By Kalima Nkonde
Most Zambians do not understand the main reason why our economy has deteriorated astronomically in the last four years and are unable to put a finger on one major cause. There are a myriad of reasons that have been advanced including external factors like the collapse of copper prices and the strength of the dollar. It is undeniable that these external factors have contributed to some extent but they have not been the main causes of the collapse of the economy because other countries have not been affected to the same extent as Zambia. Critical and comparative analysis of the numbers especially in terms of percentages, show a totally different picture. Numbers do no lie!
Many experts disagree with the PF’s attribution of the poor economy to global factors .They argue that it is more of poor economic management across the board because the numbers do tell the full story as former MMD Finance Minister Dr. Situmbeko Musokotwane correctly observed in his November, 2015 paper.
“Even without copper related problems, Zambia would still have faced serious economic and foreign exchange crisis. They should not blame everything on drought and low copper prices. A global economic crisis which resulted in even lower copper prices than they are today occurred also between 2008 and 2009 but things did not deteriorate as they have done this year. Concrete measures then were taken that minimized the negative effects of the crisis”, he said.
In the light of global factors not being the main cause of our problems, I have isolated the ambitious, massive infrastructure programme and the road construction in particular as the single most important cause of Zambia’s economic problems. The ambitious infrastructure programme has contributed to the budget deficit, huge public debt, kwacha depreciation, high inflation, high interest rates, economic corruption and the loss of investor confidence. The negative percentages economic changes are abnormal and indefensible by any rational knowledgeable person as most them are above hundred percent which is a rarity in well managed economies! I will demonstrate how, in simple terms, in this article.
Economy in 2011
When the PF administration came into power in 2011, they found an economy awash with cash reserves and high credit rating which made it easy to borrow on the international capital market. They went on a spending and borrowing binge. To them, all previous administrations were ‘foolish’ not to ‘develop’ Zambia! They forgot that the good economy they found was a result of prudent macro economic management by the MMD.
The PF, it appears, had one dimensional approach to economic management and adopted management by wishes as a strategy. They embarked on an ambitious, massive infrastructure programme without thinking about where the money will come from and the effect such a programme will have on the other economic variables! As former Botswana President Sir Ketumile Masire put it in his Memoirs,
“Both politics and economics involve choices, and a President must understand the consequences of economic as well as political choices.”
President Sata and his team clearly did not! Most economic observers wondered how economically prudent the PF policy was, as Dr. Brian Chituwo, a former Minister in the MMD government observed in the Post Newspaper of 28 July,2015.
“They tried to bring a populist type of governance. Were the issues of creating districts well thought out and planned for, within the ability of Treasury to pay? Our country has been committed to massive infrastructure development as if Zambia is ending tomorrow!”
Dr. Brian Chituwo’s sentiments have been supported by many enlightened observers like the former Finance Minister in the MMD government, Dr. Situmbeko Musokotwane, who observed how the PF’s apparent chaotic approach to infrastructure development had destroyed the economy. “From 2011, the PF embarked on many infrastructure projects without sound planning and regard to the sustainable availability of financial resources to do so. Construction of new universities has been declared without planning.
Similarly, construction of new districts, roads, sports stadia have been declared also without plans. This has resulted in rapid accumulation of both domestic and foreign debt, which will soon become difficult to service,” Dr. Situmbeko, lamented.
PF motivation for infrastructure programme
The impression one gets is that the motivation for these projects was not entirely economical but rather political and personal by the Party Leader, the late Mr. Michael Sata. The programme could be said to be politically motivated in that it was tied to the electoral cycle of the 2016 election, and thus the hurry! The programme, therefore, was not being done in good faith! It could also have been personal, in that Mr. Sata gave the impression of being obsessed with his legacy by outdoing all the previous Presidents of Zambia, especially his nemesis, the late President Levy Mwanawasa. The fact that the late President Chiluba and President Kaunda are on record as having said Mr. Michael Sata was not Presidential material and needed to be under supervision, must have been a major motivating factor for him to change the face of Zambia in record time and prove every body, who had a low opinion of him, wrong!
