Trevor Simumba’s submissions to President HH on economic reforms

Background and Context

Public Debt in Zambia is a growing problem, perhaps the most pressing economic challenge that the country faces. Domestic debt currently stands at K61.9 billion and external debt at $12 billion, and these figures continue to increase. Years of borrowing on short-term plans with little return on investment has left Zambia with little means to repay its debts – in 2017 interest payments alone cost Zambia K9.8 billion.

High debt weakens the Zambian economy, slowing growth. As money is spent on debt servicing payments, investment in other areas such as skills, research and development and infrastructure projects fall. High debt also limits the Government’s ability to respond to economic shocks such as a fall in the copper price, failing rains or currency depreciation.

Without urgent action from the government to address the high debt problem, the Zambian economy is at risk of toppling into an economic crisis; inflation could increase as the kwacha depreciates, businesses turnover and profits will fall, and jobs will be lost as new wealth is created at a slower rate. However, with a New Dawn Government, this inevitable decline has been halted for the time being.

This debt crisis directly and significantly affects Zambia’s businesses, large and small. The business community are a key stakeholder in the debt crisis, and an influential voice in the debate.

Five impacts on business are particularly worrying:

1. Arrears and unpaid bills: With more and more money being channeled to debt servicing, the Government is short of cash, which leads to mounting arrears. The Ministry of Finance has confirmed arrears had risen to 20.9bn Kwacha. The impact of delayed payments on the private sector can be critical; local companies’ cash flows are hit hard, which can lead to delayed wage payments and postponed investments, reducing the private sector’s contribution to GDP growth.
2. Reduced access to credit: Companies struggle to access credit domestically as high levels of domestic borrowing by the Government reduces access to finance on the domestic market. New lending to businesses between January and March 2018 witnessed a significant decline of 3.5 percent – this stands in contrast to the growth in lending of 8.3 percent that was posted during the last quarter of 2017. This contraction presents a serious threat to private sector-led growth: smaller businesses will find it increasingly hard to obtain the finance they need to expand, or even to cover themselves during periods of negative cash flow, while larger businesses find it harder to raise funds for major investment projects.
3. Falling investor confidence: External investment will also reduce, as Zambia’s high total debt stock impacts investor confidence, leading to higher interest rates on the international market. Investors drive up interest rates in return for greater risk of default, making the components of economic expansion, such as infrastructure, business growth and business loans, more expensive.
4. Pressure to make redundancies: As the economy contracts and access to finance narrows, companies’ risk being forced to make reductions. A weak economy combined with a credit squeeze means less demand for company’s services and products. Ultimately this means many companies risk being forced to downsize and lay off workers. This can include workers; which companies have invested time and money skilling up.
5. Pro-business public spending cut: Government funding which is intended to support the private sector and economic growth will be hit as it struggles to meet high interest payments. Government now spends around 20% of its revenue on repaying debt. Once you also account for spending on salaries, this leave a shrinking pot of funding for other areas. This includes spending which can help boost productivity and growth and help business – for example training, research and development as well as physical infrastructure.

The above factors were also present in the case of Ghana in 2015. The transformation of Ghana’s economy and society was anchored on the Ghana Shared Growth and Development Agenda (GSGDA) II, 2014-2017 – Vol I: Policy Framework. This was the platform for development. It provided a consistent set of policy objectives and strategies to guide the preparation and implementation of medium-term and annual development plans and budgets at sector and district levels. It also served as a platform for donor coordination (something that Zambia has lost in the last ten years of PF rule). Consequently, the medium-term priority policies were anchored in the following thematic areas:

• Ensuring and sustaining macroeconomic stability,
• Enhancing the competitiveness of Ghana’s private sector
• Accelerated agriculture modernization and sustainable natural resource management
• Oil and gas development
• Infrastructure and human settlements development
• Human Development, Productivity and Employment
• Transparent, Responsive and Accountable Governance

Ghana’s economy was in trouble, hobbled by widening current account and budget deficits, rampant inflation, and a depreciating currency. Credit dried up as interest rates rose and banks’ bad loans piled up. At the root of Ghana’s woes was out-of-control government spending, largely to pay salaries of an overgrown civil service.

The program

In early 2015, Ghana turned to the IMF for a $918 million loan to help stabilize the economy. IMF advisors, working with the Ghanaian government, developed a three-part program:

• Restore debt sustainability. The government limited hiring and wage increases and eliminated subsidies for utilities and petroleum products. To raise revenue, it cracked down on tax evasion and rationalized exemptions. New revenue sources included a tax on luxury cars and increased taxes on high earners. To put Ghana’s finances on a sounder footing, the new Public Financial Management Act called for improved accounting standards, procedures, and technology.
• Strengthen monetary policy. The authorities agreed to gradually end central bank financing of the budget deficit—a major source of inflation—and to fortify the inflation-targeting regime.
• Clean up the banking system. An asset quality review revealed significant under-capitalization. Some banks were recapitalized, and the Bank of Ghana used its newly enhanced authority to wind down insolvent lenders. The central bank developed regulations to ensure that banks meet sound underwriting and credit evaluation standards. It also paid back insolvent microfinance institutions’ depositors.

The outcome

Ghana’s economy is on the mend. The trade and budget deficits are narrowing. The pace of economic growth rose to above 8 percent in 2019 onwards from 2.2 percent in 2015. The inflation rate fell to 8 percent from almost 19 percent. Cuts to wasteful spending made room for much needed social services, such as free secondary education. For Ghana’s 28 million people, it all adds up to higher incomes, better job opportunities, and more purchasing power.

