Arguments for and Against an IMF Austerity Program
By. Dr. Mbita Chitala
I and many Zambians are relieved at the announcement by the Minister of Finance Hon. Felix Mutati that our government “is putting in place an economic program owned by the country and not by the International Monetary Fund.” (Zambia Daily Mail, September 29,2016). As one that participated in seeing Zambia exit the painful HIPC initiate, I feel compelled to make a few observations hoping that they will be useful in the country reaching consensus about our next economic program.
1.Challenges in the Economy
What are Zambia’s economic current challenges? Our copper export prices which have been averaging US$5,000 per metric ton has not been good enough to fund our development. In order to eradicate poverty in the short term, our economy must grow above 8% of GDP annually. However, our real GDP growth has reduced from 5.1% in 2013, 5.0% in 2014 , 3.2% in 2014 and will grow between 4-5% of GDP in the medium term.
The current account balance deficit has been growing from positive US$216.50 million in 2013 to negative US$581.20 million in 2014, US$767.70 million in 2015 and is likely to continue growing in 2016 and beyond because of the low commodity prices and the depreciation of the Kwacha.
Gross international reserves have dropped from US$3,182 million in 2015 to US$1.95 million in 2016 reducing the months of import cover from 4.2 in 2015 months to less than 2 months in 2016-09-25.
The merchandize trade balance deficit has increased to US$316.4 million in 2016 during the first half of 2016 as compared to US$231.7 million during the same time in 2015. The Non-Traditional exports where Zambia earned US$1,849 million in 2015 have dropped by 7.7% in 2016. The impact of this has been a drastic drop of foreign exchange in the country to support investment.
The exchange rate of the Kwacha depreciated by 72% in 2015 but in 2016, it has stabilized between K10-11/$ because of liquidity tightening policies by the Bank of Zambia. This has however resulted in the slow down in economic activities as the interest rates have risen to usurious unsustainable levels where borrowing has been impossible.
The fiscal deficit has been rising from K2,992 billion representing 2.4 % of GDP in 2011 to K4,306 billion in 2012 representing 3.3% of GDP, K8,205 billion representing 5.4 % of GDP in 2013, K8696 billion representing 5.2% of GDP in 2014, and K17,264.19 representing 9.4% of GDP. It is expected that 2016 figures will also be higher. This means that the country has been surviving on debt.
To fund our expansionary fiscal policy, our government relied on massive contracting of public debt. Our external debt has been rising from US$1,956.10 million (10.8% of GDP), to US$ 3,480.66 million (15.8% of GDP) in 2012, US$3,512.93 million (15.1% of GDP in 2013, to US$4,788.80 million (20.7% of GDP) in 2014 to US$6,288.80 million (37.4% of GDP) in 2015. The external debt service has also been rising. It rose from US$34.14 million in 2011, US$296.60 million in 2012, US$160.80 million in 2013, US$185.26 million in 2014 and US$297.26 million in 2015. The external debt service is projected to jump to US$549 million in 2017 and US$727 million in 2019 which will surely become unsustainable.
This year, the government will be running a very high budget deficit estimated to be around 7% of GDP on a cash basis and 13% on accrual basis. Furthermore, the government has unsustainable payment arrears mainly from infrastructural related activities such as road construction, petroleum subsidies, electricity import arrears – all estimated at about K20 billion. Because of non payment, many construction projects are on hold.
To worsen the challenges, the cooperating partners have since 1914 stopped providing to Zambia budget support and they have also drastically reduced on their grant aid and project support. Zambia has essentially been on its own.
Given the above challenges, what can Zambia do to reduce on the pressures of its macro economy? Noting that copper export prices will hover around US$4,000-5,000 range in the medium term meaning that Zambia will not have sufficient earnings from copper exports to fund its budgets; that cooperating partners will still not support Zambia’s budget; that the country will have increased and unsustainable external debt service obligations; how can our country build its reserve position and bring its current account into a surplus?
Is Zambia on its own capable of resolving the over K20 billion arrears in view of the reduced revenues from copper exports and reduced domestic borrowing? Will Zambia be able to pay when they fall due the foreign exchange denominated arrears to foreign contractors, fuel imports, electricity imports, fertilizer imports and other external debt service obligations? Furthermore, can Zambia on its own bring down to sustainable levels the high interest rates in the economy that is making investment for growth impossible?
These appear to be the challenges that our government faces and which the new Minister of Finance Hon Felix Mutati and his economic management team must address without reneging on the promises of the PF party as described in their election manifesto and what the people want from their government.
