I have taken note of the ongoing debate with regards to whether Zambia should get on an IMF program. Some of the suggestions being advanced are that we refinance our debt by acquiring more debt through the issuance of addition international bonds (new Eurobonds) and further local borrowing through the issuance of more bonds in the local financial market. However, both suggestions stem from a lack of understanding of our current economic context.
Let me explain why:
One of our major challenges we are facing as an economy is the lack of adequate money in our foreign reserves for balance of payments. Therefore, if we issue bonds to raise money to service our debt, two negative effects will follow, namely:
By issuing additional local bonds, we will be crowding out of the private sector from accessing credit by increasing the cost of credit and reducing the available credit on the market. The private sector, which is the engine for economic growth will have limited access to financing, and when they do, it comes at expensive costs due to high rates emanating from government borrowing. This would also trickle down to household borrowing which becomes costly as financial institutions now prefer to lend to government. This crowding out has devasting long run effects such as increase in the cost of living and reduction in overall economic welfare of citizens. The option, therefore, is not sustainable nor desirable.
As to issuing further Eurobonds, our international standing has been eroded in the last seven years. Our failure to service the debts the past one year have rendered us a high-risk country to lend to, and as such, the cost at which we would borrow from the market would be significantly higher. Even in the face of the positive image we have been getting in the last couple of weeks, we will not be able to get money cheaply until the market is able to trust us again. Remember that it took us years to work on our image so much that when we issued our first bond in 2012, it had the lowest interest rate in the developing world – in fact, lower than the rate at which Spain borrowed! With the developments of the past 7 years, it is certainly impossible to get favourable rates and subscription to our Eurobonds. Therefore, this route too is not desirable.
So, what can be done?
Suffice to say, when your reputation internationally is damaged, you need someone to cleanse you for you to be looked at differently – this is where the IMF comes in.
So how does the IMF cleanse you?
Firstly, 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.
Today, the IMF is governed by and accountable to the 189 member countries, including Zambia. As soon as Zambia gets on an IMF program that will spur investor, donor and market confidence and ultimately better performance of our bonds. Consequently, the private sector in Zambia will be able to borrow money cheaply on the international market. The market, investors, and donors usually rely on the opinions of the IMF to make investment decisions, and as such, having the IMF around is an assurance that our country is putting its house in order. This assurance is strong currency that Zambia can use to turn its fortunes around by winning back the confidence of international players in the financial world;
Secondly, when a country is on an IMF programme, the Fund will give you balance of payment support which will stabilize your exchange rate as you won’t be raising money through your central bank then go to the market to buy forex;
Thirdly, the IMF program will give Zambia access to loans with interest rates as low as 0.75 percent to finance its balance of payment position thereby relieving the stress on the fiscal side resulting in a reduced fiscal deficit which is currently being financed largely by very expensive non-concessional borrowing, and that’s why our debt is unsustainable;
Fourthly, with an IMF program in place, Zambia will have the credibility to renegotiate its current debt payment schedule but also get budget support from donors as well as the World Bank. All these avenues have been blocked due to lack of credibility; and,
Finally, the IMF programme comes with conditions that are necessary for prudential and robust economic governance to avoid the excesses witnessed in the past 7 years. This will ensure that the country attains macroeconomic stability and fiscal consolidation.
With the above, I strongly argue that being on the IMF program is not only necessary but also inevitable given where we are as a nation. Be that as it may, it is my considered view that the details of the programme, once agreed, should be clearly articulated to the nation for all to appreciate what lies ahead, and why it is important for the nation.