Zambian economy fairly stable, promising but precarious and hurting main street – Analysis

Kalima Nkonde

Story Highlights

• • Economic performance in 2018 remained generally resilient, supported by relative macroeconomic stability as well as less volatile commodity prices particularly for copper. This notwithstanding, several downside risks included: continued global trade tension; and, rise in global oil price, negative market sentiment related to fiscal challenges; upward adjusted debt; sluggish credit growth; depreciation of the Kwacha impacted on the overall performance of the economy ( Minister of Finance, Margret Mwanakatwe, December,2018)
  •  Companies in Zambia experienced a further deterioration in business conditions in December, ending a challenging second half of 2018. Output fell at a sharp and accelerated pace in December, with slow business and a lack of money in the economy highlighted again by panelists ( Stanbic Bank Purchasing Managers Index Survey, 2019)
  • Credit to the private sector remained constrained and contracted in the fourth quarter of 2018, underpinned by elevated lending rates and persistently higher than programmed fiscal deficits. To support sustainable macroeconomic stability and achieve higher growth, prompt and effective implementation of fiscal adjustment measures remains critical ( Bank of Zambia Governor Dr. Kalyalya, Feb 2019)
  • The current fiscal position of the nation does not allow for a massive experiment in the risky aviation industry at the expense of taxpayers. Zambia is grappling with rapidly increasing debt, now about US$16 billion, and is currently implementing austerity measures (Centre for Trade Policy and Development (CTPD )researcher Bright Chizonde, January 2019)
  • Corruption really has serious negative implications on the economy of the country, especially in Zambia where most of the major projects are being done by donors like the USA, in terms of the rehabilitation of our sewer system, water reticulation system, also the help that we are receiving in the health sector. It sends a very bad picture as to what is happening in the country. People cannot stop talking about corruption. But because there are accusations of corruption, people are talking about corruption and other problems in the economy. That is sending a negative picture to the capital market and our bonds are performing very badly because of this. ( Dr. Lubinda Habazooka, Economics Association of Zambia President)

There have been a lot of comments about the performance of the Zambian economy in 2018 leading into 2019 by various commentators and experts but no full unbiased picture has yet been given. The majority of comments and analysis have been couched in technical language as usual, whereby ordinary Zambians, cannot exactly figure out what is happening apart from feeling the effects. This article presents facts supported by numbers from the government, World bank/IMF, Africa Development bank and Bank of Zambia. The analysis and interpretation of the same is done in a relatively layman’s language.

This writer tries as much as possible to give an objective, independent but critical picture of the Zambian economy while wearing patriotic lens. It is in this respect that it is not true to say the Zambian economy is in a crisis like it was in 2015 as postulated by certain quarters. On the other hand, it is also incorrect to say the economy is doing very well and government should be contented.

The analysis looks at the following main ten economic indicators: interest rates, inflation, exchange rates, unemployment, Debt/ GDP %, and fiscal deficit % of GDP, international reserves, external debt%, domestic debt% and GDP. The article goes on to explain the effects of these technical indicators are having on ordinary people. The objective is to educate the public, politicians and also help government to act and accelerate the implementation of reforms.

The bright spots in the Zambian economy

The major bright spots in the Zambian economy lie in the monetary policy environment where both the monetary policy rate and the Statutory Reserve Ratio has been maintained at 9.75% and 5% respectively for a period of 12 months. In a normal economy, these metrics were supposed to bring down interest rates to between 12% -15% but because the government is borrowing from the market at 21.5% and continuing, it is a pipe dream to expect commercial bank rates to come down any time soon.

Although the inflation rate has been trending upwards for quiet sometime, one needs to consider that it was about 22% a few years ago. At the latest rate of 7.8% at the end of February, 2019, it is both below the double digit inflation threshold and the Central bank target of the 8%. The recent reduction in pump price of petrol is also a positive for the economy.

The expected maize output for 2018/19 season is 2.6 million tonnes compared to 2.4 million the previous year. This means that Zambians will not have to import the staple food. On the other hand, the price of copper has been relatively stable, hovering around $6,000 per tonne, and had it not been for the USA and China trade war, it may have even reached beyond $7,000 per tonne. The latest copper price as at 28 February, 2019 was $6,500 per tonne.