How massive infrastructure contributed to budget deficit
The ambitious, massive infrastructure programme especially the roads, have contributed to the huge budget deficit. According to civil engineering experts, a 1km tar mark road’s cost can range from $1.2m to $2million dollars depending on the terrain and specification in terms of quality (K13.2 million – K22million per Km). It means that to construct a 500Km road; the cost could be as high as $1billion (K11billion)! Owing to the huge costs involved in road construction projects, there is no doubt that it has been a major contributing factor to the huge budget deficit. Zambian roads are said to cost more than similar roads elsewhere due to corruption and cost overruns as the Road Development Agency (RDA) Report to President Lungu, quoted by the Post newspaper in 2015 noted.
“Owing to the urgency with which government wanted to commence the works, Phase1 of the Link Zambia 8000 Programme had commenced on a design and build basis. This implied that detailed designs were not in place by the time of tendering. The accelerated method of road construction works exposed the Agency to high risks of cost escalations due to the fact that the real scope, cost and time frame of the projects were unknown. In the absence of adequate project preparation at the planning and design stage and stringent fiscal discipline during project implementation, cost escalation on road projects are bound to increase further,” the RDA report explained.
The budget deficit at half year was 135% above budget at K20 billion instead of K8.5billion and infrastructure projects must have contributed a great deal to the deficit than any other expenditure budget line item.
Infrastructure projects and the high public debt
The Government embarked on infrastructure projects without money to fund it. They, therefore, embarked on excessive borrowing from China and the international capital market. This has resulted in increasing the foreign debt from $1.2 billion when the PF took over in September, 2011 to $6.05 billion in July, 2015 which is an increase of 404% in four years! The excessive borrowing both local and foreign has affected the economy as the government needs to money to service these debts.
The Government will have to cut expenditure including removal of subsidies like on electricity, fuel, farming inputs etc. We would have given the PF a lot credit if they had built infrastructure projects with a higher proportion of internal resources especially from mining houses like smart countries like Botswana and Namibia have done! One cannot boast about bringing the so called development at the back of huge borrowings; anybody can do that!
If PF had devised innovative internal revenue generation measures to build the roads, bridges, schools, hospital etc, then most of us will be praising them as they would have been seen to have used their brains. Also, if a higher proportion of the borrowed billions of dollars had been invested in the agriculture, tourism and energy sectors, the money would have generated more revenue for future infrastructure developments, created more jobs, generated foreign exchange, diversified the economy in a shorter period of time and we would have been better off than we are now!
Infrastructure, Kwacha depreciation and inflation
The infrastructure projects have resulted in the loss of the value of the kwacha in two ways. First and foremost, the budget deficit that infrastructure expenditure caused has led to Zambia’s credit rating being downgraded. This consequently led to loss of investor confidence which negatively impacts on the value of the currency. In addition, the infrastructure projects have been done mainly by foreign contractors who have had to externalize foreign currency once they are paid. The demand by foreign contractors for foreign currency has put the kwacha under tremendous pressure and contributed to its massive depreciation from K4.86 when PF took over in 2011 to K11.00 as at the end of December, 2015 which is a depreciation rate of 126%! The negative contribution of foreign contractors to the kwacha depreciation was echoed by Special Assistant to the President for Project implementation and Monitoring, Lucky Mulusa when he addressed Mission Staff in Pretoria, South Africa in September, 2015.
“Road Contracts which are in the hands of Chinese Companies have also contributed to the shortage of foreign exchange in the country as most of the money paid to them is taken out of the country,” he said.
The infrastructure programme is also major contributing factor to the increase in inflation through the depreciation of the kwacha given that Zambia is an import oriented economy. Zambia’s inflation closed at 21.1% for the year 2015, the highest in many years!
Infrastructure and investor confidence
When Zambia entered the Euro- bond market, it meant that we were under observation by the international market and rating agencies. The flawed way that the PF was implementing the massive infrastructure projects did not go unnoticed! The result of the mismanagement was a huge budget deficit which forced the rating agencies like Standard and Poor, Moody’s, Fitch to down grade Zambia’s credit rating. Consequently, investor confidence in Zambia plummeted! Infrastructure projects, therefore, can directly be linked to the loss of investor confidence.
President Lungu, did in a way, indirectly admit to the fact that the ambitious infrastructure development programme has been a major cause of the problems in the economy and he wanted to correct it as he noted at the State House Press conference.
