The International Monetary Fund (IMF) says global debt had risen to more than double (225%) global GDP hitting a record $152 trillion in Q3 2016.
In its half-yearly fiscal monitor report covering 113 countries, the fund revealed that the private sector was responsible for two-thirds of the debt. It warned that without urgent intervention, the growing debt mountain would trigger a global recession similar to that of 2008.
Zambia’s domestic and external debt has in recent years been climbing to near unsustainable levels of around 50% of GDP at a time when USD:ZMW ratios and the price of copper, the country’s chief export, are at multi-year lows.
“Many low-middle income countries are being hit by falling commodity prices,” said Tim Jones, economist at the Jubilee Debt Campaign (JDC), a coalition of organisations and groups in the UK calling for the cancellation of ‘unjust’ and ‘unpayable’ debts of poor countries.
He said that affected governments’ revenues had been lowered while the dollar’s gains against their currencies increased the size of debt payments in foreign currencies. “Further, less tax is being collected than had been expected.” is being collected in these countries. In the 1980s, commodity prices fell and the US dollar rose. The result was 20 years of debt crisis and a rise in poverty.”
IMF Director of Fiscal Affairs, Vitor Gaspar notes that certain sectors are exhibiting rapid debt growth. “In some places we have excessive debt, while in others, particularly non-financial corporations’ debt, there is fast growth. A crucial message from the fiscal monitor is that when private debt is on an unsustainable path it is important to intervene early in the process to make sure financial crises and recessions are prevented.”
AN AILING ECONOMY
Zambia’s fiscal position has been deteriorating in recent years with headwind from low copper prices, soaring subsidies and a debilitated kwacha among others keeping growth at about 3% from a 5% average between 2004 and 2014.
Government earlier this year said it would soon hold talks with the IMF to discuss an aid package for Zambia as the country gears up for a five year economic recovery plan.
Tsidi Tsikata, Head of the IMF Observation Mission in Zambia said an unbalanced policy mix was contributing to the economy’s sluggish performance. He said that tightening of monetary policies had contributed to slowing GDP growth.
“Electricity shortages, a decline in exports and strained public finances have subdued private sector consumption and investments, putting it and the banking industry under great stress.
This has led to an increase in stock of arrears from 5% of GDP in 2015 to slightly over 10% in 2016,” he said.
Tsikata who was addressing a press gathering after closed door consultation talks with government officials in November said that “fiscal performance through Q1 2016 was characterised by shortfalls in revenue and substantial public overspending. To a larger extent, this had an adverse effect on the general economic outlook.”
Since the debt crisis of the 1980’s, the IMF has assumed the role of bailing out countries during financial crises with emergency loan packages tied to conditions, often referred to as structural adjustment policies (SAPs) according to Global Exchange (GE), an international human rights organisation dedicated to promoting global economic, social and environmental justice.
Finance Minister Hon. Felix Mutati says discussions with the IMF on a USD $1.2bn bailout package will be held in Q1 2017.
TO SIGN OR NOT TO SIGN
Former Finance Minister Situmbeko Musokotwane said Zambia needs to seal a deal to access emergency funding from the IMF to prevent a further decline of the economy. “It is incumbent upon the government to agree with the IMF on a programme that will stabilise the economy, restore investor confidence and stimulate accelerated growth.”
Much has been made of the possible SAPs the fund may impose on its loan to Zambia. Over the years, the IMF has been criticised by various civil society organisations as well as independent commentators for imposing austerities that appear to hurt struggling economies as opposed to saving them.
Renowned Economist Joseph Stiglitz argues that the fund fails to implement the best policies for the benefit of developing countries. He accused the lender of reflecting the interests and ideology of the western financial community at the expense of poor countries.
The real beneficiaries of typical IMF conditions are not the citizens but rather foreign investors according to Kampamba Shula, Programmes Officer at Economics Association of Zambia (EAZ).
“When subsidies in electricity are removed for example, the energy sector becomes more investor friendly in that more foreign energy companies are encouraged to participate. At current tariffs, foreign energy companies have no incentive to participate in the sector. The same goes for fuel subsidies.”
Meanwhile the GE said that “IMF’s SAPs ensure debt repayment by requiring countries to cut spending on education and health; eliminate basic food and transportation subsidies; devalue national currencies to make exports cheaper; privatise national assets; and freeze wages. Such belt-tightening measures increase poverty, reduce countries’ ability to develop strong domestic economies and allow multi-national corporations to exploit workers and the environment.”
