Background and Context
Public Debt in Zambia is a growing problem, perhaps the most pressing economic challenge that the country faces. Domestic debt currently stands at K61.9 billion and external debt at $12 billion, and these figures continue to increase. Years of borrowing on short-term plans with little return on investment has left Zambia with little means to repay its debts – in 2017 interest payments alone cost Zambia K9.8 billion.
High debt weakens the Zambian economy, slowing growth. As money is spent on debt servicing payments, investment in other areas such as skills, research and development and infrastructure projects fall. High debt also limits the Government’s ability to respond to economic shocks such as a fall in the copper price, failing rains or currency depreciation.
Without urgent action from the government to address the high debt problem, the Zambian economy is at risk of toppling into an economic crisis; inflation could increase as the kwacha depreciates, businesses turnover and profits will fall, and jobs will be lost as new wealth is created at a slower rate. However, with a New Dawn Government, this inevitable decline has been halted for the time being.
This debt crisis directly and significantly affects Zambia’s businesses, large and small. The business community are a key stakeholder in the debt crisis, and an influential voice in the debate.
Five impacts on business are particularly worrying:
- Arrears and unpaid bills: With more and more money being channeled to debt servicing, the Government is short of cash, which leads to mounting arrears. The Ministry of Finance has confirmed arrears had risen to 20.9bn Kwacha. The impact of delayed payments on the private sector can be critical; local companies’ cash flows are hit hard, which can lead to delayed wage payments and postponed investments, reducing the private sector’s contribution to GDP growth.
- Reduced access to credit: Companies struggle to access credit domestically as high levels of domestic borrowing by the Government reduces access to finance on the domestic market. New lending to businesses between January and March 2018 witnessed a significant decline of 3.5 percent – this stands in contrast to the growth in lending of 8.3 percent that was posted during the last quarter of 2017. This contraction presents a serious threat to private sector-led growth: smaller businesses will find it increasingly hard to obtain the finance they need to expand, or even to cover themselves during periods of negative cash flow, while larger businesses find it harder to raise funds for major investment projects.
- Falling investor confidence: External investment will also reduce, as Zambia’s high total debt stock impacts investor confidence, leading to higher interest rates on the international market. Investors drive up interest rates in return for greater risk of default, making the components of economic expansion, such as infrastructure, business growth and business loans, more expensive.
- Pressure to make redundancies: As the economy contracts and access to finance narrows, companies’ risk being forced to make reductions. A weak economy combined with a credit squeeze means less demand for company’s services and products. Ultimately this means many companies risk being forced to downsize and lay off workers. This can include workers; which companies have invested time and money skilling up.
- Pro-business public spending cut: Government funding which is intended to support the private sector and economic growth will be hit as it struggles to meet high interest payments. Government now spends around 20% of its revenue on repaying debt. Once you also account for spending on salaries, this leave a shrinking pot of funding for other areas. This includes spending which can help boost productivity and growth and help business – for example training, research and development as well as physical infrastructure.
The above factors were also present in the case of Ghana in 2015. The transformation of Ghana’s economy and society was anchored on the Ghana Shared Growth and Development Agenda (GSGDA) II, 2014-2017 – Vol I: Policy Framework. This was the platform for development. It provided a consistent set of policy objectives and strategies to guide the preparation and implementation of medium-term and annual development plans and budgets at sector and district levels. It also served as a platform for donor coordination (something that Zambia has lost in the last ten years of PF rule). Consequently, the medium-term priority policies were anchored in the following thematic areas:
- Ensuring and sustaining macroeconomic stability,
- Enhancing the competitiveness of Ghana’s private sector
- Accelerated agriculture modernization and sustainable natural resource management
- Oil and gas development
- Infrastructure and human settlements development
- Human Development, Productivity and Employment
- Transparent, Responsive and Accountable Governance
Ghana’s economy was in trouble, hobbled by widening current account and budget deficits, rampant inflation, and a depreciating currency. Credit dried up as interest rates rose and banks’ bad loans piled up. At the root of Ghana’s woes was out-of-control government spending, largely to pay salaries of an overgrown civil service.
