Both Dr. Situmbeko Musokotwane and IMF have not answered our questions- Amb. Emmanuel Mwamba

By Amb. Emmanuel Mwamba
Both Dr. Situmbeko Musokotwane and IMF have not answered our questions

I alerted the country that the failure of the $3billion debt reschedule was being reported as a very big scandal in major western capitals and the development had jeopardized the earlier initial success reported in the $6.3billion debt reschedule.

Here is a brief background and some aspects of the scandal;

1. On 26th October 2023, Dr. Situmbeko Musokotwane announced that Zambia had reached a historical milestone and agreed with External Bondholder Steering Committee to reschedule the $3billion Eurobond.

Zambia’s three international bonds rose sharply after the announcement, adding as much as 3.9 cents on the dollar.

There was hope that this development would restore full international capital markets access to Zambia and encourage long-term investment in the country.

2. However, the International Monetary Fund (IMF) was the first to raise immediate alarm when the details of the Agreement-in-Principle (AIP) between Zambia and the External Bondholder Steering Committee, were known.

3. The Agreement raised the coupon value from $3billion to $3.135billion.

Who raises the face value of their debt in debt negotiations?

4. Zambia was to pay $2.5billion in cash-flow to the bondholders during the period of the $1.3billion IMF bail-out ( 2024-2025).

Where was Zambia going to obtain $2.5 billion to give bondholders in one fiscal year when the very reason of its program with the IMF was to seek a $1.3billion bail-out?

This would immediately send Zambia to debt distress status, the very crisis the debt reschedule program was trying to fix!

5. Despite the G20 framework provision on debt suspension, Zambia pledged to pay the Past Due Interest (PDI) accumulated to $821million. The G20 Framework provides that the Past Due Interest must be written-off, but Zambia pledged to pay and clear the outstanding.

Whose interest or who was going to be the beneficiary for Zambia to pay the $821million which the G20 Framework encourages that it must be written-off?

6. While China and other multilateral institutions agreed to a haircut or to a discount of 40% on Zambia’s debt, Zambia accepted a discount of 18% from the bondholders.

Again Zambia was agreeing to pay more instead of demanding a bigger hair cut beyond 40%!

These terms were a clear violation of the G20 principles on equal treatment of debt and creditors.

The Common Framework was designed to coordinate debt relief offered by public and private lenders and set debt treatment standards across both traditional Western lenders and major new creditors like China, India and Saudi Arabia.

The Common Framework requires that a debtor country that signs a memorandum of understanding (MOU) with participating creditor countries to seek debt treatment from its other creditors that is at least as favourable as that of the MOU.

The Official Creditors Committee immediately rejected the Agreement between Zambia and the bondholders.

China, France and the Paris Club threatened to cancel or renege on the $6.3billion debt reschedule earlier agreed in June 2023.

Newspapers in Paris, London, New York reported the development as a scandal.
Musokotwane was ordered to cancel the deal.

On 20th November,2023 Musokotwane announced that the Agreement-in-Principle would not be implemented due to objection from the Official Creditors Committee. He stated that the agreement had failed to meet the G20 Framework on Comparability of Treatment.

The announcement sparked a sharp rally in Zambia’s three outstanding bonds, which has been partially reversed since Zambia said on November 10 that official creditors and the IMF had “expressed reservations” about the deal, sparking fears that the country’s drawn-out default could be extended still further.

This was a setback and Zambia was back to the old scenario before the debt reschedule.

Meanwhile the G20 Framework on Debt Service Suspension Initiative (DSSI) has expired and Zambia is expected to start paying its debt!
Under this arrangement, Zambia has not been meeting its debt service obligation since December 20, 2020.

And as usual, President Hakainde Hichilema is looking for people to blame including the Patriotic Front or China!

Below is the IMF latest response.

QUESTION & ANSWER OUTREACH ON ZAMBIA’S PROGRAMME WITH THE IMF

The IMF and the authorities (Zambian Government) have received some questions on the Zambia’s homegrown
programme supported by the IMF through a US1.3 Billion Extended Credit Facility (ECF).

This write-up is aimed
at responding to some of the most frequently asked questions.

