By Alexander Nkosi

1. HOW WILL A HIGHLY INDEBTED COUNTRY AFFORD SUBSIDIES?
In 2022, Zambia’s domestic revenue is projected at K98.9 billion. A total of K78.6 billion will go to debt service. When we add the huge civil service wage bill, all the domestic revenue is exhausted. This means that we have to borrow to cover other important items outlined in the budget, and this includes social sector spending and activities aimed at stimulating the economy. Our external debt is $12.9 billion, domestic debt is K189.7 billion and domestic arrears stand at K46.9 billion. As debt is rising one would expect since we are borrowing heavily, arrears should be going down, but unfortunately both debt and arrears are increasing.

2. FUEL AND ELECTRICITY SUBSIDIES
In a country like Zambia where the cost of production and cost of living is so high, fuel and electricity subsidies play a key role both to producers and consumers. Removing these subsidies will increase the cost of production, reduce profitability, growth and job creation. It will also increase the cost of living. This is a fact we cannot dispute even if the impact has not been quantified. The question is much as we know the importance of these subsidies, how do we afford them given our debt and economic situation? Accruing more debt and arrears to provide subsidies will only lead to a situation where we struggle to provide electricity and fuel leading to a situation worse than the removal of subsidies. Let us take a closer look at the fuel and electricity subsidies to appreciate the dilemma we face.

3. FUEL
Between December 2020 and October 2021, the prices of petrol and diesel increased by 89% and 76% respectively. Despite this increase, Zambia did not adjust the pump prices to reflect the cost. Zambia effectively subsidised and because we don’t have money to meet this fuel subsidy, we ended up accruing arrears. Fuel arrears have significantly risen due to the price differential between the landed cost of petroleum products and the pump price. The stock of fuel arrears as at end-August 2021 stood at US $477.79 million. On average, the monthly cost of subsidising fuel is $21 million and this is bound to rise based on projections. The task at hand is to dismantle the $477.79 million arrears and also meet the $21 million monthly subsidy. Where does this come from in an economy where all domestic revenue is exhausted by just two items (wage bill and debt service)? Do we borrow more? Our debt is unsustainable. If we keep accruing arrears, we risk have prolonged periods of fuel shortages which would hurt the economy more than cost reflective prices. What do we do?

4. ELECTRICITY
With regards to electricity, ZESCO buys at a high price from Independent Power Producers (IPP) at an average of US$c11/kWh and sells to its customers at an average tariff of US$c7/kWh. As a result, it owes IPPs about US$ 1.1 billion for the supply of power. Despite only contributing 20% of total power distributed by ZESCO, IPPs consume about 47% of ZESCO’s total revenue. The other issue is that most of the cost related transactions by ZESCO are dollar denominated while it sells to domestic consumers in kwacha. With kwacha depreciating, this has led to huge losses. When the last tariff adjustment was made, the exchange rate was K12/ $, however it increased to K22/$ by 2021, leading to a huge loss. Between 2018 to 2020, ZESCO made losses amounting to $432 million due to kwacha depreciation. By September 2021, ZESCO’s total debt rose to $3.5 billion.

How do we dismantle the $3.5 billion debt? How do we attract more private players into power generation when we are owing the existing ones $1.1 billion? How do these IPPs expand and improve generation if they are owed so much? Efforts are being made to renegotiate and increase tariffs in the mining sector but this won’t be enough to address this high level of indebtedness. Even after restructuring, ZESCO will still have problems if it does not review its business model. How does government bailout out ZESCO when it is also high indebted and actually owes OMC $524 million and ZESCO around $53 million?

5. DO WE BLAME IMF?
We have not had any solution to these problems but we just left them to pile while deceiving ourselves we were managing to subsidise. A subsidy that is funded by simply accruing so much debt and arrears to unsustainable levels is counterproductive. Hence even before we bring in IMF and accuse it of impose removal of fuel and electricity subsidies on us, the question is what alternative solutions do we have apart from motivational speeches from critics? As we are debating this, people are consuming electricity and fuel and our level of indebtedness is getting worse. Apart from cost reflective prices, what immediate alternative solutions do we have and what is the estimated impact of those alternative solutions?

6. CONCLUSION
It is true that reverting to cost reflective electricity tariffs and fuel prices will increase the cost of production and lower profitability, growth and job creation. It will also increase the cost of living. The problem is that the debt levels are already unsustainable and we need concrete solutions with a quantifiable impact. We have not been affording these subsidies, all we have been doing is accruing arrears and if this goes unchecked we risk having frequent power and fuel shortages which will hurt us more than the cost reflective tariffs.

Reverting to cost reflective prices looks inevitable much as it also comes with negative effects on both producers and consumers. We have to revert to cost reflective tariffs and start looking at ways of pushing down costs through reforms. For fuel, we should revisit procurement and transportation though it might not result in any significant change in the short run. We further have to consider putting up infrastructure for huge strategic reserves to help cushion us from sharp changes on the international market. For electricity, we have to promote alternative energy sources for domestic use to cushion them from high tariffs. We further have to speed up restructuring and explore ways of efficiently delivering electricity to consumers. Increased competition in electricity generation could also lead to a reduction in future though not quantified.

Overall, we need to understand that these hard choices we have to make where the opportunity costs are high will mean the pace at which we fix the economy won’t be as fast as anticipated, hence there is need for buy-in by Zambians. This calls for efficient civil service and quasi government institutions, supportive citizenry and robust communication machinery.

Thank you.

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