Why Dr. Ng’andu’s Austerity Measures May Fail Too: How to Bring IMF Back Fast.

“IMF suspended talks in August, 2017, they withdrew their country representative Dr. Alfredo Baldini a year ago, have not yet replaced him”

By Kalima Nkonde

Story Highlights
• In Zambia, major economic decisions are primarily made in the Office of the President rather than in the Ministry of Finance. The President and his advisers, under various political pressures, decide on actual spending.(Norway’s last Ambassador to Zambia Arve Ofstad, July,2019)
• We have also announced a number of measures aimed at slowing down the pace of debt accumulation, such as postponement and cancellation of debt, subject to discussions with our creditors, expansion of the revenue base, addressing the challenge of domestic arrears. Implementation is at the heart of all these pronouncements. That will be my key objective. (Zambia’s new Finance Minister Dr. Bwalya Ng’andu, July,2019)
• The only advice I give is to urge the Government to align the austerity measures towards a possible IMF programme. As things stand today, it is very hard for government to manage its own austerity as it’s like asking a patient with a foot problem to amputate self. You can only cut that far and will stop when pain is unendurable. ( Chibamba Kanyama, Economist and Broadcaster, July, 2019)
• It is envisaged that the new Minister will leverage his emotional intelligence skills to bring Zambia to the discussion table with IMF. He comes at the time when investor confidence in Zambia is very low and should signal that Zambia seeks to redress some of its challenges. ( Zambia Daily Mail Comment, July,2019)

The appointment of Dr. Bwlaya Ng’andu as Zambia’s new finance minister in July, 2019 was received with euphoria in some circles including the bond market which saw the demand for Zambian Eurobonds go up. This writer, however, while welcoming the appointment, is cautiously optimistic about the impact the new finance Minister will have. There are some doubts whether he is a panacea to Zambia’s economic recovery.

The skepticism is borne out of the fact that this writer was among those who were excited and praised the government for announcing austerity measures some in recent years, but there is nothing much to show for it in terms of improvement in the economy, but instead the three has been a continuous deterioration in the macroeconomic metrics especially since the International monetary Fund pull out in August, 2017.Zambia has had four Finance Ministers in four years- since 2015- when President Lungu took over and it is curious whether the previous three were all incompetent. The fault must surely lie somewhere in the system.

Why Dr. Ng’andu may fail too

The number one reason why Zambia’s austerity measures have failed in the past is that there is an apparent lack of political will to implement them. In Zambia, short term political considerations, which not even well researched; far outweigh economic common sense. The finance minister will announce measures, quoting the President as having authorised them but because the political authority do not believe in them or understand them, they start undermining them through statements and actions by themselves or their surrogates. For example, how do you announce austerity measures and the next day you are creating districts, announcing a discredited business model of national airline, purchasing executive jets, entertaining bringing back deputy ministers back, purchasing expensive vehicles, undertaking expensive trips to the USA to fetch second hand fire tenders and the list goes on and on.

In the Corporate world, any internal control system will not work if there is management override. It is the same case with Zambian austerity measures. There is management override by political masters especially at State house where some Presidential Aides are alleged to be almost untouchable, and are so powerful that they can give instructions to ministries even without the President’s knowledge. There is just so much inconsistency and unpredictability by the political authorities which must be frustrating for the bureaucrats at the Ministry of finance and Bank of Zambia.

Standard Bank, in their recent country report, while welcoming the appointment of Dr. N’gandu, was cautious by clearly pointing out the fact that although the appointment was positive, it was a case of a different messenger but the same message.

“This is the third Finance Minister in three years, taking account of the very strong possibility that the senior leadership of the Finance Ministry, besides perhaps the Finance Minister, is not going to change, then the advice that the Finance Ministry will deliver to the President and the Cabinet regarding fiscal matters is probably not going to change. Presumably, the President and the new Finance Minister conferred on the state of government finances, fiscal policy management challenges and the Minister’s proposed strategy to deal with them. If so, then this appointment would probably also be an implicit acknowledgement by the President that he broadly agrees about the need for fiscal consolidation,” The Bank said in its latest Statement.