It cites a recent IMF loan package for Argentina tied to cuts in doctors’ and teachers’ salaries and decreases in social security payments which contributed significantly to lower investment in the public sector further damaging the economy as an example of a typical bailout.
The fund’s remedy for Greece and Portugal during the Eurozone crisis fared little better having been tied to salary and benefits cuts, reduced public spending, privatisation and lower minimum wages among others.
In many of its standby arrangements negotiated during the last global recession, the IMF had included conditions that would reduce output and employment in situations where economies were already shrinking says Mark Weisbrot, Co-Director of the Centre for Economic and Policy Research in Washington DC.
In the Asian crisis of the mid 90s, SAPs imposed on Indonesia, Malaysia and Thailand encouraged tight monetary policy (higher interest rates) and tight fiscal policy to reduce budget shortfalls and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a deep recession with mass unemployment that spread to other countries and created over 200m “newly poor,” notes GE.
The IMF claims critics choose to focus on its failures, ignoring its success. It argues that in dealing with economic crisis, any SAP offered is likely to come with its own difficulties which often require ‘painful adjustments’ especially in the short term but benefit the economy in the long run. “Countries are not obliged to get IMF loans but the fact that they do, shows there is some benefit to having a lender of last resort,” it says.
“We are satisfied with the steady progress Ghana has made in the first year of its bailout programme,” it said in a statement earlier this year. It praised Ghana’s government for making the first year of its programme – which will run till 2018 – a success.
Mozambique has not been quite so fortunate however, after the World Bank and IMF cancelled planned direct budgetary support following the discovery of an undisclosed debt of USD $1.5bn. This raised the country’s sovereign debt stock to USD $9.6bn (nearly 80% GDP) and put into question its debt sustainability.
The IMF noted that it will take time to restore the relationship with the southern African country which may delay restoration of the Standby Credit Facility.
Meanwhile, Republican President Edgar Lungu said Zambia would only sign the IMF loan deal if the SAPs were acceptable.
“If we find that their conditions are acceptable, we will work with them. If not, we will throw them out,” he said.
It has to be noted that Zambia has already began the economic recovery plan and any terms with the IMF will be complimentary rather than obligatory says Shula. “Zambia is already reviewing state owned enterprises, moving to cost reflective energy tariffs and other structural reforms indicated in the 2017 Budget. So in this deal Zambia is making or at least appearing to make policy reforms out of her own volition.”
Shula added that The IMF deal was crucial to instilling confidence in the economy, which would bring about the right market sentiment for donors and other funders to support the financing requirements of the 2017 budget.
Hon. Mutati said that government’s aim was to strike a deal that would help get the economy back on track and not hurt its citizens any more than the downturn had.
He however said that the recovery would not be achieved without sacrifice.
“Turning the economy around requires that we make hard choices and implement difficult reforms. The task of restoring stability and accelerating growth will not be easy. We have to be bold and decisive. People will need to sacrifice on the cost of electricity, transport and other areas.”
“Trimming the budget deficit will be a major component of Zambia’s planned IMF programme,” Mutati said.
However, Jesuit Center for Theological Reflection (JCTR) has expressed dismay at government’s decision to form new ministries including the ministry of National Guidance and Religious Affairs when the country is expected to cut unnecessary spending as it seeks to stimulate economic recovery.
“The Ministry of Religious Affairs is a non-essential ministry whose creation is straining the country’s already stretched resources that could be directed to growth sectors and poverty reduction,” the faith-based think-tank said.
“The formation of this ministry comes at a time when Zambia is looking to secure a loan agreement with the IMF that must be used sustainably looking at the many expenditure saving conditions that are likely to be tied to it.”
“Moreover the ministry’s mandate may be redundant considering the existence of influential church mother bodies like Council of Churches in Zambia (CCZ), Evangelical Fellowship of Zambia (EFZ) and Zambia Episcopal Conference (ZEC). We therefore urge IMF to make ‘non-creation of new Ministries’ one of the conditions for the bailout package as opposed to subsidy removal.”
In his budget speech, Hon. Mutati said that copper output rose 8.2% to 575,780 metric tonnes between January and September 2016 from 2015. Copper prices climbed 15.4% in November which if maintained and coupled with the IMF loan could prod Zambia much faster up the path to recovery.