2. Peoples Demands
What do the people want? The people want a macro-economic policy regime and social spending approach that is targeted at eradicating poverty and underdevelopment in our country. The people want and have supported the PF fiscal policy and spending increases that have supported massive public investment, the building of essential economic and social infrastructure and the promotion of human and economic development.
The people want to continue with the PF expansionary monetary options that will allow the private sector to access affordable credit to expand the production of goods and services, create employment opportunities and in turn contribute to the tax base of our country. The people want that the Bank of Zambia manage lower reserve requirements to ensure that development finance is available and that there is no unnecessary capital flight from our country.
The people want a government that provides safeguards in the public sector wages, that the government continues to subsidize public goods to help the poor and vulnerable of our citizens access basic necessities such as affordable food, water, fuel, electricity and other social services. The people want a government that stops adding to the unsustainable debt burden of the country.
2. Is the IMF Program the Answer to the Challenges?
For the country to move forward, it is evident that Zambia needs new money to stabilize the economy but without compromising the peoples desires as enshrined in the PF manifesto.
The two choices available to Zambia is to continue with the expansionary policy of the PF government or to abandon PF program and adopt an IMF supported program. Let us discuss the issue of the IMF/World Bank program which some people particulary the neo liberals would want to force on Zambia.
For sure, one source of relatively cheap money is the IMF and the World Bank. Our country exited from the IMF/IBRD supported program in 2010 after we graduated out of the HIPC program. Some of our countrymen are advocating that we should seek for another program with the IMF to enable our country access between US$1.2-1.5 billion of balance of payments support. The submit that the receipt of the IMF and World Bank funding will assist in stabilizing the exchange rate, boost confidence in the economy, attract direct foreign investment in the economy and improve the country’s credit rating. These are the positives of an IMF program.
However, there are also disadvantages in a country adopting an IMF program. If a program is negotiated and approved, the IMF and World Bank will impose conditionalities based on what is termed the ‘Washington consensus’ that will demand for austerity and tightening of belts of the Zambians.
The IMF has a very negative reputation among development observers and practitioners and this has led many countries to avoid engagement with the Fund altogether. Our country may recall the food riots that Zambia experienced in 1990 which resulted in our former President Kaunda cancelling the IMF program because it turned out to be too painful and destabizing to our country.
Generally, the IMF/IBRD will demand that Zambia loses its authority to govern its economy as the policies will be predetermined under a package in Washington. The package so negotiated will tend to constrain public spending which in turn tends to impede recovery.
Furthermore, the country will enjoy some relief from its US$1.2 billion balance of payment support but will also be forced to pay its K20 billion arrears by cutting budgetary spending on education, health and other necessary public goods.
The country will be forced to eliminate basic food such as our FISP subsidies and transportation subsidies mainly those related to petroleum products, they will demand that the Kwacha is devalued to make exports cheaper. They will demand the privatization of our remaining strategic assets. They will demand the freezing of wages in the public sector and retrenchment of workers.
The IMF will for sure demand that our 2017 budget is an austerity budget instead of an expansionary developmental budget. They will demand for the introduction of belt tightening measures that will tend to increase the incidence of poverty in our country, reduce Zambia’s ability to develop a strong domestic economy and allow multinational corporations to continue dominating our economy and which will push Zambia into greater debt.
In other words, an IMF/IBRD bailout everywhere particularly in poor countries such as Zambia, tends to deepen rather than solve economic crises. IMF/IBRD policies tend to cause layoffs and undermine development in the long run. The programs may spack recessions by raising interest rates which in turn may lead to bankruptcies, unemployment and increased poverty. To the many critics of IMF programs, they criticize the programs as an immoral system of modern day colonialism.
That is why many of our progressive countrymen who are opposed to the country being humiliated by the IMF’s strict fiscal and austerity requirements, lending procedures and structures of accountability – which it is feared will in fact prevent our country from recovering but will instead push Zambia into greater debt and hinder long-term development of our country.
Such observers are of the view that our government comes up with its own home grown policy anchored on a stimulus providing and expansionary options. The announcement by Hon Felix Mutati, Minister of Finance that the “economic recovery plan that Government is putting in place will be driven and owned by the country and not by the International Monetary Fund” is therefore a welcome relief and assurance that our government will continue with programs that create wealth and seek to end the rampant poverty in our country.
It is recommended that our government continues with its expansionally policies and seek assistance from fraternal friends such as the Peoples Republic of China, the Kingdom of Saudi Arabia and others who may gladly advance us bridging finance to support our balance of payments challenges.