By Mwamba Peni II
International economy has experienced the following monetary systems: classical gold standard, the golden standard, the interwar period and the current Bretton Woods system. Following the end of the World War II, the international monetary system was unstable, currencies were volatile and many economies on the verge of collapsing. This propelled the 1944 Bretton Woods conference to respond to the challenges affecting individual countries in particular and the global economy in general. Thus the formation of the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD or World Bank).
The IMF’s primary purpose is simply to ensure the stability of the international monetary system, the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability. Today, the IMF is governed by and accountable to the 189 member countries.
I was having a chat with someone over the misconceptions and misgivings some people have on the IMF and his response was classic. “I would liken the fear of IMF to a medical procedure called lumber puncture. There is a belief that lumber puncture causes death of patients as most of those who undergo that procedure die. In my view, many patients only seek medical attention when their situation has deteriorated, and they are too weak to respond to the procedures and medications.” Similarly, some countries seek IMF support when they are in a dire situation: debt crisis, huge deficit and depleted reserves. Hence when they start the economic program, the usual solution require tightening of the belts by citizens. What the general citizenry is not told is that even if they have to go through a home grown program, the solutions are the same.
Having said that, let us now state why the IMF engagement is not only necessary but inevitable:
1. An IMF-supported program will help stabilize the rapidly deteriorating macroeconomic situation and revive economic growth through balance of payment support to Zambia in the face of depleted foreign reserves;
2. Zambia, with an IMF program in place, will have access to funds to ameliorate the near-crisis situation it is in now with low reserves and mounting debt service obligations. Zambia needs cheap loans to finance its fiscal deficit which is currently being financed largely by very expensive non-concessional borrowing (commercial borrowing) which has resulted unsustainable debt servicing. The IMF loans come with interest rates as low as 0.75 percent;
3. An IMF program will help boast investor, donor and market confidence. Much of the sharp depreciation in the exchange rate and large spreads on Zambia’s Eurobonds can be attributed lack of confidence in the economy. And the impact of investor and market shouldn’t be underrated because each time there is a huge spread in Zambia’s Eurobond the debt service on the bonds increases throwing our budget in disallay. Remember, we had to go back to Parliament last year for supplementary budget to finance debt service;
4. Technical support to help with debt consolidation, realignment of policies and help us how to navigate the effects of COVID-19; and,
5. If you cannot stop borrowing, despite countless voices from key stakeholders including the Central Bank, may be you need someone with the capacity to curb your appetite for the sake of the economy and future generations.
The IMF has recorded success stories in countries that were affected by the 1997 Asian Financial crisis such as
Indonesia, South Korea, and Thailand. The Fund also record great success in Hong Kong, Laos, Malaysia, the Philippines, Brunei, Singapore, Taiwan, and Vietnam. Other success stories have been recorded in former Soviet Republics such as Estonia and Latvia as well as Central Eastern Europe countries like Bulgaria. Near home, the IMF has implemented successful programs
Rwanda, Ethiopia and Senegal.
For Zambia, like the Lumber Puncture analogy, we went under the programme when were were in a dire situation. However, the reforms that begun in 1992 lead Zambia on a trajectory of unprecedented path of economic growth. By 2012, investors, donors and the market had so much confidence in Zambia such that when we went into Eurobond market we borrowed our first and second bond on one-digit interest rate which is historically the lowest for emerging and developing economies world-wide.
Yes, the IMF comes with conditions such as respect for the rule of Law, transparency and accountability, freedom of speech and assembly, a free press, a vigorous fight on corruption and creating an environment where the opposition is allowed to conduct its affairs, within the law, without being arrested. You now why some people may be dragging their feet over the IMF engagement.