Tag: IMF

What was Yellen’s  visit to Zambia for?

What was Yellen’s visit to Zambia for? Featured

What was the purpose of US Treasury Secretary Janet Yellen’s trip to Zambia and other African countries? To address Zambia’s debt with China, to undermine China’s position in Zambia and Africa, and for what? Critical minerals!

And it coincided with International Monetary Fund (IMF) managing director Kristalina Georgieva’s visit to Zambia. What was Georgieva’s mission to Zambia? The answer was transparent in all her meetings in Zambia, including one with President Hakainde Hichilema – the media was present. From what we observed this was nothing but a PR stunt by the IMF to claim that the institution had become better and more humane.

Zambia has requested a 38-month arrangement from the IMF under the Extended Credit Facility Arrangement (ECF) in the amount of SDR 978.2 million (Special Drawing Rights) – 100 percent of Zambia’s quota. The proposed ECF-supported programme aims to restore macroeconomic stability and foster higher, more resilient, and more inclusive growth.

To support this, the IMF is seeking extensions of maturity dates and reduction of interest payments. But there are serious challenges. Unlike the debt relief efforts of the 1990s and early 2000s, where lenders were mainly bilateral and multilateral – and all belonged to the Paris Club – today, lenders include private bond market holders.

Presently, the lenders have different characteristics and motives. And today there’s also China, which was not one of the lenders of the 1990s and 2000s. The Chinese debt is a mixed basket of private, quasi-government and government creditors. This makes it very difficult to reach a common framework.

Even when the characteristics of the lenders were similar under the Paris Club it took more than ten years to agree on the debt relief we received in the early 2000s. And how long has it taken the IMF and the Zambian government to reach a deal? They started negotiating in 2017. This complex mixture of lenders may take a long time to reach a deal or some consensus. It will certainly not be fair and just to blame China for this.

The truth is that following the “China debt-trap” narrative being thoroughly exposed as a fraud internationally, there is a new two-pronged game in town: China must bail out Western bondholders controlling the debt of many nations in distress; at the same time, the International Monetary Fund, the US, and the EU are pressuring those nations to abandon infrastructure projects financed by China in return for debt relief. In the case of Zambia, the IMF made this very clear.

This seems to be the goal of the visit by US Treasury Secretary Janet Yellen to Zambia, i.e. making Zambia an example or a template for this new push to block the Belt and Road Initiative and China-Africa cooperation, which is soundly based on building infrastructure (transport, power, water management, modern telecommunications, healthcare and education) and modern agriculture and industry. This is the way, as China proved at home, for these nations to escape the double traps of poverty and chronic debt distress. At the same time, the looting of the raw materials of African nations by the same nations’ transnational corporations continues with great vigour and malice under the guise of reforms, privatisation, and investment incentives. In the case of Zambia, the situation is probably as bad as it was in the colonial period.

The debt distress experienced by these countries predates China’s involvement through the Belt and Road Initiative in Africa and Asia and, was made worse with the outbreak of the COVID-19 pandemic in 2020 and 2021. It continued as inflation in global energy and commodity prices maintained pressure throughout 2021, and finally dramatically worsened with the outbreak of the Ukraine crisis in February last year.

The nations that rely heavily on imports of fuel, food, and fertilisers are the worst hit. Zambia is a case in point. Zambia already defaulted in November 2020 on Eurobonds (not Chinese debt service) and has been negotiating a financial assistance package with the IMF and international creditors. Zambia had resorted to borrowing heavily from international private bond markets even before the COVID-19 pandemic.

When the commodity prices plunge took place in 2014, Zambia entered a major financial crisis, pushing it to resort to borrowing from international private bond markets. In 2014, Zambia issued Eurobonds worth US$1bn, in a deal supported by the IMF and managed by Deutsche Bank and Barclays. In 2015, another US$1.3 billion Eurobond was issued. The interest rate was an incredible 9.3 per cent. Maturity time for these bonds varied between seven and 11 years. The Eurobond issuances were intended to fill a gap in the budget deficit of US$ 2 billion, and not to invest in any productive processes.

In November 2020, the country defaulted on a US$42.5 million payment on one of the Eurobonds. This was not because the Zambia government couldn’t raise this amount of money. Its advisors on debt told them not to pay it because it would make other lenders less eager to cooperate on its debt relief efforts.

