Depending on whom you speak to, there appear to be two coexisting economic realities in Zambia – the somewhat positive image internationally as a country enjoying a +6% GDP growth for consecutive years, and the local reality of a chaotically mismanaged circus, making the Kwacha among the worst performing currency in Africa and causing the prices of basic staple foods to soar.
This week, the Patriotic Front-led government of the reclusive President Michael Sata once again fooled international markets into thinking things are still sunny on the economic front. In response to runaway fiscal deficits caused more than $1.75 billion in foreign borrowing, the PF has gone hat in hand to the International Monetary Fund (IMF), apparently to discuss “an economic programme that could be supported by a fund arrangement.”
The IMF arrangement could begin as soon as September, casting a greater burden of responsibility on President Sata’s struggling economic team to deliver on their promises.
Investors will be happy to see even more money pouring into Zambia again, but of course investors care very little about our ability to pay back so much interest from this foreign borrowing spree. Very few people are asking where all this capital is going. We are told about “massive infrastructure investments,” but the Roads Development Agency (RDA) has been a hotbed of suspected corruption since being “taken over” by State House, including contracts going to companies owned by members of the president’s family.
In exchange for a temporary halt to the depreciation of the kwacha and a lower bond yield (for now), Bank of Zambia (BOZ) Governor Michael Gondwe is getting ready to surrender partial control of fiscal policy to a foreign institution – for instance, the IMF has already stated in no unclear terms that the PF from keep their hands off scandal-ridden KCM.
However, one wonders if the officials at the IMF have any clue whom they are dealing with in the economic team of the current administration, and whether or not they have any intention (or ability) to fulfill their promises.
According to the IMF statement following the visit to Zambia, the central bank is going to have to apply “forceful measures to address the emerging vulnerabilities,” including continuing to raise rates and increase “reserve requirements for banks.”
Therein lies the problem: How can the IMF expect Dr. Gondwe to uphold Zambia’s banking regulations when in fact he owes his appointment precisely for violating BoZ laws?
Let’s rewind the tape to 2011, shortly after the election. One of President Sata’s first moves once in power was to restore ownership of Finance Bank to one of his biggest campaign donors, Rajan Mahtani. In order to do so, President Sata sacked the well regarded BoZ Governor Dr. Fundanga, who had held the position for the past nine years and who succeeded in reducing inflation below 10% for the first time in 30 years.
What had Dr. Fundanga done wrong to deserve this unceremonious removal? On December 31, 2010, the Bank of Zambia issued an official Government Gazette declaring Mahtani’s Finance Bank to be operating in violation of the law through undeclared shareholder interest. Sata declared that a “commission of inquiry” would be formed to probe the seizure of the bank, and then a few days later, perhaps impatiently, he restored ownership to Mahtani without the commission ever having been formed.
Given that this Government Gazette has never been retracted or corrected, presumably Dr. Gondwe is currently overseeing a market in which preferential parties are allowed to violate the banking code, while others are not. This situation does not inspire confidence that Dr. Gondwe can legitimately enforce reserve requirements, much less halt the PF’s insatiable desire for debt.
Adding suspicions to the political motivations behind Dr. Fundanga’s firing, President Sata had no ready replacement in the fall of 2011. Amazingly, Zambia actually went on almost three months without a sitting Governor of the Bank of Zambia. At one point, there was even a hoax rumour that Bank of Israel Governor Stanley Fischer would be given the job, but then nothing came of it.
Then Rajan Mahtani stepped forward to convince President Sata to appoint his ally, Dr. Gondwe, who up until then, had been the Zambia manager of Eastern and Southern Africa Trade and Development Bank (PTA Bank). Dr. Gondwe had a fine academic background in law and experience in regional lending, but his resume left him woefully unprepared to handle the complex fiscal issues and monetary policy decisions that are the responsibility of the central bank.
At the helm of PTA Bank, Dr. Gondwe developed a close personal relationship with Mahtani (he was even spotted at Mahtani’s daughter’s wedding as a guest of honor), where the two men are alleged to have conspired to work together to steal control of assets through lending manipulations. In the contentious saga over control of the $160 million Zambezi Portland Cement company in Ndola, PTA Bank violated their loan agreement with the company founders by terminating the contract without the required arbitration, and knowingly appointing illegal management and incurring debts while under receivership to help Mahtani take over control of the company.
Once installed as Governor of the Bank of Zambia, Dr. Gondwe has been seen as a puppet of Mahtani, taking actions such as allegedly handing out K120 billion to the Finance Bank Chairman as “compensation” for the year that his bank had been seized. Under Gondwe’s stewardship, there have also been reports of politically motivated firings to benefit Mahtani, security breaches, and tenders handed out companies represented by other cabinet members.
Now this is the man that the IMF is trusting to reign in spending, tighten fiscal policy, and keep budgetary discipline. But how can Dr. Gondwe accomplish any of these objectives when his employer is not the people of Zambia, but a man whom even the United States government had started helping investigate for money laundering?
Zambia’s economic crisis is largely self-inflicted. The global slide in copper prices began long before the PF committed itself to so much foreign borrowing, and any rational, intelligent government would have curbed runaway debts and prepared a crisis plan to absorb the balance of payments.
The fact that Zambia’s current central banker appears to be beholden to a suspected money launderer should raise a number of red flags at the IMF.