How to get the economy productive again

By Billy Katongo Litana

Being a professional in finance and economics, the current problems faced by our economy and kwacha are as a result of underlying defects that need serious attention to improve economic productivity and arrest the Kwacha decline. I believe the following needs to be looked into,

1. The financial services sector needs to be supported by our government
2. We need to rebuild investor confidence
3. Other sectors of the economy need to be productive
4. We need to end corruption

The Financial services Sector and its role in the economy

Before I start, I must explain one important principle of how the financial sector creates money. The Money multiplier multiple states that, for every deposit into a bank account, the increase in money circulation will be the amount of Money deposited in the bank multiplied by money multiplier. The Money multiplier is calculated as 1 divided by the reserve requirement. In Zambia the reserve requirement currently stands at 9% thus giving a money multiplier for a Zambian bank that is 11. What this means is that if USD5 million was to be deposited in a Zambian bank that bank can potentially create 55 million dollars through lending and relending of deposits.

The principle explained above is how banks around the world create money.

What tends to happen when our country borrows is that the amounts borrowed do not make their way into a local Zambian bank. Instead the funds will be paid directly from the host bank account to the contractor bank account in the same country. Most times the contractor will only maintain local Zambian bank account to pay salaries, which is a small amount since most of the people they employ will have basic skills and thus low wages.

Take a hypothetical loan of USD 300 million borrowed for roads from an Indian bank. The loan agreement will most probably state that an Indian Company be contracted to build the road. This bank will then make payments to the Sum of 300 million dollars from its Indian bank account to the contractor’s Indian bank account without these funds ever reaching Zambia. At a money multiplier ratio of 11 it means our economy has missed creating 3.3 billion dollars for the Zambian economy but the very same economy will still be required to make payments of 300 million dollars to the Indian bank.

Multinational Corporations and their role in African economies

Moving on to the current state of Multinational Corporations and financing structures, Some miners in this country have set up foreign entities whose purpose is to Manage funds for the miner. The argument for this is that the special purpose vehicle managing the funds is better able to ask for reduced rates from its bankers and also better able to allocate funds to areas of the corporation that need it. Unfortunately this is disastrous for African countries like Zambia because again this money does not enter the local financial system. Some Miners in Zambia have been known to sit of cash of about a billion dollars. Again using the money multiplier ratio 1 billion put in a Zambian bank will translate to 11 billion dollars of Money created. 11 billion dollars is equivalent to the money our government owes the world in debt.

However it’s worth noting that us a country we have given these Multinationals an extra reason to not bank their Money here. A Multinational will want assurances that its assets will not be nationalised as is the case with KCM and that the court system will protect its legitimate right to Zambian assets something I feel our courts are not doing very well. The implication of this is a multinational that does not trust our country and prefers to keep its money abroad just in case its physical assets are ceased by the government.

Inconsistent and high taxes also hurt Multinationals and the country at large. A tax authority that is very unforgiving and slaps insurmountable penalties on a vague law hurts the country. Zambia must strive to be an investment heaven. To attract foreign Money we need a tax system that is easy to understand and follow and one where the tax authority and the multinational corporation can talk to each other respectfully and resolve their matters amicably. The current situation where some multinationals are claiming they are owed millions in tax refunds means there is a breakdown in the tax administration system. No one would want to invest in a country that does not honour its tax obligations.

Improving Productivity in other sectors – Agriculture and Energy

Sectors like Agriculture need to be enhanced, to be honest I don’t see why we don’t make any fertiliser in Zambia. I don’t see why we have not seriously thought about recapitalising Nitrogen Chemicals of Zambia. This Company can be used to produce fertiliser not just for Zambia but for the entire region. This would lower the cost of food in Zambia and enable us produce food for export. Agriculture would help support rural communities with decent livelihoods since it requires very little education to be a farmer

Another sectors that can be productive is Petroleum and Oil. Angola produces oil and Indeni oil refinery is almost dead. Refurbishing Indeni can bring down the cost of fuel as well as give it capacity to supply Malawi Zimbabwe and other regional countries. Indeni can lower the cost of fuel and save us on foreign exchange used to purchase fuels. A lower fuel cost can even support the electricity production sector since some of our power is from thermal power stations. Lower fuel costs will also support the cost of doing business and lower inflation in Zambia as fuel is a cost in almost every business

Ending corruption in Zambia

Corruption in Zambia both in and outside of government has reached alarming levels. Our police service and other corruption fighting wings are no longer feared by any would be Law breakers. I have heard countless stories of the police being bribed and how cases are decided based on who can pay the most. Almost everyone reading this article, am sure would have bribed a police officer at one time or another, especially police officers in the traffic section.

While we speak of corruption it’s important to acknowledge that the police are not corrupt by themselves and that as Zambians we too engage in corruption when it most fits us. Rather than pay a fine of K950 one would rather give the cop a bribe of K100 so we get on with our business. The police knowing this then actively look for law breakers not because they want to uphold the law but because they know that as a society we would rather pay them than fearlessly face the law. This type of thinking then spreads to other government departments rendering an entire government and its people corrupt. For example, why wait in line for an NRC when one can pay K50 to skip the line and get it instantly? Why pay duty when one can bribe a tax officer? What then happens is that you have a government that cannot deliver a service because the officer entrusted to deliver services will first want to see who can bribe them. Corruption of this magnitude puts off investors and also destroys local businesses.

What can be done?

So what must be done to help our economy and our Kwacha?

1. We need to put an end to borrowing where our financial system is not actively involved in these transactions. Where a lending country refuses to let us borrow and inject into our financial system then such a borrowing must only be for purchase of equipment and education on how to use and maintain that equipment. What this does is that while the money has not come here as a country we would have learnt how to build a road and also how to operate the machinery.
2. Multinationals must be given tax incentives to keep their Money in Zambian banks. Again, if 1 billion was entrusted to Zambia that would translate to 11 billion dollars for the economy since this money will be learnt over and over again.to do this a penalty needs to be charged in the form of tax to those banks that keep our money in offshore accounts. For those that keep our money in our banks a lower tax rate must be given.
3. Taxes as a whole need to be lowered for everyone and government needs to spend its annual budgets more carefully. A lower tax rate for Zambian Companies will encourage these companies to reinvest locally, thus producing more Jobs. The more investments the company makes, the larger its profits and the more money government can yield through a lower tax rate. Also a lower personal income tax will mean individuals will spend more thus boosting Company profits and government revenue through Company tax.
4. We need to respect our own rule of law. The KCM case is being watched by the world. How we decided the last presidential elections says a lot about our current courts. If Investors Judge that we have a weak rule of law then they would rather consider investing elsewhere because their rights to property will not be respected if there was a political interest. I tell my friends that if ever I broke a law and I was given a choice to be tried by a Zambian Judge or a white American Judge I would choose the latter despite the racist background of the American Justice system. This is because if you look at George Floyd’s death, you can see that the American Justice system has tried to investigate what happened and has tried to remedy the issue. On the other hand to this day we still don’t know what happened to Vespers.
5. We need to be serious about investing in other sectors of the economy like agriculture and energy. This is where using our reserves might come in handy. If we have positive return projects then why not use a little of our reserves. Is this not the reason we keep reserves in the first place? For situations like ours? Revamping these sectors will not require no more than 300 million dollars to make an impact.

The Author is a professional consultant with vast experience in Accounting and financial management. He is currently a candidate for the CFA exams known to be one of the toughest exams in finance.