By Caesar Cheelo
Zambia is experiencing the most dramatic economic downturn seen in the country’s post-liberalization era. Some have described the downturn as a crisis and an economic collapse.
Somehow the current situation seems a lot like déjà vu. About four decades ago the Zambian economy collapsed. Many accounts show that this happened because despite its rich resource base, by the late 1970s, Zambia was suffering from a number of chronic structural economic problems rooted in the policies of the 1960s and 1970s coupled with external shocks.
One of the major structural problems was that the mining sector remained virtually the only source of foreign exchange for the economy (95% as of 1978). In that period, balance of payments deficits and foreign exchange crises became recurring problems brought about by macroeconomic mismanagement. In particular, the Government assumed a position of maintaining consumption expenditure at the post-independence levels that had been established when world copper prices had been high. The shortage of foreign exchange associated with the external imbalances disrupted production, especially in the manufacturing and mining sectors, since these sectors were heavily dependent on imported inputs. Even worse, the problem of exchange shortages was to some extent self-perpetuating; shortages disrupted mining activities, thereby further reducing foreign exchange earnings.
The government of the late 1970s diagnosed the basic economic problem as insufficient investment combined with unfavourable external conditions. No fundamental structural reforms were contemplated. Rather, the government borrowed externally and negotiated several agreements with the IMF to bridge what it viewed as temporary balance of payment shortfalls. These programmes fostered some amount of interim macroeconomic discipline, but this discipline had largely broken down by 1982 when the budget deficit reached 17% of GDP.
Looking at Zambia today, many of the happenings and current policy responses seem eerily familiar. The facts are that Zambia is still highly dependent on copper for foreign exchange; copper accounts for 72% of total export earnings. Copper mining activities also provide 30% of total Government tax revenue. Like déjà vu, global copper prices have been stumping again since 2010, driven by declining copper demand in China. Like déjà vu, manufacturing and mining production in Zambia today are still heavily dependent on imported inputs or copper foreign exchange. Thus, unsurprisingly, external imbalances have emerged again, with mounting current account deficit and net capital outflows from the financial account; Zambia is in an emerging balance of payments crisis.
Like déjà vu, the policy response is to assume that investments are insufficient and to borrow. External borrowing is on the rise again; in 2015, the Cabinet approved external loans to the tune of US$2.7 billion, including a Eurobond loan of $1.25 billion in July 2015. About 48% of the total annual debt was contracted in December alone and without any prior project appraisals or expenditure plans. Most of this debt is non-concessional, meaning it is very expensive. It is also becoming increasingly so as the Kwacha continues to depreciate. Moreover, the productivity of the loans is unknown, with the funds seemingly being treated like a sort of slush fund.
Unsurprisingly, the Cabinet meeting of 15th February 2016 approved that the government engages the IMF on an economic programme within 2016. In preparing for this, the Minister of Finance announced: “As government now, it is important to prioritize… number one priority is to service the debt. Second, there is expenditure which is related to constitutional requirements in terms of emoluments for the public sector, then it is education services and health services.” And commendably “What we will not prioritize are things like excessive travel and even those allocations for those interminable seminars…” Clearly, the spending demands are many and Government is trying to apply the fiscal consolidation measures announced in the 2016 National Budget as well as those announced by the President last year.
And like Déjà vu we are heading back to the IMF. Now, please do not get me wrong, the Cabinet’s approval of a return to the IMF is commendable. In fact it was long overdue. However, in the same breath, I must say this: there is a real quagmire here because we are already at a point of dire straits. Government spending has remained difficult to arrest, showing little sign of slowing down (well, maybe except when it came to delaying university student allowances). The fiscal deficit has risen sharply and may well have reached 10% of GDP by the end of 2015. Debt service costs have escalated, partly due to the Kwacha’s depreciation. In this context, what will be our negotiating position as the IMF comes to Zambia in a few weeks’ time in March? IMF will require deep Government spending reductions as proof of commitment to reigning in fiscal discipline and re-establishing macroeconomic stability. Out of the priority areas of debt servicing, public sector emoluments, education services, and health services, where will the Government be willing and able to cut spending?
Perhaps more importantly, as we negotiate with the IMF, will we have the presence of mind the keep domestic consumption stimulated in order to avoid a full-on depression? Will we have the presence of mind and the fortitude to keep an eye on longer term economic restructuring, which we did not contemplate in the crisis of the 1970s?
I do not have answers to these questions. They are for our politicians…
What I do know is that Zambia has to formulate a well thought out position for negotiating with the IMF. Protecting social spending must be prioritized, but so too must the protection of domestic consumption demand (to simulate domestic production) and long-term economic transformation. These are tall orders and Zambia’s policymakers are possibly in a dilemma, namely how to balance re-stabilizing macro-economy with initiating long-term structural reforms. Zambia must learn from the mistakes of the 1970s and break the déjà vu by establishing an economic recovery programme that does not overly trade-off long term development for short-term stability.
The silver lining is that we are engaging the IMF again and seeking solutions; and in an election year, I must say, this is a bold, commendable and astute move by the government.