There is no doubt that the Government’s announcement of revision of mining taxes, which have been very popular among Zambians, is a step in the right direction. Zambia needs to benefit more from its natural resources. The firm stand of government, and the public outcry about the Mining houses’ corporate greed, forced mining houses to backtrack on the threat of job losses. The stand by government and Zambians is commendable.

The other bright spot in the economy is the stable electricity supply. Zambia’s power generation capacity has increased above the 1901 MW which is about what the nation needs at its peak. The Finance Minister reported a 12.6 % in the 12 months period ended 2018 in power generation. This augurs well for the productive sector of the economy. There is virtually no load shedding in Zambia apart from a few inexplicable disruptions for domestic users from time to time. The dark days of load shedding are long gone. This is certainly a positive given the trauma that load shedding caused in 2015 and 2016.

The Zambian economy has been growing, albeit in a subdued manner. The economy is expected to grow at about 4% in 2018. According to the African Development Bank, the medium-term outlook remains positive, with growth projected at 4.2% in 2019 and 4.3% in 2020. Although the fact that the economy is growing and not in recession is a positive; it is way too low to have any positive impact on the lives of ordinary Zambians. It is also way below the growth rates of countries like Ghana, Ethiopia and Rwanda which are growing between 7% to 10%.

The last positive aspect about the Zambian economy is the issue of the competence of the two key managers of the economy- the Central Bank Governor and the Minister of Finance. The writer is an admirer of Governor Dr. Denny Kalyalya’s management of the Central since he took over.

The current evidence also suggests that Mrs Margret Mwanakatwe, despite being a Chartered Accountant like the writer, and not an economist, has so far proved to be a promising finance minister. This is especially regarding her attitude of being transparent by regularly communicating to the market, information about the economy. She has helped in building some level of confidence among market players. However, the jury is still out on her. In the event that she manages to seal the elusive deal with the IMF, it will certainly bode very well for her competence. The two economic managers have demonstrated that when the right Zambians are appointed with the three crucial ingredients to success in such jobs – Education, Experience and Exposure – and with minimum political interference, they can deliver.

The dark spots of the Zambian economy

The poisoned well of the Zambian economy, from which we are all drinking, is the massive public debt. According to the African Development Bank, in 2018, Zambia’s domestic debt was estimated at 20% of GDP while the external debt, including government guarantees, fell to an estimated 39.2% of GDP which makes the total ratio to be 59.2%. The high public and publicly guaranteed debt led to Zambia being classified as being at high risk of debt distress in 2017 by a joint IMF-World Bank’s Debt Sustainability Analysis (DSA) study and led to the subsequent suspension of the IMF talks on the bailout programme.

The total debt servicing costs are estimated at about 35% as of total revenue. The external debt alone is estimated at US$ 9.51 billion from US$ 8.7 billion at end December 2017 an increase of 9%.Domestic debt which is mainly government securities as at 30 September,2018 was $4.62billion (K54.6 billion). Domestic arrears (amounts owed to suppliers of government) were $1.25 billion (K14.7 billion) whereas Government guarantees were $1.2 Billion.

It follows from the above numbers that the total government debt without guarantees is $15.38 billion if domestic debt and arrears are converted at K11.8. When Government guarantee is added, the total government borrowing amounts to $16.38 billion. This is way too high and is causing havoc in the economy.

Government’s high domestic borrowing at high interest rates continues to crowd-out private sector lending and encourage banks to charge high lending rates to households and the private sector. Government is borrowing at 21.5% for treasury bills and 19.9% for government bonds. It is no surprise that commercial bank lending continued to be very high at 23.6 per cent in December 2018. The banks’ lending to the private sector has continued to decline meaning that economic activities ( growth) will continue to be subdued and employment creation will continue to be a pipe dream.

The government’s fiscal deficit for 2018 is estimated at 7.45% of GDP which is above the 6.1 % budgeted in 2018. The target was missed mainly due to high capital expenditure, rising debt, growing government suppliers debts and a large wage bill. According to the African development bank, “Another downside risk to the economic outlook arises from the slow pace of fiscal consolidation”.