For the IMF it is a matter of the same recipe being repackaged with better public relations in light of its dented image in the Global South.

The exact same mistake is being made in the new “debt relief” arrangements of the IMF, which focus on filling fiscal gaps in government finances rather than developing the economy. New loans ease emergency needs and will be consumed without any impact on improving the productivity of society. The new loans will mature sooner or later and the vicious cycle will be repeated.

The demands being made by the West on China and the type of conditions being imposed by the IMF on Zambia in return for assistance reveal several objectives that could be problematic for China and the Belt and Road Initiative:

The call on China to provide more assistance in the IMF-driven debt restructuring of Zambia implies that China contributes to bailing out Western private sovereign bond holders, who themselves are pressed by the global financial crisis.

The IMF is demanding that Zambia stop borrowing (from China without naming it by name) for important infrastructure projects.

Zambia is being pressured by the IMF to resort to “public-private partnership” in financing and building infrastructure. This means that many projects will not be achieved, as their financial yield would be deemed as too small or non-existent by private investors. Or, otherwise, certain vital strategic facilities will be privatised and owned by foreign interests.

There is a risk of asset grabbing by the same Western interests and their allies focused on strategic raw materials.

US Treasury Secretary Janet Yellen’s counsellor Brent Neiman said in a speech on September 20 last year that China’s lack of cooperation with the G-20 and the IMF on debt relief could burden dozens of low- and middle-income countries with years of debt-servicing problems, lower growth and underinvestment.

“China’s enormous scale as a lender means its participation is essential,” Neiman said in the speech citing estimates that China has US$500 billion to US$1 trillion in outstanding official loans, mainly to low- and middle-income countries. However, these numbers are difficult to ascertain and it is not clear to what projects and what countries these loans were extended.

China’s share of Zambia’s foreign debt is a mere 30 percent. The real culprits that Yellen should be focusing on are the Western private bondholders. It became obvious that the IMF’s main conditionality to help Zambia was to cut a deal first on repayment of the debt of Western bondholders.

The statements by Yellen and other American officials are being used in Western media to show that China’s unwillingness to help the IMF programmes is undermining the efforts to help poor nation with debt restructuring. But China is doing the right thing by avoiding the IMF methods and focusing instead on its own solutions.

Zambia is Africa’s second largest exporter of copper and other industrial minerals like cobalt and gold. But while the mining sector constitutes 70 to 80 percent of the country’s exports, it does not contribute more than four to five percent of government revenues, because foreign Western companies largely own the mining sector. The absolute largest of these are: Glencore PLC (Glencore Xstrata PLC), Konkola Copper Mines PLC (Subsidiary of Vedanta Resources), Barrick Gold Corp, First Quantum Minerals Ltd, Axmin Inc., Caledonia Mining Corp, Lubambe Copper Mine Limited, Trek Metals Limited (Zambezi Resources Pty Ltd).

Only one major company is Chinese, China Nonferrous Metals Corporation (CNMC).

Most of the profit from mining does not return to the country. In 2021, Zambia estimated exports were US$8.1 billion. Copper accounted for US$6.1 billion of that (76 percent of total exports). But those companies repatriated only less than US$1 billion to Zambia. These companies do not use local suppliers for the mining operations and all machinery and services are supplied from abroad. The privatisation of the mining sector was part of the liberalisation process in the 1990s agreed upon with the IMF and World Bank. These policies also made foreign mining companies largely exempt from taxation under the pretext of encouraging more foreign direct investments into the country.

Zambia external debt reached US$8,472 billion in late 2021. Eurobond holders held $3 billion of Zambian debt plus US$336 million of interest arrears at the end of 2021. British Abrdn (Aberdeen) is one of the largest bondholders, and it leads a committee of bondholders estimated to hold around 45 per cent of Zambia’s international market debt. Aberdeen and its partners were opposed to any “haircut” to the bondholders in any settlement. American giant investment fund BlackRock holds around US$215 million worth of these bonds. BlackRock has reportedly made big profits from these holdings through the years. By comparison, Zambia’s nominal GDP was reported at US$17.1 billion in December 2019.

