Wednesday 1 April 2015

Reading into the IMF's Press Statement on Zambia

So the IMF was recently in Zambia to complete their 2015 Article IV Consultation process. The consultations usually take place in December but they could not be completed this time around because the country was just about to elect a new president. 

During an Article IV Consultation, the Fund consults annually with the government of each member country with the aim of assessing the country's economic health. Following the completion of the process, the team leader releases a press statement giving a summary of the IMF's initial assessment. Later, the Fund then releases a more comprehensive report once the Fund's Executive Board has discussed it (example for Zambia from last year is here).  

The press statement following last week's visit was released late afternoon yesterday. I will try to unpack the statement as best as I can (i.e. try to read between the lines, as it were).

On the issue of the Kwacha, which has depreciated by about 17% since the beginning of the year, the Fund had this to say (my emphasis):

"The kwacha has depreciated sharply against the US dollar since the beginning of the year, reflecting the general strength of the dollar and low copper prices, but also domestic factors clouding the outlook for the supply of foreign exchange to the domestic market."

In other words, some portion of the depreciation (we don't know how much) is due to domestic factors around uncertainty of the future supply of foreign exchange. Getting certainty around future forex flows is critical for the biggest players in the forex market because they, unlike you and I, have contractual obligations whose outcomes are only realised in the future.  

As IMF press statements go (they are usually written in diplomatic niceties), the following bit is really an indictment of the government's management of our fiscal affairs (emphasis mine):

"The government budget is under stress from significant obligations that have emerged in relation to fuel and agricultural subsidies, pensions, and road construction. There is an urgent need for action to contain the fiscal deficit in order to alleviate financing pressures that are keeping interest rates high and crowding out lending to the private sector."

Further, the IMF commented on the Central Bank's recent move to increase banks’ reserve requirements in an effort to stabilize the domestic currency. Banks are now required to hold more "deposits" with the Central Bank. The Fund, however, thinks this is not enough. Here’s the relevant paragraph (my emphasis):

"The Bank of Zambia’s recent action increasing the reserve requirements for banks is helping to stabilize the kwacha. However, monetary tightening would be more effective if accompanied by fiscal tightening."

In other words, the most important policy lever in stabilizing the Kwacha at present lies with the Ministry of Finance. There’s little that the Central Bank can do. I am surprised, however, that the IMF is not concerned with the downside risks associated with monetary tightening, especially when they themselves acknowledge in the first paragraph of their press statement that “[t]he Zambian economy is experiencing strong headwinds”.

The Fund also acknowledged government’s efforts to resolve some of the impasse with the mines especially around the proposed mineral royalties regime and issues around VAT refunds. But the bigger issue the Fund is concerned with is the current atmosphere of policy uncertainty and policy incoherence. This paragraph best captures their apprehensions:

"Resolute actions to contain the budget deficit, resolve the mining tax disputes, and foster policy coherence and stability would go a long way toward boosting investor confidence and unlocking the country’s high growth potential."

I look forward to the release of the compressive staff report at some point after May.

PS: Zambian Economist has also added his thoughts to the press statement here


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