Story highlights

• The IMF is working closely with the Zambian authorities to develop a plan that will anchor macroeconomic stability. Recent steep depreciation of the kwacha is raising inflationary pressures and expansionary fiscal policy which has created large budgetary imbalances. The authorities have requested the IMF team to return in early September to discuss an economic programme that can be supported by a fund arrangement.(IMF Statement June,2014)
• What we were proposing is similar to what was agreed with Ghana last month and we were able to provide $918 million to the authorities and you can now see some stability with the Cedi. ( IMF Team after State house rejected IMF deal, November,2015)
• I wish to mention from the onset that the efficacy of the IMF programmes is beyond getting financing, but inducing the confidence and cooperation of external benefactors such as the investor community and cooperating partners regarding the credibility of our economic programmes (Former Finance Minister, Felix Mutati in Parliament on Zambia Plus Economic Programme 2016)
• 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 (President Lungu declaring the State of emergency in July, 2017 )
• The latest borrowing plans provided by the authorities continue to compromise the country’s debt sustainability and risk undermining its macroeconomic stability and, ultimately, living standards of its people. Against this background, any future programme discussions can only take place once the 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 ( IMF refuting rumours of resumption of talks with Zambia, Feb, 2018)
• IMF has withdrawn its representative to Zambia, Alfredo Baldini and does not plan to have a placement anytime soon (Former ZNBC CEO and former IMF employee Chibamba Kanyama, August 2018 )
• I did mention to them(International Monetary Fund Team) in the meeting that when you say that we can only have a programme after you have exhibited debt sustainability, it’s like you are going to give me an umbrella after the rains ( Dr. Bwalya Ng’andu, Feb.2020)

By Kalima Nkonde

The IMF team will be visiting Zambia next week from the 18 March to 1st April, 2020 for their annual Article 1V consultation, during which it is expected that the long outstanding bailout programme will certainly be discussed. Most Zambians are now fed up with the protracted bail out talks which have lasted five and half years without a deal. This frustration is reflected in the recent statement by finance minister Dr. Bwalya Ng’andu when he presented the status of the economy.

“They were very clear that one of the things they want to see before we can get down to the programme is exhibiting debt sustainability. Now, the problem with that, and I did mention to them(International Monetary Fund Team) in the meeting that when you say that we can only have a programme after you have exhibited debt sustainability, it’s like you are going to give me an umbrella after the rains,” Dr. Ng’andu is quoted as saying by the Mast Newspaper. “Is it possible that we can have a meaningful discussion? But just remember that it doesn’t entirely depend upon us: if it were up to us, we would have had the programme last year. But we just have to discuss and see whether we can have it.”
The impression one gets is that the IMF is playing hard ball with Zambia this time around; the question is, why? And who is to blame for this protraction? It is, therefore, important to put the current status of Zambia’s relationship with the IMF and the programme support talks in the proper context by taking a historical perspective. This article attempts to be objective and presents facts on the issue as they are, so that the reader is educated and enabled to make his or her own judgement as to who is to blame for delayed IMF bailout.

Zambia’s recent history with IMF

Zambia approached IMF in June, 2014, and that is before Ghana did, but Ghana accepted the deal in 2015 and has since completed their programme, and their economy is flourishing. It grew by 8.1% in 2017, 6.3% in 2018 and it is estimated to have grown by 7.0% in 2019.The Ghanaian currency, the CEDI, is now stable.
In 2015, the Ghanaian born Mr. Tsidi Tsikati, a very senior and respected man in IMF circles, and who was the division chief for the African department in Washington, led an IMF team that presented Zambia with a bail out deal of about $1billion. President Lungu, according to the Lusaka Times of 21st November, 2015, rejected the deal despite the Finance Minister Mr. Alexander Chikwanda and his ministry officials being in support of the same. https://www.lusakatimes.com/2015/11/21/president-lungu-turns-down-imf-aid-package.

Mr. Tsikata, continued working very hard despite the rejection, to ensure that Zambia got the deal before he retired, just like his home country had done, but all to no avail, until he retired. The economic merits of the deal were just as compelling then, as they are today,but for some reason, Zambia rejected the deal. And today, we are going cap in hand for the same. Zambia’s economic problems today, are largely a result of politics driving economic policy and people with little knowledge about the economic consequences of certain decisions influencing and/or taking decisions. There is just too much uninformed decision making taking place in our country resulting in unforced errors or own goals to use the tennis and football metaphors, and its the innocent citizens that are suffering the resulting hardships. In 2019, the former Norwegian Ambassador to Zambia Arve Ofstad, made an observation on how important economic decisions are made in Zambia.