The respondent is ERIC LAUTIER, IMF Resident
Representative, Lusaka, Zambia.

QUESTION: Could you tell us more about the IMF supported program for Zambia and the economic prospects for the country?

RESPONSE by Eric Lautier: “Absolutely. As you know, the country defaulted on its external debt in November 2020. Since then, Zambia developed its own economic plan to face this situation, and, in August 2022, our (IMF) Executive Board approved a 38-month, US$1.3 billion program to support Zambia’s efforts.

The IMF program supports the authorities’ (Zambian Government) efforts in restoring fiscal sustainability through fiscal consolidation and debt restructuring, making space in the budget for social spending such as on health and education, and enhancing governance and anti-corruption efforts,
particularly by improving the management of public finance – notably with the Integrated Financial
Management Information System (IFMIS).

Under the program, the authorities define their engagements for prudent policies and reforms,
including quantitative targets (the so-called quantitative performance criteria) and structural reforms (which come under the so-called structural benchmarks in the program).

These are targets that the
country must meet to show that it is making progress in addressing its economic problems. The IMF
then conducts bi-annual reviews of the country’s progress.

During the last review, we saw that the country has made significant fiscal effort and kept its commitments on track despite a challenging
domestic and global environment in 2023, including with lower copper price and production.

The IMF Board completed the second review on 20″ December, 2023, giving Zambia immediate access
to US$187 million, and bringing the total financial disbursements by the IMF under the arrangement to
about US$558 million.

But it is not only about financing, the Board approval also sends a clear message to other multilateral /bilateral partners and investors about Zambia’s commitment to remedy past weaknesses in economic governance and public financial management that led to an unsustainable debt overhang.”

QUESTION: Can you give us details on what performance criteria is, similarly what is a structural benchmark?

RESPONSE by Eric Lautier:

“Think of performance criterion as a specific quantitative target the authorities are trying to meet. For example, as I mentioned earlier, the quantitative performance criteria that was missed for the second review was on net international reserves.

The Zambian authorities
remain committed to build external reserves to make Zambia more resilient to external shocks. So, in
consultation with IMF staff they proposed a certain level of reserves to be achieved to meet their target to at end December 2023 and at end June 2024.

Structural benchmarks are critical measures that serve as clear markers on advancing the implementation of structural reforms; unlike quantitative performance criteria, they are usually not about reaching a numerical target.

Instead, they support the authorities’ plans for reforms, supporting big changes on policies and systems the country is targeting to achieve higher and more inclusive
economic growth.

Zambia has already made great progress on past structural benchmarks by shifting spending away from inefficient public investment and poorly targeted subsidies, towards greater
investment in health, education and the delivery of more social benefits.

These benchmarks can also be focused on improving governance and transparency.

Some examples of the foregoing are the submission to Parliament of the public private partnership Act or the implementation of the e-voucher under the FISP program to ensure flexibility in supply and increase transparency. In general, structural benchmarks target a wide range of topics and all the information is publicly available on our website (https://www.imf.org).”

QUESTION: Has the Zambian Government reform agenda managed to restore macroeconomic stability?

RESPONSE by Eric Lautier:

“As you know external factors were making reforms even more difficult in 2023, but the authorities implemented a tighter monetary policy to counteract inflationary pressures, coupled with substantial fiscal measures. Importantly, this fiscal prudence was balanced with sustained investment in essential sectors like social programs as well as education and health.

The authorities are also actively engaging with private creditors to address the debt situation.

So even though we are not at the end of the tunnel, Zambia has demonstrated commendable tenacity
in stabilizing its economy, with growth rates in 2023 and 2024 surpassing initial forecasts despite facing
its economic shocks.

However, challenges linger: decreased mining production, fluctuating copper prices, and delays debt restructuring have all contributed to a challenging economic landscape.

This has exerted pressure on foreign exchange rates and fueled inflation but the authorities remain resolute in their reform agenda.

QUESTION: Can you elaborate on the fiscal measures Zambia has implemented as part of this program?

