Zambia's IMF bailout

 An Analysis of the pros and cons of IMF Bailout for Zambia

 Formed in 1944, the mandate of the International Monetary Fund was to regulate the global regime of exchange rates and international payments. This function, however, collapsed in the 70’s as countries abandoned fixed exchange rates. Recasting itself in a new role, the fund’s primary function became intervention in economic crises of its member states. Since then many nations have turned to the fund when faced with a deteriorating economic situation. The Zambian government under the administration of President Hichilema has made it clear that they intend to pursue talks with the IMF and Minister of Finance, Situmbeko Musokotwane, indicated a bailout package could be finalized before the end of the year. Economists and politicians have expressed varying views on the prospective bailout, with some vouching for it and others strongly opposing it. In understanding the IMF’s role in sovereign debt crises over the years, it is helpful to analyze the notable interventions of the body in recent decades; namely the Latin American debt crisis, the Asian debt crisis and the European debt crisis.  

The IMF’s Role in the Latin American Debt Crisis In the 80’s

  Latin American countries were grappled with a worsening debt crisis. Emanating from the global recession and skyrocketing oil prices, Latin American states found themselves in a liquidity crunch. In order to finance the purchase of oil, these states borrowed from private banks. At the same time, oil exporting countries were awash with revenues from oil sales and saw sovereign debt as a viable investment. In the late 80’s interest rates rose in the United States. A rise in interest rates in the US and Europe, coupled with a decline in prices for the Latin America’s export commodities and a depreciation of the region’s currencies set the stage for a debt crisis. In 1982, Mexico’s finance minister announced that the country would not be able to service its debt. Lenders immediately halted the issuance of new loans to Latin America and began demanding for their money. As a pre-requisite to debt restructuring lenders demanded that indebted countries in the region accept the intervention of the IMF.  The IMF’s support was conditional on adoption of a structural adjustment program and the institution of austerity measures. Latin American countries, such as Mexico and Brazil, agreed to the intervention of the IMF. The IMF did provide money for debt repayments and restructuring, however, this came at the cost of the implementation of austerity measures; measures which have been described as crippling to economies that were already ailing. The reduction in government spending had the effect of disrupting social protection measures and curtailing industrialization efforts. This coupled with the abrupt shift to a market economy, exacerbated inequalities and poverty in many Latin American states. During this period economic growth rates in the region plummeted, a phenomena attributed to the fall in government spending. The intervention of the IMF became a source of great exasperation to the citizenry of many Latin American countries as it was blamed for the economic ills their economies were facing. In the late 80’s Brazilian officials, at a convention, decided never again to work with the IMF. In the end, creditors and multilateral institutions came to the conclusion that the region would not be able to liquidate its debt and they began advocating for debt relief.

 The Asian Debt Crisis and the IMF 

In the late 90’s a financial crisis began to ensue in East Asia. Prior to the financial meltdown, East Asian countries had been lauded for their economic progress. Countries in the region had experienced dramatic increases in GDP and living standards, as well as a sharp rise in private savings. The high interest rates prevailing in the region also made it attractive to foreign capital from the developed world, given sluggish growth rates in much of the first world. This strong economic performance however had masked certain vulnerabilities in many of the Asian economies; vulnerabilities of rapid debt accumulation and lack of regulatory oversight. The majority of these economies had in place pegged exchange rates against the US dollar. A crisis began to unfold, however, as countries in the region began to experience challenges in sustaining unrealistic currency pegs against the dollar.  In the face of dwindling reserves, as it became clear, the central banks could no longer intervene, economies in the region began to allow their currencies to float freely against the dollar. This set the stage for large scale depreciations of currencies in the region and capital flight away from the economies. These depreciations in value were particularly damaging to countries that had contracted a large amount of dollar denominated debt. Given the linkages between the developed world and the burgeoning Asian market, the IMF stepped in to halt the currency crisis that was rapidly developing in the region. The IMF proceeded to develop a series of bailout packages for countries that were amongst the hardest hit in the region, bailouts that were tied to financial system, banking and currency reforms. These bailouts  totalled roughly $40 billion. These funds were to meant to cushion official reserves as adjustment was pursued. Distressed economies were made to limit government spending and deficits, raise interest rates and allow insolvent firms to fail. Economic critics of this approach argued that these measures would only stifle economic activity and worsen recession. These critics contended that increases in government spending and reduction in interest rates would be more beneficial to getting the economies out of a recession. Response to the IMF intervention in East Asia was mixed. Nevertheless, the impact of the IMF was much less contested than it was in Latin America. The Asian crisis was contained and growth in the region was restored, a success that has been credited to the work of multi-lateral institutions such as the IMF and other governments.