Chinese loans to Zambia account for 30 percent of its total external debt. However, these are long-term loans with long grace periods dedicated mostly to infrastructure projects, such as airports and hydropower projects, roads, highways, telecom and digital infrastructure, hospitals, and clean drinking water management systems.

The most important results of the agreement between the IMF and Zambia’s government to be granted a zero-interest loan of US$1.3 billion with a grace period of five-and-a-half years and a final maturity of 10 years, was indicated in the reports of the IMF staff. To receive the financial support, Zambia had to accept specific conditionalities to reduce government spending, but most emphatically to stop borrowing for infrastructure projects.

The IMF staff report in September 2022 stated clearly, “Zambia is dealing with large fiscal and external imbalances resulting from years of economic mismanagement, especially an overly ambitious public investment drive that did not yield any significant boost to growth or revenues”, it asserts also that, “rapid debt accumulation on the backdrop of deteriorating economic fundamentals has led to unsustainable debt levels and subsequent accumulation of arrears. Debt contracted has mainly been for infrastructure projects in sectors such as roads, education, health and defence”. This is outright sophistry, since the most poisonous part of the debt was accumulated through borrowing in the global bond markets from mainly British and American sources. China’s credits were long term and focused on improving the physical economy and productivity of Zambia.

This has been the demand of the IMF since the previous government started its negotiations in 2017. It led the government to cancel a large number of projects mostly agreed with China, but whose loan disbursements were not yet made. Some of the Chinese projects cancelled are:

• A major highway – the US$1.2 billion Lusaka-Ndola dual carriageway funded by China Jiangxi Corporation. Zambia has engaged China Jiangxi to cancel US$157 million in undisbursed loans.

• Digital projects, such as Smart Zambia phase II (US$333.2 million), which was being implemented by Huawei Technologies and funded by China Exim Bank. Digital terrestrial television broadcasting systems in Zambia phases II and III.

• Zambia asked China Exim Bank to cancel US$159 million of funding for the building of Chalala army barracks in Lusaka.

• FJT University under the Ministry of Education.

• Rehabilitation of Urban Roads phase III under the Ministry of Infrastructure and Urban Development.

Given the conditionalities imposed by the IMF and Western partners on Zambia and other countries to cancel vital infrastructure projects, mostly with China under the BRI, it is not reasonable for China to participate in these programmes.

When 77 percent of Zambia’s population do not have access to clean drinking water, 60 percent do not have access to electricity, 46 percent do not have access to the internet, and the roads are in a bad shape, it is unfathomable how cancelling all these infrastructure projects will lead to any improvement in the country’s economy. There is no evidence supporting the IMF staff assertion that these infrastructure projects “do not yield any significant boost to growth or revenues”. It is a basic fact of economics that improvements in infrastructure lead to direct and indirect increase in the productivity of the economy by creating efficient transport networks, lowering the cost of production through abundant electricity and transport facilities, and increasing access to markets.

The other risk resulting from this policy is that the government will be allowed to continue non-productive public spending, such as payment of public employees and disbursements to mitigate the globally induced inflation. This will increase the non-productive financial burden. At the same time, the IMF conditionality of lifting government subsidies on fuel will lead to an increase in the cost of production of most commodities.

China will be pushed back as a partner and the Western-controlled multilateral partners, like the World Bank, will assume the major role through assistance measures that are directed as social programmes to deal with effects of poverty rather than dealing with the causes. This will keep the country, where over 60 per cent of the population is under the poverty line, in a permanent state of poverty and reliance on aid programmes from the West.

If this push in Zambia succeeds in achieving the goals set by the United States and its partners, it will be used as a template elsewhere, where it will become the precedent and standard.

The attempt to pressure China to make concessions to the IMF and other financial institutions is intended to help bailout the private interests in the US and Britain, which are themselves facing huge risks due to the current Trans-Atlantic financial and banking crisis. The other goal is to block BRI projects, especially in the least-developed countries with large mineral reserves.

China is recommended to make public its position on “no bailout” of private interests, with loans to those countries not made to benefit the people but to make profit in times of crisis. China must make it clear that its loans to those countries, especially for the building of vital infrastructure, are “qualitatively” different to the Western loans, because China’s projects lead to an increase in the productivity of the countries and their ability to refinance their debt. Western loans in times of crisis are intended to pay old debt (especially to private interests as argued by the IMF itself). This kind of credit policy puts developing countries in a real debt-trap and vicious spiral, as they are not given the opportunity or permission to invest in productive projects.

