At the turn of the year the GRZ gave its assessment of the 2014 macroeconomic performance and the outlook over the 2015-17 period. Here the key quotes from Finance Minister Alexander Chikwanda :
ECONOMIC PERFORMANCE“The economy in 2014 has remained strong with preliminary real GDP growth of 6 percent; making Zambia the seventh and tenth fastest growing economy in sub-Saharan Africa and the world, respectively”“The positive performance was driven by agriculture, manufacturing, construction, energy, transport, communication, and the financial sector. Preliminary data shows that mining is expected to contract on account of operational challenges at some localities during the year under review. Considering that growth has been driven by non-mining sectors, this is clearly a reflection of the Government’s relentless efforts in diversifying the country’s sources of growth, income and employment”
“Going forward, it is the intention of the Government to continue with policies and strategies that will further consolidate the diversification of the economy, and in the process ensure resilience to any adverse external developments, such as those associated with volatile copper prices”
“Over the medium term, 2015 - 2017, real GDP growth is expected to escalate to an average of 7 percent principally as a result of increased agriculture production, electricity generation, construction and growth in transport and communication….Investor confidence continued to be strong in 2014. Evidence to this was re-affirmation of the country’s sovereign credit ratings at a ceiling of B+ coupled with the continued rise in FDI inflows…”MINING INDUSTRY“Some economic analysts have been raising concerns over the outlook in the mining sector. There is no cause for alarm. As Government, we are confident that working in collaboration with mining companies, the concerns will not be insurmountable as they will be resolved with reciprocal amicability”“The Government remains committed to resolving the matter of VAT refunds to mining houses and other sectors. Movement on this issue has been delayed on account of the court actions which some mining companies have instituted. Our hope is that we can still resolve this matter…. For 2015, we have made provisions to cover normal VAT refunds as well as dismantling prior claims”“Following the approval of the 2015 Budget and in particular the new mining fiscal regime, Government fully recognizes the reported concerns by some mines…Government will engage the concerned mines within the framework of the existing statutes, upon presentation of the likely adversity on their operations… while taking due consideration for the Zambian people to benefit from their natural resources. The current tax structure is a final tax that has replaced the profit based tax, which was largely illusory and disadvantageous to the country..”FISCAL AND DEBT POLICY“The Government in 2014 made progress towards fiscal consolidation. Our assessment of the deficit in 2014 indicates that it will be contained around 5.4% of GDP, a rate lower than the 6.5% of GDP registered in 2013. For 2015, the projection is an even lower deficit of 4.6 percent, while in the medium term; the Government will reduce the deficit to around 3 percent of GDP, in line with the policy of promoting the availability of capital for private sector growth. The reduction in the deficit will be firmly anchored on continued re-alignment of expenditures to priority areas such as infrastructure, improved public service delivery, and rationalizing the Government wage bill to forestall structural imbalances and deformities. Recurrent expenditures of up to 70% largely emolument and emolument related cannot be a recipe for country-wide sustainable development..”“The Government takes the issues of debt sustainability very seriously…The last Debt Sustainability Analysis (DSA) was conducted in June 2014 and the full report is ready. Total public debt is in the order of 32 percent of GDP, a level that is below the internationally accepted threshold of 40 percent. Our external debt as at end-September 2014 stood at US $4.7 billion. In net present value terms, this represents 17.6 percent of GDP. The domestic debt as at end-September 2014 was at 13.6 percent of GDP”“Regarding the exchange rate, the trend this year has been towards depreciation, especially during the first half of the year. Some measures undertaken by the Bank of Zambia have led to relative stability of the currency…Going forward, the Government will continue to monitor exchange rate developments to ensure stability as continued tight liquidity conditions may overtime harm the economy”“We have noted that credit conditions have generally remained supportive of economic growth. For the year to September 2014, domestic credit increased by 14.8 percent. Government however, remains committed to ease liquidity conditions in the financial sector once relative stability in the exchange rate has been attained”.(Source: Ministry of Finance, December 2014)
Four things worth noting. First, it is correct that Zambia’s economy is growing well and the growth is increasing more broad based. However, it worth remembering that the 2014 growth rate is lower than the GRZ target – something the minister neatly side steps. And it is not just the growth target out of sync. The inflation target was also missed despite falling oil prices [a testimony to our flawed procurement strategy]. More importantly the minister should have been more upfront to acknowledge that Zambia’s failure to register spectacular growth, rather than merely “good growth” has been down to lack of policy consistency.
Secondly, whilst it is true strong growth should continue over the medium term, it is not by all means guaranteed. Zambia faces important external risks than need to be actively managed. Global growth is likely to slow down further, as the Eurozone continues to experience stagnation. We have also seen China record it’s slowest growth for two decades, sending copper prices below $6000 per tonne with every possibility that copper will fall further. Though this risk is manageable, it would have been more helpful for the finance minister to set out a clearer strategy for dealing with the inevitable negative headwind, especially given the mining taxation debate. Is there sufficient fiscal space to stimulate the economy if the need arises in 2015?
Thirdly, related to the second point the statement notes the alleged progress Government has made in 2014 towards fiscal consolidation. The finance minister says “our assessment of the deficit in 2014 indicates that it will be contained around 5.4% of GDP, a rate lower than the 6.5% of GDP registered in 2013”. What he does not seem to mention is that the 2014 deficit is based on a different definition to the 2013 deficit because the economy was rebased last year. Zambia’s is only looking better on this issue due to the rebasing of GDP which suggested the economy was 20% larger than previously estimated. More importantly as we noted yesterday, the deficit is likely to worsen in 2015. Here again the issue is not simply that we need strong stability in 2015, it is vital that government is proactive in engaging various players so that they understand the risks e.g. public sector unions need to realise that now is not the time to lift the wage freeze.
Finally, the statement by the minister that “credit conditions have generally remained supportive of economic growth” is clearly misleading. Liquidity conditions may have eased after the stabilisation of the Kwacha after the chaos of the first half of 2014, it is hardly true to say “credit conditions” are enabling as that is a wider problem. The cost of borrowing remain a huge constraint to entrepreneurship. The scale of the challenge appears too great for short term solutions here. As we have noted before the route to lower borrowing costs is through reducing exchange rate volatility, revising inflation expectations downwards; improving competition in the banking sector; credit bureau support; sorting out our address system (and housing) to be able to track defaulters; improvement in policy consistency – including syncing economic and political issues - ; and, tackling land reform to help release collateral.
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