IMF is Zambia’s Best Option for Now!

The stigma attached to seeking help from the International Monetary Fund means countries try to avoid it wherever possible. But currently there are still no better options for struggling emerging markets including Zambia.

First and foremost., what is Zambia’s problem? Zambia is facing a lot of pressure on foreign exchange and it is no wonder its currency, the Kwacha is spiralling down. Simply put Zambia does not have dollars, which it badly needs. Where have Zambia’s dollars gone? Zambia’s problems have mainly been caused by the impact of capital outflows through debt servicing obligations and the current account deficit (we imported more than we exported), which have resulted in the dwindling supply of dollars and ultimately depleted foreign reserves.

In some cases, the outflows have been caused by suspension of capital projects by investors. Thus, debt service is not the only source of pressure on foreign exchange and not just for Zambia. As hinted out, the other cause of diminished dollar inflow is simply because Zambia is not earning much from copper exports as both copper prices and output have gone down.

By 2016, Zambia began to experience a narrowing trade surplus. As a result, its current account deficit widened from 1.5% of gross domestic product (GDP) in 2017 to 2.6% in 2018. A current account deficit is not bad in itself; what makes it bad is its cause and how it is financed. Because of limited options, Zambia financed its overall balance of payments deficit with official reserves. By the end of 2019 Zambia’s gross official reserves therefore fell to $1.4 billion (roughly 1.5 months of imports) from $2.1 billion at end-June 2019. The current account deficit also reflected higher interest payments on public debt, which swallowed the trade surplus.

This outflow and scarcity of dollars has led to the depreciation of the Kwacha against the dollar. In order to prevent the fast depreciation of the Kwacha and maintain a relative exchange rate stability, the Bank of Zambia intervened and supplied dollars from its foreign exchange reserves but the supply of more dollars in the foreign exchange market got more Kwacha in return. As a result, the quantity of Kwacha that should be with banks as credit declined causing liquidity problems in the Zambian banking system. This is a problem in that it affects the flow of credit for the financing of working capital and therefore reduces business activity and ultimately levels of income and banks risk aversion. The banks’ risk aversion ultimately restricts the flow of cash to consumers who may want to buy cars or houses, or other goods and this therefore reduces consumption and economic activity.

These are not normal times: Zambia has no options!

When times are normal, Zambia would have looked for an alternative. The principal amounts would simply be refinanced in global capital markets or offset by new disbursements from existing lenders. But as we speak, according to the Financial Times, Zambia’s Bonds have dropped upon an initial request for debt restructuring at the end of last month. In addition, given the current scenario, credit markets have tightened and spreads have risen.

What should Zambia do? Go to the IMF Lender of the Last Resort

Zambia has no option and there really are no options out there. Already 90 countries have approached the IMF to access emergency financing instruments. The IMF has reported that this is unprecedented. Why is IMF better support for now? Zambia has no income and therefore needs to adjust. Adjustment can be painful and if not handled properly can lead to negative outcomes, including shortages of essential commodities as was the case at the end of the 80s and beginning of the 90s when Zambia severed its relations with the IMF. The IMF will give Zambia breathing room to implement adjustment policies and reforms that will restore conditions for strong and sustainable growth, employment, and social investment. The IMF will shelter Zambia with fast credit, which Zambia bad needs and will also help Zambia arrange for debt standstills, which again Zambia needs.
An image I could use here is that Zambia and many African countries are in ICU and need special care. So, Zambia needs emergency relief. I have heard others recommend that Zambia should just make reforms and take leadership rather than go to the IMF. Those are more medium term and long-term answers. Zambia needs fast relief. We can’t recommend long-term reforms to an ailing person in need of intensive care. Zambia needs first of all to be resuscitated. It needs intensive care. From the pain of the intensive care it will learn a lesson how to live better in future, not now.

IMF has conditionalities?

Yes, they are needed. Country reforms are crucial for Zambia. Zambia cannot and should not receive unconditional help. Before Zambia can receive a loan, Zambian authorities and the IMF must agree on a program of economic policies and sound financial management. Zambia must undertake certain policy actions as an integral part of IMF lending. Those policies will be designed to ensure that the funds will be used to resolve balance of payments problems. They would also help to restore or create access to support from other creditors and donors.

Like the 1980s debt restructurings, the conditionalities will help Zambia look to growth-enhancing structural reforms. Later debt restructurings, such as the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative, emphasized a link between debt relief and expanded public spending on pro-poor services. Both types of reforms will be needed this time round; structural reforms to avoid turning higher debt ratios into solvency problems, and properly prioritized public expenditure to persuade official creditors that tax-payer funded aid is not being wasted.

Zambia has Multiple Creditors:

The IMF Has Muscle to Call All Creditors to participate in Debt Relief. On its own Zambia doesn’t have that muscle. Zambia owes other bilateral and commercial creditors who are not part of the currently proposed IMF/World Bank debt relief plan. Currently, there are two groups of potential free-rider creditors who are quantitatively important but who do not participate in any formal debt restructuring processes like the Paris or London clubs. These are private holders of bonds without collective action clauses, and official lenders from China and other non-OECD countries. However, for both political and financial reasons, it would be hard to have an effective response today without including these two groups of creditors. The IMF together with the G7 may have the muscle to call them to the table. In addition, with the leadership and support of the IMF, Zambia debt sustainability analyses can be undertaken jointly between Zambia and the IMF/World Bank, to determine if, and by how much, debt write-offs or reschedulings are needed. The debt sustainability analysis would form the basis of negotiations by the Paris and London clubs, and by debtor governments with commercial and official creditors who are not participating in those forums.

Fr. Charlie Chilufya, S.J. is an international economic policy analyst

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