by Caesar Cheelo
The Ministry of Finance recently issued a Ministerial statement instructing ministry officials to prepare for the International Monetary Fund (IMF) and to improve their execution of the 2019 National Budget. ZIPAR welcomes this statement.
We laud the Minister for putting her directives to the ministry on record in the public domain. This gives the general public the opportunity to scrutinize the ministry’s progress in implementing the budget, encouraging important transparency and accountability tenets. Inter alia, the statement calls for professionalism, integrity, innovation, and diligence in budget execution. If followed through, these elements will be decisive for restoring fiscal discipline and fostering overall budget credibility.
However, Zambia is likely to face strong headwinds and choppy waters in 2019. The fiscal authorities will therefore need to up their game in order to navigate the economy through the imminent challenges. Among the many potential threats in 2019, we believe two are particularly crucial in the context of the ministerial statement, namely: the pressures of a mounting debt overhang; and the credibility risk of another failed attempt to woo the IMF.
Firstly, Zambia’s public debt has grown tremendously, increasing from 18.9 percent of GDP in 2010 to 53.9 percent in June 2018 according to the Ministry of Finance. The mounting debt is underpinned by a persistent weakening of the overall fiscal balance, with a deepening deficit from 2.4 percent of GDP in 2010 to about 7.4 percent in 2018. The IMF projects that this will deepen further to 10.6 percent by the time the first Eurobond falls due in 2022.
The most significant underlying problem of the large debt overhang is that it now imposes a heavy debt service burden. In December 2018, the Ministry of Finance released a total of K4.3 billion under that year’s budget. Of this, a staggering K1.5 billion (or 35 percent) went to external and domestic debt service, dwarfing the K1.1 billion (26 percent) released to various Government programmes, projects and public service delivery in that month. The debt service amount was even greater than the K1.3 billion (30 percent) released for the wage bill. With the debt service burden dominating the fiscal profile, the deceleration of public debt accumulation and the dismantling of arrears, which the ministerial statement has emphasized, will be imperative for reducing the stresses from the overhang.
Secondly is the credibility risk should Zambia fail for a third year in a roll to convince the IMF that its fiscal plans are credible enough to warrant the Fund’s support. The ministerial statement is clear in directing “the Ministry of Finance to implement a well-structured engagement strategy and clean up all the required data sets in preparation for Article IV Consultations” slated for the first quarter of 2019.
A few things are worth clarifying regarding engagements with the IMF. For starters, the forthcoming Article IV Consultations are a routine monitoring function of the IMF. They will focus on discussing recent economic developments and prospects for Zambia. This does not imply an actual negotiation towards an IMF-supported programme. The most that the Zambian authorities can do is to propose milestones and a timetable for the negotiations as a way to re-introduce the negotiation motion. This will entail addressing the IMF’s concerns, which caused it to walk away from the negotiating table back in August 2017. Back then the authorities unveiled ambitious borrowing plans when they should have been planning fiscal policy restraint. The IMF, then, believed that the borrowing plans threatened Zambia’s debt sustainability. Now, the authorities have less than three months to clean up their act and get ready to reactivate the negotiations.
Once the engagement resumes in earnest, the negotiations are likely to be quite challenging. The fact that Zambia has delayed its inevitable fiscal adjustment means that the adjustments, once applied, will be that much more painful to sustain. Non-statutory budget items such as infrastructure projects, which have hereto enjoyed protected public spending, may come to a crashing halt. Staying the course of the negotiations will take stamina or what the Americas call “true grit” on the part of the authorities.
A successful negotiation will ultimately mean an IMF-supported programme, with sizeable and relatively cheaper (standby) financing that could be used to offset the external debt principal payments on the Eurobonds as they fall due. A Fund-supported programme will also win over international investor confidence, possibly swaying the adverse sentiments against Zambia’s domestic and international bonds and improve their performance. Finally, this may attract new foreign direct investments and donor aid to Zambia.
Conversely, a failed negotiation will further erode Zambia’s already weakened international credibility and economic reputation. This will imply a deterioration of the country’s prospects to securing favourable terms and conditions under any debt refinancing negotiations. Securing IMF support in 2019 could be a make or break affair for Zambia.
We send good tidings to the ministry, and wish them great skill and tenacity in navigating the choppy waters ahead in 2019.