The precarious status of the Zambian economy, 2017 gains reversing & Prices to go up

• The near-term outlook for the Zambian economy has improved in recent months, driven by good rains and rising world copper price. Directors noted that domestic and external risks pose significant challenges. They advised the authorities to take advantage of the current favorable conditions and implement decisive and prudent macroeconomic policies and reforms to place public finances and debt on a sustainable path, build international reserves, increase the economy’s resilience to shocks, and achieve higher and inclusive growth (IMF Country review statement of 2017, the IMF Executive Board )

• Zambia’s external debt may grow by more than 40 percent to $13 billion next year as the cost of planned projects are added to the total, and debt-servicing charges could double, according to former finance minister Alexander Chikwanda. The government of Africa’s second-biggest copper producer could face debt-servicing costs of $1 billion next year, from $500 million to $600 million this year, due to new loans, Mr. Chikwanda said Sunday in comments broadcast on state-owned ZNBC television. “It’s going to be a challenge to service the external debt.” (Alexander Chikwanda in ZNBC interview June, 2018)

• Sometimes it looks like we are proud to have borrowed so much. Even at an individual level, you can’t contract so much debt which you cannot pay from your income. We used to say they (youths) don’t have education [but] now a lot of people are graduating [but there are] no jobs. This is obviously something which will explode and it should be a concern for everybody. We all have a responsibility to ensure that we avoid this time bomb which is just about to explode ( Former Bank of Zambia Governor Caleb Fundanga)

• The Euro Bond remains one of the most important barometers to measuring the performance of the Zambian economy. If yields are high, it sends a picture that there is less confidence by investors in the Zambian economy. So potential investors will hold their investment and those who are already here will take a conservative approach by withholding their investments. As you know that for the kwacha to be strong, you need foreign exchange. (Economics Association of Zambia president Lubinda Haabazoka, Sept.2018)

By Kalima Nkonde

The Finance Minister Margret Mwanakatwe is presenting the 2019 budget on Friday 28 September, 2018 and it is important that Zambians have an idea as to what the current status of the economy is so that the projections to be announced and the credibility of the budget can be objectively assessed by comparing with the current actual numbers on the ground ,and past pronouncements. This will expose any sugar coating that may be in the budget.

At end of 2017 and the beginning of 2018, most of us, independent, patriotic and objective observers of the Zambian economy including outsiders like the IMF, praised the Zambian government for the improved economic numbers that were recorded in 2017 especially on the monetary side of the equation but warned that government needed to do more on the fiscal side to build on the gains and avoid reversals of what had been achieved.

In their Country review statement of 2017, the IMF Executive Board commended Zambia for the improved economic indicators but warned that these gains were precarious and could easily be lost if decisive fiscal action was not taken.

“The near-term outlook for the Zambian economy has improved in recent months, driven by good rains and rising world copper price. The economy was in near-crisis from the fourth quarter of 2015 through most of 2016, reflecting the impacts of exogenous shocks and lax fiscal policy. Executive Directors welcomed the recent improvement in Zambia’s economic outlook. However, Directors noted that domestic and external risks pose significant challenges. They advised the authorities to take advantage of the current favourable conditions and implement decisive and prudent macroeconomic policies and reforms to place public finances and debt on a sustainable path, build international reserves, increase the economy’s resilience to shocks, and achieve higher and inclusive growth”, the IMF advised.

In June,2018,we were all excited by the austerity measures announced and this writer penned an Op Ed, praising the PF government for the job well done and predicted economic recovery if measures announced were implemented. Alas, little did he know that the austerity measures announced were a gimmick and merely targeted at convincing the IMF to resume bailout talks. It immediately became clear that in the light of the IMF playing hard ball, and their representative pressuring government for full disclosure of the debt situation and to follow through the austerity measures, government could not take the heat and had to ask IMF to recall him and as the saying goes, the rest is history.

Since June, 2018, there is very little evidence so far that austerity measures are being implemented. In fact, the opposite seems to be the case. Since the announcement of austerity measures, the following “austerity measures” have been implemented : The President has Chartered an aircraft to attend the UN general assembly , the President led an unprecedented high delegation to China for the FOCAC conference, the President created a number of districts in North Western and Eastern provinces, the government bought some expensive Toyota cars for permanent secretaries and recently, the Minister of finance announced increases salaries and allowances for the President and constitutional office bearers’ and the list reckless expenditure amidst austerity goes on and on.

