By Alexander Nkosi
When we talk about job creation, it comes as a consequence of a recovering economy. It is difficult to create a significant number of jobs in an economic environment that is not conducive.
The prime role of government is to create an economic environment that allows private players to start up new businesses or expand existing ones. It is through this creation and expansion of entreprises that jobs are created. So, what makes the environment less conducive for private players to flourish? What are the major challenges private players are facing? In Zambia, access to credit is a challenge as the cost of borrowing is high. The cost of production is also high. This raises a challenge of profitability, making it hard for firms to survive.
One sector with huge potential for job creation is the manufacturing sector. Existing and new manufacturing firms need funds to fund new business ventures as well as expand existing ones. For them to produce better products, they need to import machinery. Due to weak kwacha, the cost of importation is high. This coupled with other high internal costs like transportation, power, rent, water – increases the cost of production. At the end of the day, their products have to compete with foreign products that are produced at a relatively lower cost depsite being of high quality and better brand appeal. The result is that most local firms fail to pay their businesses loans and they collapse.
Another sector with high potential for job creation is the agriculture sector. The problem is that the major inputs in production are imported. The prices of inputs are very high, significantly pushing up the cost of production. However, depsite production costs being high, the prices of agriculture products are usually low and unpredictable. The result is that most farmers make huge losses and fail to expand to allow for rapid job creation.
It is clear from the two examples that without addressing the underlying economic challenges, it is hard to grow the private sector and create millions of jobs. So, what are these underlying economic challenges and how exactly do they affect private sector growth and job creation?
Why are interest rates high? Government borrows heavily, crowding out the private sector. Banks would rather lend to government than high risk individuals. This pushes up interest rates. But why can’t government stop borrowing from the domestic market? Currently our domestic revenue for 2022 is K98.9 billion. Allocation to debt service is K78.6 billion. When we add the wage bill, all the domestic revenue is exhausted. If government does not borrow how does it finance the rest of activities for the year since two items exhaust the entire budget? Do we fire all civil servants to create room in the budget? This is not feasible! Do we increase taxes and rates to collect more revenue? This will further hurt the economy. Do we borrow heavily from the capital markets at commercial rates? This will worsen our debt crisis.
A clear and feasible option we have is dealing with the K78.6 billion we are losing through debt service as this keeps increasing and we risk a situation where it takes up the entire domestic revenue. How do we reduce the amount we spend on debt service? Through debt restructuring. For the people we owe to trust us with debt restructuring, we need to be on an IMF program where economic management is being closely monitored. This is where the IMF program comes in. If we restructure our debt, the amount we spend on debt service reduces. Where we are paying K78.6 billion, we could be paying K28.6 billion, this means we have created K50 billion within our domestic revenue which otherwise could have been raised through borrowing. Cutting down on domestic borrowing reduces the pressure on interest rates. This allows more individuals and firms to access credit at low rates. Cheap credit allows for profitability and expansion of production, creating more jobs.
Last year inflation went as high as 24%. Under such circumstances, if the Bank of Zambia does not manage money supply when inflationary pressure is building, we risk a situation where prices rise fast and the cost of production increases every day making it even more difficult for firms to plan and operate. So the Bank of Zambia has to monitor money supply closely and ensure there is balance. This is what informs the monetary policy rate which in turn affects interest rates. This is why at a time we need to lower interest rates, the Bank of Zambia does not reduce the monetary policy rate. It is all in the interest of the economy and entreprises.
The other economic fundamental that needs addressing is exchange rate. Farmers use imported inputs, manufactures use imported machinery and some other imported inputs. With an unfavourable exchange rate, the cost of importation goes up. Why is exchange rate unfavourable? We earn less dollars from exports, remittances and capital inflow but we lose more dollars through servicing foreign debt, procurement of fuel, fertiliser and other things. This weakens our kwacha, further pushing up the cost of production. Debt restructuring will reduce the amount of foreign debt we pay every year, thereby reducing amount of dollars we lose. This will reduce pressure on the kwacha. This hinges on an IMF program. Other things which will lead to kwacha appreciation are capital inflow and an expansion of production such as the mining sector with the tax incentive they got.
Also note that when government spends less on debt service after debt restructuring, it will have more money to provide more economic empowerment funds to Zambins that cannot get bank loans. It will have more money to invest in infrastructure required for entreprises to thrive. It will also have more money to clear arrears and allow entreprises owed to expand their production. Currently, our domestic arrears stand at K46.9 billion.
Being on an IMF program will also allow us to have increased access to concessional borrowing. Concessional loans come with very low interest rates and very long span of repayment. This allows us to borrow less from domestic market, it also allows us implement development programs without significantly increasing annual debt service outlays. This is what we need to allow private sector flourish.
This is why job creation and overall economic recovery hinges on addressing these underlying economic challenges. This is why the success of domestic solutions hugely depends on us addressing these challenges which require increased interaction with foreign entities. What some people call foreign solutions are a prerequisite to the success of what they call local solutions. For me, there are no foreign or local solutions, I simply call them solutions.
Given this background, the many foreign interactions the President has been having with IMF, World Bank, African Chamber of Commerce, European Union, European Investment Fund and many investers- form part of a critical component of addressing the underlying economic challenges. This will earn us an IMF program, debt restructuring, concessional loans, capital inflow, joint ventures. All these are very important for the success of the private sector and job creation. Is the President actively pursuing these? Yes he is!
At local level, debt restructuring will allow for more investment in agriculture, manufacturing, mining, tourism and other key sectors. Attracting joint ventures will allow for increased capital, better production methods, better branding and easy access to foreign markets. Low interest rates will allow for increased access to credit required for expanding production. Increased CDF and economic empowerment will allow youths and women access funds for business. Strong kwacha will lower the cost of importing raw materials. Transitioning from FISP to comprehensive agriculture support program will help farmers access increased support. Tax incentives in the mining sector will allow for $2.5 billion investment in expansion.
In conclusion, government is actively implementing both economic recovery and job creation agenda. The few hitches like high fuel prices are due to the huge amount we owe making it hard for us to increase subsidies. We are currently still subsidising atvaround $41 million per month through foregone tax.
What government needs to urgently address is communication. Ministries should step up communication. Tell Zambians the state of each sector, challenges identified and how these are being addressed.
Thank you!