China should, otherwise, continue its well-known and documented debt-forgiveness and rescheduling in a case-by-case manner. China’s loans for vital infrastructure projects must continue because China has become the creditor of final resort for such important investments to pull nations out of poverty. In the worst case, China may shift to “investments” in infrastructure rather than financing and constructing through loans, and secure the mineral resources it needs for its industrial development through win-win cooperation with mineral-rich countries.

African nations have to take control of their natural resources in a fair and organised manner. The neocolonial methods have to be exposed and ended.

African nations need to abandon the primitive economic process of exporting raw materials. These raw materials, if processed and manufactured into products inside the countries will add value in many orders of magnitude to the raw materials extracted. The recent case of Zimbabwe banning the export of raw lithium and entering a joint venture with a Chinese company to build a lithium-ion battery plant in the country is a revolutionary move. It has the potential to reconstruct the relationship of the whole African continent with the rest of the world.

The age of exploitation of nations through colonialism and neocolonialism has to end and be replaced by the win-win concept manifested in the Belt and Road Initiative.

Fred M’membe,
President of the Socialist Party

We have been on this path before

We have been on this path before Featured

Let’s not cheat ourselves or allow ourselves to be deceived. The International Monetary Fund (IMF) programme guarantees us nothing. We have been on this path before. Yes, the language has or is changing slightly, but the fundamentals of these programmes have remained the same. The IMF management would like recipient countries to “own” the policy conditionalities much more than they have done. But genuine ownership can only be derived if the countries themselves participate in the making of the policies; and this is generally not the case as the policies are usually imposed by the IMF, often against the wishes of the governments or people.

Still, the policies would be more acceptable if they work. But generally they have not worked. Instead of recovery, growth and getting out of debt, many recipient countries have experienced stagnation or worse, and many are still trapped in debt. Thus, more “country ownership” of IMF programmes does not simply mean improving the methods of getting countries to really accept and internalise IMF policies which, it is assumed, are good though tough. It is not a communications or public relations task.

Ownership can or should be increased only if there is genuine participation by the government and people of recipient countries; and only if the content of conditionality (i.e., the policies) are appropriate and bring about good outcomes. Thus, the key issues are the democratic (or rather non-democratic and non-participatory) process of IMF policy-making, and the appropriateness (or rather inappropriateness) of the IMF policies. Unless these issues are resolved, no amount of persuasion or arm-twisting (ultimatums such as “convince us beforehand that you are a believer or we won’t agree to giving you a loan”) will bring about genuine ownership.

The issues of non-participation and inappropriate policies are not academic but of life and death dimensions. From the mid 1980s we have lived through IMF programmes. We closely followed policy debates and policies in the different affected countries, saw the effects of the market practices and the IMF-led policies, the social and political upheavals, the traumatic economic downturn, the devastating effect on the lives of millions of people and on the viability of thousands of local firms, big and small. Due to the evidence of recent events, there is a crisis also in development thinking and the development paradigm. In the past there was a bias or blind faith in predominantly relying on the state for development. Then, there was a swing to the other extreme of having total reliance and blind faith in the private sector and on globalisation (rapid opening up to international finance and trade). Now the pendulum is swinging back.

The emerging view is that openness can have good or bad effects, depending on the specific condition and stage of development a country is in, for example, whether the local firms and banks are prepared for external competition, whether there are regulations or knowledge on managing and utilising foreign loans so that they can be repaid, whether there is reciprocal benefits from opening up, whether there are opportunities for increasing exports or if the capacity to produce and market for export has been built up, and what are the balance of payments effects of opening up given the conditions the country finds itself in. Although if conditions are right there can be many benefits from opening up, there are also great risks and costs to be borne if the conditions are not right. For many countries, the conditions are not or may not be right, at least not yet. If they nevertheless open up, they may suffer the risks and the costs.

