DISCUSSING ZAMBIA’S IMF DEAL WITH ALEXANDER NKOSI- HAS THE IMF DEAL COLLAPSED? IS ZAMBIA NEGLECTING LOCAL SOLUTIONS? DOES IMF DEAL GUARANTEE ECONOMIC RECOVERY? IS IMF DICTATING RECRUITMENT?
By Alexander Nkosi
As the IMF debate rages on, there is so much information being thrown at the public, I have therefore decided to share this article to address the burning questions.
LOCAL SOLUTIONS
1. What do we need to make local solutions work? There are many factors we need to address but I will focus on four for illustration purposes:
1.1 Increasee access to affordable credit
1.2 Reduced cost of production
1.3 Government infrastructure investment
1.4 General enabling environment
2. 1 How do we increase access to affordable credit (low interest rates)?
One of the main reasons interest rates remain high is that government borrows heavily on the domestic market, crowding out the private sector. As long as debt service outlays remain high, government will continue borrowing heavily on the domestic market and interest rates will remain high.
How will the IMF deal help address this? It will allow us restructure our debt which will reduce annual debt service outlays and hence reduce domestic borrowing. It will further help us access concessional borrowing so that instead of borrowing heavily on the domestic market, we will access concessional loans. This will push interest rates down and allow the private sector have access to affordable credit for investment. This will make local solutions work.
2.2 How do we reduce the cost of production?
Zambia is heavily dependent on imports, both for production and consumption. We need to import machinery for us to produce better products and compete both in the domestic and foreign markets. We further need to import key inputs like chemicals we need in production. We also need to import fuel which is a key input in production.
However, as long as the kwacha remains weak against the dollar, the cost of imports will remain very high. What affects kwacha performance? We earn less dollars from exports, remittances and capital inflow. On the other hand, we lose more dollars through debt service and expensive imports like fuel and agriculture inputs. This creates a situation of low supply of dollars and high demand pushing the cost of dollars up.
How does IMF deal help address this? Debt restructuring will reduce the amount we spend on debt service. We pay our foreign debt in dollars, so the less dollars we lose through debt service the less pressure on the kwacha. The IMF deal also helps attract capital inflow as confidence builds. We get more dollars and opportunities for joint ventures. Increased investments lead to increased production and export earnings (dollar earnings). Hence we lose less dollars and gain more leading to kwacha appreciation. With a strong kwacha, our entrepreneurs are able to import machinery, chemicals and inputs required for production at a low cost. We are also able to import fuel and fertiliser at a low cost. This pushes down the cost of production and increases competitiveness of our products and profitability. Local solutions flourish, producing more, exporting more, earning more revenue and reducing dependency on borrowing.
2.3 How does government invest in support infrastructure? Right now most roads, schools, health facilities, dams, industrial yards and many other projects have stalled because we need to borrow heavily to finance them as domestic revenue is exhausted by debt service and salaries. Even if we reverse tax deductibility of mineral royalties and earn an additional K3.2 billion, it won’t finance these projects. Do we increase taxe rates? If we do, we will kill consumers and producers? Do we borrow heavily? If we do, we will worsen our debt situation.
How does an IMF deal come in? Debt restructuring reduces annual debt service outlays and releases resources needed for investment in infrastructure so as to enable local entrepreneurs flourish (local olutions). Increased confidence in the economy also helps boost PPPs required to leverage financing of projects like roads and energy projects.
2.4 General enabling economic environment. Consumers need tax relief to increase disposable incomes and encourage consumption as well as savings and investment. People have to save their money in banks for others to borrow. They also have to save to invest. How do we reduce tax rates if we have pressure to raise more to pay debt? Debt restructuring helps reduce this pressure and this is how the IMF deal helps address this.
Government has a total domestic debt of K189.7 billion which should be close to K200 billion by now. Domestic arrears stand at K46.9 billion and this could be above K50 billion by now. Most contractors and suppliers have lost properties to people they owe, their businesses have closed and workers have lost jobs. Clearing this debt and arrears is key to unlocking economic activities, but where does government get the money to speed up the process of dismantling debt and arrears? Borrowing at commercial rates will worsen the situation.
How does the IMF deal help? Debt restructuring reduces expenditure on debt service and releases money which can be channelled to dismantling domestic arrears. IMF deal also improves access to concessional borrowing which can help finance projects so that we can channel resources meant for these projects to dismantling arrears. Paying contractors and suppliers helps boost economic activities (local solutions).
WHAT IF WE ABANDON THE IMF DEAL?
3. What happens if we abandon the IMF deal?
Having reached a staff level agreement, creditors are ready to negotiate and potential investors are assured of a more objective debt sustainability analysis and management which can help them commit long term investments.
The moment this deal breaks down? Debt restructuring will break down and debt default alarms will go into overdrive. This will be followed by capital flight and rapid kwacha depreciation. The cost of borrowing on the international markets will skyrocket and most local banks will fear dealing with government. Investors will shift their investments elsewhere and production will be negatively affected and domestic revenue will shrink. Due to kwacha depreciation, imports will be very expensive. Inflation will go up; further pushing up the cost of living.
Given this analysis, how can domestic solutions work in such an environment? Where do we get money to subsidise fuel, agriculture inputs and education? There will be no resources for mass recruitment. In short economic recovery will take very long and it will be a very painful process characterised by increased poverty, mortality and other far reaching negative consequences. We fear IMF conditionality? We don’t have money to fund anything we fear IMF will object to. In short, there will be more things we will fail to do without the IMF deal.
