Ministry of Finance Posts Answers to Questions about the IMF Deal

The Ministry of Finance and National Planning has released to the media what they described as the most frequently asked questions on the GRZ/IMF Staff Level Agreement (SLA) and related matters.

Below are the questions and their responses

QUESTION 1
My question on behalf of a common man: Apart from the Macroeconomic conditionality which are actually in line with the Government’s stance on its 2022 macroeconomic objectives, are there any other hidden conditionality we must expect from the IMF deal? This arises from the fact that we have heard a lot of sentiments from Government officials concerning the removal of fuel & electricity subsidies.

RESPONSE
There are no hidden conditionalities being requested by the IMF. The government and the IMF have focused on the need for the whole public sector to curtail inefficient public expenditure, including in State Owned Enterprises (SOE’s) and Agencies. The two parties have agreed that rationalising where and how the Government spends public resources is an important part of the economic transformational agenda.
In this regard, the removal of subsidies will facilitate an important shift in spending from poorly targeted subsidies towards greater investment in health, education, and the delivery of more social benefits such as:

1. 1. Enhanced allocations for the Constituency Development Fund – meaning that more schools, desks, clinics, water bore holes, etc. will be available for rural communities;
   2.  Paying off all outstanding pension arrears – some beneficiaries have been waiting for several years for their retiring benefits; and,
   3. Hiring of 30,000 teachers, hiring of 11, 000 health personnel, introduction of a bursary scheme and elimination of tuition fees for secondary school education, etc.

Subsidy removal is a measure that will enable realignment of public expenditure from poorly targeted choices such as fuel, to enhanced investments in health, education, and social protection, as outlined above. The outcomes favour our society’s less privileged.

The Government is also working on measures to streamline the licenses and permits required by businesses, in order to further improve the business environment.

It is also important to note that although the Government will continue to support small-scale farmers through the implementation of the Farmer Input Support Programme, the facility will be re-assessed to address the embedded historical challenges. Following this, a comprehensive agriculture support Programme will be launched, commencing in the 2022/2023 agriculture season. The new Programme will be cost effective, better targeted, and equitable across beneficiaries. It will also support the supply of quality inputs, attain diversification of crops, and increase production and productivity of the sector.

QUESTION 2
What is the status of Lazard on debt restructuring?

RESPONSE

The Government of Zambia embarked on a debt restructuring exercise in 2020 and appointed Lazard Freres as financial advisors during this process. The restructuring exercise is anchored on the G20 and Paris Club Common Framework, which is also underpinned by an IMF Programme support.

Following a period of discussions and exchanges with the Fund, Government recently reached a Staff Level Agreement (SLA) with the IMF which should culminate into an Extended Credit Facility that will provide financial support amounting to about US $1.4 billion, for three years. The SLA has also provided a basis for achieving consensus on the macro framework and the debt sustainability analysis that will inform the debt restructuring exercise.
In view of the above, Government will continue to work with the financial advisors, the IMF and all other stakeholders towards securing agreement with creditors on the debt restructuring exercise.

QUESTION 3
Clearly state the advantages and the disadvantages of IMF Staff Level Agreement (SLA) and the removal of subsidies. Give a cost-benefit presentation on why the decisions are important.

RESPONSE
The Staff Level Agreement (SLA) will underpin Government’s engagement with its creditors to restructure the debt. The SLA is also expected to pave way for a formal Programme with the IMF which will be a major step towards achieving the comprehensive debt restructuring, needed to repair the economy and place it on sustained growth trajectory.

The Programme will help create fiscal space for Zambia to implement reforms and unlock highly concessional financing amounting to US $1.4 billion to be disbursed over a period of 3 years under the Extended Credit Facility. This will enhance the balance of payments position and further boost investor confidence; important components in the competitiveness of the economy. The SLA will also pave way for restoring macroeconomic stability and provide a foundation for an inclusive economic recovery process.

The removal of subsidies may temporarily increase the cost of doing business. However, to reduce the cost of doing business, the Government will implement counter-active measures such as improving the business environment and streamlining the number of licenses and permits required for businesses. Subsidy removal is a measure that will enable realignment of public expenditure from poorly targeted choices such as fuel, to enhanced investments in health, education, and social protection. The outcomes favour our society’s less privileged.

