by Caesar Cheelo and Nakubyana Mungomba
At the end of October, the Ministry of Finance reported that the IMF would undertake a staff visit to Zambia to exchange views with the authorities about policies for stabilizing the economy. With the IMF team expected in the country this week, ZIPAR commends Government for its timely effort in bringing the Fund back to the discussion table.
Having consistently called on the Government to pursue and secure an IMF programme for the country since late-2016, ZIPAR applauds these developments. Especially given the recent protracted stalling of negotiations. An IMF programme would entail using one of the facilities offered by the IMF to replace as much as US$1.3 billion of Zambia’s expensive commercial debt with cheap, nearly interest-free concessional financing. More importantly, an IMF deal would also signal to the international community, particularly to foreign investors and multilateral and bilateral development partners, that Zambia is finally working towards a sustainable fiscal policy path and is open for business. Finally, IMF support would reinforce mutual accountability between the Fund and the authorities, thus stemming risks of domestic policy misalignment, and fiscal slippage.
Granted, it is currently too early to start celebrating that an IMF package is now firmly in our sights. Indeed, it would be premature even to claim that negotiations towards an IMF-funded programme have begun in earnest. The forthcoming IMF staff visit is definitely a big step in the right direction, but one that requires careful domestic preparation by the authorities.
It is well-known that a salient part of the IMF mission will be to look for so-called prior actions. These are voluntary pre-negotiation actions that demonstrate commitments towards economic stabilization through frontloaded (or ‘homegrown’) fiscal adjustments. And it is in this area that evidence of our commitment needs to be strengthened. A quick comparison of the policy pronouncements in the 2020 Budget Speech and key prior actions expected by the IMF’s July 2019 Article IV Consultations Report reveals three key contrasts to be addressed.
Firstly, in the 2019 Article IV, the IMF expected that: “Fiscal consolidation should continue in 2020, to bring the deficit to 3.4 percent of GDP. Achieving such a reduction in the deficit would hinge critically on the authorities’ ability to rein back capital spending.”
With a deficit target of 5.5 percent of GDP in the 2020 National Budget, however, next year’s plans show significant variance with IMF expectation. Moreover, the 2020 budgetary allocation by function shows large allocation increases for infrastructure projects relative to 2019. These include Energy Power Infrastructure increasing by 181%, Health Infrastructure (139%), FTJ Luapula University (94%) and Roads Infrastructure (62%). Thus, instead of reining in capital spending, the Government has expanded it. Therefore, this staff visit will require effort on the part of the Government to begin to demonstrate commitment to fiscal consolidation.
Secondly, the IMF’s Article IV report expected: “fiscal adjustment centred on stronger control and prioritization of public investment projects”. In synch with this expectation, the 2020 Budget pronounced that the Government has developed a comprehensive system for the appraisal of projects in order to strengthen the management and implementation of public investments. To support this Public Investment Management System, the Government has constituted a multi-sectoral Public Investment Board to appraise major public investment projects; a silver lining as far as policy goes.
What will be critical in engaging the IMF will be to prove that these policies are more than just pronouncements. The public investment management reform ideas have been on the cards since the 2018 Budget. However, to the best of our knowledge, these reforms were not implemented that year. Instead, in practice, public investment management has remained hazy with project appraisals, feasibility studies and even environmental impact assessments for the selection and commissioning of large public infrastructure projects proving to be evasive or seemingly non-existent. This staff visit therefore presents an opportunity for the Government to present evidence of the works done to constitute the multi-sectoral Public Investment Board and to spearhead other public investment reforms.
Finally, the IMF has repeatedly called for enhanced transparency in debt management and reporting, particularly through regular detailed debt reports to the general public. In this regard, the Government has in the past promised to issue quarterly debt reports. Over the past three years, however, the authorities have had limited success in presenting these comprehensive debt reports to the public. Moreover, even the 2020 Budget Speech is silent on debt reporting. This will therefore be another area for the Government to present convincing evidence of its sincerity in confronting the issue of debt.
Despite the issues highlighted here, we remain of the firm belief that an IMF deal remains within Zambia’s reach. In order to make this a reality, however, securing a deal will require the Government to show unwavering, transparent commitment and will to restore fiscal and debt stability, enhance debt management and transparency, and implement pro-growth policies over the medium-term. Only with commitment to fulfilling the requisite prior actions can we say we have booked ourselves a seat at the negotiation table.