Economic inconsistencies- Bad for growth and investment

WEEKLY POLICY ISSUE

Regular reversals in economic policy by the Patriotic Front Government are damaging Zambia’s economic and social development. The recent reversal of a controversial mining tax regime barely three months into its implementation is the latest in the long list of policy inconsistencies and u-turns by the PF. The PF Government has had three mining tax regimes in the last three years:

1. the 2012 regime when the mineral royalty was increased from 3% to 6%
2. the January 2015 regime when the two-tier system (mineral royalty and corporate tax) was scrapped in preference for only mineral royalties,
3. and from July 2015 a reversal to the the two-tier system which pegs the mineral royalty at 9%.

This follows the reversal of their stance on VAT Rule 18 which was originally set out in 1997 and required exporters seeking VAT refunds to provide proof of export. The PF, without consultation, changed this to include provisions that require proof of sale, instead of just proof of export, which has been considered unreasonable by mining companies and other exporters.

Government stopped paying the refunds leading to accumulation of arrears in excess of US$600 million, it is not clear how the money was spent. The ensuing row between Government and the exporters has threatened investment into the country, and eventually in February 2013 the PF had to reverse their position. However, by then the arrears had already made fiscal and monetary management more difficult. While we warned them of the consequences, rather than heed our advice, they instead hurled personal insults at us.

Just about a year ago, the PF Government had to reverse two statutory instruments – SI 33 which prohibited the quoting, paying, demanding or receiving foreign currency as legal tender for domestic transactions, and the SI 55 which empowered the Bank of Zambia to monitor inflows, outflows and international transactions. Again we spoke out against the two SIs and warned of the consequences.

[pullquote]The kwacha is one of the worst performing currencies in the world due to high depreciation and high volatility[/pullquote]

The current situation in Zambia where tax and other policies and their implementation have changed without consultation or considering the reputational risk to the country’s economy is not only dangerous but very harmful to Zambia. It is apparent that the PF Government runs the country on an adhoc basis. Policies are arrived at without due care and skill. This is unacceptable in a country endowed with professionals such as finance professionals, economists, lawyers, geologists, and investment analysts who can help the Government weigh-up the likely outcomes of policies before they are implemented.

Unfortunately the one policy the PF Government appears to be committed to is its “no-look-outside” policy; only willing to consult PF sympathisers. They are fishing from a pool with limited talent and skills. It is no wonder economic growth has been on the decline since the PF took over power: the Kwacha has fallen by over 56% (4.95 to 7.46 per USD). The kwacha is one of the worst performing currencies in the world due to high depreciation and high volatility, and the country is faced with a high fiscal deficit due in part to the huge VAT refund arrears which are equivalent to the entire health sector budget for 2015. This is happening in an economy that exports one thing; copper, and imports everything because of the continued failure of Government to take any action to support manufacturing and value addition.

It is a known fact that when investors, foreign or local, are choosing where to invest their money, they will, among other things, take into account policies of the Governments of the potential investment destinations. Stable policies enable the investor to assess various risk profiles of the proposed investment country. Most importantly, peace and the security of the investment is a top priority for an investor. These inconsistencies threaten the over US$2 billion in Foreign Direct Investment (FDI) that Zambia recorded in 2013, with the mining sector accounting for 65.5 percent of these inflows. To illustrate the connection between policy consistency and politics with investment; between 2002 and 2008 Zambia received FDI to the tune of US$3.8 billion while a neighbouring country which had an unstable political environment received US$276 million. The cumulative effect of policy inconsistency is that Zambia will be viewed as an increasingly unreliable investment destination. Recent downgrades by international credit rating agencies attest to this. The potential damage to the economy is immense. Long-term investors will shy away from investing in Zambia. Only speculators and other short-termists will invest in the country with a view to making a quick kill and repatriate their investments before policy changes prevent the structured growth of their investments. It also increases the cost of capital should Zambia decide to borrow internationally again, since lenders will also be aware that the poor investment climate increases the risk of default.

Our Position

Zambia’s image in the international business arena has been damaged as a result of PF policy inconsistences and uncertainty. The PF Government needs to address this now and with the urgency it deserves.

• In order to enhance the attractiveness in the investment climate, we in the UPND will pay particular attention to maintaining a stable and predictable fiscal policy, exchange rate stability as well as sustaining a robust GDP growth of over 10% per annum. We already know the untapped growth sectors of the economy
• There is no point in tightening monetary policy without tightening fiscal policy. Most of the current problems being faced in the country are as a result of policy inconsistencies on the fiscal side. We in the UPND will ensure consistency between the fiscal and monetary policies. We shall not borrow (fiscal policy) to destabilise the interest rates (monetary policy).
• Taxes will be predictable, there is no way a corporate body can plan in an environment where they are not sure which direction a particular tax will go. One day the Government will refund your VAT, the next day that Government wants you to provide proof beyond what you agreed to initially. These are the inconsistencies you will not experience in a UPND Government
• We shall introduce a robust budget implementation policy to avoid wastage by the Government which lends the Government to start unplanned borrowing thereby affecting the monetary policy.
• A UPND-led Government will not depend on monetary policy i.e. interest rates and inflation to stabilise the economy in the long run, we shall institute rigorous measures to ensure that every Ngwee counts. This will keep Government from crowding out the private sector in the financial markets.

A UPND-led Government knows the value of public money and will make decisions based on the end result for the Zambian people, rather than taking short-term populist decisions that will later cause us damage. We know that good leaders listen, consult and are not afraid to engage experts, are capable of explaining their decisions to the people. Good leaders debate issues with fellow politicians rather than relying on personal attacks to defend their position. When the PF is called upon to explain their stance, they have always rushed to call people names in respone and we expect the same reaction to this policy brief.

Hakainde Hichilema
UPND President

“Together We Can”

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Issued by: UPND National Campaign Centre, Lusaka