How President Lungu’s loan ban and fiscal measures has averted a crisis and led Zambia to economic recovery

By Kalima Nkonde

President Lungu’s decision to stop debt contraction, cancel some existing loans, terminate projects below the 80% completion rate, accelerate payment of suppliers and contractors owed arrears and the implementation of expenditure reduction measures should be applauded by all patriotic Zambians-overdue as it may be-as it will avert the inevitable economic crisis similar to the one in 2015/16.

The measures announced by Finance Minister Margret Mwanakatwe, if strictly implemented, will set Zambia on a quick road to economic recovery as the monetary policy base is already in place and has been waiting for fiscal policy measures to complement them. The recent measures announced are what this writer and other experts have been calling for ad nauseam in the past three years.

It has been clear to those who keenly follow the Zambian economy, and those who read this writer’s articles and other experts’ comments , that the red flags for an impending economic crisis for Zambia was on the horizon and urgent action was needed.

The article gives the background to the President’s decision, and why it is the correct decision and how it is likely to lead Zambia’s to economic recovery within the next two to three years just like Ghana did, if strictly implemented.

In 2015/2016, Zambia went through an economic crisis which saw the kwacha tumble to $14.50 to a dollar, inflation sky rocket to 22.5%; bank interest rates go up to 45%, copper prices plummet to $4,858 per tonne which was a ten year low, and massive power shortage with incessant load shedding. These led to massive job losses being registered across all sectors of the economy with the mines retrenching over 12,000 miners. Zambia had to run to the IMF for talks on a rescue package and technical support.
As part of the negotiation process and preconditions for the IMF rescue package, the Zambian government put in place measures for stabilizing the economy; and admittedly there was overwhelming evidence in 2017, that the Zambian economy was on a recovery trajectory.

The rate of inflation dropped to 6.1%, commercial lending rates dropped to 25%, the kwacha stabilized below K9.5 on average and copper prices started recovering .As a result of the improved economy and the expected IMF deal, foreign investors’ confidence in the economy rose and inflows of foreign exchange through the purchase of Zambian government bonds and Treasury bills increased. The Zambian Eurobond was the best performing among emerging market economies. It appears that the Government applied some brakes to the measures as was evidenced by statements by the President and Minister for development planning to the effect that Zambia could do away with the IMF.

“Everything we do, we consult and I want to be remembered for just sticking to the law and doing things within the expectations of the people so if IMF want to go because of this, they can go and I am saying this openly, if IMF thinks we have gone beyond the norms of good governance and democracy, they are free to go,” said President Lungu, whilst declaring a State of emergency in July, 2017. “But I have made it very clear that if they think I have gone astray, let them go”, he added.

The President‘s view that Zambia did not need IMF was later supported by former Minister of Development planning, the now fired Lucky Mulusa.

”I will tell you this and tell you now that our worst time was between mid 2015 and mid 2016 just before the elections. That’s when the economic downturn had reached the bottom and during that time, we never ever defaulted on any of our international obligations, we never defaulted. Now the economy is picking up as a result of economic activities picking up in China and China is demanding more of our copper so we are able to export more copper and more revenues through taxes from that copper exports and also bringing in more hard currency in terms of also managing our exchange rate. What this means is that we can do away with the IMF and our economy will still be vibrant so people must not have this perception that maybe Zambia’s economy has gone berserk and we need bailout from the IMF, no. it is merely investment in perception in order to trickle down the interest costs that we are paying because the investors will be very comfortable with us engaging with the IMF,” Mulusa said.

On October 6, 2017, against all expectations, IMF dropped a bombshell that it was putting the Zambian deal on hold due to the country’s high level of indebtedness which increased Zambia’s chance of default. According to the IMF, their projections showed that the country’s debt levels could reach 90 per cent of GDP by 2021.

“Public debt has been rising at an unsustainable pace and has crowded out lending to the private sector and increased the vulnerability of the economy. The outstanding public and publicly guaranteed debt rose sharply from 36 percent of GDP at end-2014 to 60 percent at end-2016,” The Fund noted in statement announcing the suspension of talks.

“Against this background, any future programme discussions can only take place once Zambian authorities implement credible measures that ensure debt contraction is consistent with a key programme objective of stabilizing debt dynamics and putting them on a declining trend in the medium term,” The IMF added.

There is overwhelming evidence that since the IMF suspended talks with Zambia, nine months ago, the improved signs of recovery that were apparent in 2017 have started reversing. Since the beginning of 2018, inflation has gone up four months in row to 7.8%; the exchange rate of the kwacha has gone above the K10 to a dollar and trading about K13 as on 15 June, 2018, compared to a low of $8.90 in 2017.
Zambia’s foreign exchange reserves are down to an all time low of $1.8billion or two months import cover instead of the target of 4 months and well below SADC’s 6 months cover. In regard to the debt situation, Zambia’s foreign debt has increased from $7.2billion in 2017 to $9.1billion; the fiscal deficit for 2018 is likely to be higher than the 6.1 percent projected in the budget. Zambia currently spends 22% of its revenue on debt servicing.

