President HH’s Pledge to unlock Local Economy is due for implementation, as Debt talks Stalling

 

“Zambia’s Economic Recovery lies in Micro and Small Enterprises’ Accelerated Growth”

By Mwansa Chalwe Snr

President Hakainde Hichilema (HH) declared last year that in 2023, his administration will focus on unlocking rigidities in the economy and factors hampering economic growth, as 2022 was dedicated towards stabilising the economy. It is advisable that he starts implementing the planned unlocking measures now, to give people hope, more especially the Youth, as the clock is ticking very fast.

Stalled Debt Talks

At the moment, the debt restructuring talks have stalled. They have been delayed for 30 months now, according to Lazard Freres, the French investment Banker. It is apparent that Zambia is on a long haul to getting binding debt deals with its creditors as the deadline for the conclusion of talks is uncertain.

“Debt restructurings stall for three main reasons: The actors (the debtor, the IMF and the various creditors) do not agree on the quantum of debt relief needed to restore debt sustainability; even if they agree on the necessary quantum of debt relief, each creditor is worried about contributing disproportionately to the restructuring effort (issue of comparability).

“The fluidity of the process is further complicated by the fact that IMF lending (critical in the post restructuring recovery of the country) is conditioned on an IMF board decision. The current approach de facto gives recalcitrant/undecided bilateral creditors a veto right before the restructuring negotiation even starts,” Lazard Freres, the investment banker, wrote in its February,2023 Policy Brief

In the light of the foregoing, Zambia needs to figure out well thought out and credible home grown solutions to unlock the economy, using available resources, rather than wait for the conclusion of debt talks. This article outlines some generic measures, and suggests one innovative home grown solution for unlocking the economy through the accelerated growth of Micro and Small Enterprises (MSEs).

 

Generic measures to unlock economy

The starting point for the implementation of measures to unlock the economy is to review the performance of Chief Executives of Ministries – Permanent Secretaries – for the last twelve months, and to make necessary changes otherwise the measures will not work well as there is inertia currently.

Zambia’s four key sectors – Construction, Manufacturing, Mining and Agriculture – are currently in the intensive care unit. The focus of any generic measures to unlock the economy should prioritise interventions in these four sectors so as to ramp up their production.

One of the generic measures to unlock the economy was announced by the Minister of Small and Medium Enterprises Development, Elias Mubanga. It entails the disbursement of loans by the Citizen Economic Empowerment Commission (CEEC) to SMEs.

“We targeting the small and medium business community. This is a year of action, I just want to be very frank, and especially to the SME sector, this is a year of action. If you have something that will convince the Minister of SME that this will work beyond reasonable doubt and it shall create jobs, I will try by all means to source for funding for such a project. We want to create jobs; we want to grow the economy. You know the President said ‘this year we have to unlock the local economy’, but for the local economy to be unlocked, we need the SME sector’s involvement,” said Mubanga in an interview with News Diggers of 7th February, 2023.

It is, however, doubtful if the loan interventions will be successful as there is no evidence of any innovation in the CEEC’s current programs to differentiate them from the previous failed ones. The lesson has not been learnt that SMEs financial empowerment on its own, without intellectual capital, technology and other equally important components of the empowerment value chain, is no panacea for economic growth and job creation. The majority of loan recipients, for example, have a poor relationship with money, and the current programmes have no mitigation measures against this risk. The CEEC’s current non-performing loans amount to K284 Million as per Auditor General Report.

The second generic intervention to unlock the Zambian economy is the infusion of liquidity. It is expected that the infusion of liquidity in the economy by government paying its many local creditors and other allied measures, can quickly help unlock economy. The Stanbic Purchasing Manager’s index (PMI) identified liquidity as a major cause of the low economic activity in 2022.

The other measures that could have immediate impact, relates to infrastructure projects, which have been badly affected by the cancellation and suspension of contracts. There are two broad measures that are required. First, re-starting of suspended credible infrastructure projects since audits must have been completed by now. As part of the process, foreign contractors should be compelled to use local materials as much as possible, and be made to comply with the 20% sub contracting of Zambians.

Secondly, there should be the acceleration of the commencement of the two long awaited mega multi-million projects – the estimated $700 million Lusaka to Ndola dual Carriage way; and the estimated $180 million Mwenda – Kasomeno (DRC) -Luapula Bridge Road project. The latter project will end Kasumbalesa congestion once and for all. The road will cut the traveling distance between the port of Dar Es Salaam and Lubumbashi by close to 300 kilometres.

