PLAN B TO DEBT RESTRUCTURING AND IMF DEAL- WHAT SUGGESTIONS DO YOU HAVE?

By Alexander Nkosi

Our dependence on mines for revenue and forex is like a patient on an oxygen support machine. A patient on an oxygen support machine cannot effectively negotiate the price of being on that machine. This is the challenge most copper producing countries like Zambia, Chile and Peru that have been trying to increase benefits from these natural resources face. As for Norway, it has a diversified resource base and its government directly owns and runs a huge share of the oil and gas industry. Its approach to investors is that they can either take it or leave it. This is why its tax rate is around 78%. For Zambia and other countries, prolonged disputes that impact on production have a huge and immediate impact on the economy and playing hard-ball with investers becomes a challenge. The previous government had to make some quick reversals when mining firms stood firm on tax proposals because we just could not stand our ground for too long. This is why increased local ownership and economic diversification is key.

Here is how this complicates economic recovery options: Most people are asking the Minister of Finance to state what options Zambia has in the event that we don’t get our debt restructured and the IMF deal. The consequences are that we are going to default big time, kwacha will swing into rapid depreciation and there will be capital flight. A weak kwacha means import of inputs in production and machinery will be very expensive. The cost of production will be way to high and some firms will close down. Imported consumer goods will be very expensive and the cost of living will go up.

Government will be left with limited options to raise revenue: increase taxes, fines and fees and borrow heavily from domestic market. With a huge increase in taxes in the mining sector, mining firms will play hard-ball and government will be left with an option of whether to lose what we are currently getting and risk economic collapse or give in. The situation is explained in the first paragraph. If government taxes locals more, most of them will collapse. Should government tax workers more, they will struggle with the high cost of living. Increased domestic borrowing will crowd out the private sector and this will impact on their performance and revenue collected by government.

How did the previous government resolve this? They did not increase domestic resource mobilisation but continued with heavy borrowing. A few times they tried to adjust mining taxes, they had to make quick reversals. There was no clear roadmap on KCM and plans for Mopani were to find a new partner. This explains why the previous government also insisted on the IMF deal.

To those asking about concrete alternatives, my question is what exactly are you suggesting? Provide details of how much revenue we would raise and how that can help us meet annual debt service which might soon be above K100 billion, cover the wage bill and fund all sectors. We also have domestic arrears which soon could be way above K50 billion.

Thank you.