“In Zambia, major economic decisions are primarily made in the Office of the President (often just described as “State house”) rather than in the Ministry of Finance. The President and his advisers, under various political pressures, decide on actual spending,” he said.

Following the August, 2016 general elections, Zambia continued its engagement with the IMF for programme support and the IMF team was working closely with the Ministry of Finance. The market confidence of 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. However, in August, 2017 IMF suspended talks with Zambia as they discovered that the country’s borrowing plans compromised debt sustainability.

“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 strange coincidence of the timing of the suspension of talks was that it was just after a State of emergency had been declared in July, 2017 and the President had dared IMF to leave if they were unhappy with his decision.

Zambia has been making a number of proposals of revised borrowing plans to IMF since the August,2017 suspension of talks which have all been rejected by the Fund. The expulsion of the respected IMF country representative, Dr. Alfredo Baldini, in 2018 has made the discussions on a possible fund supported programme much more difficult and could have been a deal breaker.

Zambia’s borrowing binge

The major cause of Zambia’s current economic problems is excessive government debt. According to the finance minister’s recent briefing, the country’s debt profile as at end of the fiscal year 31 December,2019, was as follows: government securities $5.73billion(K80,2 billion),domestic arrears excluding VAT $1.87 billion (K26.2 billion), foreign debt $11.2 billion which brings the total debt to $18.8 billion. The pipeline debt (contracted but not disbursed) is $7 billion which brings the total potential debt obligation to $25.8billion excluding government guarantees and VAT refunds. This represents 96.6% of the 2018 GDP of $26.720billion. These debt numbers are just mind boggling if one considers the capacity for the economy to repay. This rate of borrowing binge whether at household, corporate or national level borders on recklessness. An informed observer will wonder about the thinking and analysis that went this before final decisions were made to contract such level of debt. During his recent economic briefing, the finance Minister announced that government will be negotiating the cancellation of $5billion of the total pipeline debt of $7 billion; but this is likely to come with cancellation costs. The country is literally drowning in debt.

Zambia’s expenditure profile at the moment is follows: debt consuming 40% of revenue, Civil servants salaries 51% and only 9% is left to run the economy. If the kwacha continues depreciating, the share of debt servicing will continue to grow and things will get worse. The foreign debt interest payments alone amounted to K18 billion during the 2019fiscal year. The Finance minister admitted in his recent interview during the State of the economy presentation that external debt, is causing havoc in the economy .
“When I am talking about servicing debt, I am talking about servicing external debt rather than domestic debt. Because of that, our capacity and ability to service domestic debt has become a problem, which is what we are calling arrears”, Dr. Ng’andu told the press conference.

Reasons why Finance Minister desperately wants IMF deal

The best solution Zambia’s debt problem that is to be on the IMF programme; but so far the discussions do not seem to be going well nor are they promising. This is based on what Zambian Minister of finance Dr. Bwalya Nga’andu recently said during the economic briefing, if one reads between the lines. He sounded clearly frustrated: “if it were up to us, we would have had the programme last year,” he lamented.

There are immense benefits that come with an IMF programme beyond the $1.3billion that the country has been asking for. 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.

If Zambia was to be on the IMF programme, there are about five major tangible benefits. First, the programme will come with the balance of payment support which will help with the stabilisation of the kwacha. The kwacha will be protected from further depreciation, and consequently, the current escalation of inflation which has been trending upwards for over a year or so now, and currently in double digits of about 13.9% from a low of 6.8%.

Secondly, the cost of servicing the foreign debt which is causing havoc in the economy including influencing the price of the staple food, maize meal. The current cost of servicing foreign debts is likely to start going down with an IMF programme in place. The foreign debt is suffocating the Zambian economy. Bloomberg recently reported the interest on Zambia’s $750m Euro bond to be 24.64%.

Thirdly, there will be the restoration of confidence in the management of Zambia’s economy under an IMF programme. This will in turn attract both foreign direct investors and portfolio investors thus increase the inflow of foreign exchange therefore assist with the kwacha appreciation.

