ABOUT AN IMF BAILOUT PACKAGE FOR ZAMBIA: A JACKPOT OR A POISONED CHALICE?
By Sean Tembo – PeP President
1. Over the past couple of years since the advent of Zambia’s downward economic spiral, a lot of notable people have floated the idea of an IMF bailout package as a potential solution to our economic problems. In fact, Government itself did pursue this path during the tenure of Mutati and Mwanakatwe as Finance Ministers, although without much success. Today, l came across a statement which was supposedly issued by a number of former government officials in previous administrations, which essentially prodded Government to immediately consider engaging the International Monetary Fund for a potential bailout package. But all the people that have so far advocated for an IMF bailout package have not taken the time to explain in detail how it is supposed to be good to our economy. Ostensibly, in their minds, the fact that it is being implemented by the IMF makes it good so they did not find it necessary to explain what the take-homes and the sacrifices would be from such a package. So then, what really is an IMF package?
2. An IMF package is essentially a loan with several conditions attached, which is advanced by the International Monetary Fund to a country that has an ailing economy and whose credit rating is so poor that such a country cannot possibly get a loan from anywhere else, and the IMF is a lender of last resort. Let us look at each and every part of the definition above. There are essentially two parts; the loan and the conditions attached to the loan.
3. Talking about the loan that we would seek from the IMF, the last time Zambia made a pitch for an IMF bailout, we were looking US$1 billion, and then we revised our requested to US$1.2 billion then to US$1.5 billion and am quite not sure how much Government would be looking for if an application for an IMF bailout package was to be made today, but possibly about US$3 billion to US$5 billion. Now, unlike other types of loans such as the Eurobond whereby the moment it was approved the funds were disbursed to Zambia, in the case of an IMF package loan, even after it has been approved and the relevant contract agreements signed, no single Ngwee would be disbursed to Zambia until a series of gradual conditions are met. This brings us to the other aspect of an IMF bailout package; the conditions.
4. As part of the package, the IMF often imposes various conditions on the borrowing country, which in this case would be Zambia. These conditions are often premised on the assumption that the reason the borrower found themselves in the financial quagmire which necessitated an IMF bailout package in the first place is because of poor financial management, which in the case of Zambia, cannot be further from the truth. However, one of the standard conditions, among others, which the IMF often imposes is that they essentially take over the country’s financial managment. They determine the budget and decide who and what to pay for. If one was to draw a parallel between a country and a company, the contraction of an IMF bailout package would be equivalent to the appointment of a Receiver to manage the affairs of a company which is in financial distress.
5. Apart from determining our country’s budget and managing our treasury, part of the conditions of the IMF are often to do with economic reforms which often entail the sale of strategic national assets which are considered to be a drain on the treasury. Here, you can be rest assured that most of the companies that fall within the Industrial Development Corporation (IDC), such as ZESCO, Zamtel, Zaffico etc, would be obvious targets for disposal. Now, you may wish to note that the objective of the IMF in selling these strategic national assets will not necessarily be to realize the greatest return, no. But rather, the IMF will be selling these assets so as to get rid of them so that they can stop being a drain on national coffers, so they are likely to be sold for a song. If you remember the sale of our various national companies under the Structural Adjustment Program (SAP) in the 90s, this particular IMF package would be no different.
6. So what would essentially happen is that as part of the package, the IMF will list a number of milestones and the amount that would be disbursed after each milestone has been achieved. So let’s say we want to borrow US$3 billion, the package can be structured in such a way that stage 1 will involve the Government retrenching half of the civil servants and once this milestone has been achieved, then the IMF releases say US$500 million which will not even be released to our treasury but they directly pay our creditors, say KCM shareholders if they are win their case. Next milestone would be say to sale off all loss making strategic assets such as ZESCO, Zamtel, etc., for a song. Once we do that, then IMF would release say US$750 million which they would again pay directly to one of our creditors such as redemption of the Eurobond. The third stage might involve getting rid of all charitable budget lines like social cash transfer etc., and once that is achieved, then the IMF would release say US$100 million and so on and so forth.
7. At the end of the IMF bailout package implementation, say after 3 years, we may end up with our debts restructured so that instead of having a allocate huge amounts to debt servicing, IMF will help negotiate on our behalf so that we can reduce our repayment amounts but pay over a longer period of time. Additionally, we may have averted a default on our debt and we may have paid off some creditors and remained owing the IMF instead. However, the questions that we must ask ourselves is whether the potential benefits are worth the potential cost. Which brings us to the next matter that must be addressed; what is the potential cost of an IMF bailout?
