Zambia’s debt, the IMF and Covid-19

Zambia’s debt crisis has been making news for some time now. Now that the country is likely to default on its debt, this ordinary news item is now making headlines around the world. The repercussions of a country defaulting on its debt differ in form and severity. Effects range from the devaluation of the local currency, austerity measures, economic uncertainty and negative publicity. Although Zambia has not officially defaulted on its debt (at the time of writing), the effects mentioned above and others are already being felt in the country. One can only imagine what would happen if and when the country officially defaults.

Zambia’s unsustainable debt has not skyrocketed overnight. Since 2012, the government has borrowed huge sums of money some of which has been used to drive infrastructural projects around the country. Now that we are in this situation, the best thing to do strategize on how to get the country out of the current economic turmoil onto a path of economic recovery and growth. Many people and the government are calling on international lenders like the International Monetary Fund (IMF) for debt relief. While this option does have a lot of merit and could potentially save Zambia from defaulting on its foreign debt, it must be considered carefully.

Zambia and the IMF are no strangers to each other. As early as the 1980s the IMF worked with Zambia to help the country accelerate from the economic slump caused by declining copper prices in the 1970s. The IMF implemented the Structural Adjustment Programs (SAPs) in efforts to save the country from economic collapse. Although it is impossible to measure the exact impact of this IMF’s intervention, it is considered by some to have caused more harm than good unlike in Ghana where similar SAPs were thought of success stories. It seems that the pill that the IMF gives to an ailing nation – austerity, if often hard to swallow and it also tends to have side effects which are not clearly labelled on the packaging.    

Isn’t it a great idea for one to cut back on his/her spending once their debts gets out of hand? Shorthand answer, yes, it is a good idea. However, the current circumstances that the country is in calls for more brainstorming before accepting an IMF package. One underlining fact is that when the IMF lends money, there are conditions attached. Mainly, the conditions are to cut back on government spending and create an environment where the private sector can flourish. Sounds good right? Yes. However, there have been cases where this has not worked out as planned. The East Asian crisis provided a natural experiment in this regard. In the 1990s, countries in this region were all facing serious economic shocks. South Korea, Indonesia and Thailand welcomed the IMF. Malaysia on the other hand rejected the organisation and put up a fiscal stimulus of 7 billion ringgits. Countries that cut social protection programs as advised by the IMF saw a higher increase in poverty levels while Malaysia’s increase was minimal and manageable. In fact, in Korea, the fund made by the IMF became known as the “Infant Mortality Fund.” A similar story is observed between Iceland and Greece following the world financial crisis of 2008. Iceland rejected the IMF while Greece welcome them. The effects of both actions can be felt today in the respective countries.

My intentions of writing this is not to simply talk bad about the IMF. I believe they have a vital role to play. The point here is that when a country is going through a crisis, especially a public health crisis, it is not the best time to implement austerity measures. The Covid-19 pandemic is still upon us. Small businesses are struggling, people are out of employment, students are out of schools. This is the time when the government needs to come in and assist those small businesses and create employment for the unemployed. It is the time to invest in education so that everyone has access to it. Needless to say, it is the time when the government should invest in healthcare. Lack of investment in the health sector during a crisis is disastrous. The US (during the great depression), Russia, South Korea and Greece are only a few examples of what happens when you do not. Unlike these countries, what they faced were economic/financial crises. What we now face is a health crisis. I do not know of a better time to increase government spending, especially on health.

What does this mean for Zambia? Well firstly, let us learn from this: borrowing excessively is not wise. Secondly, Zambia needs to do everything possible to avoid a default. If the country defaults, it will be very expensive for us to borrow in future (and yes, we do need to borrow even after we learn from this. Borrowing is normal and essential. The question is how much?) which inevitably leads to more years of repayments and cuts on other important government programs. Therefore, if the IMF is the only way out, then they should be considered. However, it is extremely important that close attention is paid to the conditions and implications thereof. Austerity might not be avoidable when dealing with the IMF. However, sectors to take a cut should be thought of carefully.  Otherwise, the IMF package may only be a preamble to another crisis that lies beyond the cover page of the debt contract. After all, it is also just another loan.

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