In this week’s Monday opinion, we look at whether or not Zambia needs an IMF package. Does this mean that there are no other options to correct the debt situation and finance our public spending?
The Zambian government primarily finances its spending through taxes and non-tax revenues. In 2021, the government planned to achieve tax and non-tax revenue targets of 44.5% and 10.6% respectively as a percentage of the national budget. As domestic revenue was insufficient to cover expenditure, the government ended up making up the deficit by borrowing. In 2021, the government planned to acquire 14.6% domestic financing and 30.6% external financing.
Now let me draw your attention to an economic program without the IMF and what it might look like. The option of raising taxes or even introducing new ones to maximize income can be counterintuitive as it will have a negative impact on individuals and businesses. The result can be business failure, high cost of living, unemployment, and subsequently further shrinkage of the tax base.
The government may need to sell some of its assets, privatize parastatals, or sell Mukula to raise additional funds. Selling assets and privatizing may not be a popular decision of citizens, given the impact of privatization left by IMF / World Bank Structural Adjustment Programs (SAPs).
Another way would be to quickly recover the proceeds of crime and corruption; however, this exercise could be time consuming and therefore uncertain to support domestic resource mobilization.
The other option is to ensure that all parastatals are run profitably and contribute to government revenues. Unfortunately, only a few SOEs are making a profit right now. And to make them all profitable and then pay dividends to the government, it will take some time.
The government must stop financial leakage and generate huge savings to channel into key sectors. This is an ongoing activity that may require many structural changes, especially in the civil service, before we can see the fruits of it.
One inevitable option will be for the government to embark on austerity measures – cut spending or freeze jobs. This will most certainly be unwelcome, especially among citizens, especially young people.
Therefore, without the IMF, Zambia must borrow from external commercial creditors. Zambia’s negative credit rating outlook and debt-to-GDP ratio are not attractive for cheaper and unpleasant loans to all lenders, unless they have very high interest rates. As a result, the government can borrow domestically and thereby overburden the private sector.
Now let’s turn to the unique benefits of the IMF’s involvement in Zambia’s economic stimulus package.
Besides technical support, IMF loans come with repayment flexibility when faced with repayment problems, interest rates are very low and concessional, there is a possibility of debt cancellation, helps build the confidence of other creditors with non-concessional loans and additionally provides an opportunity for debt restructuring.
The restructuring will reduce the current debt service as a percentage of the budget to less than 40%. Without the IMF package, the debt service will continue to increase, the budget deficit will widen, health, education and social protection spending will be reduced due to the debt trap situation we are in. let’s find. The IMF helps you spend in key sectors while servicing your debt in a sustainable manner and growing the economy.
International creditors use the IMF’s involvement in a program as an assurance that risk will be reduced on their part and therefore support restructuring. Creditors perceive the IMF’s participation as a technical guarantee and benefit from its surveillance function whereby a country implements sound macroeconomic management and therefore commits to servicing the debt.
So what has changed between the IMF of the SAP and the IMF of the Extended Credit Facility (ECF)? Unlike the SAP where economic policies have been imposed, the IMF’s current engagement with Zambia is based on a mutually beneficial agreement that Zambia must develop its own economic recovery plan.
The IMF’s capacity building (CD) program, which includes surveillance, technical assistance and training, has made significant progress. The convergence of CD, surveillance and funding, as well as an overall methodology adapted to the country have modified the delivery to allow a more coherent implementation.
Traditional SAPs had several flaws, one of which is the disproportionate reduction in social spending. When there are cuts in public spending, disadvantaged communities, often poorly organized, are the first to suffer. In current IMF demands, government support for social protection is one of the preconditions for Zambia to join the IMF program.
Questions of where we borrow from and why should drive the debate on whether we need the IMF or not. Based on Zambia’s current economic situation, any real stimulus package will require sacrifices, whether by the government alone or with the IMF. While we understand that the change of administration gives hope to investors, CTPD believes that without an IMF program access to finance will be costly for Zambia and, due to the problems that precede this article, we believe that the IMF will be key to unlocking cheaper financing and accelerating economic recovery.
Mr. Boyd Muleya is Research Officer at the Center for Trade Policy and Development, he is an economist and banker by training, and his areas of research interest include monetary economics, financial markets, investment analysis and financial inclusion.