The second reason why austerity measures do not work in Zambia, is that there are sacred cows as to the implementation of austerity measures. The implementation is not meant to inconvenience or cause pain to certain individuals and institutions in terms of cost savings. Although the country could be in austerity, top politicians, top civil servants, constitutional office bearers continue enjoying all the fringe benefits as before, which they do not even need, such as 2 or three personal to holder cars for wives and children etc.

We need to emulate Botswana and Tanzania in thrift management of resources by not letting our “leaders” enjoy opulent life styles with little value addition which even the private sector Executives do not enjoy. This has led to attracting the wrong people in the public service thereby leading to the creation of the politics industry with sub sectors of per diem industries developing which do not produce anything but require taxes to finance them.

Thirdly, there are allegations of conflict interests by the political elite who benefit from public debt contraction, for example, and who resist austerity measures. One gets the impression that personal interests, short term political goals and populism, determine the severity of the implementation of austerity measures in Zambia rather than public interest, rational and medium term to long term economic interests of the country.

Why did IMF shelve negotiations and now delaying coming back?

In order to analyse the reasons why the IMF suspended the negotiations with Zambia for the $1.3billion bail out, and the IMF being slow to resume the same, it is important that one does not only look at economic reasons but also diplomatic reasons. It should not be forgotten that institutions including the IMF, are run by human beings with feelings, views, prejudices including racial issues etc .

It follows that is only the most naïve and the unexposed to international business dealings will not take into account the impact that such human behavioural factors have in influencing decision making. The role that relationships and diplomacy play in business and international deals should never be underestimated.

It is apparent to any keen observer that Zambia’s relationship with the IMF has not been at its best during the Lungu administration. The IMF suspended talks two years ago in August, 2017 and up to now, talks have not resumed. The non-technical reasons relate to the Zambian government’s poor diplomacy as exhibited by the rhetoric concerning the IMF programme at the middle of crucial negotiations in 2017. The unhelpful rhetoric include President Lungu’s past remarks which were reminiscent of Kenneth Kaunda and Robert Mugabe.

“Everything we do, we consult and I want to be remembered for just sticking to the law and doing things within the expectations of the people so if IMF want to go because of this, they can go and I am saying this openly, if IMF thinks we have gone beyond the norms of good governance and democracy, they are free to go,” said President Lungu, whilst declaring the State of emergency in July, 2017.

The President‘s view that Zambia did not need IMF bailout was later supported by former Minister of Development planning, the now fired Lucky Mulusa.

“Now the economy is picking up as a result of economic activities picking up in China and China is demanding more of our copper so we are able to export more copper and more revenues through taxes from the copper exports and also bringing in more hard currency in terms of also managing our exchange rate. What this means is that we can do away with the IMF and our economy will still be vibrant so people must not have this perception that maybe Zambia’s economy has gone berserk and we need bailout from the IMF, no. it is merely investment in perception in order to trickle down the interest costs that we are paying because the investors will be very comfortable with us engaging with the IMF,” Mulusa said.

In 2018, the Zambia government was reported to be pressurising the IMF to recall its Representative Dr. Alfred Baldini on alleged unprofessional conduct and/or incompetence. The Fund resisted the requests from Zambia but eventually gave in. Zambia’s renowned economic commentator and veteran Broadcaster Chibamba Kanyama, who worked for the IMF in the Communications department, confirmed the same in a tweet. There were other analysts who warned of consequences of the forced recall of country representative.

“IMF has withdrawn its representative to Zambia, Alfredo Baldini and does not plan to have a placement anytime soon,” Kanyama said in a tweet, he later deleted, possibly due to pressure from authorities.

Government Spokesperson Dorah Siliya, confirmed the departure of Dr. Baldini and claimed that his replacement will come very soon. It is twelve months now and there is no Resident Representative for the IMF in Zambia. There can be no IMF bailout without a Resident Representative. Zambia through Dr. Ng’andu needs to lobby for the appointment of a Resident Representative.