How was it done – Some key elements

1. The government of Ghana prepared a Shared Growth and Development Plan as a platform for policy reforms and engaging with the IMF and other donors.
2. Allowed full public transparency and published the Debt Sustainability Analysis done by the IMF. This enabled the Government to generate strong public support for austerity measures.
3. They also participated in “Peer to Peer” exchanges facilitated by the IMF with other countries like Mauritius, Cape Verde and Seychelles to understand what it takes to reform successfully
4. An ambitious Fiscal Consolidation anchored on enhanced revenue collection was implemented. On the revenue side, measures included: the imposition of Special Petroleum Tax of 17.5 percent (implemented in November 2014) to bring Ghana’s petroleum taxes more in line with international practice; and the implementation of the VAT on fee-based financial and of a 5 percent flat rate on real estate (implemented in January 2015) to broaden the tax base.
5. On the expenditure side Government agreed with the Unions on a nominal wage increase of 10% and thereafter agreed a 2-year wage freeze. Strict limits on net hiring in the public sector were imposed (which were frozen except in education and health). Moreover, subsidies for utilities and petroleum products were fully eliminated through strict implementation of tariff and price adjustment mechanisms.
6. The government used part of the resulting fiscal space to safeguard social and other priority spending under the program, including expanding the targeted social safety nets—such as the flagship cash transfer program (Livelihood Empowerment Against Poverty (LEAP)) benefitting the poorest households and which doubled its coverage to 150,000 households in 2015—and protecting basic health care coverage.
7. The authorities also cleared the outstanding stock of arrears over the three-year period through cash payments and securitization of arrears to SOEs with marketable financial instruments including liquidating arrears owed to Micro-Finance institutions. About a quarter of outstanding arrears were repaid in 2015. Note that outstanding arrears to suppliers were audited first.
8. To increase control over budget execution and avoid the accumulation of new arrears, the government (i) only recognized purchases generated by the Ghana Integrated Financial Management System (GIFMIS) as valid commitments of Government and (ii) extended the GIFMIS system to revenue and expenditure transactions of Internally Generated Funds (IGFs) to progressively enhance budget comprehensiveness.

Recommendations Moving Forward for Zambia

1. Convene Coordinating Debt Task team led by the Secretary to the Treasury

   The first step would be to convene a small team of no more than seven to nine people to begin the work of putting together a debt management strategy and negotiating framework using the Medium-Term Framework approved by Cabinet. This task team should comprise eminent Zambian technocrats that have the experience and knowledge. For instance, Dr. Caleb Fundanga, Prof. Oliver Saasa, representative from ZIPAR, representative from ZICA and the Bankers Association. This task team would report to the Minister of Finance that would then report to you. The task team should also include as Observers your Economic and Legal Advisors.

2. A private roundtable session with the President, Ministry of Finance, Bank of Zambia and key senior Government officials to discuss possible pro-business policy solutions for the 2021 Budget

   This roundtable should occur once the private sector is properly aligned in terms of the key issues, they would want the Government to act upon. At this stage those business leaders with strong networks and relationships with Government would need to be in frontline in terms of moving the discussions forward. All the main sector business associations and professional associations should be involved in this roundtable discussion.

3. We must also stop all new projects until a full project audit and expenditure review is undertaken.
4. Renegotiate all Government infrastructure contracts, loans from China and ensure that Zambia gets value for money.
5. In addition, Government needs to do the following to grow the economy and create more jobs:
   • Immediately dismantle domestic arrears owed to local Zambian contractors and suppliers of goods and services which will immediately bring liquidity into the economy. Government can issue a domestic bond specifically to pay of these arrears.
   • Revert RDA to Ministry of Infrastructure and allow it to operate devoid of political interference.
   • Fully implement PPP legislation to allow private finance in key infrastructure projects and ensure that PPP projects are assessed independently of political influence and patronage.
   • Initiate a mass housing project through IDC under a PPP using labour intensive technology so as create jobs for Zambians.
   • Maintain wage freeze and rationalise the civil service to make it more performance oriented.
   • Implement a “National Agricultural Development Initiative” that will provide low cost financing for emergent farmers to grow high-value export crops.
   • Facilitate under PPP arrangements the establishment of Cross Border Trade Zones at all the key cross border posts namely; Kasumbalesa, Nakonde, Kipushi, Mwami, Kazungula and Chirundu.
6. More importantly we need to enact a flat tax system across all sectors which would reduce admin costs, improve compliance and enhance the business environment. Government must stop borrowing for consumption. Furthermore, Government must get out of doing business and allow the private sector to drive growth. Zambia can do better but we need a focused Government with competent people allowed to work without undue political influence.

Others have done it

Mr. President, the experience of other countries suggests that Zambia’s ambition is achievable. Between 1990 and 2013, about 40 countries across the world have achieved average growth in real per capita GDP of 5 percent or more (at purchasing power parity).

International experience suggests that Zambia can be even more ambitious and lift its growth rate to 7 percent in the medium term, driven by domestic reforms and foreign investment–generated exports. Although not all countries succeeded in all reforms, countries that Zambia could emulate include India, Guyana, Vietnam, and Sri Lanka. African “lion” emerging economies, such as Cape Verde, Ghana, Mauritius, and Uganda, have also begun the journey already traveled by Asian “tiger” economies to move from low-income to middle-income emerging market status. With resolve, discipline, and a strong team it can be done.

Submitted in National Interest