By David Whitehouse
The end of a consultation period between Zambia and the International Monetary Fund (IMF) this
month brought a cautious signal from the fund that progress is being made following the sovereign default in November.An IMF statement on 4 March said that “significant progress” has been made, while noting that fiscal consolidation – cutting spending and collecting more tax – is among the key remaining challenges.
Finance minister Bwalya Ng’andu said the government is committed to securing an IMF programme. But by highlighting the need for “more detailed policy steps”, the IMF is signalling that Zambia’s Economic Recovery Programme is an incomplete response to its debt crisis, argues Nick Branson, director at Gondwana Risk in London.
“Similarly, calls for ‘debt and expenditure transparency’ indicate that the fund has doubts over the completeness of the government’s accounts,” Branson says.
Some question whether investor confidence can be restored. Indigo Ellis, associate director at Africa Matters in London, argues that the Zambian Revenue Authority has been operating on “thin margins” and that the removal of value-added tax of 16% on petrol and diesel prices, which came into effect on 1 January, will reduce legroom by a further K3bn ($140m).
“Tax policy in the past five years in Zambia has been inconsistent at best, and incessant policy changes continue to reduce already low investor confidence,” Ellis says.
Incremental gains
Despite the difficulty for the IMF of committing to a mid-term plan with elections approaching in August, the consultation exercise has value, says Gregory Smith, an emerging-markets strategist at M&G Investments in London. “Dialogue is a positive. Someone has to get the broader information,” about public finances.
Smith lived in Zambia for three years. His book, Where Credit is Due: How Africa’s Debt Can Be a Benefit, Not a Burden, analyses the future of African debt and will be published by Hurst in the UK in June.
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The problem, Smith says, is that Zambia borrowed too much to spend on ambitious infrastructure projects. Rather than being clouded in opacity, Smith says, the excessive borrowing was “a problem in plain sight”.
After the election, Smith says, the need is for a “prioritised strategy” rather than the “broad wish lists” of the past.
- The government is still not collecting enough revenue, and so the recovery will depend on a combination of collecting more and reducing spending plans.
- Smith says that Zambia should be collecting at least 20% of GDP as tax revenue, compared with a five-year average of 18.5%.
- Broadening tax collection to the informal economy is “hard and unpopular,” Smith says, and requires money to put boots on the ground. “Political will and investment are needed.”
- Sales taxes, Smith argues, may be the best way forward. “The gains only come slowly. You don’t fix it in six weeks.”
The prospects for continued higher copper prices provide a stronger tailwind to the economy.
The Economist Intelligence Unit projects the fiscal deficit to narrow to 9.2% of GDP in 2021, from an estimated 10.9% in 2020, and will decline to 4.3% in 2025.
Smith says there has been long-term improvement in the management of the revenue authority and in revenue collection. “There are solid technical capabilities, but they are at a disconnect from the political agenda.”
Bottom line
The IMF wants to see more progress and commitments to deeper reforms from the Lusaka government before committing to a programme to help the government’s finances. And the timing for this is complicated by the August elections, a time in which the governing party tends to spend to boost its popularity.
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