Answer to Question #280110 in Macroeconomics for Andrick Angel

Question

On the 3 December 2021, the new dawn government and IMF mission to Zambia reached a staff level agreement on a program under the IMF's extended credit facility that envisages provision of financial support of $1.4bn over the next three {3} years

Taking into account the anticipated IMF conditionalities what implications will such an agreement have on the general economic outlook of Zambia? [25 marks]

Answer 1

As an international financial institution, the International Monetary Fund (IMF) seeks to promote global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty worldwide. Zambian government agreed to change its economic policies when it borrows $1.4billion from the International Monetary Fund (IMF). Her ability to repay depends on International Monetary Fund (IMF) policies. These policies include design of macroeconomic and structural policies as well as the specific tools used to monitor progress toward the country's stated goals. In order to avoid harming national or international prosperity, countries can use conditionality to solve balance-of-payments issues. To protect IMF resources, the measures are designed to ensure that the country's balance of payments is strong enough to repay the loan, which is why they have been put in place.

 This is in line with the Bank's Africa strategy of promoting Africa's economic transformation and reducing poverty, and the overall goal of these studies has been to support Zambia's broad-based development by facilitating evidence-based debate and policymaking. The World Bank's sectoral teams have distilled Monetary Funding to Zambia and brief policy notes as the new government for 2021-2026 prepares to take office. There are policy notes that attempt to summarize the main findings and challenges while laying out policy options. Zambia's physical and human capital have been eroded by hyperinflation and weak economic management over the past decade, but these can be rebuilt with the right combination of sound economic policy and incentives for private sector investors, both domestic and foreign. Therefore, it is imperative that policymakers deliver well-articulated, credible, and stable economic policies no matter how they choose to proceed with regard to the future direction of the economy.  Policymakers should encourage and unleash the private sector's creative energy and entrepreneurial spirit, the one that has delivered so often in the past. According to this policy note, long-term development faces a wide range of challenges. It will take a long time and a strong commitment to long-term goals and policy consistency to deal with these issues effectively.

Positive Impact of IMF to Zambia Economy

It was predicted that Zambia's economy would grow by 6.0 percent in 2014, which is lower than the previous two years' average of 6.7 percent. Growth is fueled by a large harvest of maize, rapid expansion of the construction industry, and strong growth in services, all of which are supported by public investment in roads. The economy was in turmoil in the first half of 2014 as the kwacha depreciated sharply against the dollar and other currencies and inflation pressure increased as a result of the large fiscal deficit of 6.6% in 2013. It is possible that in response to policy actions, the value of the kwacha will stabilize and regain about half of its lost value, and inflationary pressure will also decrease. Higher than both the 6.5 percent target and the 2013 average of 7.0 percent, inflation is expected to average 7.8 percent in 2024.

As part of its seventh national development plan (7NDP), Zambia has set lofty goals for the country's economy and the reduction of poverty. As Zambia moves forward with this vision of economic transformation, technology can play an important role. Transforming government can also be accomplished through the implementation of digital systems. There are numerous ways to increase private sector productivity, enhance public sector efficiency and effectiveness, and improve the accountability of both the public and private sectors. Zambia's strengths and weaknesses are examined in this diagnostic of the digital economy, which is built on the foundation of five pillars that can help the country reap the benefits of digital transformation. Among these are digital platforms and financial services as well as the aforementioned pillars of digital infrastructure and digital skills. Zambia will make significant progress in the next few years toward digital transformation. While digital infrastructure, financial services, and platforms have made significant strides, there are still significant gaps in digital entrepreneurship and digital skills. Digitally optimized government systems will reduce transaction costs and lower the cost of doing business, while promoting greater use of digital technologies in the economy, encouraging entrepreneurship, decreasing government transaction costs, and improving sector-specific outcomes using data and digital systems.

Zambia’s Transportation sector will improve and more parts of the country will be easily accessible. This will encourage more foreign investors and increased industrialization. Access to goods and services and to education, employment, and health care are all improved when transportation projects reduce travel time, operating costs, the cost of roads and parking facilities, accident damages, and other forms of pollution. This leads to an increase in economic productivity and development.

Zambia will experience an increase in Imports. IMF will enable her to trade fairly with the rest of the world through reduced production cost and import duties which results increased imports and also increases the exports as well. The raw materials for industries will be easily accessible and availability of market for their finished products will be abundant.

Negative impact of IMF to Zambia

Increase in industrial activities will make Zambia to contribute more of toxic gas emission to the atmosphere which results to greenhouse effect. This will lead to increase in temperatures. As a result, there will be increase in melting of ice, increase in sea levels and increased hurricanes which are a danger to human.

Zambia will be in depts. It will take decades for her to pay back the loan. The high interest rates will see her pay more than it received which is a burden to the coming generation

Conclusion

Liberation of prices and marketing systems, financial sector policy reforms, international trade regulation reforms, government budget rationality, parastatal privatization, and civil service reforms will all be achieved through the use of the International Monetary Fund (IMF) if well invested by the Zambian government