Republic of Zambia

Ministry of Finance and National Planning

MINISTERIAL STATEMENT BY THE HONOURABLE MINISTER

OF FINANCE AND NATIONAL PLANNING, DR. SITUMBEKO
MUSOKOTWANE, MP, ON REACHING A STAFF-LEVEL
AGREEMENT WITH THE IMF

7 December, 2021

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Madam Speaker,

I thank you for according me this opportunity. This afternoon I will

provide the House with an update on the discussions between the
Government of the Republic of Zambia (GRZ) and the International
Monetary Fund (IMF) regarding the possibility of Zambia obtaining
support from the latter.

As you may be aware, our predecessors, the PF government, had

been making efforts to reach an understanding with the IMF as far
back as 2016. This was upon realizing that the country was headed
for a serious financial crisis caused mainly by excessive borrowing.
Up to the point when the UPND government entered office, success
in the negotiations with the IMF had not materialized.

It is against that background that from the outset, President

Hichilema and his government set out to ensure that the
negotiations with the IMF succeeded. My statement this afternoon
to this August House is a confirmation of the fact that indeed the
negotiations have succeeded. And this has happened within 100
days of coming into office.

To start with, what is the IMF? Why did we need to negotiate with
them? Where are we, with the negotiations? What does Zambia
hope to gain from an agreement with the IMF? And, what are the

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key terms of the expected agreement with the IMF? These are some
of the answers that I shall provide in this statement.

Madam Speaker,

The IMF is an international lending institution. It is structured like

a co-operative credit union in which members contribute funds
into a common pool for lending to one another if need arises.
Obviously, only governments can borrow. Most countries in the
world, including Zambia, are members of the IMF.

Governments typically borrow from the IMF because they are

facing an international financial crisis, meaning that they don’t
have sufficient foreign exchange resources to meet their critical
requirements. A crisis brought about by excessive foreign
borrowing is a common reason for governments to approach the
IMF for financial support. Indeed, this is the situation that Zambia
finds herself in today.

Madam Speaker,
The heavy debt burden that Zambia carries is at the core of some
of the serious socio-economic problems witnessed in Zambia in the
recent years. The weakening of the Kwacha from less than K5/$ ten
years ago to more than K20/$; the rise in inflation to double digit
numbers, closure of some businesses due to lack of demand, etc.
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are all the consequences of excessive borrowing. Excessive
external debt servicing drains money away from Zambia, leading
to the failure to hire teachers and provide sufficient money for our
education and health services. In other words, external debt has
had serious consequences on the budget.

In the 2022 Budget, for example, the amount of money required to

pay the salaries of public workers and service the debt exceeds the
revenues that the government collects. This means that to fully
meet these two budget items alone, GRZ must borrow. It also
means that for any development expenditure to be financed, the
government must first borrow. You will agree with me, Madam
Speaker, that this is extremely unsatisfactory and dangerous.

Madam Speaker, it is clear that Zambia cannot make headway in

reviving her economy without first dealing with the debt crisis that
she faces. Presently, the exchange rate is relatively stable and the
inflation is gradually coming down. This should not deceive us into
thinking that the problems associated with excessive debt are over.
It is simply that we are defaulting on repaying most loans in line
with the formalized international understanding on debt service
suspension. But this is only a temporal arrangement.

If we do nothing, the problem of the ever-depreciating exchange

rate will resume with even stronger force and will lead to higher
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prices. Further, the Treasury risks running out of resources for
even the basic things like paying salaries of public workers. And,
lastly, the objective of creating jobs for the youth will be a
pipedream because investors will stay away. Doing nothing is no
option at all because the consequences will be severe. To prevent
these risks from materializing into realities, we need to work with
the IMF.

In order to get relief on her debt, Zambia must negotiate with her
creditors to re- arrange the debt. An example of debt re
arrangement is stretching the repayment period so that what is
paid per year is reduced. The goal is to arrive at a new debt profile
such that after spending on debt servicing, Zambia will still have
adequate money to spend on essential development.

