Cabinet recently approved engagement of the International Monetary Fund (IMF) with a view to setting up a program. The economy has been hit by shocks from a 70% depreciation of the currency versus the US dollar in 2015, a 590MW electricity deficit which started in H2 2015 and a decline in global copper prices (contribute over 70% of export earnings). This has put even more pressure on Government finances which are not only committed to major infrastructure projects but are also subsidizing a number of things in addition to forking out more Kwachas to pay interest on external debt ($6.4b as of eoy 2015).
Inflation reached 22.9% in February. The Bank of Zambia (BoZ) has focused the majority of its monetary toolbox to tightening liquidity and stabilizing the Kwacha in order to stave off further acceleration in inflation. This has seen interest rates rise – a factor which will negatively affect business this year.
So what could this IMF program potentially involve?
The Government currently subsidises the Farmer Input Support Program (FISP), Food Reserve Agency (FRA) and fuel pump prices:
They have also been supporting state-utility ZESCO in the importation of electricity which is costing around $25 million a month. The IMF will be looking for changes in these areas.
- Increase in fuel pump prices to cost-recovery levels and possible reform of procurement system
- FRA purchases limited to 500,000MT of maize for strategic reserves
- Increased electricity tariffs to help cover importation costs in the short-run with a view to attracting more investment in the long-run
2. Civil Service Wage Bill
Over the last 3 years since civil service wages were increased, they have been consuming about 49% of revenues (42% pre 2013 hike):
This doesn't leave a lot of fiscal space for the Government to invest in other much needed areas or react to economic shocks as has been the case since the second half of 2015. The IMF will be looking to help unlock efficiencies in this area. For instance – according the the Governments Annual Economic Report of 2014, the health sector had a total of 37,130 staff of which 43% were administrative staff (i.e. NOT doctors, nurses etc).
- Restructuring of labour force in various ministries
- Wage and hiring freeze in non-key areas
3. Revenue Raising
Cost savings alone will not be the silver bullet to increasing fiscal space for the Government. Revenues have more than doubled since 2010 but the pace at which they were growing has slowed:
Expenditure on much-needed infrastructure projects remains a priority but requires the Government to grow and diversify their revenue streams. This is another area that an IMF program will be focusing on.
- Rise in VAT (currently at 16%)
- Higher tax rate for low taxed sectors
- More stringent enforcement of various tax measures (e.g. withholding tax on rental income)
- Increasing capacity and resources of Zambia Revenue Authority
In addition, further reform of the civil service pension system will also be on the table because the system has been underfunded for a long time.
What the Government has already done (or is currently implementing):
And possibly more.
Right now, there isn't a lot of confidence in the Government to adequately address fiscal issues in an election year. Increased Eurobond yields are an indication of global investors dim views on the Zambian economy (on top of a reduction in participation in domestic treasury and bond auctions).
Some of the which will be part of the IMF program, if implemented to the full extent will put further pressure on the pockets of consumers/businesses which are already constrained with inflation in the 20s. But in the long term, IF the Government follows through on key measures, they will create a much stronger base for the country to grow on.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *