuing where PF left from. In the light of the aforementioned facts and the scenario painted above, the critics of the IMF bailout are, in a way, just being disingenuous. There is also some element of simplicity in the understanding of the reasoning behind the IMF program. It is not just an act of BORROWING MONEY per se, as it is being presented by some politicians. The programme is much more than just getting $1.3billion loan. It is much more complex than that and has a lot of intangible benefits. Also, the SDR1.33 Zambia received to boost its reserves has nothing to do with the bailout talks that have been going on between Zambia and IMF but rather a Covid-19 initiative for IMF member countries.
Benefits of IMF programme to Zambia
There are about six clear benefits to the Zambian economy if it goes on an IMF programme. Firstly, it will open the door for talks for the restructuring of Zambia’s foreign debts with its creditors as former Finance Minister Dr. Bwalya Ng’andu once clearly spelt out in one of his statements on the issue.
“Zambia’s total public and publicly guaranteed debt reached USD 18.5bn, or approximately 104 per cent of GDP as at end 2019, impacting Zambia’s ability to advance social and economic initiatives, especially in the current COVID-19 environment,’’ Dr Ngándu once told creditors “It has become increasingly difficult to service debt. Zambia is spending half of government revenue collections to service interest on debt currently, compared to a few years ago when only 20 per cent of revenues would be channelled towards interest obligations,” Dr. Ng’andu added.
Debt restructuring is the top priority of the new administration. Zambia has a $750m Eurobond which is due next year – 2022- but the country has no money to pay that amount and so the negotiations with the creditors is imperative. The new finance minister, Dr. Situmbeko Musokotwane, confirmed the same in a Zambia National Broadcasting Corporation (ZNBC) interview.
“We don’t have the money to pay back. This is why it is important that we get on (an) IMF (programme) so that we can re-arrange not to pay next year. I am 100% confident that it will be done,” he told the interviewer.
Secondly, the programme would come with the balance of payments support which would help with the stabilisation of the Kwacha by forestalling the currency depreciation. Consequently, as an import dependent economy, this will prevent inflation from escalating and thus result in reduction in cost of living and cost of doing business.
Thirdly, since Zambia entered the international capital market in 2012 by borrowing Eurobonds, its economy and the currency became subject to the dictates of the international financial markets. These markets are highly sensitive to even mere statements by authorities. This is what most people fail to understand. If Zambia goes on the IMF programme, the cost of servicing foreign debts which has been causing havoc in the economy will start going down. The reduction in interest payments on loans will result in more funds being available for social services such as health and education.
Fourthly, there will be restoration of confidence in the management of Zambia’s economy under an IMF programme. This would in turn attract both foreign direct investors and portfolio investors resulting in increased inflow of foreign exchange (dollars). This will assist with the Kwacha appreciation. This increased confidence is already happening following the reduction of the country’s political risk as a result of the election victory of President Hakainde Hichilema. The IMF programme will just add further to the positive market sentiment.
Fifthly, the IMF programme would open up opportunities for Zambia to borrow at concessionary rates (borrow cheaply).The majority, if not all, bi-lateral and multilateral lenders, would only lend Zambia, if it was on IMF programme as it reduces their exposure to risk.
Sixth, the IMF programme will instil some financial discipline and help in the restoration of budget credibility. Government expenditure is likely to be strictly controlled. This could lead to the reduction in the budget deficit. The strict expenditure control would lead to the reduction in government borrowing from the domestic banking system thus make more funds available to private sector as government will no longer be crowding out the private sector. There will also be reduction of domestic interest rates. This can in turn lead to increased economic activity and job creation.
There is one politician who challenged supporters of an IMF programme to name a country that was successful whilst on IMF programme. Following the reforms of the 21st Century, there are many countries that have been in debt and economic crisis that the IMF has helped return to economic stability and growth. There are two countries that come mind. One is in Europe and the other in Africa. In 2014 Serbia’s economy was in serious trouble. The authorities adopted an ambitious program of fiscal adjustment and broad-based economic reforms under the IMF supported program, economic advice and monitoring. After three years of effort under the program, by 2017, the economy had been turned around. In early 2015, Ghana turned to the IMF for a $918 million loan to help stabilize the economy. IMF advisors, working with the Ghanaian government, developed a three-part program to restore debt sustainability. By the end of the three year period in 2018, the Ghanaian economy had recovered. The pace of economic growth rose to 8.8 percent in 2019 from 2.2 percent in 2015. The inflation rate had fallen to about 8 percent from 19 percent. Cuts in wasteful government spending made room for much needed social services, such as free secondary education. Ghana has free education now!
There is no denying the fact that the IMF program will certainly come with some pain but one gets the feeling that the PF administration had implemented most of the harsh conditions. And these have already filtered through the Zambian economy as experienced by the high cost of living and high cost of doing business. One gets the impression that the remaining big prior conditions are likely to be issues of removal of fuel and electricity subsidies.
All things considered, there are more benefits than costs from the IMF Program. If there is one thing that the PF and UPND agree on, it is the fact that Zambia needs the IMF program to solve its debt crisis and for the economy to recover. On the basis of the election results, the two major parties represent 98% of the Zambian population. It is, therefore, rational to state that the uninformed views of three minor Opposition parties on a highly economic technical and consequential subject, (and when one of them was not even on the ballot paper), should really be ignored as there is very little or no merit in their arguments and are merely politicking.
The writer is a Chartered Accountant and Author. He is a retired international MSMEs Consultant and an independent financial commentator. He is also an Op-Ed Contributor to the Hong Kong based, Alibaba owned, and South China Morning Post (SCMP) .Contact: [email protected]
Most of the contents of this article are abridged excerpts from my book whose link is below.
CHINA-WEST BATTLEGROUND IN AFRICA: DEBT RIDDEN ZAMBIA: Why U.S. May Lose Geo-Economic Competition to China https://www.amazon.com/dp/B097DVXBKH/ref=cm_sw_r_wa_api_glt_7PR5H7YBZZ14FCDNT54Y