Lusaka, May 26, 2019
We as the undersigned civil societies organisations (CSOs) welcome the decision of the President, His Excellency Edgar Chagwa Lungu, to hold an emergency Cabinet meeting this week to discuss the country’s economic outlook as well as its current debt situation.
In light of the country’s high poverty rates we are concerned that the country’s negative economic outlook will have the most negative effect on women and youth. In anticipation of this meeting, therefore, we would like to take this opportunity to highlight key issues the we hope will be discussed during the meeting.
Country’s economic outlook
This year, the country’s poor harvest and global economic slowdown have left the economy vulnerable, with growth forecasted to slow to 3.1% which is too low to achieve meaningful reduction in poverty. Further to this, the instability over the last few weeks has seen the Kwacha depreciate against the US Dollar to one to 14. Inflation is therefore forecasted to increase above the 8% threshold which will result in increase in the cost of goods and services.
An increase in the cost of living for ordinary Zambians is particularly burdensome for poor Zambians who are already burdened with high living expenses. According to JCTR, the Basic Needs Basket for a family of five in urban areas is currently costing a household ZMW 5,519 for a month which is way above the average income of most poor households.
Country’s debt situation
It is important to realise that the concerns above are not taking place within a vacuum. The country’s debt situation remains at the heart of many of the economic problems we see today, and many citizens are beginning to recognise this. According to a perception survey that was undertaken by the Consumer Unity and Trust Society in October last year, 75% of Zambians expressed concern about the country’s debt situation. Citizens indicated that rather than notice the benefit of debt in the form of infrastructure improvement, they were increasingly associating it with increased taxes and charges, increased prices and poor delivery of social services.
In the first quarter of 2019, debt increased by over $125 million. The country’s national debt currently stands at over 70% of GDP. With over one in four Kwacha budgeted for debt servicing as indicated by the 2019 national budget, debt has created liquidity problems in the economy and thereby contributed to a loss in investor confidence forcing Government into harmful policy decisions.
In order to address the debt situation, we believe that the Government should consider the following steps:
- Firstly, Government needs to take immediate action to improve cooperating partners’ and investors’ confidence in the markets through robust financial management. This includes implementing long overdue financial oversight reforms, improving transparency on pipeline debt and revising the Medium-Term Expenditure Framework. The revision and enactment of the Loans and Guarantees Act and the Planning and Budgeting Bill respectively would also serve to achieving this objective.
- Secondly, Government needs to implement a genuine austerity budget for 2020 but also begin to undertake austerity measures immediately. Social protection spending to Zambia’s most vulnerable citizens, however, must be protected, meaning that Government must look to cutting emoluments, reducing capital investment (such as suspending plans to launch a national airline), and streamlining social spending where there are opportunities. Examples include continuing to reduce the Food Reserve Agency reserves as well fully rolling out the e-voucher FISP programme.
- Thirdly, Government must take a number of policy decisions to address Zambia’s debt and promote private sector-led growth. It must look to dismantling pipeline debt and restructure existing debt through meaningful discussions with China. In addition, Government must look to empower the private sector as the engine of growth, rather than infrastructure spending: this means resolving issues with the mines and improving linkages with domestic firms, dismantling arrears to improve liquidity in the economy and improving access to finance for SMEs.
Taking these steps will allow Government to refinance its debt to relieve the pressure of debt servicing on the budget and wider economy. This could be done with the support of the IMF, who would be brought in to provide technical assistance, or on the markets, who will have confidence in a country with a clear plan for fiscal sustainability and achieving its economic potential.
Other issues which, in our view, need urgent tackling include the following:
- Sales Tax: it is important to discuss how the Government seeks to address the inflationary impact that Sales Tax will have. Stakeholders have urged the Government to consider delaying its implementation in order to allow the Government time to fully develop a model the that will have the least negative impact on growth, inflation, trade, jobs and revenue. According to ZIPAR, research indicates that the effective tax rate under Sales Tax will likely be 23%, up from 13% under VAT when accounting for exemptions. Pushing up prices will harm businesses and consumers and result in job losses.
- Mines: it is important to discuss how the Government will seek to resolve the standoff between the Government and the mines. Mines are the largest source of foreign exchange in Zambia. Foreign currency is needed for debt repayment and stabilising the economy from shocks. At present the country’s foreign currency reserves stand at $1.43 billion which translates to 1.6 months import cover. In the first quarter we saw that copper production had contracted by 11.3% in the first quarter.
- Domestic Arrears: it is important to support the private sector by settling debt payments owed to them in a timely manner. This will ensure that these companies are profitable and are able to contribute to economic growth, rather than cease operations due to liquidity challenges and lay off workers.
As civil society we are of the view that this meeting can contribute to undoing the harmful effects of recent policy on the economy and lead Government to setting out a roadmap that will look to address Zambia’s debt and restore long-term growth in the interests of ordinary Zambian citizens.
We call upon the President to consider broadening the consultation on the economy by engaging local think tanks and civil society organisations that have actively been monitoring economic performance. As civil society organisations we stand ready to support Government to make the necessary decisions to return the country to sustainable growth and look forward to hearing the outcome of meeting with the Cabinet.
Signed by:
Consumer Unity and Trust Society
Centre for Trade Policy and Development
Alliance for Community Action
Oxfam
Action Aid
Civil Society for Poverty Reduction
Non-Governmental Gender Organisations Coordinating Council