Zambia’s fiscal position, what are the challenges and the way out?
By 2011, the economy was growing at an average of 6.5% per annum. The debt stood at 21% of GDP and debt service was 11% of GDP. The country’s budget deficit averaged 2.6% of GDP per annum. The exchange rate was stable and inflation was in single digits. Gross International reserves were at least four months of import cover. The average income per head was above US$1,600, which prompted the World Bank to reclassify Zambia a lower middle-income country. In other words, the economy was doing well in 2011. It was doing so well that the first PF Budget Speech delivered by then Minister of Finance, Hon. Alexander Chikwanda – on 11th November 2011 – acknowledged the economic achievements of the country under the stewardship of the MMD Government. He paid tribute to the MMD administrations for laying a strong foundation.
Then the PF came to power in 2011 and things quickly changed for the worse. They promised to build upon the firm foundation that they had inherited from the MMD Government, but they did the exact opposite. Five years down the line, the PF Government had reversed all the economic gains that the country had recorded in the previous years. And by 2017, debt stock had increased to a whopping 57% of GDP from a modest 21% of GDP in 2011. Debt service as a share of domestic revenues had increased to 29% in 2017. Economic growth declined from the 6.5% per annum on average during 2000-2011 to a meager to 3.5% per annum during 2015-2018. Exchange rate has soared from ZMW4.80 per US$1.00 in 2011 to ZMW13.10 per US$1.00 in May 2019, meaning that the Kwacha loss 173% of its value over the period. International reserves have drastically declined to about one month of import cover in 2019.
Around 2016/2017, the PF Government started to realise that they had created huge fiscal problems. Apart from the heavy debt repayment and civil servant salary demands, which were consuming about 29% and 45% of domestic revenues, respectively, a third fiscal challenge emerged; domestic debt arrears were accumulating rapidly. By 2017, domestic arrears stood at K12.7 billion from K1.1 billion recorded in 2011.
But the PF regime was clueless about how to deal with these huge fiscal challenges. They therefore brought in a political outsider, Felix Mutati of the MMD as “ a crisis” Finance Minister, recognising that economic management was simply a dream under PF. The then new Finance Minister consulted the Zambian people and developed the Economic Stabilization and Growth Programme, which he dubbed Zambia Plus. In our view, this was the first attempt by the PF Government to come up with a coordinated economic programme that has credibility in seeking to address the economic challenges of the country. However, strictly speaking, Zambia Plus was not a PF initiative.
The Zambia Plus programme recognized the three main challenges causing the fiscal imbalance in the economy: personal emoluments were consuming 45% of domestic revenues; debt servicing was taking up 29% of domestic revenues; and domestic arrears, which had escalated by 1,055% to K12.7 billion in 2017. Thus, Zambia Plus tried to arrest this situation by focusing on: (a) arrears dismantling to unlock economic activities (b) debt sustainability; and (c) structural reforms while implementing an effective social safety net. To achieve this, the fiscal focus was on restoring macroeconomic stability and establishing fiscal fitness for sustained inclusive growth and development.
Of course, the underlying fiscal adjustments were always going to be painful because of the depth of damage the PF Government had inflicted on the economy. Therefore, when it came to the implementation of Zambia Plus, the PF regime lost its nerve and removed the author of the programme because they knew he would have actually implemented it, cut off their illicit and corrupt lines of monetary gain in the process. The PF Government could not live with this so, instead of pursuing fiscal consolidation, they threw a good and credible economic plan out the window and continued with its irresponsible spending and borrowing spree. In 2018, the Government borrowed US $2.6 billion. In 2019, the projection in the budget is to borrow US $2.8 billion while domestic arrears increased further to K15.6 billion.
In June 2018, the Minister of Finance announced some half-hearted austerity measures to control expenditure. However, this was nothing but window dressing. President Lungu readily contradicted and completely undermined the measure to suspend undisbursed debt by pronouncing that debt from China would not be touched at all by the austerity measures. Confirming its complete departure from Zambia Plus, PF Government crafted a highly fiscal expansionary 2019 National Budget. Instead of undertaking the structural and legislative reforms prescribed in the Zambia Plus, they neglected to work on critical pieces of legislation such as the introduction of the Planning and Budget law, as well as amendments to the Loans and Guarantees (Authorisation) Act and the Public Procurement Act.
As a result of non-action and irrational contrary actions by the PF Government, the IMF projects that the public debt stock will account for 80.5% of GDP by the end of 2019. As a share of domestic revenues, debt repayments alone now account for 42% of GDP while Personnel Emoluments account for 45%. Together these two expenditure components account for 87% of domestic revenues. This leaves the Government with only 13% to cater for critical services like health, education, water and sanitation and other routine government activities. No doubt, PF has put the country in a very precarious situation.
As a concerned party, the UPND would like to advise the PF Government to consider the following as practical solutions for stopping the fiscal haemorrhage and addressing the economic malaise:
(a) Find the political will to genuinely listen to others and learn from them, particularly the intelligentsia, both within the Government and outside it. The arrogant, know-it-all attitude of the decision-makers in the PF Government is hurting the Zambian economy. Technically inept ministers in ministries like Housing and Infrastructure should not be the ones negotiating for loans from China. The PF should find the political will to stop this dysfunction.
(b) Go back to the Zambia Plus programme and implement it in earnest. At the same time, review the implementation of the plan with the view of developing a new medium-term fiscal framework, which represents a more ambitious fiscal consolidation effort.
(c) Re-commit to the austerity measures that the Minister of Finance announced in June 2018. The PF Government should now go beyond policy pronouncement to actual execution by giving us how each of the measures will be implemented, how much savings will be realised from each of the measures and how the implementation will be monitored. This should include shutting down some of the Government departments with non-essential operations to save money for the core Government operations.
(d) Seriously engage with the private sector to leverage their resources for economic growth. This will require important economic dialogue with the private sector. We propose an Economic Indaba with two main points of discussion, one to concentrate on fiscal policy and the other to deal with monetary policy. We propose two taskforces to be co-chaired by the Government and private sector, accordingly who will then be updating the nation on a regular basis.
(e) Engage with the IMF and China with more seriousness and honesty, based on a firm and inclusive national consultation through the above-proposed indabas. Engaging the IMF should not be only about securing a financial bailout package but also to signal Government’s commitment to good governance, transparency and fiscal prudence as the basis on which economic actors can begin to respond to the Government policy intentions.
(f) Re-engage Cooperating Partners, especially those that have traditionally supported social sectors – Education, Health, poverty alleviation (Social Cash transfer), Water and Sanitation, etc. – for help with resources and technical assistance to implement effective social programmes and a robust safety net, to lessen the impact of the stabilisation measures on the most vulnerable.
(g) Rationalise infrastructure expenditure by being more rigorous and consistent with independent project appraisals, feasibility studies, environmental impact assessment and so on. These should always be done prior to the approval of any public-funded infrastructure project, without exception.
(h) Halt any further borrowing and engage creditors for possible re-profiling of the current debt.