Thus, the balance, degree, timing, sequence of liberalisation must be tailored to each country. Though it may become the new wisdom in rhetoric, this principle has not yet been translated into policy by international agencies like the IMF, nor into national policy of most developing countries. Many countries are unable to do so, even if they want to, due to conditionality or binding rules. Many, if not most, developing countries are neither growing nor developing. The situation is bleak for many. Business as usual cannot be the response, as it has generally failed. The issue of conditionality and ownership should be viewed in a broad perspective, and this includes looking critically not only at the roads taken by the IMF but also at the roads not taken.

The raison d´etre of the IMF at its creation and in the era of the Bretton Woods system is to ensure global financial stability. This arose from the recognition that left to itself the financial institutions, markets and players, can become a too-powerful force with the potential of destabilising the financial system itself as well as undermining the real economy. The IMF’s implicit mission included taming and regulating global and national finance so that finance would serve the real sector objectives of growth of output, income and employment.The original Post WW2 framework supported this function. It included a system predominated by fixed exchange rates (which could be adjusted with IMF assistance when needed by objective conditions), BOP adjustment through country-IMF discussion when needed, limited cross border financial flows, and the normality of national capital controls.

Policy was influenced by an understanding of the need for caution on the potential for instability, volatility and harm to the real economy that can be caused by unregulated finance and by speculative activity. This regulatory system and the period of relative financial stability ended with the 1972 Smithsonian Agreement. Floating replaced fixed exchange rates, financial deregulation and liberalisation took off in the OECD countries, new financial instruments developed, there has been a massive explosion in crossborder short term capital flows and in speculative financial activity.

There has also been the spread of capital liberalisation to developing countries, to which advice from developed countries and from the IMF contributed. These developments underlie the frequent occurrence of financial crises. The failure of the IMF and other international financial agencies to prevent such crises should be recognised as one of its major flaws, and this should be rectified. Indeed, the failure of the IMF in preventing the global financial system from going down the road of such rapid deregulation and liberalisation (with the consequences of currency instability, volatility of capital flows and financial speculation), and instead presiding over this road that was taken, is a major mistake. It also goes against the original role of the IMF to establish and maintain a stable financial order.

There needs to be a backtracking to the crossroads and take a new turning which is more true to the IMF’s original mission of establishing financial stability. That is the road of crisis prevention through establishment of greater stability through better understanding and regulation of capital flows and capital markets; and a more stable system of exchange rates (including among the major reserve currencies, and in the currencies of developing countries). There is need to understand capital markets and the role and methods of players like highly leveraged institutions (for example hedge funds) which are now non-transparent and unaccountable but have major impact on global and national finance and real economy. There is need especially to curb manipulative financial activity. There is need to understand the behaviour and potential and real effects of various kinds of capital flows to developing countries – including credit (to the public and private sectors), portfolio investment, foreign direct investment (and its varieties, such as mergers and acquisitions, Greenfield investment, and FDI that produces for the domestic or the foreign market).

There is need to look at inflows and outflows arising from each, including the potential for volatility of each and the effects, especially on reserves and the balance-of-payments. What are the implications for policy and what guidelines should be given? For example, when should (or should not) a government or company borrow in foreign currency? Regulations and guidelines are needed because the market lacks a mechanism that can ensure appropriate outcomes. One guideline that is most relevant could be that local companies should be allowed to borrow in foreign currency only if (and to the extent) the loan is utilised for projects that earn foreign exchange to repay the debt.

The potential for devastating effects of short-term capital flows should be recognised and acted on, to prevent developing countries from the dangers of falling into debt traps. The IMF must recognise this and have an action plan A(or at least be part of a coordinated action plan) that:

(i) regulates global capital flows, through international regulations or through currency transaction taxes; (ii) establishes surveillance mechanisms and disciplines on countries that are major sources of credit so that the authorities in these countries monitor and regulate the behaviour and flows emanating from their capital markets and institutional sources of funds;

(iii) provides warnings for developing countries of the potential hazards of accepting different types of capital inflows and provides guidelines on the judicious and careful use of the various kinds of funds ;(iv) educates members and the public on how capital markets work and establishes surveillance and accountability mechanisms to guide and regulate the workings of the markets; (v) appreciates and advises countries on the functions and selective uses of capital controls at national level, and helps them establish the capacity to introduce or maintain such controls; (vi) identifies and curbs the use and abuse of financial instruments and methods that manipulate prices, currencies and markets, and prevents the development of new manipulative or destabilising instruments and methods;(vii) stabilises exchange rates at international and national levels, which could include mechanisms to stabilise the three major currencies, and measures that can provide more stability and more accurate pricing of currencies of developing countries; (viii) provides sufficient liquidity and credit to developing countries to finance development.The prevention of crises through a more stable global financial order is more beneficial and cost effective than allowing the continuation of a fundamentally unstable and crisis-prone system which would then throw up the need of frequent bail-outs with accompanying conditionality.

