Zambia Plus Economic Recovery and IMF Support by Caesar Cheelo and Thulani Banda

ZIPAR Macro-Economics Research Team

Macro-Economics Macroeconomics & Monetary Policy

The overall goal of the Macroeconomics and Monetary Policy unit is to improve public policy for growth, equity and poverty reduction through macroeconomic policy analysis and research. It focuses on analysis of pertinent macroeconomic policy issues such as interest rates, inflation, and exchange rate movements; domestic and external public debt.

For the year 2017, the Unit envisages to carry out the following activities:

a) Establishing a Macroeconomic Performance Assessment Framework (MPAF)

The Ministry of Finance monitors the health of the macro-economy through a range of outputs under its Macroeconomic Framework. These outputs include Annual Economic Reports, economic forecasting reports (MTEF Growth Estimates), semi-annual reports (Mid-Year Economic Reviews), monthly reports (Monthly Economic Indicator (MEI) reports) and weekly reports (Weekly Review of Domestic and International Prices). They combine routine MOF data with data from BOZ, CSO and ZRA. The outputs are generally very informative and often shared in a timely fashion, particularly on online internet platforms.

However, the outputs of MOF have two key limitations. Firstly, they are more descriptive than analytical, and thus offer relatively less usefulness or policy insights to policy-making. Secondly, they are not readily accessible as simple, reader-friendly reports for easy use by non-economist policy-makers in the line ministries or for general readers in the public domain. In addition, possibly as a result of a paucity of information, some stakeholders in Zambia (some civil society organizations, the general public and some policy-makers) have sometimes expressed skepticism about the macroeconomic policy direction and planned reforms. For instance, some have questioned the reliability of both the forthcoming Economic Recovery Programme (Zambia Plus) and the IMF aid package it may entail.

ZIPAR therefore proposes to establish and operationalize a rigorous analytical Macroeconomic Performance Assessment Framework (MPAF), which will draw on routine management information systems to provide an independent, analytical perspective about the health of the Zambian macro-economy. It will use secondary data from MOF, BOZ, CSO and ZRA to evaluate the macroeconomic (fiscal, monetary and external sector) policy stance, on-going policy reforms, and performance outcomes (e.g., macroeconomic stability, growth, structural change, aggregate employment and so on) in order to determine Zambia’s status of economic health and its prospects for growth and development. This will be coupled with qualitative component that will involve quarterly key informant interviews (KIIs) with key stakeholders (high-level policy-makers, decision-makers, and civil society and CP observers), to qualify the quantitative analysis. Critical events monitoring and analysis will also be used as a qualitative tool to support the quantitative component.

This activity will be conducted jointly by the MMP and PF Units. The exercise will build on a rapid study on Zambia’s Return to an IMF-Supported Programme, which was initiated in late 2016. The MPAF will track and evaluate economic performance on a quarterly basis. In 2017, it is proposed that this should run from Q1-Q4: 2017, with the framework being designed and pilot tested in February and March 2017 (based on Q4:2016 data and previous). The quarterly reports will be as follows: Q1:2017 Report to be published in May 2017; Q2:2017 in August 2017; Q3:2017 in November. 2017 and Q4:2017 in February 2018. The following quarterly publications will be produced:

Quarterly Macroeconomic Performance Assessment Reports: this will be the main report under this activity;
Quarterly National Budget Reviews: this will be a sub-report of the main report, to be prepared depending on the relevance for policy; and
Quarterly ERP/Zambia Plus Assessments: : this will also be a sub-report, to be prepared depending on the relevance.

The publications will help to routinely inform the fiscal, monetary and planning authorities (MOF, BOZ and MNDP, respectively) as well as line ministry policy-makers and the general public about the influences of macroeconomic policies on economic outcomes and performance.

b) Study on Causes and Consequences of Wide Interest Rate Spreads in Zambia

Financial intermediation is vital for economic growth and development. Among other things, it allows lenders and borrowers to exchange funds, enabling economies to mobilize domestic savings and channel them towards productive investment areas for growth and development. An important indicator of the health of the financial intermediation process is the interest rate spread. Wide margin between the deposit and lending interest rates or so-called wide interest rate spreads are often indicative of banking sector inefficiency, austere and restrictive banking sector policy and regulation, or shallow overall financial market depth and development. Since 2012, Zambia has seen rising interest rate spreads. In 2015, the Bank of Zambia (BOZ) requested ZPAR to offer a second option on the causes and consequences of these rising spreads.

This study, therefore, seeks to achieve the following:

to determine interest rate setting behaviour in the Zambian money market;
to understand the main determinants (causes) of interest rate spreads in Zambia;
to explain the consequences of recent widening interest rate margins for different players in the Zambian money market; and
to suggest to key policy-makers the most appropriate policy response options for correcting the resurgence of higher interest rate spreads in Zambia, towards mitigating negative consequences.