The program
In early 2015, Ghana turned to the IMF for a $918 million loan to help stabilize the economy. IMF advisors, working with the Ghanaian government, developed a three-part program:
- Restore debt sustainability. The government limited hiring and wage increases and eliminated subsidies for utilities and petroleum products. To raise revenue, it cracked down on tax evasion and rationalized exemptions. New revenue sources included a tax on luxury cars and increased taxes on high earners. To put Ghana’s finances on a sounder footing, the new Public Financial Management Act called for improved accounting standards, procedures, and technology.
- Strengthen monetary policy. The authorities agreed to gradually end central bank financing of the budget deficit—a major source of inflation—and to fortify the inflation-targeting regime.
- Clean up the banking system. An asset quality review revealed significant under-capitalization. Some banks were recapitalized, and the Bank of Ghana used its newly enhanced authority to wind down insolvent lenders. The central bank developed regulations to ensure that banks meet sound underwriting and credit evaluation standards. It also paid back insolvent microfinance institutions’ depositors.
The outcome
Ghana’s economy is on the mend. The trade and budget deficits are narrowing. The pace of economic growth rose to above 8 percent in 2019 onwards from 2.2 percent in 2015. The inflation rate fell to 8 percent from almost 19 percent. Cuts to wasteful spending made room for much needed social services, such as free secondary education. For Ghana’s 28 million people, it all adds up to higher incomes, better job opportunities, and more purchasing power.
How was it done – Some key elements
- The government of Ghana prepared a Shared Growth and Development Plan as a platform for policy reforms and engaging with the IMF and other donors.
- Allowed full public transparency and published the Debt Sustainability Analysis done by the IMF. This enabled the Government to generate strong public support for austerity measures.
- They also participated in “Peer to Peer” exchanges facilitated by the IMF with other countries like Mauritius, Cape Verde and Seychelles to understand what it takes to reform successfully
- An ambitious Fiscal Consolidation anchored on enhanced revenue collection was implemented. On the revenue side, measures included: the imposition of Special Petroleum Tax of 17.5 percent (implemented in November 2014) to bring Ghana’s petroleum taxes more in line with international practice; and the implementation of the VAT on fee-based financial and of a 5 percent flat rate on real estate (implemented in January 2015) to broaden the tax base.
- On the expenditure side Government agreed with the Unions on a nominal wage increase of 10% and thereafter agreed a 2-year wage freeze. Strict limits on net hiring in the public sector were imposed (which were frozen except in education and health). Moreover, subsidies for utilities and petroleum products were fully eliminated through strict implementation of tariff and price adjustment mechanisms.
- The government used part of the resulting fiscal space to safeguard social and other priority spending under the program, including expanding the targeted social safety nets—such as the flagship cash transfer program (Livelihood Empowerment Against Poverty (LEAP)) benefitting the poorest households and which doubled its coverage to 150,000 households in 2015—and protecting basic health care coverage.
- The authorities also cleared the outstanding stock of arrears over the three-year period through cash payments and securitization of arrears to SOEs with marketable financial instruments including liquidating arrears owed to Micro-Finance institutions. About a quarter of outstanding arrears were repaid in 2015. Note that outstanding arrears to suppliers were audited first.
- To increase control over budget execution and avoid the accumulation of new arrears, the government (i) only recognized purchases generated by the Ghana Integrated Financial Management System (GIFMIS) as valid commitments of Government and (ii) extended the GIFMIS system to revenue and expenditure transactions of Internally Generated Funds (IGFs) to progressively enhance budget comprehensiveness.
