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IMF ADVICE FOR NEW ENERGY BORROWING RISKS CREATING A “MORAL HAZARD SYNDROME,” WARNS JCTR!
March 2008
On 28 February 2008, the visiting mission from the International Monetary Fund, led by Mr. Francesco Caramazza, proposed to the Zambian government a set of measures aimed at resolving the problems facing the energy sector. These proposals were reported in the Sunday Times of Zambia 23 March 2008. They include “external borrowing” to assist the ailing energy sector particularly for “investment in additional capacity.” The IMF adds that this “should only be undertaken for economically viable projects so as not to undermine debt sustainability”.
While the caution not to undermine debt sustainability is welcome, the Jesuit Centre for Theological Reflection (JCTR) notes that this advice for new borrowing is a potential cause of escalating debt. Muyatwa Sitali Coordinator of the Debt, Aid and Trade Programme of the JCTR says “Debt contraction should not be used as a ransom for poor planning and lack of measures to meet foreseen developments. This can make Zambia a “moral hazard” and reinforce the notion that we can borrow for any economic failure regardless of the cause. We reiterate that Zambia should not be advised to borrow for problems arising out of poor planning for developments which were foreseen.”
The problems in the energy sector are largely a result of lack of investments to cater for rising domestic and external demand. The rising demand is neither a shock nor an unforeseen development. Given the opening of new mines and household construction in the country which was projected before the setting of Zambia’s Fifth National Development Plan, the necessary institutions should have prepared for this situation by investing adequately in the energy sector. However, ill-planning among other weaknesses has led to the failure to meet this rise in demand. These weaknesses should not constitute reasons for indebting Zambia and further risk Zambia’s public debt (domestic and external debt) outlook which is now over K9 trillion.
We also note that, the IMF and the World Bank have been carrying out debt sustainability analysis (DSA) for Zambia which takes into consideration major macro-economic indicators based on e.g. debt and export ratios. But this DSA which is likely to accompany the advice of the IMF on the proposed external debt flows does not consider human development which is key for poor countries to meet the Millennium Development Goals. The JCTR has constantly emphasized that a viable DSA must include social development issues.
Moreover, current loan contraction procedures, lack Parliamentary oversight and are neither guided by a debt management strategy nor a comprehensive legal framework. Zambia urgently needs to put in place a comprehensive debt legal framework in order to avoid a resurgence of the debt which in the past was not only caused by economic, political and social reasons but was also caused by inappropriate policy prescriptions by International Financial Institutions.
We urge the Government of Zambia to pursue an appropriate debt contraction and management framework which will guarantee sustainable human and economic development. The government’s pronouncements in the 2008 national budget indicated intentions to “intensify efforts to consolidate the legal framework governing the contraction and management of debt” this surely needs immediate follow – up with a clear map of action in order for Zambia to effectively put in place mechanisms that can weigh all policy advise against national requirements for development. We urge the government to quickly produce a road map for this process. We point to the JCTR proposed Debt Management Bill which provides for Parliamentary oversight and creates space for broader transparency and accountability to the Zambian people in the contraction and management of public debt.
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Debt and Aid
Trade
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