ANALYSIS: NAKUBYANA MUNGOMBA, IGNATIUS MASILOKWA
THE debate of whether Zambia needs an IMF programme has heated up again. This time, with a deal feeling much more likely than ever before, the temperature is even higher. The question on everyone’s lips: what would an IMF programme really mean for Zambia? The deterioration of the country’s macroeconomic fundamentals over the years is well documented, including suppressed economic growth, rising inflation, depreciating Kwacha, a mounting debt burden, and the COVID-19 pandemic pushing the economy into recession in 2020. Against this backdrop, the Government is seeking an IMF programme as a catalyst to get the country on the path to recovery. For Zambia, the first step to securing an IMF programme would be a staff level agreement between Government and the IMF on steps for fiscal consolidation. With this, the Government then has the formidable task of negotiating a path to debt sustainability with all of its creditors. However, a staff level agreement may help provide a reasonable sense of confidence that Zambia is negotiating transparently and in good faith with all its creditors.
Negotiations with creditors will most likely include some combination of debt restructuring, refinancing, or reduction and relief. Once a sustainable path is agreed and signed with the external creditors, the IMF Executive Board can then approve a programme. Notably, working towards an IMF programme therefore lends credibility to our debt negotiation and restructuring strategy. In the last few weeks, Zambia has seen investor confidence soar, the Kwacha appreciate dramatically, and international reserve holdings double following an injection of US$1.3 billion equivalent special drawing rights (SDR) from the IMF. Indeed, things seem to be looking up as we reap the benefits of post-election optimism. However, this optimism is temporary and, unless it is backed by deliberate policy actions aimed at addressing the basic macroeconomic challenges, it will dissipate. Clinching an IMF programme would send the message to international stakeholders that the Government is serious about getting their house in order. This is best done when the Government is still enjoying the electoral goodwill. Most critics of the proposed IMF package point to the conditionalities and subsequent austerity measures that it would come with. However, a well-structured IMF programme must be economically, socially, and politically viable and sustainable. It is developed and agreed upon with the Government and implemented jointly. Economically, fiscal consolidation will be essential to agreeing a programme. We therefore expect that economic reforms would likely centre around cutting back on inefficient spending such as subsidies on electricity and fuel, while encouraging reforms to boost growth and access to concessional financing.
On social sector spending, an evaluation report on The IMF and Social Protection (2017) gives hope that an IMF programme would not encourage deep cuts. In fact, given the severe underfunding to social sectors such as health and education in recent years, it is conceivable that an IMF programme could mandate social sector spending to be protected and even expanded. This may take the form of requisite ringfencing of funds and setting spending floors, for example. Meanwhile, programmes such as FISP and Social Cash Transfer might be better rationalised and targeted. Using a case study of Ghana’s 2015 IMF programme, we can gauge what Zambia’s own program might look like. Similar to Zambia, at the time of its request, Ghana faced subdued growth, double digit inflation, and a relatively high debt-to-GDP ratio. Some of the measures instituted in the Ghana IMF programme included limitations on public sector hiring and wages; removal of subsidies; a crackdown on tax evasion and rationalisation of exemptions; increased tax on luxury goods and high earners; and the enactment of a Public Financial Management Act. There is no question that some of these would be tough measures for the people in a country already in pain like Zambia. However, years of public financial mismanagement have led us here and the treatment cannot be expected to be quick or pleasant. Once the country is back on a sustainable economic path, the people can reap the benefits of a well-managed economy and the associated economic growth. Although this will rely heavily on the newfound fiscal discipline being maintained long-term. For Ghana, at the end of its programme, the country’s GDP growth had increased from 2.2 percent in 2015 to 6.5 percent in 2019; inflation had fallen from 17 percent to 7 percent; and the debt-to-GDP ratio reduced from 73 percent to 64 percent. Moreover, the cuts in wasteful spending and increased revenue collections were channelled towards social services to support the most vulnerable. Gone are the days of the imposition of structural adjustment programmes that strike fear in the hearts of ordinary citizens that lived through them. As Christine Lagarde, former Managing Director of the IMF, famously declared in a 2014 speech: this is “not your grandmother’s IMF!” The Fund has learned from its past policy missteps. And as the other party in these negotiations, the onus is on our Government to negotiate a deal that is as economically, socially, and politically viable as possible in the long-run. As such, our national debate on the direction of policy must take this into account. The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR).
ANALYSIS: NAKUBYANA MUNGOMBA, IGNATIUS MASILOKWA