Recommendations Moving Forward for Zambia
- Convene Coordinating Debt Task team led by the Secretary to the Treasury
The first step would be to convene a small team of no more than seven to nine people to begin the work of putting together a debt management strategy and negotiating framework using the Medium-Term Framework approved by Cabinet. This task team should comprise eminent Zambian technocrats that have the experience and knowledge. For instance, Dr. Caleb Fundanga, Prof. Oliver Saasa, representative from ZIPAR, representative from ZICA and the Bankers Association. This task team would report to the Minister of Finance that would then report to you. The task team should also include as Observers your Economic and Legal Advisors.
- A private roundtable session with the President, Ministry of Finance, Bank of Zambia and key senior Government officials to discuss possible pro-business policy solutions for the 2021 Budget
This roundtable should occur once the private sector is properly aligned in terms of the key issues, they would want the Government to act upon. At this stage those business leaders with strong networks and relationships with Government would need to be in frontline in terms of moving the discussions forward. All the main sector business associations and professional associations should be involved in this roundtable discussion.
- We must also stop all new projects until a full project audit and expenditure review is undertaken.
- Renegotiate all Government infrastructure contracts, loans from China and ensure that Zambia gets value for money.
- In addition, Government needs to do the following to grow the economy and create more jobs:
- Immediately dismantle domestic arrears owed to local Zambian contractors and suppliers of goods and services which will immediately bring liquidity into the economy. Government can issue a domestic bond specifically to pay of these arrears.
- Revert RDA to Ministry of Infrastructure and allow it to operate devoid of political interference.
- Fully implement PPP legislation to allow private finance in key infrastructure projects and ensure that PPP projects are assessed independently of political influence and patronage.
- Initiate a mass housing project through IDC under a PPP using labour intensive technology so as create jobs for Zambians.
- Maintain wage freeze and rationalise the civil service to make it more performance oriented.
- Implement a “National Agricultural Development Initiative” that will provide low cost financing for emergent farmers to grow high-value export crops.
- Facilitate under PPP arrangements the establishment of Cross Border Trade Zones at all the key cross border posts namely; Kasumbalesa, Nakonde, Kipushi, Mwami, Kazungula and Chirundu.
- More importantly we need to enact a flat tax system across all sectors which would reduce admin costs, improve compliance and enhance the business environment. Government must stop borrowing for consumption. Furthermore, Government must get out of doing business and allow the private sector to drive growth. Zambia can do better but we need a focused Government with competent people allowed to work without undue political influence.
Others have done it
Mr. President, the experience of other countries suggests that Zambia’s ambition is achievable. Between 1990 and 2013, about 40 countries across the world have achieved average growth in real per capita GDP of 5 percent or more (at purchasing power parity).
International experience suggests that Zambia can be even more ambitious and lift its growth rate to 7 percent in the medium term, driven by domestic reforms and foreign investment–generated exports. Although not all countries succeeded in all reforms, countries that Zambia could emulate include India, Guyana, Vietnam, and Sri Lanka. African “lion” emerging economies, such as Cape Verde, Ghana, Mauritius, and Uganda, have also begun the journey already traveled by Asian “tiger” economies to move from low-income to middle-income emerging market status. With resolve, discipline, and a strong team it can be done.
Submitted in National Interest
I don’t know when Zambians’ infatuation with Ghana will end. Ghana is no economic model for Zambia. Poverty and unemployment are widespread, local government doesn’t work, litter is everywhere.
The author is not saying we do it exactly like Ghana but giving it as an example. In his recommendation, he has varied steps to follow and this is sound. Anyone with alternative can also write. This is as it should be. Thank Trevor..
Good thoughts Trevor. I salute you. Sound economic theory ( any field of study for that matter) grounded in research followed up by disciplined execution does produce outstanding results. Our problem though are the short term 5 year plans anchored on the election cycle rather than long term plans. Add to it the thieving & cadreism culture where some former ministers could publicly mock late KK’s children for not having stolen during their father’s 27 year rule. Ooh it is depressing to say the least! I hope Dr Musokotwane will read your article.
Good article, thanks Trevor. I believe you could add strengthening of law enforcement as required condition for better economic growth.