 The Greek Debt Crisis and the IMF 

The Greek government pursued expansionary fiscal and monetary policies in the 80’s and 90’s. These pursuits however did not have the intended outcomes as the economy became beset with ails of inflation, deteriorating exchange rate and low economic growth. Joining the European Union was viewed as a panacea to this predicament, in 2001. Membership into the EU, the single currency and centralized monetary policy produced mixed results. Borrowing became much cheaper for Greece, and the government did so at a large scale. In addition, Greek products were largely uncompetitive in the European market and so their exports lost out to the more productive economies. This fueled low tax revenues. The global financial crisis of 2009 ignited the turmoil in Greece. In its aftermath the Greek government revealed that it had been under-reporting its debt figures. Markets responded by denying the country access to finance, and a debt crisis ensued. At the peak of the crisis the public debt to GDP ratio had risen to 179% In stepped in the multilateral agencies, amongst whom was the IMF. The troika issued bailouts to the tune of 240 million Euros, which came with stringent conditions, i.e. austerity measures, tax increases, privatization of public assets and structural reforms.  The IMF has openly admitted it got it wrong in Greece. The austerity measures left the country much worse off, with the citizenry grappling with a failed economy. Taxes rose precipitously, large numbers of public workers were laid off together with large cuts in pensions and other social support services. This triggered a contraction in the economy which resulted in job losses in the private sector and further deterioration of the Debt to GDP ratio. Counter-intuitively, in response to this malaise, the IMF and other cooperating partners prescribed further bailouts which came with deeper austerity. In all, these prescribed remedies put the Greek people through a lot of suffering. Greeks lost their jobs, their homes, were unable to afford medical care and those who were able to leave did so. Eventually the IMF relented in its advocacy for austerity, recognizing that what the Greek economy needed was debt relief A similar debacle has been witnessed in Argentina, which has caused commentators to wonder if the IMF has learned anything from its misadventure in Greece. Once more a humongous bailout was prescribed to a country that had shown very little capacity to meet its debts.

 The Rationale for a Zambian Programme with the IMF 

The Zambian economy is facing an impending debt crisis. The past administration undertook large scale infrastructural development that was funded by loans from external creditors, among them 3 Eurobonds. These loans have begun to fall due, with Zambia unceremoniously becoming the first African country to default on a Eurobond payment in the Covid era. The new administration has made it clear that the country’s debt, if not restructured, will choke the treasury. Debt restructuring, however, is conditional on being placed on an IMF programme, which is in the best interest of creditors given a bailout provides the resources for creditors to be paid. Whether an IMF programme is in Zambia’s best interest is debatable. It therefore seems Zambia is caught between a rock and a hard place. IMF bailouts do not always work, nevertheless, sometimes they do. What determines this success is the underlying conditions to the economic predicament. An analysis of IMF bailouts reveals less complex economic ailments respond better to bailouts, more intricate crises based on deep rooted economic misalignments are not as responsive. An IMF programme also has the potential to make the incumbent president unpopular. IMF bailouts have a long history of leading to political upheaval, as has been witnessed in Greece and Latin America. IMF programmes work on austerity measures, squeezing an economy with a view to cut expenditure and raise taxes assuring the fund of the return of their money.  While the rationale for entering into an agreement with the IMF is understandable, the new dawn administration should explore the merits and de-merits of such a move critically. An IMF deal is not something to go into blindly. These are long term commitments that will have a bearing on the citizenries quality of life for years to come. Upon examining the pros and cons, which I imagine Dr Musokotwane has done, a decision should be made although it seems one has already been made