Maintenance of debt sustainability will remain pivotal in the rebalancing of the Zambian economy. Government’s borrowing over the medium term, therefore, will be guided by the Medium-Term Debt Strategy, to ensure that the country remains within sustainable debt levels. It is envisaged that the fiscal deficit will be reduced to no more than 3 percent of GDP by 2020. A recent research done by ZIPAR shows that interest payments and debt servicing are likely to be a major source of spending overruns in the 2018 budget.
Government has been borrowing heavily from the domestic market crowding out the private sector. Debt servicing is now taking a significant portion of Government spending. The Government of Zambia must be careful not regulate too much as that alone defeats Government’s programme that aims to foster job creation. If Zambians cannot benefit, then they will not only have been denied a share of the cake, but they will also have been excluded from participating in the economic rebuilding of the country. The current uncertainty and widespread debate on recent major policy shifts is creating a lot of tension within the business community.
But how will the Government balance the need to increase taxes to repay debts with the pressure to spend more on social services and the need to stimulate higher growth? Advocates of tax cuts argue that reducing taxes improves the economy by boosting spending; those who oppose them say that tax cuts only help the rich because it can lead to a reduction in government services upon which lower income people rely. In other words, there are two distinct sides to this economic balancing scale. According to Africa Confidential “Zambia has been using foreign reserves to service its debt. These foreign exchange reserves are now so low that the Bank of Zambia has not updated its public figures since February, and we hear that they fell to well below the last reported figure of $1.8bn”.
This puts the economy in a precarious situation as any shock to the economy will lead to serious consequences. Imported inflation will bring about higher cost push inflation if the Government does not manage the economic measures well. Zambia is now facing an economic shock that requires strong management from the Minister of Finance. She should not allow herself fall into the same trap her predecessors fell into of trying to appease political cadres that “all is well”.
Priority must be on prudent government expenditure. The Bank of Zambia by artificially strengthening the currency increased the real income of civil servants leading to spending sprees and higher share of public wages against revenues. Inflation is a tax on the poor. This has contributed to debt distress, unfavorable demand conditions and reduced tax collections as companies are not profitable and jobs are not being created.
Secondly, there is need to protect the poor- FISP, social cash transfer, etc. These must be implemented well without wastage or leakage through corruption and mis-appropriation. The Government must also act decisively on the reported cases of tax evasion by the FIC and ensure this money is collected. Why should the country be struggling to raise revenue when we have clearly identified tax evaders walking the streets of Lusaka freely without any consequences? If the powers that be have no courage to deal with money launderers and corrupt people, then at least get them on tax evasion and obtain the taxes due.
Another critical area of public finance leakage is in the construction sector where Government is spending billions of borrowed dollars that are being spent on inflated projects. In a recent live interview on ZNBC the former Minister of Finance, Mr. Chikwanda stated that there is an estimated additional US$4 billion in new loans that needs to be added to the $9 billion bringing the total external debt to US$13 billion. This was further confirmed by the current Minister of Finance when she announced measures to control debt contraction. One of the key measures announced was to “indefinitely postpone the contraction of all pipeline debt until the debt is brought back to moderate risk of distress”. The key catchword here is ‘brought back to moderate risk of distress’ implying that the country is at a high rate of debt distress! The current crisis is self-created by the Government and our current erstwhile Minister of Finance has truly been handed a ‘poisoned chalice’.
The key challenge now will be how she will implement the key expenditure measures especially as it relates to only funding projects at 80% completion and the cancellation of loans not yet disbursed. Based on recent pronouncements by the President on his country tours a substantial number of projects are below 80% completion. There are major implications not only for the economy but also the impact it will have on the construction sector that has been struggling lately due to payment arrears. This will require the Presidents support and full commitment to the implementation of these measures, otherwise it will be another beautiful pipedream for the Zambian economy.