What critics won’t tell you about the IMF deal

What critics won’t tell you about the IMF deal

*THE IMF DEAL – WHAT YOU NEED TO KNOW AND CRITICS WON’T TELL YOU!*
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By Alexander Nkosi

1. INTRODUCTION

I have done a long and detailed article on IMF, if you have time, access it from my page and read. It explains everything you need to know about IMF, conditionality, evolution of Zambia’s economy and why we need it. This article is a condensed version, addressing emmerging issues as the debate evolves.

2. STATE OF THE ECONOMY

In 2022, Zambia’s domestic revenue is projected at K98.9 billion. A total of K78.6 billion will go to debt service. When we add the huge civil service wage bill, all the domestic revenue is exhausted. This means that we have to borrow to cover other important items outlined in the budget, and this includes social sector spending and activities aimed at stimulating the economy. Our external debt is $12.9 billion, domestic debt is K189.7 billion and domestic arrears stand at K46.9 billion. As debt is rising one would expect that since we are borrowing heavily, arrears should be going down, but unfortunately both debt and arrears are increasing. In the coming years we have eurobond principal repayments which would almost exhaust the entire domestic revenue.

3. ZAMBIA WITHOUT IMF DEAL

To appreciate the importance of the IMF deal, perhaps we have to look at what the situation would be without the deal.

Without an IMF deal, negotiations for debt restructuring will breakdown, implying that we have to go to the capital markets to borrow at very high rates to raise money to repay debt. It further means that very few investers would want to invest in such an economic environment. Forex earnings will remain low since dollar denominated debt outlays will be high, kwacha will further depreciate, pushing the cost of living as well as cost of production up since we are import dependent. The economy will shrink, leading to job losses and many companies closing. Some lenders will probably target our properties due to high debt burden and slim chances of repaying. Under such circumstances, we won’t manage to sustain even the same subsidies we are worried about. We will struggle to procure drugs in hospitals and meet the civil service wage bill. Hence as we discuss the negative effects of IMF conditionality, let us weight that against the negative effects of not getting the IMF deal.

4. WE WILL HAVE A WORSE SELF-IMPOSED CONDITIONALITY IN THE ABSCENE OF AN IMF DEAL*

The question we should ask ourselves is: what IMF conditionality are we afraid of which is worse than where we would be in the absence of the IMF program? The problem is that IMF program critics argue as though we are a country with stable economic fundamentals that does not want to focus on domestic solutions but opts for an IMF deal. They forget that domestic solutions require a better economic environment to thrive which is hard under the current circumstances:

a) We struggled to recruit health personnel at a time we badly needed them during Covid second and third waves, yet we are worried that IMF will ask us to implement a partial employment freeze. Didn’t we already have it?

b) We owe civil servants unpaid allowances and arrears, we even struggled remitting loan deductions and yet we are afraid IMF will ask us to impose a partial wage freeze. Hasn’t the way we managed the economy already imposed a partial wage freeze?

c) The stock of fuel arrears as at end-August 2021 stood at US $477.79 million. On average, the monthly cost of subsidising fuel is $21 million and this is bound to rise based on projections. So we borrow to finance fuel procurement, but still accrue huge arrears. We end up with huge debt and arrears. Are we affording subsidies? We are not! we are only accruing huge debt and arrears without any plan of repayment or sustainability. The result is a bad economy. Is a subsidy that comes at the expense of a bad economy worth it? We end up indirectly paying a big price through huge debt which is chocking the economy.

d) With regards to electricity, ZESCO buys at a high price from Independent Power Producers (IPP) at an average of US$c11/kWh and sells to its customers at an average tariff of US$c7/kWh. As a result, it owes IPPs about US$ 1.1 billion for the supply of power. Despite only contributing 20% of total power distributed by ZESCO, IPPs consume about 47% of ZESCO’s total revenue. The other issue is that most of the cost related transactions by ZESCO are dollar denominated while it sells to domestic consumers in kwacha. With kwacha depreciating, this has led to huge losses. When the last tariff adjustment was made, the exchange rate was K12/ $, however it increased to K22/$ by 2021, leading to a huge loss. Between 2018 to 2020, ZESCO made losses amounting to $432 million due to kwacha depreciation. By September 2021, ZESCO’s total debt rose to $3.5 billion. So are we are not managing to sustain the electricity subsidy that is why ZESCO owes IPPs $1.1 billion and has a total debt of $3.5 billion. We did not solve anything but only left the situation to get worse to a level where if we go on like this, we will end up with cheap but unavailable electricity. So what IMF conditionality are we afraid of if we already pushed ourselves into a situation where we have no option but to revert to cost reflective tariffs.

e) In a country like Zambia where the cost of production and cost of living is so high, fuel and electricity subsidies play a key role both to producers and consumers. Removing these subsidies will increase the cost of production and impact on profitability, it will also increase the cost of living. This is a fact we cannot dispute even if the impact has not been quantified. The question is that, much as we know the importance of these subsidies, how do we afford them given our debt and economic situation? Accruing more debt and arrears to provide subsidies will only lead to a situation where we struggle to provide electricity and fuel leading to a situation worse than the removal of subsidies.

5. THE IMF PROGRAM IS NOT ONLY ABOUT THE $1.4 BILLION, THERE ARE MORE BENEFITS THAT COME WITH IT

Let me stress that an IMF deal is not a substitute to domestic solutions but would actually help domestic solutions work, through improved economic fundamentals which would otherwise limit the success of any domestic solution. The package is not only about the $1.4 billion, it will also help us get better debt restructuing which will free up money we are spending on debt service. In the 2022 budget, we are spending K78.6 billion on debt service, if we restructure our debt in a way that frees up K40 billion from this, it means that we borrow less and spend more on stimulating economic activities. The $1.4 billion will help us address BOP challenges and brings stability to our currency. The IMF deal will also help attract investments and hence increased flow of dollars in the economy. This has several advantages; it will lead to kwacha appreciation and reduce prices of imports. It will overally contribute to economic growth, job creation, expansion of domestic revenue.

6. WHY NOT REVERSE THE ADJUSTMENT MADE TO MINERAL ROYALTY TAX AND RAISE MONEY?

Some people argue that we should reverse the mining tax adjustment and make mineral royalties non tax deductible. Note that the estimated revenue loss from the adjustment made is K3.2 billion. Hence, reversing this will increase domestic revenue to K102.1 billion from K98.9 billion. This is not a significant increase and would not necessarily help us substitute the IMF deal which comes with benefits beyond the $1.4 billion. However, this reversal would actually force mines to withdraw $2.5 billion expansion project. We would be engulfed in prolonged disputes leading to a drop in production.

7. CONCLUSION

In conclusion, I’m challenging all those opposed to an IMF program to come up with feasible alternative solutions that can yield results effective 2022. It is not enough to just condemn the IMF program, what alternative solutions would thrive under the current economic environment? Provide projections of annual revenue arising from such alternatives.

*Thank you.*

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