*The Fight against Economic Decline, Poverty and Hunger*
We need not belabour the reality that our economy is now in a slump and that the devastating impact of economic mismanagement and the ripple effect on livelihoods is grave. Load-shedding of up to 20 hours a day has dealt a debilitating blow to an economy that was already in a steady decline. Energy shortages are affecting people across all walks of life, and there is little indication of a sustainable solution in sight.
It is clear that the fight against poverty reduction has been derailed, with the economy growing at less than 2 percent while population growth is at a steady 3 percent.
In fact, the World Development Indicators statistics show that the number of Zambians living in extreme poverty increased from 9.3 million in 2015 to about 10.3 million today, the majority of whom reside in the rural areas. According to the Global Hunger Index, in 2019, Zambia is the fifth hungriest country in the world out of 117 countries assessed.
The combined effect of poorly designed and inconsistently implemented public policies, poor prioritization of public programs, economic mismanagement, corruption, workforce demotivation and excessive borrowing, has sent 1 million Zambians into abject poverty, in stark contrast with the promise to create 1 million jobs.
While these hardships are claimed to stem from external factors like climate change, we would like to set the record straight that the economic malaise is largely due to poor fiscal management, which has emerged from the weak political and economic leadership since 2012. Specifically, the fiscal irresponsibility of excessive expenditures and a huge appetite for non-concessional financing is quite evident. It has pushed the debt stock to unsustainable levels and seen a rapid accumulation of domestic arrears that have negatively impacted private activity, thus hampering the growth of the economy.
Currently, over 80 per cent of the National Budget is allotted to debt service, capital expenditure (mainly roads), the wage bill, and other costs of running government, all at the expense of critical social expenditures on health, water and sanitation and education. Heavy debt service and reduced capital inflows have brought foreign reserves to record lows, leaving little wriggle room to stem currency fluctuations. We are extremely concerned that the recent weakening of the Kwacha will entail additional hardships for the general populace as the effects are passed on through to consumer and producer prices, including petroleum prices.
*Measures for Immediate Implementation*
We have repeatedly called for prudent fiscal management, particularly in addressing the rapid debt accumulation. Now that we are at this critical point, we would like to reiterate our call for fiscal prudence and commitment to strict implementation of bold austerity measures. We present the following key message to government as it reviews the country’s economic performance with external partners:
1. Muster the political will to reduce public spending and establish credible frameworks and systems for setting spending priorities. Zambia desperately needs to rein in its public spending by strictly realigning expenditures away from wasteful spending items, to ramp up pro-poor support and arrears clearance to suppliers, to ease the liquidity crunch in the economy. Among other things, this requires bold measures such as: cutting back on irrational capital expenditure on urban roads, creation of new districts, the proposed national airline and so on; a consolidation of ministries; and the elimination of non essential international and domestic travel by senior government officials. This must be accompanied by the implementation of Public Investment Strategy that will prioritize capital expenditures towards transformative projects with high economic returns, and to align these expenditures with existing fiscal capacities.
2. Urgently formulate and implement a credible debt sustainability strategy that will lower the fiscal deficit from the current (2020) target of 5.5 percent of GDP to around 3.4 percent of GDP. That will simultaneously improve credibility in terms of achieving the deficit targets. The deviations between the fiscal deficit on a cash basis and on a commitment basis must be minimized. These short-term measures should be anchored to a comprehensive Medium Term Expenditure Framework (along the lines of the Economic Stabilization and Growth Programme (ESGP) or Zambia Plus, which comes to an end at the end of 2019). Institute proper controls and procedures for transparent recording and monitoring of domestic arrears and debt acquisition. Institute a public debt accountability and transparent system that ensures regular (at least quarterly) comprehensive government reporting on the debt situation. These upfront fiscal adjustments, applied persistently over 2-3 years, will be absolutely necessary for restoring the country’s debt sustainability.
3. Promptly table the Bills for the Planning and Budgeting Act and the revised Loans and Guarantees Act and Public Procurement Act, to address weaknesses in public financial management and procurement. These pieces of legislation are critical for preventing and punitively correcting vices such as corruption, rent-seeking, public sector wastefulness and so on, which have all become endemic in the public sector lately.
4. More broadly, the government needs to halt the ill-intentioned Constitutional Review process through the now infamous “Bill 10”. The revisions in Bill 10 will entail further weakening of public institutions including through: the elimination of the National Assembly’s oversight over debt contraction; the erosion of the Judiciary’s impartiality; the distortion of the functions of key watchdog institutions (Financial Intelligence Centre, Drug Enforcement Commission, Auditor General’s office and so on), under the guise of institutional constitutional restructuring (which is in fact totally unnecessary); the removal from the central bank (Bank of Zambia) on key monetary policy functions such as the printing of local currency.
