EDGAR FACES TOUGH ECONOMIC REALITIES

By Bruce Chooma
THE biggest test for Edgar Lungu’s presidency is how he will manage the economy. The Zambian economy has suffered not only from political uncertainty but also from policy inconsistency. His decision to retain Alexander Chikwanda is an indication of continuity on the same path of economic management.
Zambia’s economy has continued to grow in a broad sense. Finance Minister Alexander Chikwanda in his end of year statement for 2014 stated that preliminary real GDP growth of 6 percent was recorded in 2014 making Zambia the seventh and tenth fastest growing economy in sub-Saharan Africa and the world. The truth he forgot to mention was that the 2014 growth rate was lower than the target government had set. In addition to that the inflation target was also missed despite falling oil prices on the international market.
Zambia would have attained a higher growth in GDP had it not been for policy inconsistency. It is desirable to have continued growth in the economy but this is something that cannot be guaranteed due to many external risks that need to be managed carefully and actively. Global growth is likely to slow down further, as the Eurozone continues to experience stagnation.  The economy of China has recorded it’s slowest growth for two decades, sending copper prices below $6000 per tonne with every possibility that copper prices will fall further. Though this risk is manageable, it is necessary that the government under the leadership of President Lungu outlines a clearer strategy for dealing with the inevitable backlash compounded by the introduction of a new mining tax regime which remains controversial and threatens the viability of the mining sector.
Given the growing level of borrowing abroad and in the domestic economy, one wonders if the Zambian government will have sufficient fiscal space to stimulate the economy if the need arises in 2015 owing to the above stated factors.

The Zambian government budget is hugely spent on personal emoluments and other human resource costs accounting for up to 70% of the national budget.  This is a bad position to be in for a developing country.  Mr Chikwanda uses this to justify his decision to maintain the wage freeze and the employment moratorium for the year 2014 and 2015.
Government borrowing is a matter of huge concern to the public. Hon. Chikwanda said Zambia has made progress in 2014 towards fiscal consolidation. The finance minister said in his end of year assessment that:
 “Our assessment of the deficit in 2014 indicates that it will be contained around 5.4% of GDP, a rate lower than the 6.5% of GDP registered in 2013”. This statement is highly misleading. The 2014 deficit was based on a different definition to the 2013 deficit because the economy was rebased. Zambia’s position is only looking better on this issue due to the rebasing of GDP which suggested the economy was 20% larger than previously estimated. The deficit is likely to worsen in 2015. The country does not only need strong stability in 2015, it is vital that government is proactive in engaging various players so that they understand the risks e.g. public sector unions need to realise that now is not the time to lift the wage freeze.
The PF government has consistently said that credit conditions have generally remained supportive of economic growth, this is not true. Economic blogger Chola Mukanga recently observed that liquidity conditions may have eased after the stabilisation of the Kwacha after the chaos of the first half of 2014, it is hardly true to say “credit conditions” are enabling as that is a wider problem.
 The cost of borrowing remain a huge constraint to entrepreneurship. The scale of the challenge appears too great for short term solutions here. The route to lower borrowing costs is through reducing exchange rate volatility, revising inflation expectations downwards; improving competition in the banking sector; credit bureau support; sorting out our address system (and housing) to be able to track defaulters; improvement in policy consistency – including syncing economic and political issues - ; and, tackling land reform to help release collateral.
The PF government needs a lot of discipline, focus and hardwork to develop an economy that produces sustainable jobs for all.