by Pamela Nakamba-Kabaso and Caesar Cheelo
It appears that fueling the on-going debate about how relevant an International Monetary Fund (IMF)-supported programme is for Zambia is a big Zambian resolution for 2019.
Given the divergent views, mixed messages and spates of misinformation surrounding the topic, it seems only fitting for ZIPAR to keep contributing to the debate. Based on several studies since 2016, we have frequently reiterated that IMF support is critical for Zambia, both for the cheaper sizable financing it promises and the customized technical support that comes with the money.
In determining the significance of an IMF-supported programme, it is essential to understand that although Zambia has not defaulted on any of its debt service obligations, the country is currently under considerable duress from the weight of a heavy debt overhang. But does the evidence corroborate this claim?
Well, in 2018, the fiscal authorities planned to spend K4.2 billion as external debt interest payments. Because of the huge external debt and the resultant increase in debt service obligations, they ended up spending K6.2 billion. This was 49 percent or K2.0 billion over-budget. Conversely, over the same period, three socially oriented programmes – Social Benefits (pensions, social cash transfer and so on), Strategic Food Reserve, and Water and Sanitation – experienced a combined 66 percent (or K2.0 billion) budget cut.
Essentially, to avoid the onerous consequences of external debt service default, among other things, Zambia opted to further marginalize its poor and vulnerable people, and to compromise its food security position. The socio-economic distress from the debt overhang is abundantly evident. In fact, many would argue that the debt-related stress signifies an emergent silent social crisis.
Clearly, we should not wait for a full blown debt crisis to manifest itself through defaults on debt service obligations before seeking debt relief. The authorities must, as they have intimated in the recent past, act now and act decisively in securing IMF financing. They should hold fast the recent Ministerial pronouncement that the Ministry of Finance will bolster preparations for the IMF Article IV Consultations slated for the first quarter of 2019.
If Zambia ultimately succeeds in clinching an IMF deal, how should the country plan to harness and leverage the support?
Well, for starters, the sizable financing could be used to partially offset the country’s external debt service dues in the short-term. External debt service is a Balance of Payments item, implying that Zambia should be eligible for IMF-financed debt service relief. Debt service relief would help immensely to sustain critical social and infrastructure spending.
Secondly, as principal amounts on external loans fall due, Zambia could use IMF standby facility financing to amortize as much of the external debt as possible, replacing the relatively more expensive commercial loans with cheaper IMF debt financing. Zambia could pursue a standby facility as a viable option for refinancing the Eurobonds when they fall due.
From the foregoing, Zambia should fervently pursue a funded IMF programme. The authorities are on the right track and should not limit their pursuits to technical support alone.
Of course, technical assistance is important too. However, it is well documented that IMF technical support tends to be more potent when underpinned by a funded economic programme than when the assistance comes without IMF money on the table. Zambia needs potent technical support, both as an external accountability mechanism and as a signal to international agencies (Moody's, Standard & Poor's and Fitch) that the country is improving its creditworthiness.
The quick evidence presented thus far underscores that ultimately professionalism, objectivity and a culture of evidence-based, not legally regulated, commentary will be cardinal for fostering a well-informed and policy-relevant IMF programme debate.
In this regard, firstly, institutions with convening capabilities would do well to offer themselves as inclusive platforms for bringing structure to the on-going IMF debate and for fostering professionalism, evidence focus and objectivity. Fostering a well-organized, inclusive debate that builds professional consensus would do much more for consistent policy and public literacy messaging.
Secondly, the importance of objective professional commentary based on concrete, traceable and verifiable evidence cannot be overemphasized. The evidence, whether drawn from one’s own research or from research conducted by other reputable parties, must be integral to all commentary. The current proliferation of off-the-cuff expert opinions must be corrected through insistence on well-grounded, evidence-based commentary. Reliance on evidence will reduce the risk of sending mixed, erroneous and misleading signals to policy-makers and the general public.
Ultimately, our view is that by pursuing an IMF financial support programme, the Zambian authorities are doing the right thing. The evidence bears them out and so they must ardently stick to their pursuit.