Sunday, June 23, 2024

About Economic Management: The DOs and DON’Ts

Share

ABOUT ECONOMIC MANAGEMENT: THE DOs AND DON’Ts

By Sean Tembo – PeP President

1. Let no one cheat you, properly managing an economy is a very complex task. That is because economic variables tend to be interrelated, and the nature and strength of those relationships tend to vary. Some variables are directly related, others are inversely related with different correlations. For instance, in order to fight inflation, a textbook will tell you that you need to reduce the money supply in the economy, but that may bring about other unintended consequences such as economic stagnation as we are seeing today under the New Dawn.

2. My considered view is that the New Dawn administration has so far repeated all the economic errors of the PF administration and have even added additional errors on top; all within a period of less than 15 months. Having admitted that running an economy is a complex undertaking, as Liz Truss and Kwesi Kwarteng would testify, l believe there are certain basic economic variables that must always be pursued no matter the circumstances, and certain basic economic parameters that must always be in place no matter the circumstances. For instance, l believe that no other economy variable is as important as growth. Therefore, l strongly disagreed with the New Dawn when they decided to restrict the money supply thereby undermining economic growth, all because they wanted to fight inflation. The bottom line is that people cannot eat low inflation. Similarly, l have always believed that some of the basic economic parameters that should be in place in order for economic growth to take place include a stable exchange rate, stable fuel prices, and a stable electricity supply.

3. When l look at the economic performance of the PF regime, l always believe that they lost their handle on managing the economy in 2015 when we experienced unprecedented loadshedding and an unprecedented fluctuation in the exchange rate. I remember one day in mid September 2015 when the forex market momentarily melted and the Kwacha exchange rate fluctuated from as low as K11 to as high as K15, all in a single day. However, despite not having a handle on loadsheding and the exchange rate, the PF regime was able to maintain some stability on fuel prices in most of their tenure.

4. Fast forward to this day under the New Dawn administration, we have seen that there is no stability in fuel prices, and of late no stability in the exchange rate and as announced by the Minister of Energy in Parliament yesterday, there will soon be no stability in electricity supply as loadsheding is coming. In other words, the New Dawn have repeated two of the economic sins that the PF committed in 2015, but have also added two other economic sins which are unstable fuel prices and reduced money supply in the economy in the quest to fight inflation at the expense of economic growth.

5. You see, an economy cannot grow if there is no stability in key economic parameters. Here, the emphasis is stability as opposed to either an upward trend or downward trend. For purposes of economic growth, you are better off having the fuel price fixed at K25 for two to three years than having it fluctuate from K20 to K28 within 3 months. Similarly, you are better of with having the exchange rate stable at K18 for two to three years than having it fluctuate from K15 to K18 within a period of two months. The reason stability of economic parameters is a key ingredient for economic growth is because it allows economic entities to plan and make decisions. When economic entities are not able to plan and make economic decisions, they will adopt a wait and see approach and that brings about economic stagnation. Therefore, any economic manager who believes that it is okay to have key parameters of the economy such as fuel prices, fluctuating on a monthly basis, lacks a basic understanding of how an economy functions and deserves to belong to the economic dustbin of Liz Truss and Kwasi Kwarteng.

6. My advice to the New Dawn administration is fourfold. Firstly, abandon these monthly fuel price reviews as they introduce a major uncertainty in the economy, given the fact that fuel is a major economic input. Make use of the Fuel Stabilization Fund which was created by the MMD regime way back in 2007, to smoothen fluctuations in world oil prices and endeavor to only revise fuel prices once a year. If you can make it once in two years, even better. In order for the Fuel Stabilization Fund to work, you need to be disciplined. When the Fund records a surplus, do not divert those funds to somewhere else, and when the Fund records a deficit, do not be shy to subsidize it. But whatever the case, please create stability in the pricing of fuel.

