Standard & Poor rating on Zambia contradictory, not helpful

By Lucky Mulusa, MP

The latest pronouncement by Standard & Poor is contradictory and not entirely helpful. The government will do well to stick with decisions that are difficult to make but will eventually assist us put strong fundamentals in place and assist remove distortions in our economy.

I agree with the Agency when it said “Zambia’s political landscape has deteriorated broadly”. This particular development has a tendency to increase the cost of borrowing and therefore of doing business. It also has a tendency to slow down the inflow of Foreign Direct Investment (FDI) because of the political risk that drives uncertainty going forward. Political tension, increased use of the police, increased involvement of the military in politics, increased militancy of NGOs and religious groups regarding civil issues are signs of increased political risk. Apart from increased military involvement in politics, the rest of the factors are at play in Zambia.

Political risk increases the cost of borrowing and therefore of doing business through an unnecessarily increased risk premium in the pricing of debt instruments (i.e. bonds, various types of bank loans etc.). In worst instances, risk premium as a component of borrowing rate can constitute as much as 75% of the interest rate charged. Any factor that drives risk premium must therefore be managed in order for cost of borrowing to be generally brought down in an economy.

The PF will do well to allow opposition parties to conduct their activities as freely as possible. I was recently in Cameroon on African Union’s senator elections observation mission representing Southern Africa. I was surprised at the lack of involvement of the security agencies in political activities. We monitored a political rally by the opposition and there was not a single policeman anywhere! Voting day saw no police presence in the manner experienced here in Zambia. I feel that we exaggerate security concerns here and therefore polarise the political atmosphere unnecessarily.

Again I agree with the Agency when it said in its latest rating for Zambia, that, “some policy measures, largely non-anticipated, have increased uncertainties regarding the future economic policy framework”. A country needs to be clear on its chosen conception of political and economic model and be consistent with policy pronouncements that create a golden thread with the chosen conception. This is what assists investors make both short and long term decisions whether to invest in a particular country or not. It is also important that governments are guided by clear development strategies and as for PF, there is none. A manifesto is not a strategy.

I however wish to differ with the Agency’s criticism of the PF government’s measures such as the, (i) mandatory use of the kwacha in domestic transactions and for listing the prices of goods and services, (ii) the introduction of an interest rate cap on lending by commercial banks,(iii) increased capital requirements for banks and most importantly (iv) a recent amendment of the Bank of Zambia Act that the Agency thinks may open the way for potential foreign exchange controls.

Let me deal with these measures one after the other:

(i) Mandatory use of the kwacha in domestic transactions and for listing the prices of goods and services: This is meant to underscore our currency’s relevancy and therefore its resilience. It will contribute towards strengthening its value as well. Dollarisation of the economy is not needed at the moment.

(ii) The introduction of an interest rate cap on lending by commercial banks: Lending rates in Zambia are too high to promote sustainable economic growth. The margins between costs from sources of funding and lending rates are ridiculously too wide. If banks can charge as high as 25% lending rates, then we should have seen them paying as much as 20% interest rates on deposits. But this is not the case. If it was, we would have seen our financial sector attracting huge cash investments from foreign and domestic sources. Savings are low in Zambia partly because of the low or non-existent interest earnings. It is not simply worth it to invest in financial instruments in Zambia and neither is it sustainable to borrow. The government was therefore spot on!

(iii) Increased capital requirements for banks: This is meant to strengthen and mature the financial sector. It is also meant to protect depositors’ funds as it tends to increase the resilience of the banking sector. The government will do well not to depart from this policy initiative.

(iv) The recent amendment of the Bank of Zambia Act that the Agency thinks may open the way for potential foreign exchange controls: This particular initiative is very close to my heart. PF applied it in their usual hard tackling manner. But that is better than not having it in place at all. All countries including USA have some strict forms of foreign exchange controls. In South Africa for instance, you cannot buy foreign currency as a foreigner unless you demonstrate that you actually entered the country with foreign currency which you sold and you must produce evidence including declaration you made at a port of entry. As a citizen or resident, you can only buy foreign currency upon production of an air ticket and passport.

This amendment is meant to ensure that wealth created in Zambia assist contribute towards the development of the domestic economy through its presence locally. Zambians’ participation in the economic activities that underwrite growth of the GDP is too low. Capital is in foreign hands and so is wealth. It is said that, “While the earth is one, people live in their own different worlds. Each community, each country, strives for survival and prosperity with little regard for its impacts on others. Some consume the earth’s resources at rates that would leave little for future generations. Others, many more in number, including ourselves, consume far too little and live with the prospects of unemployment, poverty, hunger, squalor, disease, and early death.”

In my third motion in Parliament I begged to move: That in view of the inadequate benefits accruing to the people of Zambia from the country’s natural resources despite the positive economic growth rates in the last decade, this House urges the Government, as a matter of urgency, to develop a “Broadly Shared Economic and Human Development Strategy”.

In that motion, I pointed out that during the first half of the last decade, we benefited from the HIPC initiative, in which we were saved from paying close to US $1bn annual interest and capital expenses. Over the same period, copper prices had gone up and as a consequence of that, so did production. Despite that, unemployment and poverty continued to find profound presence in our society and we continued funding our infrastructure development through loans and grants. The questions I posed were: how much do we earn from the natural wealth endowment? Is it adequate? Where does this wealth go? Who owns our wealth? Is there anything we can do to reverse the rich nation poor citizens scenario? The Minister of Finance assured the House, that he had heard me and that my motion would be implemented without reservations. When this policy formulation was being debated in Parliament through amendment to the legislation, I chose not to debate against it. I had to be consistent. I could not play politics at the expense of the robbed masses. It is a good policy and I cannot believe that S&P can advise against it!

Reports from Rating agencies are normally used by countries and firms that get rated to point them to areas of weakness where they should pay attention. This particular rating report on Zambia is misleading and is not helpful at all. Zambia’s challenges which will affect the economy going forward are:

  • A defective economic structure in which 3.7 % of the economy (mining) accounts for the country’s 86% of its forex earnings and over 90% of the economy remains minimally integrated in the global economy and only accounting for less than 14% of the country’s forex earnings.


  • Lack of electricity energy headroom to accommodate additional industries to bring in the much needed jobs and broadened tax base; and


  • An unsustainably, and economically demanding demographic characteristic that will increasingly continue putting unbearable pressure on our economy. 92 per cent or 12.7 million Zambians out of our 13.8 million population is aged below 50 years. Of the 13.8 million population 8.4 million representing 60.5 per cent are in rural areas where there are no job or economic opportunities. We have a very young population with 45.4 per cent of the total population or 6.3 million being aged below 15 years. This means that while the 6.3 million young children hope to grow and find jobs, 54.6 per cent or 7.6 million of our population is aged above 15 years and fall in the category of potential labour force but they do not have jobs. The majority of the 7.6 million people aged above 15 years old and who constitute our labour force are youths. With just around 600,000 formal jobs in our country, it gives us a real unemployment rate of close to 92 per cent in a country with a GDP growth of well over an average of 5 per cent over a 13 year period.

The Rating Agency should have highlighted the above and strongly pointed the government to the need to craft a broadly based economic and human development strategy to prevent social and economic distortions that can destabilise the economy and the country going forward.

The maintenance of the rating at B+/B rating is a welcome gesture but may go down if the highlighted negative factors are not adequately dealt with.


Lucky Mulusa, MP.

Solwezi Central Constituency

April 2013.

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