Business

What Zambia needs and wants from IMF

ZIPAR: CAESAR CHEELO and PAMELA NAKAMBA-KABASO
RECENTLY, a heated debate has raged about whether or not Zambia needs International Monetary Fund (IMF) support for its Economic Stabilisation and Growth Programme (ESGP) dubbed Zambia Plus. Different observers have taken divergent positions on the matter.

Some social media commentators have insinuated that Zambia is in such dire straits that without IMF support, the economy would crumble and fall apart.
On the other hand, President Lungu and the Minister of National Development Planning Lucky Mulusa put forth the Government’s official position, expressing that Zambia does not need the IMF’s US$1.3 billion bailout package. In 2015, the country survived its worse downturn in decades and the worse is behind us; we would therefore survive without IMF aid.
At a glance, this would seem to be at variance and inconsistent with what the Government has been doing recently. Since late last year (2016), Minister of Finance Felix Mutati has been putting together Zambia Plus as a home-grown programme, which among other things is being used in negotiating an IMF-aid deal worth about US$1.6 billion.
In May this year, Mr Mutati announced that a proposal had been submitted to the IMF so that Zambia was thereafter simply waiting for the IMF Board to meet in August and take a decision on whether or not to bail out Zambia.
As a policy think tank, we thought it prudent to add to the debate and hopefully help to clear the air about a few things. Our main message is this: “Zambia does not need the IMF for survival, but Zambia wants the IMF under its current circumstances.”
Perhaps unbundling this message a little is worthwhile. Since the economic liberalisation and public sector reforms of 1991/92, Zambia has painstakingly built systems, processes and institutions of economic governance. Over time, these have become strong and resilient, effectively supporting robust growth that averaged six to seven percent per annum during 2000-15.
Indeed, the economy weathered a notable downturn in 2015 and is now slowly rebounding. In this sense, the Head of State and the Minister of Development Planning are quite right; should the IMF Board opt not to support Zambia Plus, the economy would still survive.
Re-establishing the robust growth rates of the past would most likely be relatively slow, but the economy would survive and eventually, improve.
So, if we can survive without the IMF, why did the Cabinet authorise the Minister of Finance to negotiate an IMF-aid deal? Is the Government being self-contradictory? The simple answer is no, it isn’t. As we have already said, Zambia does not need the IMF, but it wants the IMF…
And Zambia should indeed want the IMF for three main reasons: firstly, an interest-free aid package of US$1.3 billion or US$1.6 billion is no small amount. It is equivalent to about two or three years’ worth of external debt service payments, depending on exchange rate movements.
The savings on external debt servicing under IMF support would thus be huge, and would be critical for sustaining key infrastructure, social protection and poverty reduction spending over 2018-20.
Secondly, internally, Zambia still faces fiscal discipline challenges. In 2017, our fiscal deficit and public debt have continued to mount. The total public debt is now about US$7.2 billion, equivalent to US$2,400 or K22,800 per family for the three million households in Zambia. These mounting pressures are despite the 2017 national budget address’s main message which was: “We cannot spend what we do not have. We cannot borrow beyond our ability to repay.”
Clearly, Zambia needs some level of external impetus that will help to sustain a higher level of fiscal discipline.
Finally, we should want the IMF because it will serves as a signal to the international community that Zambia is serious about the business of economic governance and is a safe environment for foreign direct investment (FDI) to locate itself.
To illustrate this, Ghana enrolled to an IMF-supported programme in April 2015 due to macroeconomic instability and fiscal challenges very similar to those in Zambia from 2011 to date.
Between 2012 and 2015, annual FDI inflows to Ghana fell by 0.3 percent per year on average and in 2016 – the only full year after the country secured IMF support – the FDI inflow rate rebounded to 9.2 percent.
In contrast, in the absence of an IMF deal, Zambia’s FDI inflows fell continuously, averaging minus 3.1 percent per year during 2012-16; in fact in 2016, FDI inflows fell by a staggering 70.4 percent.
Without the IMF, the international community will not gain as much confidence in the Zambian economy as it would with an IMF-supported programme.
We would implore the Government to hold fast to the path of courting the IMF through the Zambia Plus negotiations. As such, the Government must hope for the best and plan for the worse, including through the social tuning and mentoring that the leadership has already initiated in terms of the messages about the economy’s ability to survive should the IMF deal fall through.
The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR). For details contact: The Executive Director, ZIPAR, corner of John Mbita and Nationalist roads, CSO Annex building, P.O. Box 50782, Lusaka. Telephone: +260 211 252559. Email: info@zipar.org.zm.

 

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