7. My second piece of advice to the New Dawn is that they should take a que from Tanzania in terms of foreign exchange rate management. The Tanzanian Government has maintained the exchange rate of the Tanzanian Shilling at about 200 shillings to the US Dollar for almost 7 years now, and they are reaping the benefits of stability as they are a preferred investment destination for the region, and their economy is poised to overtake Kenya in the next few years. I have always believed that a currency should not depreciate or appreciate by more than 3 percent per annum, for economic entities to be able to plan and make proper economic decisions. For Zambia, our exchange rate has moved from about K15.50 to about K17.50 representing a depreciation of about 13 percent, all within a month!!! You cannot record sound economic growth with such fluctuations in key economic parameters. And you need economic growth for the private sector to create employment and for SMEs to thrive. Right now the economy is stagnant and everyone is complaining.

8. My third piece of advice to the New Dawn administration is that they should abandon the approach of restricting liquidity in the economy as a way of fighting inflation. In as much as inflation needs to be fought, it should not be fought at the expense of economic growth. What good is a low inflation if people are suffering due to lack of employment and lack of business prospects? Therefore, Government should increase liquidity in the economy by doing two things; firstly by beginning to liquidate the huge stock of domestic arrears which currently stands at about K45 billion. You cannot have a small economy like ours and the Government is owing the private sector in excess of K45 billion. It means there will be no money in circulation and that is exactly what people are complaining about today. So Government should begin to pay out the various suppliers that it owes money, so that such money can trickle down to the ground. Secondly, Government should reduce it’s stock of domestic debt through the Treasury Bills and Government bonds, currently standing at about K210 billion. Again for a small economy like ours, when Government borrows K210 billion from the financial markets, it means there is going to be very little money left for the financial markets to lend to the private sector. In other words, the private sector is being crowded out thereby causing economic stagnation.

9. My fourth and final piece of advice to the New Dawn is that they should not allow the planned 6-hour loadsheding to commence, as it will put a final nail in the coffin for our economy, as it did in 2015. If indeed there is a deficit, then it is better to import electricity from other countries rather than introduce loadsheding. Importing electricity might appear to be a cost, but it is actually an investment, because the cost of loadsheding to the economy will be far much higher. Also remember that a shrunk economy due to loadsheding means reduced revenue collection by ZRA. So it is better to spend a few million dollars to import power, than for ZRA to lose hundreds of millions of dollars in tax revenue due to a shrunk economy.

10. But no matter the quantity and quality of advice we give to the New Dawn Government, the million dollar question is whether they are the ones making economic decisions for Zambia, or it is the International Monetary Fund (IMF). The UPND Spokesperson Honorable Cornelius Mweetwa is on record saying that the requirement to revise fuel prices on a monthly basis was one of the IMF conditions for the $1.4 billion loan that the UPND administration recently obtained from the IMF, and to which we were vehemently opposed. As things stand, we cannot tell which of the decisions are birthed by President Hakainde Hichilema and his Cabinet, and which ones are imposed by the IMF. But whatever the case, the Zambian people deserve better given our huge economic potential as a nation. For how long are the people going to suffer?

2 COMMENTS

  1. Long ago when the exchange rate wasn’t an issue, and when 75ngwee would buy a Dollar we were told that our earnings through exports of copper were good. When the decision to auction the Kwacha was made we were told that it was because of reduced earnings as copper production had gone down. Our understanding then was that the value of the Kwacha was based on our production. But now I fail to understand why it fluctuates so much when there’s no major change in our production. Is the value of the Kwacha now determined by sentiments and not production? Last time Kambwili talked a lot of nonsense the Kwacha depreciated! Please make me understand

    2
    1
  2. Just hogwash trash article with contradictions.Economic growth and high inflation can NEVER be friends or roommates as this useless politician is trying to suggest.Also his backhanded praise of PF’s 10yr economic destruction is a cardinal sin.

Comments are closed.

Read more

Local News

Discover more from Lusaka Times-Zambia's Leading Online News Site - LusakaTimes.com

Subscribe now to keep reading and get access to the full archive.

Continue reading