Every year, the International Monetary Fund (IMF) holds bilateral consultative discussions with member states as per its mandate under Article IV of its Articles of Agreement. In line with this tradition, the IMF is scheduled to hold a virtual consultative meeting with Zambia from 22nd June to 1st July 2020. There are two key questions that arise ahead of the forthcoming engagement. The first relates to whether there has been any improvement in Zambia’s fiscal situation (i.e. fiscal metrics, fiscal buffers or fiscal strength) since the last IMF visit. The second is more straightforward: does Zambia need an IMF program?
At the conclusion of the previous consultations with Zambia in 2019, the IMF executive board issued a damning statement about the country’s weak fiscal metrics, in particular, high debt level and lack of fiscal and external liquidity buffers. The official response from the host country ranged from denial to contempt. A year later, the Fund has been vindicated as evidenced by Zambia’s recent economic woes and fiscal policy disorder that have been compounded by the impact of the Covid-19 pandemic. On 2nd August 2019, the IMF board expressed concern over the ballooning of Zambia’s public sector indebtedness, which increased from 65.5% of GDP in 2017 to 78% at end of 2018, and projected to further increase to 91.5% in 2019 with two-thirds of the debt being held by foreign creditors. Against this background, recent statements from the echelons of power that Zambia’s debt levels are unsustainable do not come as a shock to many independent-minded economists and commentators.
All indicators red-flagged Zambia’s overall risk of debt distress as “high” but fiscal managers gave them a blind eye. For example, the IMF executive board raised the debt distress warning in 2019 and argued that Zambia’s public debt was “on an unsustainable path”. The board also stated that the mounting expenditure arrears and disorderly fiscal adjustments were offshoots of inevitable financing constraints. Even local economic commentators raised alarm about the government’s high appetite for borrowing but their views, like those of the IMF, were dismissed or ignored. It is unacceptable that a country can accumulate so much debt that it begins to choke spending to critical sectors of the economy. What has heightened this insatiable appetite to accumulate so much debt that risks crippling the Zambian economy? What has contributed to such gross debt mismanagement? How did we get to this point as a country?
Zambia’s recent economic malaise cannot be attributed to the management of monetary policy, and kudos can be extended to the Zambia Revenue Authority (ZRA) which has continued to outperform its revenue forecasts. However, the economic exhaustion the country has witnessed is at the core of gross fiscal incompetence. Any country that relies on an expansionary fiscal policy financed by non-concessional loans is poised to collapse in the long run because of the adverse ripple effects on, among other things, domestic credit growth and private sector led economic activities. Besides, we don’t expect meaningful capital investment from the 2020 approved budget which constitutes about 66.6% of recurrent expenditure, with the picture becoming gloomy when amortization is factored into the equation. Serious fiscal reforms need to be undertaken, and without a commitment to such reforms, the country’s budget deficit and debt will continue to increase exponentially.
Zambia’s fiscal space significantly widened following the 2005 debt relief. The erosion of this fiscal space in the recent past is a manifestation of gross fiscal indiscipline and a terrible indictment on the fiscal managers. The hard truth is that the IMF package is painful but Zambia desperately needs an IMF program and/or aid package to stabilize the free-falling economy. It is rather regrettable that we have to turn to external disciplinary forces to placate/fix locally generated economic challenges. Unfortunately, we have pushed ourselves into a tight corner where tough choices will have to be made and austerity measures undertaken for purposes of future economic benefits. Today, a number of countries that have undergone an IMF program are experiencing positive economic growth and enjoying a cordial relationship with the IMF.
Take Rwanda, for example. In many ways, the country is a success story and the envy of many, it adopted the IMF’s Policy Support Instrument (PSI) in 2013. The PSI not only helps countries design effective programs but also signals the IMF’s endorsement of the country’s policies towards donors and multilateral development banks. The IMF board, on its tenth review of Rwanda’s PSI program, concluded that “domestic revenue mobilization, careful spending containment and strong debt management have rendered fiscal and debt positions sustainable, while still allowing for a growth-enhancing scaling up of public investment and social spending in line with the country’s development strategy”. The aforementioned macroeconomic environment is what Zambia needs to attain and the IMF program has the potential to lead the country towards such a trajectory. Granted, there are criticisms of any IMF program, but what is needed is to negotiate one that would be a product of consensus with different key domestic stakeholders. The increased fiscal space fostered by an appropriate IMF program is good for poverty reduction and growth.
While the engagement of the French company Lazard Freres to restructure Zambia’s debt is welcome, it will not achieve success without the IMF aboard given the nature of Zambia’s loans. A number of countries have successfully restructured their debt within the context of an IMF programme. For instance, Greece managed to achieve the largest debt restructuring in history in 2012 with the support of the IMF and European Central Bank (ECB) in exchange for stricter budget discipline. While there were ululations from some economists and commentators after the engagement of Lazard, understandably so, owing to the misconception that Lazard will restructure Zambia’s entire outstanding debt stock, lessons can be learnt from Argentina’s mixed fortunes.
Although Argentina managed to restructure 76% of its debt between 2002 and 2005 through the exchange of new bonds with stronger assurances and favourable interest rates indexed to GDP growth, 24% of the creditors refused to accept a haircut or the restructuring, and more recently the country was on the brink of defaulting again after creditors rejected the new terms of restructuring. It is easier to restructure bilateral and multilateral debt than commercial debt, and if reports that the majority of the Zambian debt was contracted “from the streets” are correct, then Lazard has a mammoth task ahead. Moreover, Lazard’s efforts might just be another costly exercise in an economic space where strict adherence to fiscal discipline is seriously lacking. Nonetheless, Zambia can only hope for the best outcome and acceptable concessions that will accompany the restructuring.
Zambia needs the IMF program to transform the economic landscape given the fact that the institution is the last source of emergency financing for bedridden economies and can provide breathing space for a financially troubled country. As to whether there has been change from the last IMF visit other than an open positive tone by the new Finance Minister, many would agree that the economy has, since then, continued to drift into unchartered territory for the worst. The private sector, which should ideally anchor the country’s economy has not been spared perceived interference from the government, which has reared its head in the key sectors of mining and energy.
Konkola Copper Mines was followed by Mopani Copper Mines and now Copperbelt Energy Corporation with the much publicized expropriation of its electricity assets for reasons that most observers have concluded are political rather than commercial. Designating CEC electricity transmission and distribution infrastructure as common carrier against what the law states has not only taken away the company’s rights to its property but also thwarts its rights to take commercial decisions in its interest. Despite the many protestations by government officials, the action taken amounts to expropriation of private assets and it would be interesting to hear what the IMF makes of that. If no economic reforms are undertaken, the country risks drifting into an abyss of economic distress which will make it extremely difficult in future to resuscitate the Zambian economy.
Maka B Tounkara is a lecturer at the University of Zambia under the department of Economics. Maka is a Rhodes Scholar and an Oxford University graduate. He is passionate about Zambia’s economic emancipation and transformation within a low carbon environment. Maka spends his free time cheering for Chelsea football club and listening to mind provoking music.