Has PF mismanaged Zambia’s economy or are External factors responsible?

By Kalima Nkonde.

President Lungu recently said that the current economic challenges cannot be attributed to any individual or form of mismanagement of the national economy because the difficulties are largely influenced by various factors across the globe. This statement follows the statements from Minister of Information and Broadcasting, Mr. Chishimba Kabwili who had said earlier that external factors are responsible for our problems and we are not the only country affected. The PF Secretary General, Mr. Davies Chama was also reported as having said that PF did not create the problems. The PF Deputy Secretary General Mrs. Mumbi Phiri also commented about Zambia’s economic problems being externally induced. And last week, the Minister of Finance, Mr. Alexander Chikwanda added his voice to the narrative that external factors are responsible for the economic problems that the country is facing. It is clear that the narrative coming from the Government is that they have not mismanaged the economy and are not responsible for the poor economy and it is entirely due external factors!

Most experts disagree and feel the Government statements are misleading and should not go unchallenged. They argue that it is either the Government does not fully appreciate the causes of the economic problems or they are deliberately misleading the public by putting on a spin for political reasons. The Opposition and many experts are of the view that the problems have been caused mainly by the PF administration’s mismanagement of the economy since 2011. It is also believed that since the government’s diagnosis of the problem is wrong, then they cannot possibly have the capacity and the political will to administer the right medicine in order to cure our economic ills.

In this article i will outline the major external factors that have affected our economy. I will then define the terms management and mismanagement; thereafter outline the broad categories of the causes of our economic problems and demonstrate which ones are attributable to external factors and which ones are due to poor management. One hopes this article will help the parties across the political divide to put the debate in a proper perspective thereby help find effective solutions to the problems.

There are a number of external factors that have affected our economy. The first one is the strength of United States Dollar due anticipated increase in interest rates there. The US dollar has strengthened against many world currencies including our kwacha and therefore has contributed to the depreciation of the kwacha although we have been the worst affected as the Kwacha is the worst performing currency in the world this quarter according to international financial press. The second factor is the down turn in the Chinese economy. The Chinese economy ‘s growth has slowed down in recent times resulting in lower demand for raw materials including our copper and so the Chinese have been buying less copper from Zambia affecting our foreign exchange earnings. The third external factor is the price of copper itself which has gone down thus further reducing our export earnings. These are the major external factors that have had a negative impact on our economy.

On the basis on statements made by the administration officials, the impression one gets is that people in the administration do not seem to understand what the term mismanagement means. I will therefore, first define the term. There are a number of definitions of management but I will only use one to demonstrate what management and mismanagement entails. According to Henri Fayol, “To manage is to forecast and to plan, to organize, to command, to coordinate and Control.” To expand on this definition, the functions of management in private and public sector involve among other things, policy formulation at the top level, planning and controlling, organisation and coordination, directing, motivation, decision making and risk management. .

The causes of Zambia’s economic problems are in broad terms in my view, as follows: the Budget deficit, the trade deficit, depreciation of the kwacha, excess government borrowing, load shedding, policy inconsistency, massive infrastructure projects, nepotism and corruption. I will discuss each one of them and ascertain whether it has been caused by external factors outlined above or by poor management.

Budget deficit

The country has a budget deficit which means we are spending more than we are earning. The deficit has resulted in higher interest rates, our credit rating being down graded, a reduction in foreign direct investment inflows thus affecting the value of the kwacha and contributing to unemployment. The term budget deficit has two sides: expenditure and revenue. On the expenditure side, the government has been spending money on salaries and benefits of a bloated cabinet, travel and per diem, cell phones, air time, civil servants salaries, vehicles, massive infrastructure projects, induced by elections and many more wasteful expenditure items which could have been minimized or reduced. The lack of planning and control of expenditure is a failure in management can be referred to as mismanagement and there is nothing external about it.

On the revenue side, we can partly attribute the loss of revenue from copper exports as contributing to the deficit which is an external factor. On the other hand, if there was proper local tax revenue mobilization strategies put in place to ensure a broader tax base, measures to curb tax evasion and avoidance, more revenue would have been raised thus avoiding the deficit. Revenue generation measures entail management action and decision making in making choices about various revenue sources. Overall, therefore, the budget deficit is not entirely caused by external factors but rather mainly by poor financial management and fiscal indiscipline.

Trade Deficit

Zambia has a trade deficit at the moment which means that we are importing more than we are exporting. Revenue from our traditional export copper, which accounts for 70% of our exports, has dropped due to external factors like less demand from China and lower prices. The supply of foreign currency therefore has reduced. This has affected the value of the kwacha. Foreign exchange reserves at the Bank of Zambia have also fallen to below three months of import cover to such an extent that we may even struggle to service our foreign loans! Our imports, on the other hand have been increasing .There are two variables that the Government can influence in order to avoid a trade deficit and these are the promotion of non traditional exports and the restrictions of non essential imports.