Yes agree with the view that the five year political window if accompanied with little commitment by policy drivers can compel some leaders to focus on collecting wealth for themselves such that by the time they think of getting back to the people the five year term is already over. A progressive two term window can leave some marks of positive national development, though for Africa this cannot happen without a smear of theft by some unpatriotic Zambians.
Where are Bally’s economical skills if all he’s doing is to call whites to fix it for him?. Boss life huhhh?
The problem is that we talk ceaselessly. There’s only 1 solution to Zambia’s many problems and that’s production. Let me put it this way: Suppose I and KZ set out to the fields with our hoes. When we get there, I begin to cultivate but KZ stands under the shade and begins to talk about inflation, exchange rate, blah,blah,blah. At the end of it all I’ll harvest 20 bags of maize while he’ll have nothing despite being good at propounding his ideas. He’ll later begin to scrounge for food from my family! This is the point. Tell our people to be productive and lead by example. There’s so much idleness in Zambia. All what Trevor has discussed is useless for as long as we’re not productive. Not even an IMF program nor FDI can cure our owes. It’s because of that our currency is vulnerable…
Most of our experts only know how to make money from govt tenders, they can’t compete on the financial markets. Even our banks just lend money to GRZ or civil servants or those working in parastatals. How did Bally make his dough? Possibly through inflated fees and inside trading. Would have he made that money on the open market? I doubt. And I don’t like it when these “experts” refer to foreign entities to buttress their point. Our people don’t understand what happened in Ghana. A majority of productive Zambians aren’t looking for Ghanaian models to solve their problems. The moment our people begin to look into theirselves for solutions is the time Zambia will really move forward. For now everyone is psyched to believe that GRZ has a solution to all their problems when in fact not…
I don’t know maybe I do not understand what the Author is putting forward but a lot of the recommendations in the article are already being implemented by the government such as debt renegotiations. I pick up from the Author that he probably would like to be personally involved in the process. He has given worst case scenario only of what could happen while knowing full well that in Economics we use three scenarios for any cost benefit analysis…ceteris paribus. I agree with the theory but not not the applied economics side of the article.
How does Economist Trevor Simumba compare the Zambian situation to that of Ghana. Zambia’s economy is anchored on mining activities whilst that of Ghana is base on Agriculture, strong trading and to some extent now petroleum and gold mining. In Zambia for a long time successive govts have failed to find a better of maximizing tax collection from mining houses. Zambia is supposed to formulate its own home grown solutions to solve our economic problems if at all we are to achieve some positive growth.
Zambia and Ghana are somewhat in the same boat. Only those in self denial can refute that. The point raised by Trevor is that of picking the parts that have somewhat worked for Ghana. The litter everywhere, poverty, joblessness etc that blogger # 1. above refers to are all present in excess in Zambia. Unless this blogger lives outside of Zambia.
Ghana also pursued a very aggressive policy of banning the exports of raw materials…………
Insisting on adding value on their raw materials like coaco and aluminium……
Choolwe Hantuba @ 9, garbage everywhere, poverty and unemployment widespread; aren’t these the obvious signs of failure before u even look at any economic data and economic crimes of the political elites? Trevor Simumba wishes the current government all the best and so do I.