The performance of Zambia’s Eurobond, which is one way of measuring investor confidence, is now the worst performing in the World. Investor’s confidence in the economy seems to have been lost. In 2017, Zambia’s Eurobond was the best demanded but its value has lost 11% in 2018 and its yield is above 10%.
According to Stuart Culverhouse, Head of Sovereign and Fixed Income Research at Exotix, investors’ confidence in Zambia is low.

“Market yields that have now reached 11.5% show the market has lost faith in Zambia and, if there was any confidence back in October that an IMF programme was still possible, this has now all but disappeared,” He said.

It is in the light of the above negative trends in 2018, that President Lungu’s decision should be viewed. He should ,however, be commended for having bitten the bullet and ignored political expediency by making a bold decision which is likely to avoid the country relapsing into a full blown economic crisis.

The IMF Country Director, Dr. Baldini, had warned that if no corrective measures were done, especially with regard to debt and fiscal discipline, Zambia risked relapsing into an economic crisis.
“The shock scenario [for Zambia] reflects a nearly full blown crisis similar to the one experienced back in 2015 when the REER (Real Effect Exchange Rate) exchange rate depreciated by 30 percent, copper prices fell by 20 percent, and growth slowed down from nearly 5 percent in 2014 to 2.9 percent in 2015”, He said.

Zambians may wonder how the measures announced by government will help the economy recover. There is no doubt that if strictly implemented, the measures will lead to increased economic activity, stabilization of the kwacha, creation of more jobs and improvement of the standard of living for the population.
First and foremost, as a result of the measures, talks with the IMF should be back on track and the $1.3 billion deal is likely to be concluded this year. The benefits of such a programme which have been pointed out before, include the following: help the stabilization of the kwacha through the balance of payments support, restore investor confidence and help the performance of Zambia’s Eurobonds by reducing interest rates on the loans, facilitate mobilizing additional revenue sources from multilateral institution and bilateral Donors and strengthen public financial management and restore budget credibility. On the political front, IMF programs have been correlated and credited with an increase in free and fairer elections, free speech, and good governance, rule of law, control of corruption, freedom of the press, strong and independent governance institutions.

The Government’s cancellation and suspension of foreign loans will reduce the country’s debt risk of default as well as reduce the money to be spent on servicing loans thereby leave funds for health, education and other social services.

The reduction in the cost of running government by reducing wasteful expenditure will reduce the need for government to borrow from the domestic market and therefore lead to bankers having excess liquidity and a drop in bank interest rates. Banks will be forced to lend to private sector at affordable rates and in the process help the private sector expand and new businesses set to create jobs.
Government has been a job killer in Zambia due to excessive domestic borrowing which has kept commercial bank interest high and has for so many years overcrowded the private sector. This assertion has been supported by the institution that understands the Zambian economy better than anyone else, Bank of Zambia.

“The prevailing high real lending rates continued to constrain access to credit by productive sectors of the economy as reflected in the sustained contraction of credit to the private sector. Most sectors continued to experience limited access to credit mainly due to banks’ preference for government securities, high lending rates, and prohibitive collateral requirements”, observed Bank Zambia Governor, Dr. Denny Kalyalya, in one of his quarterly Monetary Policy press briefing in 2017.

The Government’s decision to accelerate the payment of suppliers and contractors will also have massive multiplier effects on the economy. One of the major constraints to economic activity in Zambia has been the lack of liquidity. If Government pays suppliers, they will also be able to pay their creditors including banks thereby reduce the percentage of non performing loans. This measure will also make more money available for productive activities and in the process create more jobs.

There is cause for optimism for Zambia’s economic recovery because the measures announced will be building on some of the current positive indicators in the economy such as the monetary policy measures that have seen monetary policy rate reduce to 9.5%, the statutory reserve ratio of 5%, the continued improvement of copper prices to over $7,200 per tonne.

In addition, Zambia’s power generation capacity has increased to 1901MW which is almost what the nation needs at its peak. This is due to increases in generation by ZESCO to 1493MW while Independent power producers (IPPS) like Lunsemfwa Hydro and Maamba Thermal Coal Plant are producing about 493MW.
Although there is need for optimism, there is more that the Government needs to do, including following up issues raised in the Financial Intelligence Centre reports on tax evasion. The Zambian government should stop focusing on small fish like Zambian workers and Small business owners for domestic revenue mobilisation but rather find a way of focusing on multinationals tax evasion ploys including the Chinese. It is apparent that tax evasion and corruption is now being exported to Zambia and African countries by the Chinese while they are getting rid of it in their home country by punitive punishment to offenders which includes the death penalties because they know its threat to their economy.
The issue of corruption needs to be addressed head on as it is now Zambia’s biggest elephant in the economic room. The Zambian government is well advised to go and learn about reduction of government expenditure and corruption by visiting countries like Botswana and Mauritius, instead of Kenya.