Apart from the diplomatic fall out mentioned above, which could have possibly influenced the IMF pull out, and is delaying the appointment a replacement of the Country representative, the main reasons that forced the IMF to suspend negotiations in 2017 are technical economic reasons. These relate to the issue of debts and fiscal deficits and the IMF was very explicit about it.

“Public debt has been rising at an unsustainable pace and has crowded out lending to the private sector and increased the vulnerability of the economy. The outstanding public and publicly guaranteed debt rose sharply from 36 percent of GDP at end-2014 to 60 percent at end-2016,” The Fund noted in a statement announcing the suspension of talks. “Against this background, any future programme discussions can only take place once Zambian authorities implement credible measures that ensure debt contraction is consistent with a key programme objective of stabilizing debt dynamics and putting them on a declining trend in the medium term,” The IMF statement added

The outlined issues above, are the ones, that must have contributed to the IMF suspending talks and which need to be addressed if confidence in the Zambian economy is to be restored and Zambia returns to the recovery trajectory it was on in 2017 which has been reversed as we all warned.

What will it take to bring IMF back quickly?

It is now agreed by state media, most experts, investors, international organisations, Bank of Zambia, Ministry of finance bureaucrats and others with a deep understanding of the economy, that Zambia’s speedy economic recovery and avoidance of the risk of debt default, will require a deal with the IMF. The question is: what will it take to bring the IMF back to the negotiating table? My take is that it requires a combination of actions and not just technical actions – monetary and fiscal policies – which Zambia needs to take in order to speed up the process.

First and foremost, more discipline in rhetoric coming from the President and his administration as past utterances by the President were undiplomatic, unhelpful and may not have gone down well in the IMF corridors of power in Washington.

As part of the confidence building process, it may be advisable to form a task force of a crack Zambian negotiating team, which is respected in the IMF corridors of power to repair the damaged relationships but also negotiate a better deal for Zambia. They should be sent by the President to Washington as soon as possible. This will send a positive signal that Zambia is serious and help calm the markets

The negotiating team could be headed by Finance Minister Dr. Bwalya Ng’andu and include people like Dr. Denny Kalyalya, Mr. Chibamba Kanyama, Dr. Caleb Fundanga, Mr. Ng’andu Magande, some technocrats in Finance ministry and may be others. Ghana negotiated a deal with IMF by assembling a crack team which included people who were not in government but had worked at IMF, had high level contacts and relationships with people working at the Fund. They were respected due to their knowledge and expertise.

Secondly, the Zambian government needs to carry out whatever fiscal measures that the IMF wanted to be implemented when they suspended the programme negotiations. The IMF made it very clear in their statement on October 6, 2017 what was needed to be done. This was reiterated in their April, 2019 statement, when an International Monetary Fund (IMF) staff team led by Ms. Mary Goodman visited Zambia between April 16-30, 2019 to conduct the 2019 Article IV consultation. They recommended the following:

“To reduce risks, staff recommended a large up-front and sustained fiscal effort, including: avoiding contracting any new non-concessional debt, steps to raise revenues, halting the build-up of new arrears, and aligning the pace of spending on well-targeted public investment projects with Zambia’s available fiscal space”

Also last week, in a statement on August 2, 2019, the IMF Executive Board, when reviewing Zambia’s economy in conclusion of Article 1V for 2019, they revised Zambia’s economic growth projection for 2019 to 2%.

“Absent significant policy adjustments, growth likely to remain subdued over the medium term as expenditure arrears and ongoing forced adjustment in response to increasing debt- related pressures weigh on the private sector,” the Board noted

Thirdly, the issue of improvement in the political climate especially as it relates good governance and rule of law need to be addressed to facilitate speedy resumption of IMF talks with Zambia. In theory, IMF is not concerned with politics, good governance, rule of law and issues such as corruption and human rights. But in reality, these issues do matter. This is so because the institution is controlled by Western capitalist democracies and any country can only ignore such issues at its own peril.

The views of the United States of America in particular, who hold the majority shares, and have veto power in IMF, ought to be taken into account. The recent comments by the US Ambassador to Zambia at the country’s independence celebrations as well as when addressing the University of Zambia Students on Youth Leadership and Governance should be taken seriously.

