Zambia: Why Yellen’s and Georgieva’s visits were missed opportunities

Jade Scarfe
By Jade Scarfe

Development Finance Policy Analyst at Development Reimagined, an African-led International Development Consultancy. Twitter: @jadescarfe

Rugare Mukanganga
By Rugare Mukanganga

An economist at Development Reimagined, an African-led International Development Consultancy. Twitter: @rugrat001

Posted on Tuesday, 14 February 2023 15:05
International Monetary Fund (IMF) Managing Director Kristalina Georgieva and US Treasury Secretary Janet Yellen meet at the Treasury Department in Washington, DC, on July 1, 2021. (Photo by Nicholas Kamm / AFP)

The past few months have been an intense time for Zambia’s Ministry of Finance, which – after defaulting in November 2020 - finally secured a zero-interest loan of $1.3bn from the IMF. All eyes are on Zambia to watch how the deal plays out, also because of its potential applicability to other countries.

Perhaps the most intense period was when US Treasury Secretary Janet Yellen visited the country in January as part of her 10-day, three-country Africa tour, coinciding with a visit from IMF Managing Director, Kristalina Georgieva. But what did these visits achieve – if anything?

The visits ostensibly aimed to speed up Zambia’s process of debt restructuring, following the IMF deal. Georgieva primarily focused on assessing whether Zambia is implementing promised reforms from the deal, while Yellen spoke about a strengthening US-Africa relationship, placing a focus on Chinese lenders when it came to Zambia’s debt challenges.

However, if they had used this opportunity to focus and gather evidence to shift their own turf, rather than focusing on Zambia or China, both Yellen and Georgieva could have made a more positive impact on Zambia, while setting a helpful precedent for others.

Yellen’s missed opportunity

Let’s take the US.

In recent months, in an attempt to counter domestic inflation, the US Federal Reserve has been raising interest rates, reaching 4.5% – 4.75% – the highest rate since September 2007. However, because of the dominance of the dollar internationally, this, in turn, is driving up the interest rates of loans from international private creditors to countries such as Zambia – exacerbating their fiscal constraints. For Zambia specifically, a significant portion of around 30% of its total external debt is owed to private creditors with such commercial interest rates.

Is this a problem? Put simply, yes. We only need to look to the 1980s to forecast the potential impacts. Following oil shocks in the late 1970s, US and therefore global interest rates rose significantly, meaning that despite curtailing spending and debt restructuring, for many countries debt service costs grew and many defaulted.

Therefore, during her visit, Yellen could have discussed these challenges and proposed policies or innovative early solutions she could take home that might protect countries against these interest rate hikes. But she didn’t.

Georgieva’s missed opportunity

Similarly, the IMF’s Kristina Georgieva could have examined these issues, and proposed actionable solutions which the US – its largest shareholder – and others could consider. For instance, some organisations have been proposing a new one-off issuance of Special Drawing Rights.

Perhaps even more importantly, Georgieva could also have taken this opportunity to assess whether the policies recommended in her IMF deal with Zambia make sense, given past history.

For instance, proposing to end fuel subsidies at a time the global oil value chain constraints are driving fuel prices to historic highs, could quickly erode the Kwacha’s purchasing power and raise the cost of living for the poorest.

Further, the IMF’s requirement to end Zambia’s Farmer Input Support Programme – which, in part, enabled Zambia to achieve maize self-sufficiency – may test Zambia’s food security just when agricultural supply constraints have been driving up food prices globally.

The IMF is also aware of the widespread cancellation of several of Zambia’s infrastructure projects by primarily Chinese lenders, halting 20 undistributed loan balances for much-needed infrastructure projects in Zambia, adding up to just under the same value as the IMF’s loan.

‘A case of amnesia’

If these recommendations feel strangely familiar, there is good reason. A case of amnesia seems to be hitting the IMF. Looking back just 30 years ago, in the 1990s and having faced similar externally-driven economic challenges triggered by the 1980s oil shock, Zambia also engaged the IMF but after a strong backlash eventually abandoned the reforms. This is despite the fact, as with today’s deal, the terms were framed as “pro-social spending” for poverty alleviation. The policies remain traditional austerity measures that have failed before.

Indeed, the visits seemed more like “PR stunts” than a sincere attempt to reset relations. This is not unusual for such African tours, it just seems rather disappointing given the rhetoric.

So what can African leaders take from this, especially those experiencing the crunch of rising debt payments, against domestic inflation? Should African leaders double down on putting pressure on China following Yellen and Georgieva’s visits?

‘Pressure on every creditor’

Our analysis of the visits suggests just one key next step.

The visits illustrate the need for African leaders to put pressure on every creditor – from the US to China to the IMF – to act fast, in a myriad of ways, using all their possible toolboxes.

Importantly, there is no one-size-fits-all when it comes to each creditor. Each creditor clearly needs its own approach. The US’ positive or negative impact on African debt is not the same as China’s, while the IMF also differs. Their power when it comes to debt relief does not come about in the same way.

However, the most efficient way for African countries to do so will be to exchange notes and coordinate.

For instance, most urgently, countries like Zambia, Chad, Ethiopia, Ghana, and Kenya that are in discussion with or are considering the IMF loan route, should convene with each other to discuss various terms and offers from the IMF, US, China and others, and work out what are the best terms they can propose. Eventually, this kind of borrowers’ coordination can and should come standard practice.

African countries such as Zambia do have the potential to get better outcomes from all creditors, especially compared to the 1980s and 1990s. But the recent visits from Yellen and Georgieva to Zambia demonstrate that this opportunity still abounds, and blame on “other creditors” by powerful creditors should pose no distraction.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options