“In the light of economic challenges, the financing of the ambitious infrastructure development programme has to be re- aligned. All Government Ministries, Provinces and spending Agencies should cease the procurement of, or entering into contracts for new works including the road sector. All Government Ministries, Provinces and Spending Agencies to engage Attorney General to review committed projects signed but not yet commenced with view to defer where appropriate. And regarding on going road projects, in particular, the Ministry of Works and Supply shall embark on a phased approach to implementation of road projects over a longer period.”
Importance of infrastructure
There is no one who is against the building of infrastructure as it is a vehicle for economic development but it has to be well thought out, measured, properly planned, sequentially implemented and prudently financed. This was not the case with the PF infrastructure development programme and thus it has come at a great cost to the country. The PF Government should not be faulted at the intention for building infrastructure but the programme should not be motivated by economic populism but rational economic decision making. The mistakes they made were: no proper planning, risk management and cost benefits analysis was done resulting in wrong priorities, cost overruns and consequently the huge deficit. In addition, there were no proper financing strategies resulting in neither huge debt nor local capacity resulting in kwacha depreciation and no discernible multiplier effects to the economy from the massive projects with most borrowed funds finding their way outside and Zambia just being a transit for borrowed funds.
The development of a country has to be properly planned as Sir Kitumile Masire, the former President of Botswana noted in his memoirs.
“We knew that without water supplies, education, roads or communications, we could not establish enterprise that would employ people productively. But things had to be done in logical sequence. I explained that if we spent money too rapidly, given our limited capacity to implement projects, we will just drive up costs of projects and caused more inflation. We quickly realized that we should have a document that related the projects and placed them in order of priority as we decided which roads to complete and tar mark. We should not decide things as they came up. We felt there was a clear need for a road map, so we would know where we were going.”
It is clear that the PF did not follow what Botswana and other smart countries do, when embarking on development projects. Zambia’s infrastructure development process was poorly managed at all stages from conception, planning, procurement, financing, implementation and monitoring and evaluation thus the economic mess and the mountain of debt it has created which is slowly but surely drowning Zambians.
Although we may be enjoying moving on the good roads in the short term, and there is no doubt that the ruling Party will use it as a campaign issue in 2016 election by boasting that they have brought ‘development’ but the price that the country has paid and will continue paying is rather high as the programme was not properly carried out! Numbers do not lie!
The price that Zambia has paid for the ambitious, massive infrastructure programme include: an increase in foreign debt by 404%, a total public debt of $9.75billion, the depreciation of the currency by 126% in four years, movement into double digit inflation to 21.5% from 7.7% which is a 179% increase, forecast budget deficit of 14% of GDP, 135% deficit above budget at half year in 2015 ,credit rating downgrade by Standard and Poor and Fitch to B which is a junk status and thus below investment grade! Is this price worth it? I certainly do not think so, thus my view that the ambitious and massive Infrastructure Programme has been a Poisoned well!
Poisoned well in the sense that infrastructure has been toxic to the economy such that instead of nourishing the economy, it has contaminated it, resulting in having the opposite effect of destroying the economy, at least in the short term! The ambitious infrastructure programme has created four deadly diseases for Zambians economically which I have designated as the 4Ds – Deficit, Debt, Depreciation and Depression.
As with my previous articles, the motive of this article is meant to share knowledge with those in power and also those who are not in power as well as with the general public. It is not meant to demonize anybody. Unfortunately, since my return back home, I have noticed a culture of not accepting constructive criticism and thereby learn from it across the political divide. I have rightly or wrongly attributed this dysfunctional behavior to my 4s- education, experience, exposure and esteem issues. The result of not accepting constructive criticism is the unmitigated defence mechanism and the exhibition of lack of self confidence and a cover up for inherent inferiority complex .
This is in contrast with what I have observed elsewhere; the case in point being the USA 2016 Democratic Presidential Candidate Mrs. Hillary Clinton, who believes according to her latest memoirs, ‘Hard Choices’, that if you choose to be in public life, grow skin as thick as rhinoceros and learn to take criticism seriously but not personally.
“Your critics can actually teach you lessons your friends can’t or won’t. I try to sort out motivation for criticism whether partisan, ideological, commercial, or sexist, analyze it to see what I might learn from it, discard the rest,” she rationalizes. I guess the difference in our politics is that ours are politics of poverty rather than public service.
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.