IMF conditionality policies have come under severe criticism for at least three reasons: (i) that there has been “over-reach” in that the conditions widened in range through time to include “structural policies” not needed for managing the crisis; (ii) that the policies in the core economic and financial areas of IMF competence have also been inappropriate as they were contractionary and did not generate growth; and(iii) that the policies were designed in ways insensitive to social impacts, and the burden of adjustment fell heavily on the poor and at the expense of social and public services.

The scope of IMF policy conditions has been increasing through the years and has become far too broad. Many of the conditions were not relevant or critical to the causes or the management of the crisis the countries found themselves in. Some of these conditions were put into the conditionality package under the influence or pressure of major IMF shareholders for their own interest or agenda, rather than in the interests of the debtor country. On many areas where conditions are set, neither the IMF nor the World Bank has the expertise to give proper advice, and thus the potential to commit a blunder is high and the negative effects can also be high. This includes the area of political conditionality and issues relating to “governance”. In many countries, import liberalisation has led to domestic firms and industries having to close down as they were unable to compete with cheaper imports, and de-industrialisation has been the result.

There is now strong emerging evidence that trade liberalisation can successfully work only under certain conditions. Factors for success or otherwise include the ability of the country’s enterprises and farms to withstand import competition, its production and distribution capacity to export, as well as the state of commodity prices and the degree of market access for its products. In the absence of positive factors, import liberalisation may cause the country into deeper problems.

The implications for conditionality are significant. Evidence is emerging that wrongly sequenced and improperly implemented trade liberalisation is adding to developing countries’ trade deficits. The IMF should thus review its trade liberalisation conditionality to take account of the need to enable countries to tailor their trade policy to their particular conditions and their development needs. In areas of its core competence, there are also serious problems with IMF policies. The problems with conditionality do not lie only in “new areas” outside the traditional areas of the IMF’s concern. The criticism is now widespread that even in the areas of the IMF’s core competence (macroeconomic, financial, monetary and fiscal policies), there are major problems of appropriateness of policy and conditionality.

Policy objectives and assumptions and policy instruments on how to obtain them are under question, given the poor record of outcome. This questioning of the appropriateness and outcomes of policy had already been going on for several years (especially in relation to policies and results in Africa), but the doubts and criticisms grew much more intense as a result of the IMF handling of the Asian crisis.The IMF policies tend to be biased towards restrictive monetary policies (including high interest rates) and fiscal contraction, both of which tend to induce or increase recessionary pressures in the overall economy. The contraction in money supply and high interest rates decrease the inducement for investment as well as consumption (thus reducing effective demand). The high interest rates also increase the debt-servicing burden of local enterprises and cause a deterioration in the banking system in relation to non-performing loans.

The Fund has also maintained the strong condition for financial liberalisation and openness in the capital account. Thus, the country is subjected to free inflows and outflows of funds, involving foreigners and locals. The country’s exchange rate is in most cases open to the influence of these capital flows, to the level of interest rate, and to speculative activity. Often, there are large fluctuations in the exchange rate. Given the fixed assumption that the capital account must remain open, there is thus the need to maintain the confidence of the short-term foreign investor and potential speculators. A policy of high interest rate and lower government expenditure is advised (imposed) in an effort to maintain foreign investor confidence. But since this policy causes financial difficulties to local firms and banks, and increase recessionary pressures, the level of confidence in the currency may also not be maintained.

The narrow perspective on which the restrictive policies are based neglects the need to build the domestic basis and conditions for recovery and for future development, including the survival and recovery of local firms and financial institutions, the encouragement of sufficient aggregate effective demand, the retention of the confidence of local savers, consumers and investors.

