INFLATION, newly introduced taxes and adverse sentiments are likely to hurt the economy between 2019 and 2020, warns Dr Patrick Chileshe Mumbi.
During the ZANACO 2018 end of the year Economic Review and Outlook for 2019, Dr Mumbi said there was need to come up with a stable tax regime and not pick anything that looks good in the global village.
“As a country, we tend to act a bit too late, all economic information is pointing to the fact that commodity prices are going to start dipping and that is when you introduce taxes that try to capture the profit margins of the rising commodity prices,” he noted. “We need to have a mechanism that helps us to anticipate the cycles in commodity prices so that we are able to have a stable tax regime in place. A stable tax regime is even more important than having to change taxes every time you see a positive in the global economy. It’s like we are being reactionary. We need to have a much more stable tax regime that is not only favourable to the government but also favourable to the taxpayer because you do not want a tax regime that chokes the taxpayer. It’s like milking the cow then killing it, then there won’t be milk anymore.”
Dr Mumbi said effects of weather patterns, the anticipated El nino in some parts of the country, could adversely affect the agro sector production.
“But on the better side, what we expect is that improved supply of electricity will help to lower the cost of production and also the efforts by the government to arrest the growing debt in the 2019 budget, in our view, that is going to reduce the levels of adverse sentiments that are created in the media due to growing size of government debt,” he said.
“In 2019 and 2020, we expect a positive growth in the economy but with risk and they cannot be over emphasized. The poor rainfall pattern being projected by metrologists is likely to hurt the agro sector output in 2019 and also the low commodity prices on the international market.”
Dr Mumbi said adverse news put the kwacha on stress thereby bringing about inflation.
“What do we expect to see in 2018 and beyond? We expect the exchange rate to remain stable in the range of about 10 to 12 per US dollar. However, there are risks to this projection. One of the risks is that we have seen higher holdings of domestic portfolios by foreign investors and these investors tend to react to news very quickly and should there be any adverse news, they could try and withdraw their financial assets from the country and put the kwacha on the strain,” Dr Mumbi said.
He said the government needed to reduce external debt.
“Another risk is the lower copper prices on the international market. Our belief is that should copper prices drop further, this could create a lower supply of foreign currencies on our domestic market and lead to depreciation. The growing external debt cannot be overemphasized and also the trade war between China and the US,” Dr Mumbi said.
He added that the Kwacha’s performance against other currencies on the continent was extremely bad.
“Sentiments have made the Zambian Kwacha to be one of the worst performing currencies in quarter three. The worst and best performing currencies in Africa in the third quarter of the year, the Zambian Kwacha was only better than the Angolan Kwanza,” Dr Mumbi said.
“Other factors that could adversely affect the economy’s growth are the negatives views that investors have about the government’s reintroduction of sales tax. We expect that businesses are still waiting to see how best government is going to implement the new sales tax. Taxes that are being reintroduced, especially the sales tax, has a cascading effect so what happens is that all the effects and costs that you incurred on your production becomes embedded in the product. That will not only have an effect on the business but also on individuals such as ourselves.”
He said inflationary pressures were likely to rise in 2019 but were expected to be subdued by 2020.
Dr Mumbi said the key reason was the anticipated tighter food supply in 2019.
“The exchange rate volatility is also likely to be a key driver of inflation. Interest rates are likely to start rising. This is because of the high inflation rate expected in 2019 and the relatively higher credit risk that is being experienced at the moment,” he said.
“The Zambian Kwacha is likely to remain stable in the short term but likely to depreciate in 2019 if policy intervention is not taken quickly enough. Policy intervention will help stabilise the currency in 2019.”
On crude oil, Dr Mumbi said there was need to give the responsibility to the Ministry of Finance unlike the Bank of Zambia as it stood.
“Up until recently, we have had a rise in the price of crude oil. Even if oil prices have shown a downward trend in the recent past, the drop in oil prices haven’t been affected by fundamentals. These prices are likely to rebound back to their levels of about $80 per barrel,” said Dr Mumbi.
“Our procurement cycle at the moment takes about 60 days, commodity prices are information sensitive and they tend to change so often that by the time our 60-day cycle is over, the prices would have gone back to the level at which they were. We need to have a… the government needs to find time to set up a fully-fledged treasury function at the Ministry of Finance so that we remove some of these responsibility that the Central Bank has now for us to benefit from these oil price fluctuations. Government needs to quickly set up a treasury function at the Ministry of Finance to help us hedge against the risks involved in fluctuation in crude oil prices.”