RESPONDING TO MR. SEAN TEMBO’S ARTICLE ON ‘WHAT NEXT AFTER IMF BAILOUT LOAN’
By Alexander Nkosi
Good morning Mr. Sean E. Tembo,
I have just finished reading your article on what next for Zambia after approval of the IMF program. I enjoy reading such articles from you because they stimulate debate. However, allow me to correct wrong figures, assumptions and inconsistencies in your article.
You alleged that when the PF administration left office in August 2021, the country’s domestic debt (government bonds, treasury bills etcetera) was about K80 billion. You further argued that this has increased to K190 billion as at present, an increase of K110 billion in 12 months. This is not true, the correct figure is that when PF left office domestic debt was K189.7 billion. In 2021 we were using the PF revenue mobilisation framework. In the first half of 2022, domestic financing was only K8.1 billion.
While your article is premised on the assumption that government is borrowing K110 billion in 2022 and this will crowd out the private sector, this is the exact opposite, domestic borrowing in the first half of 2022 is only K8.1 billion. Moving forward, the IMF deal which unlocks access to concessional borrowing will further ensure that we borrow less from the domestic market. This will help push down interest rates so that the private sector can borrow and invest.
You further talked about high copper prices and the need to finance the 2022 budget by increasing mining tax revenue. You are still working with the assumption that copper prices are around USD11,000 per tonne. I also want increased tax revenue from the mining sector, infact I want increased ownership. However, I’m very realistic with figures and fully understand the negative implication of any radical tax increase in the sector, this explains why the PF government was forced to make quick tax reversals after attempting to increase.
On copper prices, the correct position is that in 2021 the average annual copper price was USD8200 per tonne. In 2022, the projected average annual copper price is USD8000 per tonne, the current price is USD7800 per tonne. Therefore it is not correct to ride on the assumption that copper prices are very high in 2022 and therefore we are missing a huge opportunity to collect double revenue.
Copper prices fluctuate and right now prospects don’t look good. Had we premised our 2022 budget on a sharp revenue increase from the mining sector, we would be running into a huge budget deficit right now. On mineral royalties, making them tax deductible only resulted in a loss of K3.2 billion. Even if we reversed this, it won’t change our revenue that much.
On the IMF program, it is difficult to think of any tangible solution that can address Zambia’s economic challenges without addressing the debt crisis and improving the macroeconomic economic environment. As clearly seen in the communication from both IMF and the official Creditors Committee, the IMF program and debt restructuring are linked. Hence, to appreciate the importance of the IMF program, perhaps we have to look at what the situation would be without the program.
Abandoning the IMF program would have sent a wrong signal to creditors, debt restructuring negotiations would have broken down and debt default alarms would have gone into overdrive. This would have led to a chain reaction that includes: capital flight, rapid kwacha depreciation; high cost of public borrowing, reduction in national production, reduction in revenue, increase in unemployment and many other negative effects.
Under such circumstances, we would not manage to provide any subsidies. We would further struggle to fund: hospitals, schools, constituencies, infrastructure and other obligations. Hence as we discuss conditions under the IMF program, it is important to weigh that against the negative effects of not being on the program and failing to resolve the debt crisis. In short economic recovery would take very long and it would 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.
What next after the IMF program? Does being on an IMF program automatically mean development? No! The IMF program gives us the much needed breathing space; it helps us restructure our debt, attract investments, access concessional borrowing and also comes with a USD 1.3 billion loan under the extended credit facility.
As seen above the IMF deal is not all about the USD1.3 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.
In conclusion it is important to note that in your alternative budget, you advocated for scrapping off of FISP and social cash transfer while some critics of the IMF program are advocating for an increase. I hope you have not changed your position.
Thank you.