Most IMF policies imposed on countries that face financial problems and economic slowdown are opposite to the policies adopted by (and encouraged for) developed countries, such as the US, which normally reduce interest rates to as low a level as needed and which boost government expenditures, so as to increase effective demand, counter recessionary pressures and spark a recovery. Thus there have been criticisms by mainstream and renowned Western economists (including Paul Krugman and Joseph Stiglitz) that criticise the IMF for imposing policies on developing countries that are opposite to what the US does when facing a similar situation.

Since the type of policies that are linked to IMF conditionality have been increasingly criticised for not working, including because they are contractionary and recessionary in nature and effect, it is no wonder that there is a lack of credibility and confidence in the substance of IMF conditionality, even in its core areas of competence. There is thus a need for IMF to review its macroeconomic package, re-look the policy objectives and assumptions, compare the trade-offs in policy objectives with the number and effects of policy instruments, and widen the range of policy options and instruments. This review should be made in respect of government budget and expenditure, money supply, interest rate, exchange rate, and the degree of capital account openers and regulation.

The IMF has also been heavily criticised, especially by civil society, for the inappropriate design of their policies from the viewpoint of social impact, including reducing access of the public to basic services, and increasing the incidence of poverty. The adverse social impacts are caused by several policies and mechanisms. The contractionary monetary and fiscal policies induce recessionary pressures, corporate closures, lower or negative growth rates, retrenchments and higher unemployment. Cutbacks in government expenditure lead to reduced spending on education, health and other services. The switch in financing and provision of services from a grant basis to user-pay basis impacts negatively on the poorer sections of society. The removal or reduction of government subsidies jacks up the cost of living including the cost of transport, food, and fuel.

These and other policies have contributed to higher poverty, unemployment, income loss and reduced access to essential goods and services. It is not a coincidence that countries undergoing IMF conditionality have been affected by demonstrations and riots (popularly called “IMF Riots”). The social impact of IMF policies is another major cause of the crisis of credibility in IMF conditionality. It must be recognised by the IMF that the major problem with its conditionality is that the policies associated with it are seen to be inappropriate and harmful. This view is not confined to critical academics or NGOs but is now adopted by renowned mainstream scholars, by parliamentarians of many countries, and also by policymakers of the countries taking IMF loans and undergoing IMF conditionality.

The growth of the criticism is caused mainly by the poor record of the policies adopted, and not so much by the lack of implementation of the policies. Therefore, the most urgent task is not so much to “sell” the old conditionality better to the client governments or to the public, but to review the content of conditionality itself and to come up with a better and more appropriate framework and approach. For years the IMF had been advocating that developing countries open their capital account, which would open them more directly to the forces of international capital markets. Also, there were strong moves to add capital account liberalisation to the mandate of the IMF through an amendment to the articles of association.

This advocacy that developing countries open themselves to the full force of global capital markets, when the Fund itself had inadequate knowledge of the capital markets, was surely remarkable, and in hindsight a great mistake with so many adverse consequences.With the recent admission of lack of knowledge, let us hope the Fund is starting a learning process that will lead to recognition of previous errors and a more appropriate, cautious approach with a change in policy advice to developing countries.It should go without saying that appropriateness of conditionality policies in terms of being in the interests of the debtor countries is the key issue to be resolved. “Acceptance” of externally imposed conditionality by the debtor countries is secondary and dependent on it. Moreover, the right to participate in policy making, and thus genuine ownership, is a critical element in ensuring appropriate conditionality and its implementation.

The role of the major shareholder countries is even more important. The public perception is that they would like to make use of the Fund for their interests, often at the expense of recipient countries and their people. The perception is that the major shareholders (who are also the home countries of the major creditor and investor institutions) make use of their position to skew the policy conditions in a manner that is biased in favour of creditors and investors. Is there a conflict of interest in their making use of the vulnerable state that debtor countries find themselves in, as leverage for imposing policies that are in their own narrow interests, even if these are against the interests of the debtor countries?

Finally, it is difficult or even impossible to ensure that the interests of debtor countries will be adequately reflected in conditionality and Fund decisions when the voting rights in the Fund are so skewed towards the creditor countries. Thus, the issue of the relationship between ownership and conditionality has to face up to the issue of the ownership of the IMF itself.

