Responding to Emmanuel Mwamba: Why Zambia Needs the IMF Deal

By Alexander Nkosi

Many thanks to Ambassador Emmanuel Mwamba for finding time off his busy schedule to respond to my article. The background is that  I shared an article entitled, “Discussing Revenue Leakages and the IMF deal with Ambassador Emmanuel Mwamba“.

In this article, I was responding to his suggestion that we should abandon the IMF deal and instead work on sealing revenue leakages which would potentially help us raise $1 billion.

In my response, I explained that the IMF deal is not all about the $1.4 billion concessional loans. I highlighted the following as the key benefits of the IMF deal:

1. debt restructuring hinges on IMF deal,
2. Increased access to concessional borrowing,
3. Attracting foreign investors who over the years lost confidence due to poor economic environment as revealed by BOZ and DBZ survey, and
4. The $1.4 billion concessional loan.

These measures are key to strengthening and stabilizing our currency so that the cost of importing machinery and raw materials required for production goes down. They will also help lower the prices of goods and services as we are predominantly import-dependent. Dealing with the performance of the currency alone can help lower the cost of living and the cost of production.

In the absence of the IMF deal, it will be hard to get debt restructuring, which would mean we continue to draw huge sums of dollars from our economy to pay the debt.

This will weaken the kwacha. The other thing is that in the absence of increased inflow of dollars through foreign investment, dollar supply on the market will be low leading to further weakening of the kwacha. We also need foreign investment to expand export in key economic sectors so as to further strengthen the kwacha. In a nutshell, in the absence of an IMF program, we risk seeing the kwacha trade above K25/$. When this happens, the negative impact on the cost of production and cost of living will be way too high compared to the removal of subsidies. We will actually have to borrow more at commercial rates to keep these same subsidies and we also have to clear over $700 million owed in the petroleum sector and $3.5 billion debt owed by ZESCO of which $1.1 billion is owed to IPPs.

In response to my article, Ambassador Mwamba proposed the following as alternative solutions to the IMF deal:

A) Zambia should use its natural endowment in copper, cobalt, emerald, gemstones, and gold to resolve its economic crisis.

B) Zambia should realize its huge potential in both agriculture and tourism to turn around these sectors for economic benefits.

C) Zambia should stop all financial leakages where government resources are plundered, pilfered, stolen in well-established defrauding procurement schemes.

D) Zambia should seal revenue leakages through tax evasion and avoidance by multinational corporations, especially in the mining sector.

E) Zambia should work on civil service reforms, addressing the wage bill that gobbles over 53% of our domestic revenue.

F) The appetite for new debt as shown by the government’s intention to borrow $4.2billion in one fiscal year, is also worrying as the current debt has not been restructured, re-aligned, or rescheduled.

 

My response to Ambassador Emmanuel Mwamba’s alternative solutions is that they can only be realized in the long term and will not help address problems were we need solutions now. In fact, most of these alternative solutions would only work well under an IMF program. Let me now address each suggested solution:

RESPONSE TO A: Ambassador Mwamba suggested that Zambia should use its natural endowment in copper, cobalt, emerald, gemstones and gold to resolve its economic crisis. Either government or the private sector should invest in exploiting natural resources to significantly increase revenue. This involves long term projects. It would take a very long time for locals alone to mobilize sufficient capital to venture into these huge undertakings and they too too need a good economic environment which the IMF program would help address as explained above. As for foreign investors, an IMF program would actually help attract foreign investments.

RESPONSE TO B: Ambassador Mwamba proposed that Zambia should also realize its huge potential in agriculture and tourism to turn around the sectors for economic benefits. This is again a vague solution as he has not explained how we can increase investments in these sectors under the current economic environment. It would be hard to achieve all this with our high debt levels unless we restructure and this is hinged on an IMF deal. We also need to attract both local and foreign investors.

RESPONSE TO C: Ambassador Mwamba suggested that we stop all financial leakages where government resources are plundered, pilfered, stolen in well-established defrauding procurement schemes. Fighting corruption is a key component of the IMF program. IMF emphasizes that resources are put to good use. So this isn’t an alternative, it is key to the success of our economic reforms.

RESPONSE TO D: Ambassador Mwamba suggested that Zambia should seal revenue leakages through tax evasion and avoidance by multinational corporations, especially in the mining sector. Sealing revenue leakages just like dealing with corruption is not necessarily an alternative but it is something we should work on even with an IMF program. This will incrementally boost our revenues. Good as it is, this is a long-term process and does not help address immediate needs like debt crisis and budget deficit. We will continue implementing this while on an IMF program.

RESPONSE TO E: Ambassador Mwamba suggested that the civil service reforms should address the wage bill that gobbles over 53% of our domestic revenue. This is indeed a huge problem. Discussing this in line with the proposed recruitment of teachers and health workers, it is important to note that the recruitment of teachers and health workers has not kept pace with the growing needs. While we cannot visibly see the impact of low recruitment of teachers, we saw this with health workers in the health sector when donors had to come to our aid to recruit temporal health workers during Covid. So government engaged IMF on this and will use part of our reserves under SDR to fund these recruitments. This was clearly explained by the Minister of Finance during the budget presentation. It would be interesting to hear what Ambassador Mwamba suggests we do with our current wage bill even before we include those to be recruited. Does he suggest we fire half the civil servant?

RESPONSE TO F: Ambassador Emmanuel Mwamba suggested that we cut down on borrowing. He argued that the appetite for new debt as shown by the government’s intention to borrow $4.2billion in one fiscal year is worrying as the current debt has not been restructured, re-aligned, or rescheduled. I find this whole alternative solution contradictory for the following reasons:

1. On one hand, Ambassador Mwamba wants us to fund expensive subsidies and on the other hand, he wants us to cut down on borrowing, where will the money come from as early as next month since our domestic revenue is taken up by debt service and wage bill?
2. He also talks about the need to restructure our debt before borrowing, but this same debt restructuring is hinged on the IMF deal he is opposed to, does he now understand why we need it?
3. Part of the $4.2 billion he has highlighted will come from drawing down on foreign reserves as clearly explained by the Minister of Finance. The other huge chunk is refinancing the Eurobond which will in a real sense not increase our debt stock. The remaining amount to be borrowed externally will mainly be on a concessional basis.

Our debt position won’t be as bad as he puts it and the structure of the debt is changing from large commercial to concessional which gives us room to pay in small bits over a long period of time.

In conclusion, I’m challenging Ambassador Emmanuel Mwamba to propose feasible alternative solutions explaining how we are going to deal with our huge debt, low investor confidence, and immediate needs without the IMF program. Let us work with figures and detailed alternative solutions and not broad statements. The measures he has proposed would work well under an IMF program.