The latest economic indicators appear to point toward a deteriorating situation for the performance of our economy. The management of our fiscal policy can best be summed up by drawing on the outside world’s perception of Zambia. As we make our synthesis we should ignore the upbeat ranting of our own financial men – particularly those serving in our present government.
Recent views from outside:
In October 2013, the international ratings agency Fitch downgraded Zambia’s long term sovereign rating from B+ to B, noting Zambia’s government finances had deteriorated sharply.
“The market’s perception of the government’s ability to manage public funds has worsened,” wrote financial analyst Yvette Babb. “The credibility of Zambia’s fiscal policy has suffered as a result of the overrun in the budget deficit in 2013 as well as inconsistent statements about the magnitude.”
Closer to home, the recent report by our own Auditor General only affirmed the negative perception of our country’s inability to manage the economy. The Auditor General report revealed the usual disheartening irregularities and abuse of funds … in some circles reported to have reached an aggregate total of a trillion kwacha.
Unsupported payments alone rose to K417 million from K26 million in 2011!! In general terms, there was poor management of contracts; poor financial performance; poor infrastructure management; some 21 institutions failed to produce audited accounts … the list of misbehaviour is endless.
What a tragedy to befall a young nation in 2014 that had sacrificed so much to correct the ills brought about by the unfortunate economic mismanagement of our economy in the first 30 years of independence. But beginning of these problems goes back much further.
Beginning the downward trend
A country’s economic downward trend or development takes long to manifest. It is the policies taken today that will have a bearing on the economic results in 5 to 10 years’ time.
Zambia adopted a robust, liberalised market economy system which saw the dismantling of 80% of the state-owned economy into private hands (unrepentant socialists would disagree). MMD introduced a cash budget to curb excess and unbudgeted expenditure by the government to address the kind of unchecked improprieties that had blighted the economy for more than two decades. The results are there for all to see in the first 20 years of MMD’s rule. In fact, it is ghastly to contemplate what could have happened to our country had this party not taken over.
The turnaround into our present economic woes unfortunately started with the same party that had come to our economic rescue … the MMD under President Levy Mwanawasa’s government. Some of the astute fiscal and monetary policies effected by MMD in the early years of their rule were discarded. The same policies that had promoted growth and increased economic activities, particularly in mining and agriculture, lay in limbo. And as time elapsed, the positive economic results came in during Mwanawasa’s reign. Unfortunately, by the end of his term, President Mwanawasa – perhaps perhaps buoyed by the positive results (ukutupwa) – decided to deviate from this well-articulated economic manifesto of the MMD party.
With all due respect, one lay much of the blame upon the late President Frederick Chiluba for having appointed such a misfit.
As expected, the late Mwanawasa approached economic problems from a lawyer’s perception: financial prudence ranks low as emphasis is placed on the equitable distribution of wealth. More often than not the basis of such perceived inequality is shrouded in the politics of xenophobia and other unknown factors not related to financial prudence.
In 2008, Mwanawasa’s first major move was to revoke bilateral development agreements (DAs) entered with each mining company at the time of privatization. All mining companies would now operate under a common legislative framework – a practice (revocation) that is taboo in the foreign investment community, who do not take kindly to the changing of goal posts. The president’s change in economic policy occurred because he “smelled a rat.” Some would say this only amounted to simple hallucinations, but this single, uncalled for move has eroded investors’ confidence particularly in mining from the time it was effected in 2008.
The revocation of bilateral agreements grossly disadvantaged those investors who had taken over old, uneconomic mines – the areas that require the heaviest capital investments to bring online. Apart from existing mines, increasing their production or opening new mines, the mining sector has not seen any new major player investing in mine projects in our country since 2008.
One should ask: “How can any investor commit billions in new investment when agreements cannot be honoured, and when they are toyed around like a yoyo by the government?”
In 2010, Mr Frederick Bantubonse, a chamber of mines president, bemoaned the ever changing fiscal regime of the government and predicted an end to new mining investment and capital expenditure as a pre-requisite for sustainable development.
Return of state presence in the economy
In 2007, the late Mwanawasa also changed the law in the agriculture sector to bring back state involvement in maize buying through the Food Reserve Agency (FRA). And with this move, he drove the country into the endless pit of financial mismanagement.
There are very few states in the world, if any, that are involved in the buying of maize, which creates price distortions and leads to shortages.
And yet there was nothing wrong with agriculture policies under the MMD’s initial economic blueprint. All the first 10 years under MMDs rule Agriculture production ended in bumper harvests, apart from one year affected by drought problems.
Local and foreign commodity brokers used to participate in the marketing of produce during the liberalised period. But when the state decided to get involved in buying of maize in 2007 only a fool would have remained to compete with a state agency.
The end result: Endless problems as evidenced by farmers’ late payments, poor commodity prices, fewer buyers, uncollected maize rotting in depots. And to compound the problem the tendency by the state to intervene by selling maize at below market prices for political considerations, in some cases almost bankrupting some millers in the process. The country could only head back to the disastrous agriculture policies of the UNIP days.
The mishandling of agriculture policies from 2007 through the ineffective subsidies, rampant corruption (fertilizer, maize) etc. has had a major impact on our country’s budget deficits. And we will continue on this road until we change course. The government should get out now.
The ever-changing fiscal regime under Mwanawasa continued unabated. The retrogressive windfall tax was reintroduced and subsequently withdrawn. Royalty tax increased by more 3000% from .03 to 3%. Financial analysts would note it was the first time in the country’s economic history after 1991 that the World Bank had suspended aid to Zambia in 2007. A blemish to his record that this happened during the rule of a hitherto “brilliant lawyer” who had no experience in economic matters. The “me syndrome” common to leaders seems to have taken hold of his faculties.
Of course the story does not end there. The subject of continuing fiscal woes under the current Patriotic Front administration will continue in my next contribution.
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