Columnists

Our current expansionary fiscal policy

Kaputo NAULAPWA.

Analysis: KAPUTO NAULAPWA
ZAMBIA has undertaken an expansionary fiscal policy to aid in the sustainable growth and development of the nation and, despite this, continues to face rising debt, unemployment, poverty and inequality.
To fight these obstacles to development, the Seventh National Development Plan 2017-2021 focuses on a multi-sector approach under the theme ‘Accelerating development efforts towards the Vision 2030 without leaving anyone behind’.
The plans for expansion and development are amiable but require a large amount of capital; sources include issuing government bonds and securities, selling government assets (i.e. National Land titling programme), increase in tax bases and borrowing from international financial institutions.
For some reason, these sources have proven inadequate for fiscal expenditure as the government has resorted to excessive external borrowing.
This has been observed through a continuous rise in debt, which was recorded in the fourth quarter of 2017 at US$8.7 billion and by the end of February 2018 rose to US$9.055 billion.
As per World Economic Outlook under the International Monetary Fund (April 2018), the Debt-to-GDP ratio for Zambia is 65.5 percent, which is well over the acceptable ratio of 40 percent for emerging and developing economies. Our credit rating as of July 28, 2018 by Moody’s is Caa1. A Credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of a country and also determines the cost of investment. Zambia’s reduced credit rating is the reason lenders are demanding high interest rates on debt repayments, which will further burden our economy.
The increase in tax bases is also objectionable; it will leave less disposable income and savings in the hands of consumers and potential SME entrepreneurs.
It may even encourage tax evasion by small business owners while large foreign corporations continue to enjoy tax waivers, especially in Special Economic Zones.
The tax waivers are understandable because Government is trying to attract foreign corporations and there is a strong relationship between foreign investment and economic growth as a large in inflow of foreign capital is required for a country to achieve growth and development.
On the other hand, savings encourage investment as well as bank deposits for people who have no present need for their excess income. These deposits are used by banks to finance loans to people with a present need for capital to be used in investments, which also promote economic growth. The result is a flow of liquidity in the economy and development.
Instead of its sole focus on foreign investment, Government should also invest in local entrepreneurs.
Not only does it encourage local prosperity but also community well-being. Local ownership ensures important decisions are made by people who live in the country and feel the impact of decision making.
Revenue from these businesses is recycled back into the economy, thereby enhancing liquidity unlike with foreign investment, where profits are sent back to their parent countries.
They make efficient use of public services and locally produced goods.
In the long run, an economy with thousands of small businesses ensures continuous innovation and low prices because of competition but most importantly, the government supporting local businesses encourages job creation, and may even provide better wages than multinational corporations. Eventually, locally owned businesses fuel economic innovation, reduce inequality and poverty moving families from low to middle income.
The national land titling programme became effective in 2018. According to the Ministry of Lands and Natural Resources, the programme is aimed at ensuring that all landowners are issued with Certificates of Title. This will provide security of tenure to property owners and increase revenue base and investment in the country, thereby contributing to socio-economic development.
However, this begs the question, how are consumer households going to obtain land with reduced savings from the increased tax base? We cannot completely rely on loans. Bank of Zambia has reduced the borrowing rates, which are currently at 9.75 percent to encourage investment, among others. With questionable long term stability in the economy, there is a high likelihood of an increase in defaults or non-performing accounts. All property purchased on credit would lead to land grabs and hence financial distress for households and businesses alike.
Globalisation and industrialisation have allowed the four Asian tigers (South Korea, Singapore, Taiwan and Japan) to develop and Zambia can try to follow their footsteps with investment in infrastructure and manufacturing industries.
One of the most important reasons the four tigers were able to develop so fast was because of good governance systems with firm directives and anti-corruption measures to guide their leaders and combat corruption. Zambia has a good constitution to guide our democracy but lacks implementation.
Julius Nyerere published an article on good governance in 1998 were he said, ‘The key to a governments effectiveness and its ability to lead the nation lies in the combination of three elements. Firstly, its closeness to its people, and its responsiveness to their needs and demands; Secondly, its ability to coordinate and bring into democratic balance the many functional and competing sectional institutions which groups of people have created to serve their particular interests. Thirdly, the efficiency of institutions (official and unofficial) by means of which decisions are made known and implemented throughout the country.
This is why we as individuals have to hold our leaders accountable for the various programmes created, international agreements signed and revenue spent on ventures that are supposed to benefit us. A periodic audit and review should be done sector by sector to assess whether these policies, reforms and agreements are working for us and if not, find a way forward.
If we seek to attain sustainable growth and development without leaving anyone behind, we have to understand that there is a correlation between poverty and development. Once we begin to tackle the key issues affecting our nation from the roots, we can begin the process of eradicating poverty and inequality.
The author is an economist.

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