Nkosi responds to Mwamba
Amb. Emmanuel Mwamba Wrote; “IMF will never be a solution to the challenges our country faces. No country has developed on an IMF Programme. EM8”
In Response, Alexander Nkosi Wrote;
DISCUSSING IMF DEAL AND DEBT RESTRUCTURING WITH AMBASSADOR EMMANUEL MWAMBA
By Alexander Nkosi
Following the statement issued on July 30 by the Creditor Committee for Zambia under the Common Framework for Debt Treatments beyond the DSSI, Ms. Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), issued a statement welcoming this move by the Official Creditor Committee for Zambia.
In response to the statement from IMF, Ambassador Emmanuel Mwamba argued that IMF will never be a solution to the challenges our country faces.
My reaction to Ambassador Mwamba’s statement is that we do not seek an IMF deal and debt restructuring as an end but as a means to unlocking opportunities that will allow us to invest in home grown solutions that will help stimulate key economic sectors that include: agriculture, manufacturing, mining, tourism and energy. What we seek from IMF and debt restructuring is breathing space which is key to the success of home grown solutions.
To put this into context, at the end of 2021- external debt was USD 12.9 billion, domestic debt was K189.7 billion and domestic arrears were K46.9 billion. Out of a domestic revenue of K98.9 billion, K78.6 billion was allocated to debt service. When we add the civil service wage bill, the entire domestic revenue is exhausted. Given this scenario, it is very difficult to implement home grown solutions without addressing our huge debt and without access to cheap and flexible loans. A huge component of our budget is still financed through borrowing. Some critics argue that reversing the decision made by government to make mineral royalties tax deductible (added as a cost when calculating Corporate Income Tax) would help us increase domestic revenue, clear debt and finance the budget without borrowing. This is not true, making mineral royalties tax deductible only resulted in a loss of K3.2 billion (US188 million). This is only 4.3% of our fiscal deficit and 4.1% of our total allocation to debt service.
Critics of the IMF program fear that before we get the deal, we will be asked to remove education subsidies, agriculture subsidies and implement an employment freeze. What is happening right now is that at a time we are close to getting the IMF deal: government has just recruited over 40,000 teachers and health workers in a single year; FISP which is being transformed into a Comprehensive Agriculture Support Program (CASP) has been doubled to K10 billion (close to 100% increase from last year); free education has been extended to secondary school, bursaries introduced for boarding secondary schools and an increase in tertiary education scholarships.
Why is an IMF program important for Zambia? The benefits of an IMF program are not limited to the USD1.34 billion loan under the extended credit facility. These benefits include:
1) Debt restructuring: From the statements issued by the Official Creditor Committee and IMF, it is clear to see that the IMF program and debt restructuring are linked. Why do we need debt restructuring? Currently, about 75% of domestic revenue is taken up by debt service. Debt service allocations keep growing every year and very soon the figure might surpass domestic revenue. The logic here is simple, if we reach a situation where all the money we raise through taxes, charges and fees is taken up by debt, it means that we have to borrow to pay salaries and support economic and social sectors. This worsens the debt stock and it further implies that in the coming years, more has to be allocated to debt service. This leaves less for economic and social sectors, interest rates go up and private sector performance goes down. As a result of this, domestic revenue dwindles. Debt restructuring will release resources so that we can invest is supporting agriculture, local participation in mining, manufacturing, tourism and energy. It will further reduce the pressure for domestic borrowing by government thereby reducing interest rates and allowing the private sector to borrow to grow their businesses.
A good example of the benefits of debt restructuring is what has happened after external debt service suspension, the concepts are different but the benefits in terms of releasing resources to economic and social sectors are similar. What has happened after external debt suspension is that pressure to borrow has not only reduced but we have also reallocated K19.7 billion from external debt service to critical areas like agriculture and dismantling of domestic arrears. Whereas in 2021 we allocated K5.6 billion on FISP, because of external debt service suspension, in 2022 we have increased this to K10 billion (K5.3 billion initially budgeted for and K4.7 billion in the supplementary budget). In 2021 we allocated K2.7 billion to dismantling of domestic arrears but because of external debt service suspension, we have increased this to K9.7 billion (K3.1 billion initially budgeted for and K6.6 billion in the supplementary budget). This is a clear demonstration of the positive impact of reduced annual debt service outlays.
2) USD1.34 billion loan under the extended credit facility: We are heavily dependent on the mines for forex and every time we spend on debt service, buying fuel, fertiliser and other imports- we lose a lot of dollars and since we have limited sources of forex, we end up with balance of payment problems and kwacha also depreciates. We need the USD1.34 billion to support this as we diversify and grow our export base. This comes at very low interest rates and a long period of repayment unlike mopping the domestic market for dollars, leaving the kwacha tumbling and resulting in an increase in the price of key imports like fertiliser, fuel and other inputs in production.
In our context, IMF program and debt restructuring are like an egg and chicken. On one hand the IMF staff level agreement and an independent debt sustainability assessment conducted by IMF and World Bank have been key in debt restructuring discussions, on the other hand the USD1.34 billion IMF loan will only help our economy if debt is restructured. In the absence of debt restructuring it will all be swallowed into the deep pit of economic problems.
3) Access to concessional borrowing: Related to point (2) is access to more concessional borrowing that come with being on an IMF program. Zambia will still need to borrow even after debt restructuring. However, instead of heavy borrowing on the domestic market and international commercial markets, we will have increased access to concessional borrowing. A simple example is that If we borrow USD1 billion at 20% to be repaid in 3 years in equal instalments, we will be paying USD400 million per year. Imagine if we have 5 similar loans? We will end up paying USD2 billion per year. Now imagine if the USD1 billion is a concessional loan at 1.5% interest over 10 years? We will be paying USD102 million per year. If we have 5 such loans, we will be paying USD510 million instead of USD2 billion. This will allow us to invest in growing the economy and supporting social sectors without being chocked.
After reaching the staff level agreement, the World Bank has pledged USD959 million to support economic recovery. USD294 million has already been committed while USD665 million was approved last week. African Development Bank has also pledged over USD500 million to support economic recovery under the African Development Fund. In just the first six months of 2022, we are almost surpassing our annual target for grants, the level of confidence is very high.
4) Attracting investments: Both foreign and local investers need a stable and predictable economic environment. When we are on an IMF program, investers will be assured of a stable and predictable policy environment. Government will borrow less from the domestic marketing thereby encouraging increased local investments. FDI will also increase. FQM has committed to invest USD1.35 billion in expansion and nickel project, and more firms are investing in exploration. Zambeef is investing USD100 million expanding its current investments. More investments will come in as we get into 2023.
In conclusion, it is important to understand that there are many benefits to the IMF deal and debt restructuring. It would be good to hear tangible alternative proposals from Ambassador Mwamba. How do we deal with our debt? How do we deal with huge debt service outlays? How do we deal with the fiscal deficit? How can the private sector flourish if we still borrow heavily from the domestic market? How do local businesses that need to import capital equipment and inputs flourish if our currency is left to depreciate beyond K24/ dollar? How do we provide the required support and infrastructure to economic sectors if 75% of domestic revenue goes to debt service? It would be good for Ambassador Mwamba to share feasible alternatives with quantified targets.