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Thursday, 10 December 2015

Electricity goes down and up!

Government last week increased electricity tariffs for residential and non-mining commercial customers.  Prices to residential consumers have increased by 205%. Non-mining commercial prices have increased by 180%. Social services consumers such as schools, hospitals, orphanages and churches face a 190% increase.

The largest consumer of electricity, mining companies, are exempt from these changes. They do not get their power directly from Zesco. They get it from Copperbelt Energy Corp (CEC) which buys electricity from Zesco in bulk and in turn sells it to mining companies including the local units of Vedanta Resources and Glencore.  CEC already has agreements in place which ZESCO cannot change.

The Energy Regulation Board (ERB) claims the new tariffs are necessary to bring electricity pricing to "cost reflective” levels in order to attract investment.  It suggests that the increases would generate revenue that may facilitate an investment of up to US$3.7 billion in power generation projects. 

However, these figures look more like guesswork because no analysis or evidence has been offered by ERB to substantiate the claims. A point conceded by the IMF who recently noted, “the [increase] on its own, does not ensure full cost recovery in electricity provision”. So we are far from encouraging investment in the future.

The main reason for the latest huge increase is that the current electricity deficit has led to import of emergency power at a huge cost to government. A falling Kwacha, high inflation (19.5%) and high interest rates (15.5%) means high operational costs for ZESCO. Unless the prices rise the government's budget deficit will get worse.

What does this all mean for ordinary Zambians? The cost increase will not stop the constant load shedding. It is also not clear how much new investment will be generated in the long term because much of the increase is designed to ease operational costs on ZESCO not move us to cost reflective levels.  

What the increase will do in the short term is massively increase costs for small and medium businesses. What we now have is reduced supply of electricity at substantially greater cost. This will make life very difficult for farmers, traders, manufacturers and many social sectors. The result is higher unemployment and higher inflation. 

So not only will residential consumers face higher electricity prices they will have to meet these higher costs in the context of ever rising joblessness! 

As we recently noted, Zambia is facing "supply shocks" which should not be met by increased austerity measures of the kind being taken forward. It needs to focus on boosting supply not constraining it by increasing the cost of doing business, especially given the high prevailing interest rate. It fiscal response needs to focus on moving spending away from unproductive sectors to more productive areas. 

It has to tackle its fiscal deficit challenges in a way that does not turn Zambia into Venezuela. The latest move by ZESCO is another policy that has some merit but is in fact poorly timed and badly executed. 

It is poorly timed because though we certainly need to move toward increasing electricity prices in the future to cost reflective levels, in order to encourage long term investment in generation and transmission, now is not the time for reason explained above. 

It is badly executed because the new prices are still below cost recovery, and hence are unlikely to attract levels private sector investment. Most importantly, simply increasing prices is not the answer! 

Any move towards cost reflective prices must be put forward as part of an overall policy package that includes renewed obligations by GRZ to settle its own debts to ZESCO on time; undertake privatisation reforms for ZESCO that sees it only retaining monopoly over transmission (generation and distribution should be privatised); and wider public ownership of energy policy.

Saturday, 5 December 2015

Pricing in dollars

The government is apparently considering reintroduction of suspended Statutory Instrument (SI) 33 of 2012 which prohibits quoting prices in dollars, according to the Ministry of Finance.

Times of Zambia’s James Muyanwa in a recent summary of President Lungu’s press conference reported that the President as saying the “dollarisation of prices is illegal and unjustifiable, hence it should be stopped with immediate effect”.

Wednesday, 2 December 2015

Zambia's Tinbergen Moment

A reader recently asked for more explanation on the precise challenges facing Zambia. This is a huge question! We have already said much about this subject through many posts, especially on our Facebook page. But we appreciate that there is a lot more to be said than we have said.

Simply put, the situation facing Zambia is one of having many policy objectives (problems) but insufficient policy instruments (solutions), in face of serious external supply shocks. Zambia is failing the "Tinbergen Rule".

The rule reminds us that the number of policy targets (objectives) demands at least the same number of policy instruments. In simple english, you can't solve three problems with one or two solutions! You need at least three solutions.