There is no doubt that the Zambian economy is on a slippery slope. The excessive and fast rate of debt contraction, excessive government expenditure resulting in the ballooning fiscal deficit, the low foreign currency reserves, the lack of political will to deal with corruption, the absence of a deal with the International Monetary Fund, have all finally expressed themselves in the most important economic indicator in the Zambian economy that will affect every Zambian in terms of rising cost of living, which is the exchange rate. The fall in the value of the kwacha to K12 to a dollar, the lowest since 2015 and if it continues will not choose whether you are PF or not.

The last straw to kick start the fall in the kwacha was the freezing of donor aid by the United Kingdom, Sweden, Finland and Ireland as a result of the Social Cash transfer Corruption scandal. The effect of the corruption scandal on the kwacha was confirmed by Economics Association of Zambia President, President Lubinda Haabazoka, in an interview with the Mast newspaper.

“The information about withholding of aid, corruption…those has affected the value of the Zambian kwacha. Corruption really has serious negative implications on the economy of the country, especially in Zambia where most of the major projects are being done by donors,” he said. “The Euro Bond remains one of the most important barometers to measuring the performance of the Zambian economy. If yields are high, it sends a picture that there is less confidence by investors in the Zambian economy. So potential investors will hold their investment and those who are already here will take a conservative approach by withholding their investments. As you know that for the kwacha to be strong, you need foreign exchange.”

The Zambian economy is not in a good state at all and the gains of 2017 are reversing and the numbers do not lie. The following are some of the inconvenient facts about our economy which cannot be ignored:

• Whilst the kwacha had reached as low as K8.8 to a dollar in 2017 but it is at K12,
• The economic growth was 4.1% in 2017 but the World bank projects 3.3% for 2018
• Inflation is 7.8% from a low of 6.1% and trending upwards
• Zambia’s foreign exchange reserves stood at US1.867 billion as of February 2018 when the last announcement was done compared to US$2.262 in February 2017.They could be much lower today thus the depreciation in the kwacha
• Treasury bills and government bonds are undersubscribed now but were oversubscribed with foreigners pouring in foreign exchange in 2017
• Zambian Eurobonds were once best performing but now they are the worst performing and are 32% lower than they were in January with investors expected return of 18%.
• Wage bill as percentage of revenue is above 50%
• Debt servicing costs as percentage of revenue about 25%
• Budget deficit for half year to june,2018 K5billion Kwacha which is 7.6% of budget and above target
• Aggregate public debt $15.9billion or 61% of GDP
• Commercial Bank lending rates are above 25%

The government should stop blaming the opposition and unpatriotic Zambians for the current fall in the kwacha and the economic mess the country is back in which may be worse than 2015. This writer and others did provide objective advice and started warning about what is happening today way back in 2015 but the government and the country’s Chief Executive never listened and were not interested but are more focused on politics and only get concerned with economy if it poses a risk to their hold on power which is rather sad.

The Zambian government is its worst enemy. If one was to use tennis and football terms respectively, they make too many unforced errors and score too many own goals. They have a knee jerk and fire fighting management style in running the economy. They refuse to anticipate events by engaging in risk management strategies. They seem to have street mentality of “FIKASOVA” (things will sort themselves out); only react to events when they happen rather than foresee and forestall them.

The questions to the government and its followers who are blaming critics for the fall in the kwacha are as follows: Is it the opposition and others who did not act for four months on the Social Cash Transfer corruption scandal leading to the suspension of donor fund, which is the single most important trigger of the run on the kwacha? Is it opponents who borrowed with reckless abandon from China, domestic market, suppliers etc. resulting in IMF suspending bail out talks? Is the government critics that have delayed dialogue with the opposition which was meant to improve the political climate in Zambia and in turn influence rating agencies and investor confidence?

I personally believe that the economy of Zambia can be turnaround and over a million jobs created within two years if there was political will to take tough decisions to implement some of the practical suggestions this writer and others have made as well as what is in government documents prepared by bureaucrats. The strategies should be divided into short, medium and short term. President Lungu needs to press a reset button and seriously consider reconstituting his team before it is too late.

The writer is a Chartered Accountant by profession and a Private Sector Development expert. He is an independent commentator/analyst. He has lived in England, South Africa and Botswana for over 25 years.