To what extent this was being done is debatable .Good Management also involves risk management and if we had proper economic managers, the over dependence on copper for 70% foreign exchange and the over dependence on the Chinese economy for our exports should have been mitigated against. It was shocking to learn from Finance Minister, Mr. Alexander Chikwanda saying, “Surely, nobody expected China to continue growing at the same level…. there was going to be time they will reduce their appetite for our copper……”. The statement was right but as the Manager of our economy, what measures did he put in place to mitigate against such a risk? To add insult to injury, he was in the cabinet in 1973 which is 42 years ago and he was finance minister around that time and one would have thought that his experience of copper prices collapse of the 1970s would have come in hand him to ensure that what happened then, did not happen again but it appears experience was not the best teacher in this instance! Or was it a question of sleeping on the job? The trade deficit is more a failure of management due to as far as risk management rather than external factors.

Kwacha Depreciation

Our currency, the kwacha has had such a beating this year. It has depreciated immensely resulting in high cost of fuel and generally influencing the cost of living and the cost of doing business. The Kwacha’s depreciation has been partially caused by the strong United States Dollar and the trade deficit. There is a factor that is not mentioned by most commentators in Zambia which is sentiment and business confidence. In view of Zambia having borrowed Eurobonds, the country is part of the international bond market and our actions and words are being watched by the market! The behavior and utterances of our leaders in power can have an influence on the value of the kwacha. For example, the recent reckless statement by President Lungu’s Press Aide, Amos Chanda that they are considering bringing back exchange controls can negatively influence the value of the kwacha. Also, the recent creation of districts by President, the announcement of public sector salaries increases in 2016, the announcement of more infrastructure expenditure by cabinet are signals to the market of a Government that is financially imprudent and indiscipline and not serious about deficit reduction. The above announcements constitute poor decision making and error of judgment by our leaders given the economic situation we are in and just goes to prove the IMF Managing Director’s assertion that African leaders do not understand market discipline required when you borrow from the international financial markets. The effect of such statements is that there will be more forex outflows and less inflows of dollars to supply the market and in the process putting pressure on the demand for the kwacha. This is one of the reasons our currency depreciates more than others! It is a perception of poor macroeconomic management and uncertainty. The combination of external factors and mismanagement are therefore the causes of the drop of kwacha.

Excessive borrowing

The government has borrowed excessively in the past four years both domestically and internationally. The massive domestic borrowing by Government ($3.7billion) is actually killing jobs in Zambia. The Government is crowding out the private sector in the money market as financial institutions are lending more to Government which is considered to be risk free in finance theory rather than the private sector. The private sector especially the SMMEs are unable to access finance as the Government is gobbling the bulk of the financial cake. In cases where the private sector succeeds to borrow it is at very high interest rates. The consequences of the lack of loan capital because of excessive Government domestic borrowing is that the businesses cannot expand or grow and new businesses cannot be set up and it is the private sector that is a source of jobs and pay taxes and not government! The short of it is that excessive domestic borrowing by Government is one of the causes of unemployment in Zambia and high interest rates. The decision to borrow was not imposed on Government by external factors, it was a management decision.

Load shedding

The load shedding issue is one where the public have not been told the truth by the Government. They have been saying the drought is the cause of load shedding but this has been disputed by an expert Dr.Greg Mills. He wrote an article in the Daily Maverick of South Africa and republished by Lusaka Times, stating that the two causes of our load shedding has been the delays in commissioning the new generation projects and the overuse of newly-installed ‘peaking’ turbines at Kariba. Dr. Mills said, “Zesco has also contracted an additional 120MW of hydro power from Itezhi-Tezhi and 300MW of coal-fired power from Maamba Collieries. Delays to these two projects are a key reason for the current energy shortages in Zambia. Both were planned to be online in 2014, but have been delayed due to financing issues and the slow completion of power lines to connect these projects to the national grid. If Itezhi-Tezhi and Maamba had been finished on time, there would be no power supply problem this year.”

Dr. Mills also added that: “ Zesco has been using more water than they were supposed to and Kariba has been used to meet this growing demand, requiring more water to drive the turbines, pushing the volume of water use for generation to levels unsustainable by regular annual rainfall and inflows. Both Zesco and ZPC have been using more water than they are supposed to during 2015. Zesco has been generating a lot more electricity at Kariba than in previous years .The new turbines are being run much more than they were originally intended to. It seems that Zesco has been operating the intended peaking units much more than the planned three to four hours a day. This means they’ve needed to use more water, resulting in low reservoir level.”
It is clear from Dr. Mills’s analysis that the draught excuse for load shedding has been untrue! The speculation that ZESCO has been generating enough power but had entered into non cancellable export contracts on the expectation that Itezhi Tezhi and Maamba will be ready makes more sense! This is a clear case of incompetence by ZESCO and the Ministry that it is under for failure in planning and risk management by taking mitigation measures in the event the expected supply did not materialize. The current load shedding caused by incompetence has resulted in the loss of jobs, loss of investor confidence, loss of production for export to earn foreign exchange thus affecting the kwacha value but nobody has been held accountable!. Load shedding is not a result of an act of god or some external factors but mismanagement possibly aided by replacement of experienced professionals and engineers with cadres in Zesco!

