BACK ON THE PATH

Last week saw us edging ever closer to the denouement of the IMF-Zambia narrative, as the Minister of Finance announced that the consultative process for the IMF support program was nearing its final stages.

Hon. Felix Mutati, Finance Minister of Zambia, poses for a photograph.

The “will they won't they" saga of IMF-Zambia ended at the close of 2016, when it was announced that the Fund would indeed be entering the country with an economic supplementation program sometime at the end of 1Q2017.

However, until now we have been left on a cliff-hanger regarding the finer details of the program—of what it will consist, and how it will be packaged. Estimates say the sum of the financial support provided could be as high as USD1 billion, enough to help cover the financing needs stated in the government's 2017 Budget of USD1.2-1.3 billion.

The upshot of these almost year long consultations and the impact they will have in shaping the program remains the real burning question at the forefront of many minds.

The Hon. Felix Mutati, who was in London last week attending talks with potential investors, is soon to present a “letter of intent" to the cooperating partners, regarding the kind of collaboration Zambia will propose to the IMF. Judging by the tone of the Minister's comments made two weeks prior to this, at a public debate organized by the Economics Association of Zambia, it appears the Zambian authorities are determined to be the driving force behind any IMF intervention.

“We are taking ownership and responsibility for the execution of our own economic recovery program," Mutati announced. “External organizations, including the IMF, as well as the international business world, and the private sector, must feed into this."

According to the IMF's mandate, any country facing severe financial trouble that threatens the international financial ecosystem, which the IMF was created to protect, can apply for assistance. Programs can help member countries mitigate the effects of financial crisis, resolve balance of payment problems, and avoid sovereign default. IMF aid has also been known to unlock other financing, for, if the member country meets required conditions of sound policies and government commitment, investor confidence is typically increased. The overall aim, therefore, is to direct drifting countries back onto a path of sustainable economic growth.

Currently, the IMF has programs operating in over 50 countries around the world. Since the start of the global financial crisis in 2008, the agency has issued more than USD323 billion in resources to various members.

In October 2016, the IMF conducted a mission in Zambia, led by Tsidi Tsikata, to assess the complexities of Zambia's situation. In a press release published at the end of the mission the IMF diagnosed external and domestic shocks, coupled with an unbalanced policy mix, government overspending and a build-up of arrears, as the country's principal afflictions.

While a tightening of monetary policy had resulted in more stable kwacha and low levels of inflation, the side-effect, reported the IMF, was squeezed liquidity, which, combined with these other factors, had placed considerable stress on the private sector and the financial system.

This was confirmed by Leonard Mwanza, CEO of the Bankers Association of Zambia (BAZ), in conversation with TBY last week. “In 2016 economic activity was flat," he said, “which translated into the banking sector having empty loan books and issues of liquidity. With tight liquidity and high interest rates, the pressure on customers to be able to service their debts and NPLs increased.

“And, whilst liquidity is better now, it is still true that we have not reinvested most of the money to the level necessary to push and grow key economic sectors," Mwanza cautioned. “The fiscal deficit on the government's side is pushing up treasury rates, which remain high (22%) in relation to inflation (7%)."

Such financial woes mean that many are welcoming the IMF's arrival in Zambia. Average lending rates in the country are at 29.4%, choking both SMEs and individuals. In a well-balanced environment, Mwanza pointed out, interest rates should have been scaling down in line with inflation. Such financial woes mean that many are welcoming the IMF's arrival in Zambia.

However, some are awaiting the arrival of the IMF with reservations. As the Honorable Sebastian Kopulande, CEO of the Zambian Trade and Investment Centre, told TBY, “I am optimistic, conditionally though. We must define what we want. If we don't do so, then we will be contracting a long-term debt that will not be invested in economic activities to directly increase our capacity to payback."

Indeed, many of our interviewees are echoing this, keen to emphasize the vital role Zambia itself must play in these negotiations. Kopulande highlighted that “If we receive the promised resources from the IMF, we need to have mapped out how we are going to employ such resources, what exactly it is that we want to achieve, and be able to set success benchmarks, so that we make sure that this program works, and that it works for us."

But it was Mutati who drove the message home loud and clear at the EAZ debate. “In past years we have criticized the IMF and we will continue to do so if it does not fit into our own ideas about how best to reform our economy," he said. “There is no good in imposing ideas from outside. We are entitled, as members of the IMF, to drive our own recovery."

The IMF also stress that conditions linked to loan disbursements must be appropriate to the country in question. In line with this assertion, aside from financing, the organization offers technical assistance, policy advice, public financial management, and banking supervision to its struggling member states.

Of course, there are a growing number of sceptics who express the usual concern relating to IMF conditions. Last year rumors abounded: the IMF would demand the privatization of state-owned companies such as ZESCO or Zamtel; the IMF would crack down on government spending, reducing budgets for health and education.

Their fears were not entirely unfounded. It is true that the government is so far sticking to its new year's resolutions, having embarked on a “fiscal fitness" mission, with belt-tightening and austerity measures. In early 2017, for example, cuts were made to the substantial subsidies on electricity and fuel, a move that has been championed by a fair few of The Business Year's interviewees in the private sector and in multinational organizations.

Then there is the question of what kind of package will be implemented, and how effectively this will dovetail with Zambia's own economic recovery strategy. The IMF lists several packages available to member states. For example, over the last ten years, under the Poverty Reduction and Growth Trust (PRGT) umbrella three new types of loans were created: the Extended Credit Facility (ECF), the Rapid Credit Facility (RCF) and the Standby Credit Facility (SCF).

There are differences between these instruments with relation to timeframe –ECF is medium-term, SCF is short, and RCF is urgent – and levels of concessionality, though their commonalities include low interest rates, and structures that complement poverty reduction and growth objectives.

The devil is in such details for the likes of Charles Carey, CEO of Cavmont Bank, who told TBY last week that he welcomes a support program in principal, but has his concerns regarding what the effects, in practice, will be for Zambia's economy. “It is true that we might benefit from the enforced discipline a program like this could have on our balance sheets, and we certainly need some major restructuring in the way we operate on a fiscal basis. However, if all we are looking at is about USD 1.2 billion," he said, “we have to ask ourselves, is it really worth the sacrifice?"

As he summarized, “it might not be the destination, but rather the journey we go on to get there, which proves more valuable." And while we cannot yet say whether Zambia's journey with the IMF will prove valuable or not, judging by the twists and turns of the past few months, we can all rightly assume that it will not prove uninteresting.