Regrettably, the capacity to service our loans and invest in development remains very limited and in the absence of restructuring, the country will continue to be choked by the debt burden. We reiterate that without the IMF Programme, debt restructuring would practically be impossible as creditors would be unwilling to engage in refinancing discussions. We need the IMF Programme.

QUESTION 4
Are any public entities earmarked for privatization under the planned IMF Programme?

RESPONSE
Discussions with the IMF have not centred on identifying or earmarking any public entity for privatization. The Government and the Fund, instead have agreed on the need for the public sector to curtail inefficient expenditure, including among State Owned Enterprises (SOE’s).

The Government is therefore undertaking a review of all public entities to rationalise expenditure to those entities, and where necessary, implement reforms for more efficient and cost-effective service delivery.

QUESTION 5
Is the US$ 1.4 billion from the IMF over a period of three year’s necessary, considering that Zambia would have been making over US$ 1 billion per annum had Mineral Royalty Tax not been removed. With a projected boom in demand for Copper owing to the demand for electric cars, the country could have been earning more from the mines. Also, ZamGold produced gold worth US$200 million and is said to have even higher gold deposits with potential to deliver gold worth US$500 million annually.

Why wouldn’t the state work at getting gold from Kasenseli to give the nation US$ 467 million per annum than borrow from the IMF?

RESPONSE
Mineral Royalty is a payment received by Government as consideration to extract minerals. In 2022, Government will continue to collect mineral royalty in line with international best practice. However, contrary to the previous mining tax regime, companies will now be allowed to deduct the mineral royalty as a normal business expense under the Corporate Income Tax regime. This will encourage further investment into the mining sector and consequently improve mining productivity, export earnings, and employment opportunities for our people. The Government will also continue working with gold mining companies to support the further development of a safe, transparent, and domestic revenue enhancing industry.

In addition, the Bank of Zambia has so far purchased 282.79 kilograms of gold since December, 2020, at a cost of K345.6 million. Gold weighing 195.95 kilograms was purchased from Kansanshi Copper Mines at a cost of K241.8 million, while 86.84 kilograms was purchased from Zambia Gold company, a subsidiary of ZCCM-IH, at a cost of K103.8 million.

The Central Bank plans to purchase approximately 25, 200 ounces of London Good Delivery Gold from Kansanshi Copper Mining Plc and 21, 000 ounces of dore gold with a minimum of 88% purity, from Zambia Gold Company, per year. These estimates are based on the gold purchase agreements signed with Kansanshi Copper Mining Plc and Zambia Gold Company in December, 2020. The objective of this initiative is to shore up and diversify international reserves. The viability and attractiveness of this venture is that the gold is being purchased in local currency.

QUESTION 6
Isn’t it possible for Zambia to get technical assistance from IMF without subjecting the country to tough conditions?

RESPONSE
The key functions of the IMF are to conduct surveillance of member countries’ economies, provide financial assistance to member countries, and provide technical assistance or expertise.

The IMF provides its financial support to member countries who express interest by attaching conditions to the use of its financing facilities. Therefore, member countries that apply for and accept IMF financing are obliged to fulfil these conditions. This approach is known as the IMF’s ‘conditionality’ policy.

Its policies and activities are guided by its Charter, known as the Articles of Agreement. In the Articles of Agreement under Section 3: Conditions governing use of the Fund’s general resources of the Fund, the Fund is empowered to adopt policies on the use of its general resources. One such Instrument of conditionality is the Prior Actions, which outline steps that a Country agrees to take before a Board decision on the use of Fund’s resources. Prior Actions also comprise structural measures that will be undertaken prior and during Programme implementation.

The IMF attaches significant weight to the application of its conditions and provides its financial support in tranches with subsequent disbursements dependent on the successful, transparent, and accountable implementation of the previous tranche. When conditions are judged to have been breached, the Executive Board may decide not to proceed with the Programme as it may be viewed to have gone ‘off-track’. This may result into serious consequences for the country because, once the IMF indicates that its Programme with a member country has gone off-track, other multilateral and bilateral creditors, including private-sector creditors may also decide to cease new lending and in some instances call for early repayment of their loans to the country, as their risk exposure is viewed to have increased. The ultimate consequence is macroeconomic and social instability.