There is also the issue of the cost of doing business in Zambia. The unlocking measures should incorporate reforms of some of the most archaic business regulations as well as the reduction in number of licences required to run a business and their accompanying levies.

Innovative strategy to accelerate economic growth

In the light of the gravity of Zambia’s economic problems, the country needs some innovation in how it solves its problems by thinking outside the box. The never tried before solutions should be explored to form part of the package. The proposed solution is one whose size fits the size of the problem.

The fastest and most effective way that President HH can achieve his 2023 objective of unlocking the rigidities in the economy, and accelerate the country’s economic growth, is by ensuring that he does not leave out the largest sector of the economy – the 90% employer- the informal sector, in his strategy tool box.

There is ample empirical evidence which suggests that a developing country like Zambia can only create critical mass formal jobs and reduce poverty by having strategies that include the formalization of appropriately identified demographics of the informal sector. The experiences of Latin American countries attest to the effectiveness of the strategy of transitioning the informal sector to the formal sector. And fortunately, President HH believes in learning from other countries’ experiences.

“We are very clear about what we want to achieve and will continue learning from other progressive economies as well.” President Hakainde Hichilema told his audience in Washington-DC last year in a discussion engagement organised by the Council on Foreign Relations.

There is no question that the formulation of a formalization programme and its implementation is not easy to accomplish due to the complexity of the sector. It does require extensive research and people who understand the sector. However, it can be done if government teamed up private sector players with the requisite knowledge.

The proposed formalization strategy is one that would certainly be welcomed by Zambia’s benefactor, the International Monetary Fund (IMF), as they have advocated for it in their literature.

“Informality critically affects how fast economies can grow, develop, and provide decent economic opportunities for their populations. Sustainable development requires a reduction in informality over time. Addressing informality is thus essential and urgent to support inclusive economic development and reduce poverty worldwide,” IMF, Finance and Development Magazine (December, 2020).

The international Labour Organisation (ILO) is also in support of the reduction in the informal sector.

“In sub-Saharan Africa, typically, the formal segment of the economy does not employ more than 10 per cent of the labour force. There is an urgent necessity of implementing a range of integrated and coherent policies aimed at moving economic units into the mainstream economy,” The ILO wrote in its research paper.

In Latin America, there are several countries that have successfully pursued formalization strategies. And one of the best benchmarks for the successful implementation of formalization strategies of Micro and Small Enterprises (MSEs) is Brazil.

“Over a period of only five years (2007-2012), a total of 4.9 million micro and small enterprises were formalized. Micro and small enterprises (MSEs) currently account for 95% of Brazilian firms, generate some 16.6 million formal sector jobs, and contribute 20% to GDP. Over the last three decades of the 20th century, Brazil implemented a series of measures to encourage the formalization of micro and small enterprises and to promote the creation of formal employment in this segment of companies,” The International Labour Organisation (ILO) wrote in one of its reports.

The formalization Program is a potential economic miracle and a game changing initiative. And if it is well designed and tailor made to Zambia, using two broad critical tools – facilitation and stimulation–it could easily add between 4-6 percentage points to the current projected economic growth rates.

Conclusion

The government is well advised that in mapping out the strategy for unlocking the economy, there should be a clear delineation of the private sector. In the Zambian context, the private sector should be divided into two broad categories. The Micro and Small Enterprises (MSEs) on one hand, and the Medium and Large Enterprises (MLEs) on the other. And when crafting interventions the two categories’ needs ought to be taken into account separately.

It should also be understood that money alone is not a panacea to our economic problems. There are a number of initiatives that can be done before the completion of debt restructuring negotiations, and without huge sums of money. Lastly, we can solve most of our economic problems by tapping in the knowledge of our local experts and veterans, who know the country better, rather than the current trend of over reliance on foreign advisors and institutions.

The 2023 first quarter is half gone now. Government needs to speed up and prioritize implementation of programmes and projects rather than adopt a perfectionist approach. Time lost is never regained.

The writer is a Chartered Accountant and Author. He is a semi-retired international MSMEs Knowledge Consultant, and an independent financial commentator. He is also an Op-Ed Contributor to the Hong Kong based, Alibaba owned, and South China Morning Post (SCMP). Contact: [email protected]