When decision-making rights are so imbalanced as they now are, it is not a wonder that the developed countries are perceived to be controlling the Fund’s policies, and in a manner that reflects their own interests rather than the interests of the whole membership. This situation is likely to continue until there is a fairer balance in the decision-making system.There is a dire need for the modernisation and democratisation of the governance system, including a revision of the quota and voting system. This can be accompanied by genuine reform of IMF policies and priorities. The issue of “ownership and conditionality” can then be better resolved in that context.

Fred M’membe
Statement of Socialist Party on Zambia’s shrinking economy

Statement of Socialist Party on Zambia’s shrinking economy

As we have consistently been warning, our country’s economy has collapsed.

And one didn’t need to be an economic expert to foresee the consequences of the irrational path that was being pursued by our rulers – unbridled borrowing and irrational expenditure.

All the advice given to them – even by the World Bank, the International Monetary Fund and their other multilateral and bilateral partners – was ignored and arrogantly scoffed at.

Today they are like soaked chickens – humbled by the reality they can’t ignore or conceal and do not know how to resolve.

We are clearly headed for very serious economic challenges. Our economy is shrinking at a frightening rate.

Next year’s budget has been reduced by 47 per cent. This means that the 2021 budget will only be K56,180 bn. The government’s wage bill was K25,601bn at the beginning of this year. And debt repayment was K33.726bn. This gives us a total of K59,327bn – which is K3,149bn more than our 2021 budget.

This means that without very serious down sizing, retrenchments or massive
international assistance, government will only barely manage to service the debt and pay salaries in 2021 and nothing else.

What does this mean for the Zambian people, especially the poor? More suffering, more agony, more poverty, more despair!

Zambians have no sensible alternative but revolutionary change if they have to harbour any hope of a reversal of fortunes. And only a revolutionary party – the Socialist Party – with a revolutionary programme can deliver the nation out of this hell.

Issued by Fred M’membe, President of the Socialist Party

Mwika Royal Village, Chinsali

September 4, 2020

Statement of the Socialist Party on the hiring of Lazard  to advise government on debt restructuring

Statement of the Socialist Party on the hiring of Lazard to advise government on debt restructuring

After arrogantly failing to listen to the free advice of the World Bank, the International Monetary Fund and many others, including ourselves, to rationalise its borrowings and infrastructure projects, today this government has turned to Lazard, to lizards to advise on restructuring its $11bn foreign debts that have threatened to become Africa’s first sovereign default during the coronavirus pandemic.
The investment bank was hired on a $5m contract to advise on “liability management” of the country’s debt.

Zambia is facing $1.5bn of debt payments this year, more than its official international reserves as of January. Fitch Ratings cut Zambia’s credit rating to double C in April and said that default was “probable”.

Clearly, this government is in very serious trouble. It has failed to manage its debt. It has borrowed beyond what it can manage.
They are now looking for a scapegoat in Lazard. Tomorrow they will say, ‘We were advised by most competent institution.’

But we all know the right thing to do; we all knew they could not sustain the debt this government was accumulating from the most expensive sources. We are now looking for some institution to tell us what to do – at a fee of $ 5 million – even though they know already what is required.

Going to seek advise from Lazard, from lizards is also an indication that they consider our institutions – our Ministry of Finance, our central bank, our Ministry of National Planning, our legal ministry – not competent enough to provide correct advice. It is a vote of no confidence in those managing these institutions. This is an admission that as a political party, as a government they are not competent enough to manage our country’s economy.

Are they telling us that all our institutions – universities, research institutions, professional firms – are not competent enough to help manage this debt?

But how different is Lazard’s advice going to be from what has already been given locally and internationally? Even the institutions that we already know their purpose is to serve the interests of the powerful nations that dominate them – the IMF and the World Bank – gave them advise, right or wrong, but they overlooked it.

So now that they are in deep trouble they want to look for messiah, a saviour in Lazard! This government is going to pay Lazard $ 5 million to tell them what they already know!

This is what happens when leaders stop listening to advice and only listen to their own inner demons. They used to arrogantly brag that their government will not stop borrowing! Can they say that today?

We are reminded in Proverbs 12:15, “The way of a fool is right in his own eyes, but a wise man listens to advice.”

Issued by Fred M’membe on behalf of the Politburo of the Socialist Party

Garden Compound, Lusaka