The key is issue in stemming debt is to understand the drivers and economic cycle of the. Country The performance and investments it has made to achieve growth The first thing is to achieve debt sustainability and bring elevated levels below say 60% or 80% of GDP it’s a long-term strategy that should. Be macro prudentially managed with investments. And growth of the sectors Paramount Sometimes you achieve better results or multipliers in debt management by seeing the impact on Budget measures for each revenues savings investments or spending methods in trying restructure it should be well modelled to achieve savings and economies Debt Fixing should result in savings and growth it should be a medium to long-term excise but you begin with controll ing the levels. and create…
Economies of growth you can set the longterm say 2030. and. Short-term 2026. to reduce debt levels by 80% to 60% respectively I like the word or term called sequestration You sequence your debt and fit them in your budgets and reduce the structure of your budgetary FInancing methods but again truth is it can not be zero rated you control then stem and begin to restructure having grown and performed the economy in-house Manage the budgetary process well for 2022 because that is a source of risk if it fails then it will spiral
Yes we have a lot of lazy & loquacious people in Zambia starting with politicians and cadres. Just a few days ago cadres were baying for the blood of information minister Cushi Kasanda because she has taken a sober/ different approach from Dora & the likes of Tayali. But let’s no trivialise Trevor’s school of thought. The few hardworking Zambian entrepreneurs will not operate in a vacuum. They need macroeconomic stability for them to plan and thrive. Let me pick one measurement, the exchange rate to the USD. In 2012 after rebasing it was 4.6, In 2015 it shot to 8 and then 13. In 2021 it shot to 22.5 and is now 16.5. Imagine that you were a business person who got a USD loan when the kwacha was 4.6 to the USD. How much kwacha do you now need to generate in order to service that USD loan?…
It’s like you look at all your budgets and begin to see to evaluate the reasons. For the budget deficits or balance arising from your revenue measures and expenditures including your gross financing methods then projecting to see how you will control limit and reduce What is important is to seek economic growth .
How much kwacha do you now need to generate in order to service that USD loan? On the other hand other business people have lost through the post election Kwacha appreciation. 27% wiped out in dollars terms for any money held in kwacha accounts. These wild flactuations are bad for business. I have just addressed one of many facets that Trevor touched on. Let’s not reduce Trevor’s sound arguments to banter and idioms of hoes in a maize field. Only late Sata was able to get away with such. Make economic and policy arguments against Trevor punch for punch and we
will evaluate. DON’T GIVE US BANTER AND IDIOMS. Keep it up Trevor.
But wht do u do if u govern a country where voters want a policy to be pronounced today and results to show the following month? It’s sad that the same way they quickly get high on their drugs is the same way they want government policy to work.
The biggest mistake PF did was not utilising the whole copper mining cycle to Zambians advantage…………
Most of our copper mines have at least a 20 year life , materials for the mines have a 20 year demand phase……….
GRZ should have re established all supply industries for the mines………
Only heavy machinery should be getting imported……..
These industries could then turn to the export market and the local domestic markets……….
The South Africans and Chinese love Zambians, because you guarantee jobs for them in their countries
It’s a dynamic projection because you look at the real options presented in the debt and debt restructuring it should not blind or close you to see and think about the real potential there is in growing the economy YOu focus much on the real options because you have to work as you restructure to perform the economy already certain funding methods in Infrastructure PPPs models will add to existing because gov debt is by definition gov guarantees ppp ppi parastatals and now those local gov so to control it look at. It like that it could be commercial or other that is why you need to spend more time on growth and investments in the sectors of our economy
This is what a constructive critism or checks and balances should look like, never seen before from our opposition. Trevor Simumba, WELL DONE !!
From the writing, I can sense that TREVOR might have been involved in the GHANA story, as a consultant. Therefore, the message here to our Minister of Finance is that, there are some ZAMBIAN Economists out there, who are eagerly waiting to support the New Dawn to implement effective policies learning from experiences of e.g Ghana. To those doubting Thomases, who kept saying there were no countries that has prospered on IMF Packages, here is an example – Ghana. Again it’s not about “Copy and Paste” from Ghanian Model, but rather we can pick out some valuable LESSONS LEARNT, some of which Trevor has outlined. And they sound reasonable.
@ Nemwine
Why reduce this contribution to just “….Ghana is no economic model for Zambia……., litter is everywhere.” Are the following economical results, not good enough?
Quoted from Trevor:
– The trade and budget deficits are narrowing.
– The pace of economic growth rose to above 8 percent in 2019 onwards from 2.2 percent in 2015.
– The inflation rate fell to 8 percent from almost 19 percent.