QUESTION 7
I would appreciate if you could state the guarantees provided by China to restructure its debt and whether these are sufficient to gain the approval by the IMF Board. I have noted that in the case of Suriname, the issue remains outstanding despite the Staff Level Agreement reached in April, 2021. Kind regards, Tancrede.

RESPONSE
China is expected to provide financing assurances together with other bilateral creditors in the context of the Common Framework.

QUESTION 8
Do we have the IMF’s position with respect to subsidies and whether their removal meets IMF approval?

RESPONSE
The decision by Government to remove subsidies has been acknowledged by IMF. Removal of subsidies envisages an important shift in spending from poorly targeted subsidies towards greater investment in health, education, and the delivery of more social benefits.

QUESTION 9
Congratulations on clinching the IMF bailout for Zambia! My name is Muloongo Muchelemba and I am the Founder of a Pan-African blog called Ongolo.com. The IMF was less prescriptive about how Covid-19 relief Funds would be utilized, telling countries to “spend what you need but keep receipts”. Will the Fund now adopt a more flexible approach to the definition of need and the conditions tied to restructuring packages given that austerity measures, which have to be weighed against other competing domestic needs, land differently in each country?

RESPONSE
The International Monetary Fund now allows its member country the primary responsibility for selecting, designing, and implementing policies to make the IMF-Supported Programme successful and these are agreed upon with the Fund in a Memorandum of Financial and Economic Policies. This has been done with a view to align the program’s objectives and policies with the country’s economic situation and needs. Initially, the document was drafted by the IMF and the recipient country would only append the signature. This is no longer the case.

With regards to IMF Instruments of Conditionality; Prior Actions, and Structural Benchmarks are agreed upon with the Fund on policies and structural measures that will be undertaken before and during Programme implementation. Additionally, qualitative and quantitative Performance criteria are used to monitor Programme implementation during Programme reviews undertaking by the Fund in timely intervals.
In view of the covid-19 relief Funds, the Fund advised member countries to utilize the allocations wisely and effectively without stipulated strictness of allocation. This was premised on the fact that there is no immediate solution to eradicate the Covid-19 pandemic, therefore, countries will continue experiencing its adverse effects. The country received an SDR allocation of $1.33 Billion.

QUESTION 10
Congratulations on reaching a Staff Level Agreement with the IMF which is accompanied by a lot of advantages for the recipient country of the Extended Credit Facility (ECF). Following this development, what policies is GRZ through the MOFNP/MCTI putting in place to ensure that this funding drives a productive and transformed economy through increased investment in manufacturing, thus enhancing the industrial base, and making it competitive – especially with the advent of the AfCFTA?

RESPONSE
The solution to a productive and transformed economy through increased investment in manufacturing is to grow our economy by significantly expanding its industrial productive capacity. Initially, the focus will be to increase output in agriculture, tourism, mining, manufacturing, energy and transport sectors to grow the economy and create employment opportunities, especially for the youth.

The manufacturing sector will be key in actualizing the export-led growth policy. Therefore, the Government will aggressively pursue export market opportunities presented by neighbouring countries such as the Democratic Republic of Congo (DRC), as well as regional and continent-wide initiatives such as the Tripartite Free Trade Agreement and the Africa Common Free Trade Area (AfCFA) to support job creation while simultaneously pursuing a policy framework to support industry resilience and sustainability. Government will also stimulate investment in targeted sectors particularly those where there is potential for development of value chains. Government will also support the establishment of various processing plants in collaboration with the private sector. Finally, export duty on maize and maize products was lifted in November 2021, and exports have since commenced to the DRC.

QUESTION 11
Give some recent examples where an IMF Funded Programme yielded success (beyond the standard macro-economic measures, and more from the perspective of the wider poor population) how did such a program improve the lives of the poor?

