ZAMBIA HAS TAKEN THE RIGHT STEPS TO ECONOMIC RECOVERY DESPITE THE HIGH COST OF LIVING- IMF DEAL WILL GIVE US THE BREATHING SPACE WE NEED FOR LOCAL SOLUTIONS TO THRIVE!
By Alexander Nkosi
If you are a farmer, one of your biggest challenges is the high cost of inputs/chemicals, these are mostly imported. If importing 1000kg of fertiliser is USD1000, at K18/dollar, it will cost K18,000 in kwacha. If kwacha appreciates to K9/ dollar, farmers will spend K9000 to get the same quantity of fertiliser.
If you are a manufacturer and you want to produce goods that will compete on the market, you will most likely need to import better manufacturing equipment. If a machine costs USD100,000, at K18/dollar the kwacha equivalent is K1,800 000. However, if kwacha appreciates to K9/dollar, then manufacturers will only spend K900,000.
Clearly for an import dependent economy like Zambia that also imports inputs and equipment, the unfavourable exchange rate pushes the cost of production up. This makes it hard for local manufacturers to thrive. This explains the importance of strengthening the currency to our economic recovery agenda.
Manufacturers, farmers, small scale miners, players in the hospitality industry all need capital to grow their entreprises. Heavy government domestic borrowing pushes interest rates up. Borrowing at high interest rates, importing equipment and inputs at an unfavourable exchange rate and competing with big continental players makes it hard for local firms to survive?
If the cost of production is high and the cost of imports is also high, this leaves the prices of goods and services high and generally pushes up the cost of living.
How can we strengthen the kwacha? The inflow of dollars into the economy has been slow due to low export growth and low capital inflow? On the other hand government keeps losing more dollars through debt repayment and expensive import of fuel and agriculture inputs.
Should government significantly reduce domestic borrowing? The domestic budget is exhausted by debt service and wage bill, implying that government has to borrow to fund the rest of the budget. External borrowing in international markets at commercial rates is very expensive, right now we are struggling with eurobonds.
Should government significantly lower tax rates to promote production and lower the cost of living? Out of a revenue of K98.9 billion, K78.6 billion goes to debt service and the rest to the wage bill, if tax rates are reduced, the immediate impact is to lower domestic revenue as the economy adjusts, this implies that government has to borrow to cover the huge deficit, and increased borrowing brings us back to the same problem we are trying to resolve.
Should government increase funding to entrepreneurs? This can only be financed through increased borrowing which has a counterproductive effect.
As long as debt is not addressed, we will keep going round circles. This is why the first step to economic recovery lies in dealing with our debt. This is where IMF becomes key. An IMF deal will help us get debt restructuring, attract capital inflow and enable us access very cheap concessional loans including the USD1.4 billion under the extended credit facility.This will increase supply of dollars on the market. Restructured debt will reduce loss of dollars through debt service and this will strengthen the kwacha and enable our farmers, manufacturers, small scale mining firms and other entrepreneurs import at a low cost. Restructured debt will also reduce domestic borrowing as government will now have funds released from reduction in debt service outlays, this will push down interest rates and enable the private sector to have access to cheap credit to expand production. Debt restructuring will also free funds to speed up dismantling of arrears to boost economic activities.
At the centre of Zambia’s economic recovery is the IMF deal and debt restructuring. Given that we have reached staff level agreement in seven months and remain on track to IMF board approval, we have taken the most important steps to economic recovery despite the cost of production and living going up in the short term. There is no more headroom to simply borrow and keep fuel prices and cost of living low. We have to take the steps explained above, otherwise we will end up worse off.
The greatest achievement by the new dawn government is reaching the IMF staff level agreement. The increased CDF allocation, expanded free education and mass recruitment into civil service are good but they will need a thriving economy to be sustained. There is no need to fear any IMF conditionality because Zambia in its current state does not have money to sustain any subsidy for a long time if our debt crisis is not addressed. IMF deal by itself is not development neither does it guarantee development, but it gives us the breathing space and access to opportunities needed for domestic solutions to succeed.
In conclusion, the cost of living might be high but the only way to sustainably reduce it is to address underlying problems; restructure debt, attract capital inflow, access concessional borrowing, strengthen kwacha, lower cost of production, lower cost of living. Other benefits include sustained growth and job creation.
Thank you.