But the creditors will not accept to re arrange the debt unless they
are convinced that it is worthwhile. Specifically, they want an
assurance, after giving debt relief, that Zambia will manage the
economy properly so that no new debt accumulation occurs and
that, in general, the economy will become stronger in future and
enable it to service debt.

Moreover, the creditors want an independent economic institution

that will give feed-back at all times to confirm that the economy is
being run well. That independent body is the IMF. In other words,
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Zambia needs to have a program with the IMF to convince the
creditors that she is responsible enough to be engaged with on
matters of debt re arrangement.

On top of that, the IMF provides cheap and long-term financing to

the country as it transits from excessive debt burden to normal
levels.

In short, for Zambia to make real progress and return to

sustainable debt we need to have an economic program with the
IMF. In this regard, Zambia last week reached a Staff Level
Agreement (SLA) with the International Monetary Fund (IMF).
Achieving the SLA marks an important milestone in our journey
and commitment towards our economic recovery and growth
agenda.

A Staff-Level Agreement is an understanding between the IMF and

the Government on the economic and financial policies and
reforms which the Government will undertake over time. These
are aimed at restoring price stability, bringing the debt situation
under control and achieving higher inclusive growth.

Achieving a Staff-Level Agreement does not as yet put Zambia on

an official IMF program. This is because at present, Zambia is
considered to be under financial stress and, therefore, unlikely to

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pay back a loan extended to her, including one from the IMF.
However, IMF rules prohibit lending to a borrower that is known
to be a likely defaulter.

The SLA is however an important milestone because it opens the

way for our government to enter into discussion with our creditors
regarding the re-profiling of what they are owed so that
repayments are affordable. Once that understanding is reached,
Zambia may now be put on a formal program that is supported
with financial assistance from the IMF. Here are the benefits we
expect from an IMF program:
1. Zambia will receive international support in negotiating with
creditors, leading to a more affordable debt service
arrangement
2. With a more affordable debt service payment plan, more
money will be available for the government to spend on its
people
3. Zambia will access cheaper and longer term financing as
compared to the expensive commercial loans
4. Zambia will be better placed to have stable exchange rate
because the outflow of foreign exchange will reduce. Prices
will be more stable
5. There will be greater confidence from investors to come to
Zambia and assist to create jobs

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Madam Speaker,

While we have now reached the SLA, the formal program to be

approved by the IMF, is expected sometime in 2022. It will all
depend on how quickly we can agree with the creditors on how to
to restructure Zambian debt. After Board approval, the Fund will
be able to make available highly concessional financing amounting
to $1.4 billion. This money will be disbursed over a period of 3
years, hopefully starting from 2022.

Madam Speaker,
Like any other lender that is rescuing a client that is at risk of
getting bankrupt, IMF financial support comes with reforms that
the borrowing government must undertake. These reforms are
negotiated with the borrower government and they are intended
to correct some of the weaknesses that, in the first instance,
contributed to the creation of the crisis.

Let me now highlight some key policy reforms which we will

undertake in the medium-term with the support of the IMF. By and
large, the reforms are aimed at (a) increasing the checks and
balances required for the government to borrow and (b) increasing

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revenue mobilization and shifting the utilization of public finances
from less critical areas to more important ones.

On the revenue side, the Programme is geared towards increasing

domestic revenue mobilisation. Medium term revenue targets will
be supported by a comprehensive revenue strategy based on both
tax policy and administration measures. This will result in increase
in collection of Value Added Tax, Customs and Excise Duties as well
as Income Taxes.

On the expenditure side, the reforms aim at shifting public

expenditure away from areas we consider less critical. Specifically,
and already in the 2022 budget that is under consideration, the
utilization of money will shift towards investment in people,
particularly the youth.

An example of an area where expenditure will be reduced is the

subsidy on petroleum products. For years, the government sold
fuel at a price that was lower than the cost of bringing it in the
country. This was in an effort to keep prices artificially low for
political reasons. But even then, the government did not pay for
this loss but merely accumulated unpaid arreas which now stand
at US $506.1 million as at end September 2021.