RESPONSE
A more recent successful story of an IMF supported Programme under the Extended Credit Facility is the case of Ghana from 2015-2019. The Programme paved way for a significant improvement of Ghana’s macroeconomic performance with higher growth from 2.1 % in 2015 to 6.5 % in 2019, single digit inflation from 17.2 % in 2015 to 7.1 % in 2019, fiscal consolidation, and banking sector clean-up. For Ghana’s 31 million people, it all culminated into higher incomes, better job opportunities, and increased purchasing power. Furthermore, cuts on unplanned expenditure freed up space for the desired social service provisions such as free secondary school education and scaling up on social protection Programmes. According to the 2019 Macroeconomic Report from the Ministry of Finance of Ghana, social contributions increased from Ghanaian Cedi 1,555 Million in 2017 to 2, 740 in 2019.

Another success story of an IMF supported Programme under the Heavily Indebted Poor Countries (HIPC) Initiative is Zambia herself. The HIPC Initiative was launched by the IMF and other stakeholders as the first comprehensive effort to eliminate unsustainable debt in the world’s poorest, most heavily indebted countries. This enhanced HIPC Initiative helped Zambia advance its poverty reduction Programmes and stimulate economic growth.

Zambia also successfully implemented the IMF Macroeconomic and Structural Programme under the Extended Credit Facility (ECF) arrangement, approved by the IMF Board on June 4, 2008. It is important to note that the Programme ended in June, 2011. The ECF arrangement played an important role towards the consolidation of macroeconomic stability particularly during the global economic and financial crisis. Specifically, growth in the Zambian economy in 2010 was strong and broad based. Indicatively, real GDP growth in 2010 was 7.6 % on the back of strong performance in agriculture; mining; transport; and, communications. The macroeconomic environment was also favourable, with annual inflation closing the year at 7.9 %, just below the end-year target of 8 %. Lending rates declined to 19.5 % at end-December 2010 from 22.7 at end 2009. The exchange rate appreciated slightly against the major international currencies. The international reserves position rose to $1.9 billion at end-December 2010. The Programme also provided a platform for accessing technical assistance from the IMF and other institutions and provided important signals on Zambia’s economic performance and prospects.

QUESTION 12
What have we learnt from the challenges of the past to ensure that Zambia successfully implements the IMF Programme over the next 3 years and emerges stronger as a country?

RESPONSE
The successful implementation of the IMF Programme hinges on the fundamental shift in mind-set, and teamwork from everyone. Zambian’s will have to work hard at an individual level as well as collectively for successful implementation of the Programme. Of equal importance is the need for the Government to maintain steadfast commitment to agreed policies and structural measures that will be undertaken before and during implementation of the Programme.

QUESTION 13
What will be the measures of success for the proposed IMF program? How will we agree that it has been successful in the short to medium term, i.e. 3-year horizon?

RESPONSE
The success of this Programme will be two sided in view of the Lender (IMF) and the Receiver (Zambia). On the lenders side, one conditionality to successful Programme implementation is undertaking Programme Reviews. These represent the formal condition that all Financial Programmes with the IMF must be reviewed at set intervals. After the initial financial disbursement is made, subsequent tranches are conditional on the successful completion of a Programme Review and endorsement by the Executive Board. If positively endorsed, then the Programme would be deemed to be on track.

These include the assessment of both qualitative and quantitative performance criteria such as level of net international reserves, budget deficit level, net domestic credit extension to the Government by the Banking Sector, being on track according to agreed quantities in the Memorandum of Economic and Financial Policies.

On the Receiver’s (Zambia) side, a Programme agreed with the IMF is a significant initial signal of confidence for attracting additional international financial resources. The measure of success of Programme implementation will be guided by the fulfilment of the laid out Prior Actions and Structural Benchmarks agreed upon with the Fund which are expected to translate into restoration of macroeconomic stability, signaled by the positive performance of various macroeconomic indicators, including the level of market confidence depicted by increased capital inflows on the Capital Account of the Balance of Payment and Foreign Direct Investments on the financial account. The level of liquidity in the market given by increased revenue mobilization translating into reduced budget deficits and increased debt servicing is another anticipated outcome, among others.