Last week’s opinion focused on reviewing Zambia’s performance on an International Monetary Fund Extended Credit Facility (IMF-ECF) Program. Following the recently conducted first semi-annual review, the opinion specifically delved into reviewing the country’s performance on structural benchmarks aimed at restoring fiscal and debt sustainability. At the close of the review, it was concluded that the country met all the set structural benchmarks and other performance criteria. Structural benchmarks are reform measures that may have accompanying social and economic implications. Therefore, this weeks’ opinion endeavours to review some of the implications of these reforms.

Zambia’s IMF program aims to restore economic sustainability through fiscal adjustment, debt restructuring and improved public finance management among other objectives. Program reforms include subsidy removals and austerity measures, which can have adverse socio-economic implications on the poor and vulnerable. For instance, the elimination of subsidies on fuel by reinstating value added tax (VAT) and its respective excise duty has seen a significant rise in pump prices of fuel from as low as K17.62 for petrol and K15.59 for diesel to K21.16 and K20.15 respectively in December 2021. Overtime, pump prices have been on an upward trend reaching an all-time high of K27.59 and K26.28 for petrol and diesel respectively in April this year.

Furthermore, the move to cost reflective tariffs of electricity will also see a rise in electricity tariffs as subsidies fall off. Both fuel and electricity remain key inputs in consumption and business. Therefore, an increase in the cost of these inputs translates in an increase in the cost of living and that of doing business. According to the Basic Needs and Nutrition Basket (BNNB) computed by the Jesuit Centre for Theological Reflection’s (JCTR), the cost of living for a family of five in Lusaka has increased from around K8500 at the time the IMF program was granted to about K9,077.93 in May 2023 and a national average of K6,629.91. Also, despite the monthly fuel pump price revisions promoting public expenditure containment, they have created unpredictable outcomes for the private sector due to the unstable business environment that they create.

The monetary and financial sectors have equally suffered the cost of a protracted debt restructuring process which has brought about negative investor sentiments owing to the uncertain treatment of non-resident bond holders. This has adversely affected the performance of the local currency and spill-over effects have been noticed on the prices of fuel and ultimately inflation. The Central Bank has since responded with two recent contractionary monetary policy interventions aimed at redirecting inflation to its target range of 6 – 8 percent. However, such interventions have the effect of raising cost of lending by banks, thereby reducing borrowing for investment and consumption and, hence reducing aggregate demand.

To mitigate such short-run adverse effects of Zambia’s IMF-ECF program, social safety nets have been enhanced through increased social sector spending to cushion citizens from the burden that may come with such an adjustment program. Some reforms in the social sector have been the Expansion of social cash transfer beneficiaries and transfer values, expansion of food security packs, the Home-Grown school feeding Programme and Keeping Girls in School (KGS) Programme. Other reforms have been the increased expenditure allocations to health and education that has necessitated the provision of free education and the employment of more teachers and health workers. These reforms have been critical steps in improving livelihoods and reversing poverty.
However, major effects have been the rising cost of living and depreciation of the Kwacha. Also, delays in the disbursement of the various social assistance initiatives and low budget execution rate can erode the gains that Zambia’s reform program hopes to achieve. Lastly, uncertainties around debt restructuring may compromise the effectiveness of measures aimed at protecting the poor and vulnerable especially that the second disbursement of funds (US$188 million) under the program is conditional on reaching a debt restructuring deal with our creditors. Further delays in this disbursement will begin to affect the performance of the national budget.

Therefore, to effectively provide a buffer for the poor and vulnerable against the ongoing austerity measures and subsidy reforms, it will be important for Government to urgently finalise the debt restructuring process to free up resources that can be used to increase the low budget execution rates for social sector spending which have averaged only 65 percent in the recent past. Furthermore, even as the cost of living has continued on the high side, concluding debt restructuring negotiations also remains cardinal in calming the country’s cost-of-living and exchange rate risks.

About Author
Peter N Mumba is a policy researcher and development economist who currently coordinates activities of the Zambia Debt Alliance. He studied at the University of Namibia, graduating with a master’s degree in economics. He also holds additional qualifications in monitoring and evaluation, and business information systems.