8. Before we answer the question above, it is important to dispel some underlying misrepresentations mostly by proponents of an IMF bailout package. In their statement to advocate for an IMF bailout package today, the former government officials which included Situmbeko Musokotwane, N’gandu Magande, Dipak Patel, Felix Mutati, Caleb Fundanga and a Moses Banda, they rightly state in paragraph 3 of their statement that one of the biggest mistakes which the PF Government has made is excessive borrowing, but then inexplicably proceed to recommend that the solution to our current economic problems is an IMF package, which is a loan with more stringent conditions. Surely, if Zambia’s biggest cause of economic problems is over-borrowing, then how can additional borrowing, albeit from the IMF, be a solution?
9. In paragraph 8 of the statement by the so-called former Government officials, they say that “an IMF package will bring money to the country and will also give confidence to the outside world that the country is taking measures that will take it out of trouble …”. Two issues here; an IMF package does not necessarily bring any money into the economy because most of the proceeds from the IMF loan are spent repaying creditors, most of whom are based in the western world, and are probably located in the same street as the IMF itself. So the expectation that an IMF loan will pump dollars in the economy in the same manner that the Eurobond did is nothing but a myth. Secondly, the so-called luminaries of yesteryears argued in their statement that an IMF bailout package would give confidence to the outside world that Zambia is taking measures to resolve our troubles. This could not be further from the truth. You know why? Because there is no country in this world which implemented an IMF package and emerged on the other side better. None at all! In fact, there is a lot of apathy in the business world which is associated with a country that is on an IMF package. So instead of attracting FDI, we would be chasing away FDI by getting on an IMF package.
10. In paragraph 12 of their statement, the so-called luminaries of yesteryear argue that once we get on an IMF package, our creditors will be willing to restructure our debt. As a matter of fact, our creditors would be willing to restructure our debt even without getting on an IMF package for the simple reason that it is not in their best interests that we default. In fact with the worldwide COVID-19 pandemic raging at the moment, restructuring debt is the easiest thing that any debtor can do. We can do it with our eyes closed. Contrary to our so-called luminaries of yesteryear, we don’t need an IMF bailout package for us to restructure our debt. In fact, at a personal and corporate level, a number of financial institutions have already started offering debt restructuring to clients even before the clients can ask for it. So if their argument for an IMF bailout package is that it will help us to restructure our debt with our creditors, then it has no merit whatsoever.
11. So much for what our so-called economic luminaries of yesteryear are advocating for, let us look at the other objective which an IMF bailout package seeks to achieve and see if we can actually achieve it on our own without a bailout package; that is fiscal discipline. It is a well documented fact that the PF government lacks fiscal discipline. They simply spend money which they don’t have and have to keep borrowing in order to stay on their trajectory of reckless expenditure. Can the IMF instill and enforce the necessary fiscal discipline into the PF and its Government? Personally, based on the well-documented arrogance of the PF Government, l very much doubt that. In fact, assuming we did go on an IMF package, and given the fact that we are going into an election year where the PF need to spend huge sums as part of its strategy to endear itself to the electorate, l foresee them defaulting on the IMF conditions. That means they would not get a penny from the IMF, and as a nation, we would add to our already delinquent CV, the accomplishment of having successfully defaulted on an IMF program! Such an embellishment would be worse than not having tried an IMF bailout package at all in the first place.
12. In my considered view, an IMF bailout package utilizes the time-tested carrot-and-stick tactics. They tell you that if you achieve milestone number one, we will give you so much, but the economic cost of achieving that milestone number one is five times the amount which they promise you, which by the way is not a grant but a loan. So you’re essentially taking one step forward and five steps backwards. That is why there is no country in the entire history of the IMF which went on an IMF package and emerged on the other end better off. Like the foolish donkey which chases after a carrot that is actually tied to its back, there is no winning with an IMF package. What our so-called economic luminaries of yesteryear are essentially asking, in their advocacy for an IMF bailout package, is that the Government should take up the position of the foolish donkey. The IMF will be the donkey rider and the IMF loan will be the carrot. I could almost say that this scenario can never materialize, but knowing the gullibility of our Government, anything is possible.