RESPONSE by Eric Lautier:

“On the fiscal side, the Government has taken strides to spend within its
means, shifting from a history of unchecked expenses. For instance, the fiscal adjustment was about 1.8percentage points of GDP in 2023, on a cash basis, despite lower mining revenues. To achieve this, the authorities coupled prudent spending with more revenue collection from the non-agricultural, non-
mining sector. Social spending has been maintained, highlighting the Government’s commitment to uplifting the most vulnerable. The IMF-supported program continues to accommodate the much needed increase in spending in education and health, indluding extending free primary education to all
and hiring over 41,000 additional health and education workers in 2022, then 10, 221 teachers and health workers in 2023, and over 9,400 planned for both sectors in 2024. With the limited budget, the focus
should be able to spend better to ensure every public kwacha goes further.”

QUESTION: What steps has the Government taken to enhance revenue collection?

RESPONSE by Eric Lautier: “Zambia isn’t just streamlining costs; it’s also innovating to bring additional revenues. This is partly what makes a budget bigger and gives Zambia the financial fire power to conduct its policies. In the current debt overhang, improving tax administration, including by broadening the tax
base, and improving tax collection systems is critical to restore fiscal and debt sustainability. Authorities
(Zambian Government) are also trying to find new ways to ensure everyone contributes their fair share.
For example, authorities established a specialized mining unit to focus on small and medium sized mines and ensure all operating mines start paying taxes. The establishment of a unified large taxpayer office
will also allow the revenue authorities (ZRA) to focus on large taxpayers, while additional efforts are
devoted to improve compliance, reduce tax evasion, and ensure efficient and effective tax collection.
Of course, more can be done, indluding by leveraging digitalization, and we will continue supporting the authorities, notably through capacity development delivery to boost revenues.

QUESTION: What challenges does Zambia still face, and how have these impacted the economy? proven Zambian.

RESPONSE morer resilient: than showing “Before anticipated, resilience discussing and with real potential GDP challenges, for growth let growth. me now projected general how at the we 43 see Zambian percent the in outlook. economyt 2023 and The has
4.7 percent in 2024.

Rapid progress over KCM and Mopani operations as well as additional investments as in other mines, including Kansanshi and Sentinel mines would help increase investment and mining production in the medium term. Similarly, more investments in the Agri business and energy sector could help unlock untapped growth. But in times of high uncertainty for the global economy and
fluctuating commodity prices, or with weather related risks or unforeseen mining challenges here in
Zambia, it’s crucial to have wise economic policies and to build up” financial reserves for protection.
Now coming back to challenges, let me focus on three important elements: exchange rate depreciation,
inflation, and progress with the debt restructuring.
Lower production in the mining sector has reduced foreign exchange inflows and delays in the debt
restructuring could be curbing foreign direct investment. This combination of factors is exerting considerable pressure on Zambia’s external balance. With less foreign exchange entering the country, an imbalance between the demand for U.S. dollars and the supply depreciates the kwacha. Since Zambia imports most of its food and other key items, local prices become higher when the kwacha depreciates, and inflation increases.

In addition, food and fuel price shot up last year due to external shocks putting
additional pressures on domestic inflation.

Inflation has a direct impact on the population and the Bank of Zambia has acted to curb inflation.

Then I think it is important to highlight that the economy is still very much undergoing a significant debt restructuring as a result of past mismanagement.

Debt restructurings are a long and arduous process
requiring coordination between multiple parties.

An agreement was reached with the official creditors
last October and the discussion is ongoing with private creditors. In the meantime, Zambia will need to keep adhering to its strong commitments of increased revenues and efficient spending while preserving social spending, and strategic domestic borrowing.

Improving cash management could also reduce the financing needs, sustainably.

Looking forward, maintaining fiscal discipline, strategically adjusting monetary policy, progressing on debt restructuring, and implementing structural reforms are crucial to support macroeconomic stability.

Structural reforms will help attract private investment and enhance skills and education, promoting
economic diversification and private sector activity, ultimately generating more sustainable and
inclusive growth.

It will also be crucial to safeguard the good progress made so far, in particular fuel subsidy reforms which disproportionally benefit high income households.”

ERIC LAUTIER
IMF Resident Representative (Head of Zambia Office)
Evexia Commercial Comnlex 1 Church Road