Beyond the arrears, the government is presently spending US$67.4

million every month subsidizing fuel prices. This is broken down
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into US$26 million on price differential and US$41.4 million on
foregone taxes. On annual basis, this amounts to US$809 million. It
is this expenditure that has kept fuel prices below the actual prices.

Madam Speaker,

The money spent on subsidizing fuel is really enormous at $809

million per year. Madam Speaker, the UPND government has made
a conscious decision that it will reduce expenditure on some
subsidies, such as fuel, and shift the money to what we consider
better priorities. Specifically, the UPND government is of the
confirm conviction that spending government on our youth and
their education is a worthier cause than spending it on fuel
subsidies.

That being the case, the 2022 Budget has no provision for
subsidising fuel prices. By eliminating the subsidies, the money so
saved has been re allocated to more needy areas. For emphasis, let
me re state the areas that have benefited from removal of subsidies
on petroleum fuels under the 2022 Budget:

1. Enhanced allocations for Constituency Development Fund –

meaning that more schools, desks, clinics, water bore holes,
etc. will be available for rural communities

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 2. Paying off all outstanding pension arrears – some
beneficiaries have been waiting for several years for their
retiring benefits
3. Hiring of 30,000 teachers so that hiring of medical staff,
offering bursaries and elimination of tuition fees for
secondary school education, etc.

All these changes favouring the poor of the poorest have been
made possible only because there has been a shift in money
away from some subsidies like those on fuel to the new areas I
have mentioned.

Moreover, as we go into the IMF program and negotiate debt relief

with creditors, it is very likely that savings will be realized. We
intend to present a supplementary budget to parliament later in
2022 to be financed by the savings from debt service. From those
savings, this government will propose that we re-introduce the
meal allowances for college students which had been scrapped. We
also plan to put more money in secondary school bursaries on top
of what I announced in the 2022 budget.

Madam Speaker,

The same arguments above can be advanced for other areas where
there is scope for making the subsidies provided more efficiently.

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Madam Speaker,

Another area of reform is improving economic governance and

transparency to entrench medium-term fiscal sustainability. Key
legislative reforms that will be undertaken include the repeal and
replacement of the Loans and Guarantees (Authorization) Act to
increase public oversight, together with enhanced Public Private
Partnership legislation and regulations to address current
weaknesses in the law. These efforts are essential to restore the
credibility of the budget, improve the efficiency of public
expenditures, and support private sector-led growth by halting the
accumulation of arrears and dismantling the existing stock.

With regard to the Central Bank autonomy, monetary and financial

stability remains a priority area for Government. To ensure Central
Bank autonomy and operational independence thereby enhancing
the credibility of monetary policy, the Bank of Zambia Act will be
revised.

Madam Speaker,
The reform agenda will also be matched with policies and
strategies for enhancing growth as I had outlined in my Budget
Address in October.

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Madam Speaker,
As I conclude, let me address the concerns and fears expressed by
some citizens that life under an IMF program will be harsh. This of
course depends on who you are. If you are a rural dweller, life is
likely to be better for you rather than being harsh because the
enhanced CDF money, free education and availability of teachers
will be better for you. If you are a citizen who drives, of course the
cost of fuel will be slightly more expensive.

In any case, maintaining the status quo is not an option. Doing

nothing means the exchange rate will get worse, prices will
escalate and poverty will get out of hand. Taking the measures that
I have outlined will help to sustain exchange rate stability, attract
investment in the country and in a few years raise income levels
and jobs.

I wish to assure the Zambians that our thoughts and actions are
with them all the time and we intend to deliver a much better
economy and better living conditions for the average citizen than
what they are experiencing now. Zambia is in safe hands. The
president has selected well trained and experienced managers in
the economic institutions and they will deliver. So, there is no need
of being fearful of the IMF economic program.

Madam Speaker, I thank you.

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