Today, we would like to talk about the 2019 Article IV report that was recently released by the International Monetary Fund (IMF). Firstly, we must acknowledge that IMF reports are not written to be easily understood; the data is presented at an aggregate level. So, the fact that the Ministry of Finance have so far only regurgitated the summing-up of the IMF Board discussion, which isn’t informative, is not surprising.
Here’s one fact from the report that we feel is of serious concern: Under the baseline projection, five years into the future, the average Zambian will be 7.5 per cent poorer than they were in 2018! And, in some ways, that projection is fairly rosy, as it projects a recovery from this year’s drought and (modest) growth in the mining sector beginning next year. Even with the (unjustifiably) optimistic IMF staff “adjustment” scenario, per capita GDP would decline through 2023. This is the outcome assuming that there is no financial crisis. People should understand and be talking about this. The baseline outlook is for sustained suffering.
IMF staff reports don’t make statements about the likelihood of financial crisis, because doing so might initiate a crisis. Instead, they have risk assessments, which are set out in annexes (and tables) and are fairly nuanced. So, in this case, Zambia’s balance of payments and real exchange rate are noted as not being significantly out of line with fundamentals. So, this might sound reassuring. But the assessment should be read to mean, “Zambia’s house is on fire”. Put simply, the International Monetary Fund is warning that we are flirting with a financial crisis.
Here are two points worth noting from the report:
1. Government domestic payment arrears are projected to increase by ZMK12.35 billion during 2019, to ZMK 27, 936; and
2. Gross international reserves are projected to fall to the equivalent of 0.5 months by the end of 2024.
The international reserve figure is partly projection and partly target, since the BoZ’s market purchases/sales have an impact on reserves, with a corresponding effect on the exchange rate, since it changes the demand/supply balance in the market. So, what the report is saying is that, in the absence of a further significant depreciation of the kwacha, international reserves are going to steadily fall. This assumes that the situation in the mining sector is going to stabilise.
But here’s the thing, dear readers, falling international reserves to 0.5 months of cover is not sustainable, and financial markets know that. So, the baseline projection is basically saying that either something is going to be done to improve the outlook or there will be a crisis, sooner or later. The build-up in domestic arrears and new VAT refund obligations in 2019 are projected at the equivalent of 4.3 per cent of GDP. The report doesn’t provide much detail on the domestic arrears. In April 2019, arrears to NAPSA totaled K1.1 billion, compared to total domestic arrears of K15.585 billion at the end of 2018. Unpaid VAT refunds at end of 2018 totaled K4 billion. So, there is about K10 billion in unpaid obligations to others, whoever they may be. Our wish is that Dr Bwalya Ng’andu, our new finance minister, can tell us who it is that government owes this money to. For sure, the build-up in domestic arrears is going to create problems. It is hard to know who is bearing the brunt of all this in the absence of data.
Further, we would like to petition Dr Ng’andu to take the kind advice from his colleague Chibamba Kanyama who says time is now for Zambia to engage the IMF and solicit for a new country representative to replace Alfredo Baldini who was recalled a year ago.
After analyzing the outcome of the discussion between the IMF Board and the Zambian government, Kanyama says the position of the IMF Board was not about hopelessness, but a clear guidance of what actions government needed to take to reverse the deteriorating economic fortunes.
CHIBAMBA Kanyama: “What the IMF Board has assessed is not new to Zambia, not even to the government. Those fears have recently been expressed by government itself, leading to ‘re-announcement of austerity measures in June’. What is new is that the concerns are coming from the IMF Board. What I strongly read from the IMF Board position is that IMF is ready to help Zambia. This message is carefully nuanced in the statement and government observes the hidden but clear invitation. What this means is that Finance Minister Bwalya Ng’andu should pick up the phone and call the Mission Chief for Zambia to do two things. First, ask her to send a replacement to Alfredo Baldini, IMF Resident Representative, who was recalled in July 2018…Second, the Minister should agree with the Mission Chief on a clear programme roadmap, more so that we are heading for general elections in two years’ time.”
This, to us, sounds like free advice from someone who understands the IMF language – having worked with the international organization in Washington DC – and also the shortfalls of the PF government, being a citizen of this country. Chibamba means well, listen to him. You don’t need to give him any credit, just do as he is advising and claim both the benefits and ingenuity.