The proposed revisions in Bill 10 will cause irreparable damage, resulting in even poorer economic governance than we have seen in recent times. They will completely undermine the rule of law and entrench corruption, rent-seeking and political patronage in the public sector.
5. Commit to and implement a policy of complete suspension of non-concessional financing from commercial (domestic and international) lenders. This must be accompanied by active negotiation with official bilateral and multilateral lenders on debt restructuring and the operationalization of the Sinking Fund as a sovereign fund that will better prepare Treasury for the estimated US$4.6 billion in debt service between 2019 and 2021.
6. On energy, funds spent on short-term importation of power are unsustainable, and deny the country the opportunity to invest in solar and other renewable sources that could be quickly put in place. Hence alongside investments in renewables, we call for a restructuring and reform of the legal, governance, managerial and technical operational arrangements for ZESCO, to allow for commercial independence, efficiency and restoration of its financial standing as well as to open up the energy market more broadly.
This must be underpinned by a well-managed review of the tariff structure, to establish one that will attract investments while protecting Zambian families, particularly low income households from catastrophic electricity expenditures.
7. Immediately address the fiscal leakages through ghost workers across the whole government payroll through e-governance systems, including through the introduction of biometric cards.
8. Enhance revenue collections, including through digitization to address longstanding leakages through tax evasion and other forms of Base Erosion and Profit Shifting tactics. This should be coupled with a comprehensive programmatic audit of the Zambia Revenue Authority (ZRA), which received colossal sums of public resource for the year, to modernize the tax system and enhance tax administration efficiency, but failed to do so.
*Urgency of the Matter*
The large debt service obligations, limited financing options and the declining economic activity highlight the urgency with which the measures proposed above must be undertaken. Referencing the IMF as a credible international financial authority, we estimate the debt stock to be in excess of 90 percent of GDP by the end of 2019 and economic growth to be no more than 2 percent in the same year (2019). Any delay in implementing the necessary upfront fiscal adjustments and changing the status quo will further weaken the macroeconomic fundamentals, and further undermine confidence in the economy, with concomitant effects on capital flows, depreciation and financial conditions. Should our advice fall on deaf ears, the country risks instability and a full-on economic collapse under the weight of unrelenting fiscal mismanagement and poor economic governance.
*Stabilization, Growth and the Jobs Agenda for Zambia*
We encourage Zambians not to give up hope, but to persevere and look to the near future as help is on the way. When we assume Office as the UPND Government in 2021, a key priority will be to ensure the recovery of the economy through a reform package that will not only seek to restore confidence in the economy but deliver jobs, fiscal policy stability and private sector progress.
The previous episodes of high, but jobless growth from 2000-2011 was replaced with jobless declining growth. This has demonstrated that Zambia is in need of a new growth model; a model of rapid but steady economic transformation that will deliver inclusive growth to all regions, rural and urban. At the centre of this new model for growth shall be job creation. Over the near term, we shall roll out to the public, details of our Jobs Agenda for Zambia (JAZ). Through JAZ, we shall seek to unleash the great potential in our young and vibrant youth. This Agenda recognizes that an average of 330,000 young men and women join the labour force every year and that the decline in economic activities and the skills mismatch is likely to push more people into unemployment. The lack of jobs has relegated our youth to engage in informal activities, self-employment and unproductive activities.
To absorb this wave of young and energetic Zambians into the labour market, attention will need to be placed on promoting labour intensive sectors. As such, raising productivity of the agriculture sector, which accounts for 50 percent of the labour force and 80 percent of the poor, will be one of the key pillars of the Jobs Agenda and the transformation of the economy. Private investments in value-addition, including agro-processing and other off-farm activities will be encouraged through robust incentives and will be accompanied by public programs to link our hard-working small-scale farmers, light manufacturers, small-scale miners, and small-scale providers of services (transport, wholesale and retail, etc.) to high-value markets and outlets within and outside the country, through strengthened value chains. We realize that all this will require a broader program of reform that will stabilize the economy, restore energy security, streamline regulations, lower the cost of doing business, improve access to finance for SMEs and improve skills training for the youth.
This undoubtedly requires leadership that is bold and visionary. We therefore call for prudent management of the macroeconomic affairs of the nation during this trying time and assure Zambians that a sustainable fiscal framework under sound leadership is on the horizon.