In regard to foreign exchange, foreign reserves have dropped to $1.57 Billion from $1.8 billion, which is 1.8 months import cover. On the other hand, the Kwacha depreciated by 25.2% in 2018 from an average of K 9.49 per dollar in 2017 to an average of K 11.8.

One of the most important economic metrics that is ignored or not talked about much is the unemployment rate especially among the Youth. The survey carried out by Ministry of Labour and social services indicated that Zambia’s employment rate is 41.2%. This could be even being higher. The issue of jobs in Zambia, it appears, is not a taken seriously by the Government and Opposition parties

The net impact of all the above negative effects is reflected in the low economic activity in Zambia. The very low economic activity in Zambia in 2018 was confirmed by Stanbic Bank Purchasing Managers’ Index (PMI).

“Output fell at a sharp and accelerated pace in December, with slow business and a lack of money in the economy highlighted again by panelists. The acceleration in the rate of decline in activity was recorded in spite of a slower reduction in new business. Operating conditions have now decreased in five successive months,” the Survey reported.

The World Bank review of the economy of Zambia in 2018 also supports the above view of the subdued economic activity. “Economic activity has faced a drag from a deteriorated fiscal and debt situation. Large domestic public expenditure arrears increased non-performing loans to 13.4 per cent of outstanding loans in May 2018, from 9.7 per cent in 2016, leading to lower private sector lending,” World Bank’s 11th Edition of the Zambia Economic Brief said.

How ordinary Zambians are currently affected by economy

The question lay people may ask is what is the implication of all the above technical language and numbers? First and foremost, when looks at the positive and negative economic indicators in the Zambian economy, the net effect is that the negatives far outweigh the positives and thus the reason why the majority of Zambians are of the view that the economy is not working for them. The main street, who is made up of farmers, villagers, venders, workers, youth, women, small businesses cannot say there are better off than they were ten years ago.

It is crystal clear that the causes of Zambia’s economic stagnation and problems are the interrelated issues of excessive public debt both domestic and foreign, Kwacha’s depreciation, high commercial bank interest rates, low liquidity (shortage of cash in the economy), excessive and reckless government expenditure, low domestic revenue mobilization and the endemic corruption.

The combination of the above negative economic indicators have resulted in the lack of employment opportunities for Zambians especially the Youth, high cost of living, shortages of medicines and supplies in clinics and hospitals as grants are irregular, cancellation of meal allowances for University students, less money in Zambian pockets, less business for vendors, delay in payment of farmers, delay in paying of government contractors and suppliers, delay in payment of civil servants in some months, and above all escalating poverty levels especially in rural areas.

The bottom line is that with excessive debt servicing at about 35% and a wage bill of about 50% of revenue, the huge expenditure on some superfluous capital projects with no discernible economic value, less funds will be available for the promotion of social programmes in education, health, social welfare. This writer and other experts warned about the negative effects of excessive debt four to five years ago, but we were called all sorts of names including being called lunatics by one former finance minister who is very comfortable in retirement and not feeling our pain for the debt mountain mess he helped create when he presided on a borrowing binge, despite the fact that he had the experience of the devastating effects of excessive borrowing during the UNIP/ KK years.

CONCLUSION

In summary, although a number of economic problems have been enumerated, there are three main issues that are preventing Zambia’s economy from growing by as much as 10% and which if addressed can reboot the economy and restore market confidence. These are huge public debt, excessive government expenditure and endemic corruption. These are the issues that need to be prioritised, laser focused on, and the rest is likely to follow without doubt.

If Zambia was a company, as former corporate consultant, i would have recommended a restructuring and turnaround strategy. Zambian economy needs a serious restructuring because given that approximately 35% of revenue goes to debt servicing and about 50% goes to the wage bill, foreign reserves are at $1.57 billion or 1.8 months import cover, unemployment is at 41%, commercial bank rates at 23%, this is clearly a sign of an economy that is very precarious and at great risk. It is vulnerable to any foreign and domestic shock.

Government needs to accelerate the implementation of the austerity measures in place and even add new ones like reduction in the number of the vehicles given to officials, curtail allowances and per diems and generally implement the reduction in big government like the creation of new districts.

The writer is a Chartered Accountant by profession, a Private Sector Development expert and an Entrepreneur. He is an independent finance and economic commentator/analyst and a Patriot.