“The US strongly believes in Zambia’s sovereignty. But we also believe that Zambia can progress much better by embracing the freedoms and values and capitalist approaches that has got the country where it is now. We want good governance that effectively utilizes resources and improves lives of our families. We are all aware of budgeted funds that have gone to places they should not have to. And part of my job is to try to hold those in power accountable. We all want our government to be transparent and accountable,” US ambassador, Daniel Foote said, in utterances which were undoubtedly directed at the Zambian government.

The fourth step that may help bring the IMF back quickly, is the Presidential address on the economy and not delegated statements to Ministers as before. President all over the world address nations on issues of national importance. The new Press Secretary is a mature and experienced person and should advice the President about the importance of formal communication to the electorate as opposed to off the cuff airport apron statements that the previous Press Aide seem to have advised. The President should seriously consider making a statement of commitment to austerity measures and support for the Minister of Finance. This will send a positive message to the market. Thus far, he has created an impression of being an aloof CEO and that is market perception. This need to change. The President has to take full responsibility and ownership of austerity measures in particular and the performance of the economy in general, as he correctly point out, “If I fail, the buck stops at me, not even cabinet ministers will be part of it…”

Recommendation

The finance minister and the Bureaucrats know what needs to be done for the recovery of the economy but as a private sector expert and entrepreneur, they are well advised to sequence and prioritise implementation of the measures by laser focusing on those measures that will have the maximum and immediate impact on the economy in terms of jobs and felt by the public within 6-12 months.

The number one problem that Zambia faces which is being felt by almost all Zambians is the lack of cash: liquidity. This is adversely affecting households and businesses around the country and constraining economic activity. The bulk of the cash is in wrong hands – government which does not produce anything or pay taxes and also foreign contractors who externalize when paid. It does not only make economic but it is smart politics to implement measures that will kick start economic activity immediately, and before the next election in 2021.The following are recommendations of the common sense measures that will help reinvigorate economic activity in the shortest possible time:

• In the private sector, companies do capital restructuring by replacing short term loans with long term loans to improve cash flow management. The same principle can be applied in government by paying off local government suppliers and contractors, even by obtaining a long term loan to replace these short term creditors and thereby unleashing working capital to the private sector with immense multiplier effects in terms of economic activity
• Pay bankers the bulk of what is due to them including treasury bills. Also significantly reduce what government is borrowings from Banks through treasury bills and other means so that they are stuck with excess liquidity and are forced by necessity to lend to the private sector. This action will also reduce their interest rates by banks.

The second and other major recommendation, which is publicly known is: Negotiate with IMF to fast track negotiations and have a deal in place as quickly as possible. The will help with investor confidence, balance of payments support, raising cheap bilateral and multilateral finance, improve performance of Eurobonds and forestall the kwacha depreciation. Ghana’s experience of recently completing the 3- 4 year IMF programme is testimony to the fact that when you fail to run your economy due to indiscipline and reckless borrowing – the new 21st Century IMF and not the one of the 1970s/80/90s, people who do not read and not update are familiar with – can help stabilize the economy and you up on the path to growth as evidenced by Ghana’s GDP growth of 8.5% in 2017 and the projected to grow at 7.3% in 2019.

Conclusion

Although there may be doubts about Dr.Ng’andu succeeding where others failed, there is still a chance that he may finally succeed as circumstances, especially the suffocating effect that excessive debt, is having on the economy, has sent a clear message to the appointing authority.

The key to economic recovery depends on whether President Lungu is now convinced that the unabated debt contraction, piece meal and selective implementation of austerity measures is not having any positive impact on economic growth and jobs; and it is time to change course.

I am cautiously optimistic that President Lungu will now throw his full weight behind the new finance Minister, Dr. Bwalya Ng’andu in implementing the austerity measures. The measures will no doubt start producing the desired results and create jobs for our Youth or else any gains made thus by the PF administration such as the infrastructure built and private sector shopping malls that have sprung up all over the country will be white elephants as there will be no customers for them.

The writer is a Chartered Accountant by profession, a Private Sector Development expert and an Entrepreneur. He is an independent, non- partisan finance and economic commentator/analyst and a Patriot.