In order to understand the causes and consequences of widening interest rate spreads in Zambia, the study will apply a two-pronged methodology. On the one hand, we apply regression analysis, using a panel of secondary data and an auto-regressive distributive lag (ARDL) model to establish the main determinants of interest rate spreads. On the other hand, we undertake a mixed methods analysis of the consequences of interest rate spreads. This employs a descriptive statistical analysis of primary data from the mini-survey in urban Zambia (mainly Lusaka), where the bulk of retail financial intermediation services are located, augmented with a qualitative key informant interview (KII) analysis and desk-review events analysis. Thus, we examine, from various perspectives, the consequences of the wide interest rate margins for the retail banking public. The mini-survey assumes 2015/2016 as the reference period in order to avoid recall biases. The KII and events analysis will cover the reference period from 2004-2016, with a particular focus on February 2014 to June 2016.

The component on causes of wide interest rate spreads will be finalized by March 2017, based on data collection work that started in December 2016. The component on the consequences of interest rate spread will run from Q2-Q3: 2017, with the final report expected to be published and disseminated in September 2017. The data and information from this study will help the monetary authority (BOZ) to understand, based on ZIPAR’s second opinion, the causes and consequences of wide interest rate spreads and the key policy options at their disposal to address adverse causes and consequences.

c) Zambia Plus Economic Recovery and IMF Support

Following Zambia’s macroeconomic instability and economic downturn over 2015/2016, issues surrounding the country’s likelihood to establish an Economic Recovery Programme (Zambia Plus) and possibly return to an IMF aid package have received considerable attention lately. Perhaps because Zambia experienced rather painful economic recovery processes in the past – notably during the World Bank/IMF Structural Adjustment Programmes (SAPs) of the 1980s and 1990s – some observers are skeptical about the forthcoming ‘Zambia Plus’ Economic Recovery Programme. The skepticism is even stronger when ideas of co-opting IMF support are put on the table. It is therefore critical for ZIPAR – as an impartial observer – to tell the stories about:

the inevitable necessity of an externally supported recovery programme for Zambia; and
the previous and current forms of economic recovery and IMF support, towards building broad-based national ownership of an IMF-supported ERP.

This skepticism is probably partially a result of a paucity of information about what an economic recovery programme typically entails and what a present-day IMF-supported aid package will really mean for Zambia.

ZIPAR will undertake a desk review of the past experiences of Zambia and a key comparator country (Ghana) with IMF-supported economic recovery programmes. It will also document the recent experiences of Ghana with the IMF. The purpose of the resulting outputs (a paper and some newspaper articles) will be to objectively and truthfully sensitize the Zambian public about what an IMF-supported recovery programme really entails in terms of fiscal space benefits and macroeconomic and micro-level socio-economic impacts. Such sensitization and awareness building will be critical for fostering national consensus and ownership, and for allaying public pressures on political structures when the pain of reforms and recovery sets in.

Zambia Army Commander Lt Gen Paul Mihova in Kitwe March 2017 ZIPAR will produce two papers:

“Economic Distress and the Inevitability of an Economic Recovery Programme”: policy paper to possibly facilitate Cabinet level discussions on the ERP/Zambia Plus and to facilitate public debate; draft paper to be ready by end-February 2017
National and International Experiences with Economic Recovery and IMF Support Efforts: a public literacy paper for sensitization and awareness building; draft paper to be ready by end-June.

d) Ad Hoc Studies and Policy Works

“What Zambia Needs for More and Better Jobs – Macroeconomic Stability versus Economic Restructuring”: ZIPAR completed this study in November 2016 under the More and Better Jobs Flagship Project, and will endeavor to disseminations the study to different stakeholders in Q1:2017.
“Jobs Tracker Framework”: at the request of the Cabinet Office (IJCPSD) in 2016, ZIPAR drafted a Concept Note for the Jobs Tracker Framework, under the More and Better Jobs Flagship Project. The framework was envisaged to be a mechanism for monitoring and evaluating the creation of jobs (particularly formal and decent jobs) in Zambia. ZIPAR will seek to link the Jobs Tracker to CSO’s planned quarterly Labour Force Surveys (LFS).
“Zambia’s Economic Growth Story”: as an ad hoc complement, this will be a supply-driven idea. It will be undertaken as exploratory research or a scoping study throughout 2017, building towards a comprehensive study in 2018 on Key Aspects to Zambia’s Economic Growth. The exploratory researcher will prepare analytical problem statements on: the dual economy (“One Zambia, Two Economies”); Copper-GDP Growth Story Retold; and Prospects to Substitute Copper for “Green Copper”. MMP will explore possible collaborations with the World Bank Country Office in Zambia and the planning authority (Ministry of National Development Planning). Zambia’s economic growth story will also be of interest to policy-makers in MOF and the Cabinet Office.
“China-Africa and China-Zambia Trade Developments and Impacts”: this was undertaken for the Chinese Embassy in Zambia in 2016 (April-November). The report was not disseminated in Zambia, but contains new insights about China’s relationships with Zambia. ZIPAR will aim to disseminate the study in Zambia.