Nepotism and Corruption

The effects of the two evils of nepotism and corruption are not apparent to the naked eye but the reality is that it does have a negative impact on any the economy. There are allegations that incompetent people have been given jobs in Government and Parastatals like ZESCO for which they are not qualified nor experienced just by virtue of being Party Cadres. This will have an effect on the performance of the economy and foreign investor’s confidence. The late President, Mr. Sata is on record as having said his Members of parliament and Ministers were useless. President Edgar Lungu is also on record as having said there is too much nepotism in the civil service. Will it be fair to conclude that the PF administration does suffer from the nepotism, corruption and incompetence disease based on their own leaders’ admission? Could this be what is being reflected in our economic performance? It is up to Zambians to answer.

Massive infrastructure projects

The massive infrastructure projects are part of the causes of our economic problems. Zambia embarked on a fast track, massive and ambitious infrastructure projects without local capacity in terms of skilled manpower and management to carry out these projects and so foreign companies had to be contracted. This has had a negative impact on our currency and greatly contributed to the depreciation of the kwacha as foreign companies have had to externalize forex once they have been paid. In addition, we embarked on infrastructure projects without money resulting in a budget deficit thereby ending up with borrowing excessively. We also embarked on massive infrastructure projects without capacity for project management in terms monitoring and evaluation resulting in delay in project completion, wastage and massive corruption and cost overruns. The decision to embark on massive infrastructure projects in a fast track and reckless fashion rather than a measured, sequential and prudent manner is not an external factor but entirely attributable to poor management.

Economic policy inconsistency

In the last four years, the government has made four embarrassing policy reversals which include SI33 which forbade the use of foreign currency in Zambia to carry out business transactions. The other policy reversals SI55 which was meant to monitor inflows and outflows of foreign currency transactions, and then there was VAT rule 18 which required exporters who needed VAT refunds to show proof exports and lastly there was the Royalty tax increase for the mines. There is no doubt some of these policies had some merits given the abuse that multinationals and foreigners were subjecting our country to through illicit forex outflows and tax evasion. The problem was that they were not well thought out and proper consultations with stakeholders done before implementation.

The Zamtel and Finance Bank Sale reversals, Zanaco privatization investigation and the DBZ/ Zambia airways saga- regardless of the merits and demerits of these cases – all sent wrong signals to the investor community about the new regime thus increasing the country’s perceived political risk. The Government created uncertainty in the business environment and uncertainty is one of the major enemies of business as it makes it difficult to plan. Businesses want to plan ahead and they need a policy environment which is consistent and predictable. The policy inconsistencies and uncertainty in the last four years have resulted in the postponement or cancellation of foreign investment inflows in the process starving the foreign exchange market of the United States Dollars. This has also has had a negative impact on potential employment creation opportunities. The formulation of Zambian government policy is done externally and determined by global factors. It is purely an internal matter and therefore a management issue.

Conclusion

The PF administration were hired by the Zambian people to take over the management of the country and they were expected to carry out the functions of management which includes proper planning, informed decision making and risk management by ensuring that effects of external factors are taken care of and do not affect our economy adversely when they occur. It follows that if the economy goes badly under their watch, with or without external factors, they will be held accountable for mismanagement and they cannot pass the buck. On the basis of this assertion, there is no doubt that our economic problems are almost entirely as a result of mismanagement in one way or the other by the Patriotic Front government and they should accept full responsibility for the same. They found a solid economy.

The copper prices did collapse in 2009 during the global financial crisis but the MMD managed the storm well. Also, the other countries they are claiming to be affected by the global factors are not in the same dire situation that Zambia is in and their currencies have not depreciated to the same extent as the kwacha because they have better economic managers. Great leaders do not blame circumstances but anticipate and provide for their eventuality which is risk management. Leaders should be problem solvers and not experts on apportioning blame and finding excuses when things go wrong. If a team is losing, the Manager/ coach is held accountable. If a company Chief Executive is making loses, the board holds him or her responsible. The same applies to running the country. The Party in power is held accountable and people are not interested in listening to excuses or scape goats!

The onus is now on the President, as the Chief Executive of the country, to address the nation and speak with confidence, reassuring the public by outlining his strategy on how he will resolve the problems both in the short and long term. He should also show his commitment through actions rather than saying one thing and doing the opposite like creating districts, continuing with bridges and roads leading to nowhere, embarking on extensive foreign travels with huge delegations while at the same time saying the government is going reduce its expenditure.

The writer is a Chartered Accountant by profession and a financial management expert. He returned home two years ago with a hope of contributing to the country through rational economic debate based on his exposure and also by using his entrepreneurial skills to invest in Zambia. He has lived in the diaspora in England, South Africa and Botswana for over 25 years. He is an independent and non partisan commentator.