Fourthly, the IMF programme opens up opportunities for Zambia to borrow at concessionary rates (borrow cheaply).The majority, if not all, bi-lateral and multilateral lenders, will only lend Zambia, if it was on an IMF programme to mitigate against default risk. In addition, there is evidence that some Cooperating Partners are currently reluctant to release grants to Zambia thus contributing to current budget shortfall in revenue unless IMF is on the ground. The Finance Minister mentioned the shortfall in grants in the 2019 fiscal year. The scandals of misuse of Donor funds in recent years make some donors to be cautious in releasing or providing additional grants.

Fifthly, the IMF loan will instil financial discipline and ensure that government expenditure will be reduced as austerity measures will definitely be implemented under the watchful eye of the IMF and reduce the budget deficit. The IMF will help restore budget credibility. The expenditure control will drastically reduce government borrowing from the domestic market which will in turn lead to the reduction of interest rates. In addition, more funds will be available for private sector who are currently crowded out by government domestic borrowing. This will in turn lead to increased economic activity and job creation.

According to the IMF guidelines on conditionality, disbursements are only done on meeting certain conditions. The IMF has four broad categories of conditions: prior actions, quantitative criteria, indicative targets and structural bench marks. Prior actions are measures that a country agrees to take before the IMF’s Executive Board approves the programme. Zambia will not have its programme approved and receive a single dollar from the IMF until it fulfils the Prior actions. These may possibly include the following: implementing measures to reduce fiscal deficit, avoiding contracting any new non-concessional debt, taking steps to raise revenues, halting the build-up of new arrears and align the pace of spending on well-targeted public investment projects within Zambia’s available fiscal space, placing a ceiling on public sector wages and salaries and cleaning up the public sector payroll, and implementing measures to fight the endemic corruption in Zambia. The impression one gets is that Zambia has not met some of these conditions and therefore the deal has been put on hold.

Conclusion

It is crystal clear that IMF is playing hard ball. One gets the feeling that the Fund is punishing Zambia for what happened in the past especially the perceived arrogant statements and actions of our leaders which included the rejection of an offer in 2015 and the expulsion of the IMF country representative, Dr. Alfredo Baldini, almost two years ago, who has not been replaced yet. There can be no IMF bailout without a Resident Representative. Zambia is well advised to prioritise the lobbying for the replacement of the Resident Representative.In the current circumstances, I would advise the Zambian government to do two things. First, Zambia should immediately embark on an informal behind the scenes economic diplomacy with the IMF by sending a team to Washington. The President of the Zambia should quietly appoint a team of about 5 or 6 imminent, independent, economic Zambian experts outside the government bureaucracy, who are respected in the corridors of power in the IMF, having worked there or dealt with them at the highest level and who have high level contacts there.

The envoys should go and lobby for the immediate appointment a new Country Resident Representative, as it is the necessary condition to clinch the IMF deal. In the process of their lobbying, they may be told in confidence what Zambia needs to do to speed up qualification for the program. The names that come to mind are Dr. Caleb Fundanga, Mr. Chibamba Kanyama, Mr. Ng’andu Magande, Dr. Denny Kalyalya and two more names could be added. The individuals’ suspected political and ethnic affiliation should never considered in the appointments. The issue is a nonpartisan one, as it is about the country. Impasse to deals at this level are done and agreed behind the scenes. And are dependent on the relationships between parties involved. There are just sealed in formal settings as a formality – my international experience and exposure speaks to this.

Secondly, Dr. Ng’andu and government should concentrate on implementing the austerity measures that the Fund has recommended because we really have no choice. We should hope that such measures will work in turning around the economy so that even if the IMF programme does not come, we will still be in a good place.

Those who follow my articles will agree that I gave free and independent advice to government on Lusaka Times. I and others predicted the consequences of excessive foreign borrowings, rate of massive infrastructure development, and we were insulted, and even called lunatics. We, however, never imagined the current rate of economic deterioration where the Kwacha has depreciated by 136% from K6.45 in 2015 to K15.20 to a dollar in 2020, in a period of 5 years! Our leaders should start listening to independent voices’ advice. We mean well.

In the meantime, as patriotic Zambians, we should all support the finance Minister and the government to carry out the austerity measures to bring the economy back on track. The economic hardships we are going through do not choose between supporters of the current administration, the opposition and the independents, and so, its folly for those in the opposition to wish the economy to collapse for political gain. The PF government should also stop putting politics ahead of the economy for short term political “gain” as this approach is responsible for the mess the country is in and it puts them at political risk in the medium term. Good economy is the best insurance policy to stay in power for a long time – look at Botswana Democratic Party and Swapo.

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