– Cuts to wasteful spending made room for much needed social services, such as free secondary education
“At the root of Ghana’s woes was out-of-control government spending, largely to pay salaries of an overgrown civil service.”
That’s the standard neoliberal narrative of how government is supposed to be bad. I would like to see the numbers on that. Also, what other decisions were made regarding taxation, mine ownership, etc.
Its always educational to hear from Trevor highly respected Economist who has worked in West Africa and is go to expert the international media call upon for updates.
Trevor Maliwanda Simumba
1. Good points from you, as they all interconnected together . However, if there is anyone that should be bringing big investments in Zambia it’s you {Trevor} . You understand International Business and its Modus Operandi. So join the Zion Train and start creating wealth. The bigger part of the equation is that – the answers we are looking for are inward and not outside. The bedrock of every powerful economy is the private sector.
2. Management simply means taking care of the course of your direction and reaching your potential. So we need to change and manage our Mindsets. The mind is a source of everything that has been ever created. We are creations and a source of creation with limitless potential.
Eighty Percent (80%) of success in life happens when you turn up. It means, if you have a dream, aspirations and ambitions, you must make a decision to turn up or take actions. Else talk becomes cheap. We need wealth creation in Zambia to – Fund Job Creations, Research & Development and pay internal and external debt.
Tarino Orange @ 24
Also known as JAY JAY or Jagga…. fimo fimo
This is how an economist thinks, just like Trevor Simumba.
Not a fake person like you who calls yourself an economist. , Always angry, bullying and telling people to get off from Lusakatimes. And not forgetting crying about how your uncle was not given a job by HH. ……………
INDEPENDENT OBSERVER
I agree, we need to be innovative and believe in ourselves. I am Civil Engineer. After working in Botswana & South Africa for 17 years, I got released from my company because of downsizing. I was so scared to start my own business. After 2 years of contemplating one day, I just thought – What the Heck. Let me give it a try. In the begging it was tricky, and I made mistakes. To cut the short story, I ended up partnering 50:50 with a South African colleague who understands the Business Operations, Contracts, Raising Funds From Banks, while I do a lot of project implementations. It’s the best thing that has happened to my life & family. We are in Angola doing big projects and we have 25 people in our company. We have employed 9 University Graduates and the future…
Blah Blah, Blah says…… INDEPENDENT OBSERVER
The f*ckin *sshole Mr Investment Banker, who just got lucky by investing $30,000 and made $50m from bitcoin the biggest scam in the world.
Please spare us the noise about creating wealth.
Stay there and keeping paying taxes to Presiddnt Joe Biden and the Queen of England, that old tart who refuses to hand the monarchy to the son after being a queen for 70yrs.
There is one variable that is important in economic growth that enables to acheive revenues in exports across the economic sectors is Investments in sectors and having strategies that will grow and support revenues measures restructuring without investments in sectors to rebalance the terms of trade favourably will not tied much Sectors like mining fishing and motor industries Ghana have had transformative local strategies in the sectors it imported more like motor to grow and export more so without investments in the sectors you still not have created capacity and revenues The export strategy is still weak and the interaction between imports and exports growth long-term is a good pointer
The assumption is that the debt profile is reported in real-time here and is measurable for the central gov and local gov budgetary control environments the time lag should as in the best practice you may have say some reduction in the debt held because the activities in the treasury bills and bond buying programme but without any meaning growth in economies the debt will elevated in the longterm without any meaningful restructure on amounts held and maturity Then with decentralization comes with the need to gebnotionally control those CDF and council budgets it should be like construction and unplanned projects it must be within smart city planning and implementation and over a period those must be self financing to reduce the upside pressure on gov debt profile
There is no other alternatives but to improve the economic sectors improve the leading diffusion indexs continue with lazard and other medium term to long-term macro pruential debt management strategies but critical enough now is to see this budget 2022perform on its measures by now we should be clearly see the diffusion leading indicators on the capital inventory and employments because that is what is important not just refinancing methods without working the economy okay gone