DOES A COUNTRY NEED TO BE ON AN IMF DEAL TO DEVELOP?
4. Does it mean a country has to be on an IMF deal to develop?
The answer is no! Even Zambia did not need to be on an IMF deal to develop. We found ourselves here because we mismanaged the opportunity to manage our resources and domestic solutions well at a time our debt was so low, kwacha below K10/$, single digit inflation and GDP growth rate above 5%. This was the best time to work with reduced borrowing, go flat out to implement local solutions without requiring IMF deal. While a certain level of borrowing is required, we ended up with foreign debt of USD 12.9 billion, domestic debt of K189.7 billion and domestic arrears of K46.9 billion.
Despite this heavy borrowing, GDP shrunk to around USD 23 billion from around USD 27 billion. We remained dependent on copper with the manufacturing and tourism sectors not changing much. Challenges in the agriculture sector persisted. In short despite some positives like investment in transport, education and health infrastructure, we are in deeper economic problems than before. This is what is pushing us to IMF and we are doing it to make local solutions work.
DOES AN IMF DEAL GUARANTEE DEVELOPMENT?
5. Does being on an IMF deal automatically mean development?
No! The IMF deal gives us the much needed breathing space; it helps us restructure our debt, attract investments, access concessional borrowing and also comes with a USD 1.4 billion loan under the extended credit facility. As seen above the IMF deal is not all about the USD1.4 billion, it comes with all these benefits which we need to make our local solutions work. Success of the deal therefore depends on how we utilise the breathing space we get and all these opportunities that come with the deal. This is where we need to be very innovative and use resources well.
5.1 Infrastructure: For infrastructure development, we should go for PPPs where possible and use ZNS and local contractors where PPPs are not possible. This will enable us work on infrastructure at a way reduced cost and also ensure resources remain within the economy by using ZNS and local contractors.
5.2 Mining: In the mining sector, we should support small scale mining firms as part of our local investers’ incubation program. We should further monitor all mining firms closely to cut down on revenue leakages and ensure they stick to their commitment to invest USD 2.5 billion in expanding production after being given the tax incentive (deductibility of mineral royalties). We should also increase local stake in Mopani and future mining projects to ensure we increase local ownership of means of production. Lastly, we need to emphasise value addition in the sector through joint ventures, like the initiative we have embarked on with Congo DR.
5.3 Manufacturing: In the manufacturing sector, we should provide economic incentives to firms since we will be spending less on debt service after debt restructuring. There is also need to cut down on bureaucratic processes affect smooth operations of businesses. We also need to step up trade facilitation and tag in the private sector in bilateral trade negotiations within the region and beyond. Improved business environment coupled with an Kwacha appreciation arising from the IMF deal will local firms import machinery and other inputs to expand manufacturing.
5.4 Agriculture: A strong kwacha will help our farmers get inputs at a low cost. Government should therefore clean up the agriculture inputs procurement process and ensure these benefits are passed on to farmers. Reduced debt service should enable government invest in improving agriculture extension support. Government through ZNS should further construct dams across the country for water harvesting and irrigation so that we can have a significant increase in agriculture production.
5.5 Tourism: In the tourism sector, let us reduce the cost of tourists reaching Zambia. We should also speed up infrastructure development in key tourist hot spots in the northern circuit. We should promote state and private sector joint ventures in establishing parks in tourist hot spots to diversify tourism products. We should also promote local packages so as to increase the number of local tourists. Our embassies abroad should be given strict targets and run tourism promotion campaigns to increase foreign tourists visiting Zambia. We also need to monitor players in the sector closely so as to cut down on revenue leakages. Some African countries earn as much as USD11 billion per year from the sector, so there is huge potential.
5.6 Overall, we need to revisit our investment policies, review the repatriation of profits and ensure local investers across sectors are receiving favourable treatment. Increased participation of the private players in the energy sector is also important so that electric power generation keeps pace with growing industrial needs.
HAS IMF DEAL COLLAPSED?
6. Has the IMF deal with Zambia collapsed? Why is it taking long?
The deal is very much alive, it is a process. After reaching the staff level agreement, a debt sustainability analysis was conducted by IMF. This essentially gives a clear picture of our debt situation which is then used to engage creditors. A committee of bilateral creditors will be constituted and private and multilateral creditors will also be engaged. Once this is concluded, details will be presented to the board for approval. It is a thorough process.
IS IMF DICTATING CIVIL SERVICE RECRUITMENT?
7. Is Zambia getting permission from IMF to recruit? The whole deal requires engagement in a transparent manner. Mass recruitment of health workers and teachers is a huge cost with potential to worsen our debt situation which IMF is facilitating to resolve with our creditors. Hence to finance this recruitment, we are using part of the Special Drawing Rights granted under IMF. This explains why the recruitment was discussed with IMF.
CONCLUSION
8. In conclusion, I’m challenging critics of the IMF deal to explain in clear terms how we can address our economic challenges in a better way than through engaging IMF. Produce detailed papers indicating how we are going to handle our debt crisis, ensure kwacha appreciates, lower the cost of production, lower interest rates, dismantle arrears, invest in infrastructure and other economic and social sector spending required for local solutions to work. Include actual figures year by year so that we have practical alternatives. It is not enough to just keep ridding on Pan African slogans without any implementable alternatives. Don’t just say we implement local solutions, answer these questions and share all the necessary details.