Zambia’s fiscal and monetary policies: where are we going?

Zambia is among many African countries that have been registering economic growth for the past decade. The country’s economy has been growing at an average of 6-7 percentages with inflation getting into single digit in 2011. Mainly this improvement has been attributed to the government’s prudent fiscal and monetary policies. By 2011 Zambia had attained the Middle Income Status with a credit rating of B+. With a stable political environment, the country has also improved on the ratings as a destination for doing business by foreign investors. At the start of 2011 Zambia’s foreign debt stood at around US$500 million and an international reserve of 5 months import cover.

Following the change of government from the MMD to Patriotic Front that occurred in September 2011, a number of changes have also taken place. The PF government has continued with similar economic policies of the MMD. However, having campaigned on a platform of “lower taxes, more jobs and more money in your pockets”, the PF government has in the last three budgets increased the Pay As You Earn (PAYE) tax threshold from K2000 to K3000 thereby “putting more money in the worker’s pockets”. But it is grappling with maintaining fiscal and monetary stability.

Since coming into power, the PF has embarked on massive infrastructure development of roads, hospitals, universities and schools. But these ambitious developments have put a lot of pressure on resources resulting in government resorting to borrowing. Apart from the US $750 million Euro Bond that the country obtained, the government has also borrowed from bilateral and multilateral partners to finance infrastructure development. Within two years of assuming office the PF government has raised Zambia’s external debt to about US$3.1million. This debt represents almost twice the amount that the country accrued between independence in 1964 to around the 1990s.

For the first time in 10 years the country last year registered a budget deficit of 8% against the governments’ projected figure of 4%. Some analysts have cited the massive creation of new districts, high increase in civil servants salaries and large numbers of unbudgeted for bye elections as being responsible for the budget deficit. In the 2013 national budget for instance, only K4 million was set aside for bye elections but over K90 million was used. On the other hand the local currency (Kwacha) has also depreciated to record lows trading around K5.5 to a dollar.

In an effort to address these challenges the PF government has resorted to implementing short term measures such as removing fuel and fertilizer subsidies and introduced a number of controversial Statutory Instruments (SIs). Notable among them were SI 33 banning transacting in foreign currency and SI 55 to monitor inflows, outflows and international transactions. Statutory Instrument 32 was intended to monitor balance of payment while SI 31 was revoked to allow NGOs pay tax on imported goods. Auctioning of emeralds outside the country has also been banned.

But these measures have far reaching implications on policy stability, which is vital in attracting investors. The PF government is risking foreign investors by failing to maintain stable policies.

In its 2013 October Country Report for Zambia the International Monetary Fund (IMF) warned that the country’s medium term growth outlook was uncertain due to significant policy uncertainties. The Breton Group has charged that Zambia’s current fiscal stance is unsustainable and warned that government debt would rise to over 50 percent by 2018. Warning against raising the Personal Income Tax free threshold, the Fund advised government to prioritise preserving the hard won macroeconomic stability, reduction of fiscal deficit and increased international reserves.

“This will require mobilising additional domestic revenue, realigning spending priorities, and creating fiscal space for infrastructure investment, while also maintaining a business environment that encourages job creation” it said.

Finance Minister Alexander Chikwanda is however not bothered by concerns raised by IMF, insisting that government is on the right path in managing the economy. He said that Zambia’s current external debt of $3.1 billion and internal debt of K17 billion is manageable.

“Our external borrowing is only 14.4% of the GDP which is far below the 30% internationally agreed Debt Sustainability Threshold for developing countries. Our internal debt of K17 billion is 15% of GDP which is way below the Debt Sustainability Threshold of 25% of GDP’ said Mr Chikwanda on a ZNBC television programme dubbed Sunday Interview.

The Minister added that the country can still borrow up to $6 billion and $1.2 billion externally and internally respectively without the debt sustainability getting out of hand. But if government will continue to borrow, it simply means that the borrowing will be at higher interests now that the country’s credit ratings have tumbled from B+ to B.

According to the 2014 national budget, the PF government targets seven major policy objectives which includes, creating at least 200,000 decent jobs, achieving real GDP growth of more than 7%, attaining end of year inflation of no more than 6.5%, increase international reserves to over 3 months of  import cover, maintain a fiscally sustainable public external debt, increase domestic revenue to over 21% of GDP while also limiting domestic borrowing to 2.5% of GDP and contain deficit to no more than 6.6% of GDP.

As these economic fundamentals are being targeted, various interest groups and economists however point to a number of sectors that have been or are allegedly being neglected by the PF government.  The Agriculture sector, for instance, has failed to drive the economy with most farmers being frustrated by late delivery of farming inputs and the over dependency on maize. Last year then Agriculture Minister Robert Sichinga apologized in parliament for the late delivery of farming inputs through the Farmer Input Support Programme (FISP). Prices of mealie meal, the country’s staple food, have increased by 100% in the last two years. A 25 Kg bag of breakfast mealie meal now costs at around K75 compared to K35 in September 2011.

Another sector which could contribute to the country’s economic growth is mining. It is generally agreed that Zambia has not been generating enough taxes from mining and in particular copper. Government has acknowledged this fact. While the country is the largest producer of copper in Africa, the mining sector only contributes about 5% to the GDP. But despite calls by various interest groups for the introduction of windfall tax, government has remained adamant. This is contrary to the PF promises during the run up to the 2011 elections. Currently, PAYE is the largest contributor to the country’s revenue, a situation which is unhealthy.

The tourism sector remains a sleeping giant in terms of contributing to the government’s revenue. But it is largely under developed. Benefits from the recently held UN World Tourism Organisation (UNWTO) conference remain to be seen. What has just been reported about the conference is that it was the “most successful with delegates of about 4000 people”. In terms of the economic benefits, these are yet to be felt.


High poverty levels force people to live in unsanitary places

It is therefore very apparent that the PF government has a long way to go to grow the economy. There is need for the government to harness the potential that are idling in all sectors of the economy. Meeting all the targets set out in the 2014 national budget is not enough without the trickledown effect on the general population. Employment creation especially for the young people will help to reduce extreme poverty which currently stands at over 60% of the population.

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