Reflection on 2018 economic highs and lows

WHEN Margaret Mwanakatwe was appointed Minister of Finance in February 2018, the country’s economic growth was at 3.3 percent year on year.
Inflation was around 6.2 percent while the deficit was at around 6.8 percent of gross domestic product (GDP), better than the projected 7.5 percent.
The country’s debt position as a ratio of GDP reduced from 60 percent to 56 percent at the time Mrs Mwanakatwe was taking over from Felix Mutati, while the Zambia Revenue Authority also beat its target by over K1 billion as the country closed the year 2017.
Moody gave Zambia a stable rating for the economy early in 2018.
Mrs Mwanakatwe came in eager to implement legal reforms involving loans guarantees; planning and budget; public finance management and the Procurement Act that would see Parliament in 2018 decide on debt contraction procedures.
Economist Chibamba Kanyama says Mrs Mwanakatwe had to do this quickly in order to restore economic confidence.
“She also had the task of reviving talks with the International Monetary Fund (IMF) and this led to a familiarisation but no-programme discussion visit by an IMF team in October. She also took a trip to China in September for loan negotiations, a mission whose real outcome is still expected by global investors,” Mr Kanyama says.
He says one of the challenging areas for Government in 2018 has been the performance of Zambia’s eurobonds that continued to trade on the secondary market at substantial spreads over United States treasury bonds of comparable tenor, caused by weak economic fundamentals as well as negative sentiment.
“At May 31st, the eurobond broke the 11 percent yield barrier, causing quite some panic among investors who began to re-assess their risk appetite. On the domestic market, Government had challenges with attaining full subscriptions for its auction of securities by mid-2018, this again attributed to negative sentiment and high external debt levels,” Mr Kanyama says.
He says Government decided to hold the bull by its horns and announced austerity measures in June 2018. The key highlights for 2018:
1. Mid-year budget review sought to re-align the deficit target of about 6.2 percent of GDP closer to acceptable levels of about 4.6 percent of GDP through austerity measures, primarily by way of halting additional spending on new projects below 80 percent of completion. The good news for the market at large is that as at November 2018, Government started to reign in on its fiscal spending. Government had by November 2018 frozen much of the capital expenditure as promised in June and suspended the procurement of goods and services to keep the deficit in check.
2. The Ministry of Finance began to communicate more with the market evidenced by the publication of both external and domestic debts, including arrears; thereby helping the market to carry out own debt sustainability assessment exercises. The global market has been crying for a clear document showing the debt stock, contracted debts and potential future borrowing.
3. Though the external debt stock has relatively increased in 2018, it seems Government has started slowing down its appetite to borrow. We are hoping that for the 2019 budget to remain on course, Government will have to freeze external, non-concessional borrowing, remain consistent on debt servicing, build reserves to at least four months import cover and also ensure Zambia Revenue Authority enforces tax compliance to the maximum.
4. The Government passed fiscal laws, a critical development in 2018 and a useful mechanism towards full application of THE 2019 budget. However, going forward, Government will need to fully stick to this commitment, follow its own laws and rely on Parliament for most decisions affecting financial management and debt procurements.
Going forward into 2019, Mr Kanyama says Government will have to manage three key risks that may create potential problems to the budget.
“First, the US Federal Reserve has increased the benchmark rate by 0.25 percent points and this will possibly affect the pricing of our eurobonds. At the same time, the FED rate increase will make it very difficult for the Zambian government to finance the budget through government securities unless the Bank of Zambia revises upwards its own monetary policy rate,” he says.
Mr Kanyama says this may have own economic consequences in 2019 in terms of the cost of borrowing and investment. Low participation in government securities also carries its risk of arrear accumulation or central bank financing (printing money).
“Second, Government projects US$1.3 billion mining tax revenue in 2019, and given the current resistance by mining companies, this figure remains a huge risk. Government should keep its eyes on this one revenue source. Third, we are still not sure about the weather pattern for the current farming season and any output less than 1.5 million tonnes of maize will have severe stress on the budget as Government will have to spend significantly to avert hunger,” Mr Kanyama says.
He adds that fourth, and much more seriously, the market is losing confidence in the possibility of an IMF programme.
“The longer it takes, the more difficult it becomes for Government to finance its budget in 2019. Let us close the IMF chapter by securing a programme by June 2019,” Mr Kanyama says.
The Economics Association of Zambia (EAZ) says the fact that there was a supplementary budget in the year reflects one pitfall of the 2018 proposed estimate of revenues and expenditure.
“There have been concerns around rising expenditure especially for the purpose of funding infrastructure projects. This was matched by tax revenue initiatives which cushioned the fiscal needs. Tax collections were above budget with VAT for the second first-time recording an above budget collection figure. However, part of the 2018 was for the purpose of meeting debt service obligations on dollar debt running,” EAZ national secretary Mutisunge Zulu said.
Mr Zulu cites the introduction of the revised public finance management (PFM) Act and the ability to absorb all debt service obligations for external debt running as one of the milestones.
However, he says domestic debt rose as the State’s appetite for funding rose.
During the second half of the year, Government recorded a lower appetite to borrow in the quest to manage crowding out effect that potentially impacts domestic credit.
“[The] 2018 budget allocated adequate funds to the Farmer Input Support Programme (FISP), which for the first time partially digitised the distribution of inputs to farmers despite teething challenges experienced in the period,” Mr Zulu said.
He said in line with the medium-term expenditure framework (MTEF), the Ministry of Finance pronounced the following:
i. Austerity commitment as mentioned by the Minister of Finance in the first half of fiscal performance review. This would then assist Zambia on its path to fiscal fitness. A number of measures have been actualised and implemented and have resulted in huge cost-savings. Some include the change in car ownership policy for senior government officials which allows them to fund their own maintenance and fuel costs. The association did however advise that there is further latitude for fiscal prudence.
ii. The Ministry of Finance’s commitment to a ‘debt refinance strategy’’ programme which would be tabled before Cabinet and a financial advisor sought to provide requisite guidance.
iii. The Ministry of Finance has embarked on quarterly fiscal performance reviews to disseminate official information of debt, reserves and expenditure. This has helped allay fears that investors have had around Zambia’s fiscal direction.
iii. The Ministry of Finance also committed to reopen engagements with the Washington-based lender IMF for a likely US$1.3 billion bailout package.
Forecast for 2019?
“If the oil price bears continue where crude (Brent and WTI futures) are suppressed, Zambia will likely receive a growth stimulus through lower pump prices of fuel in the first half of 2019,” Mr Zulu said.
He said with adherence to austerity for fiscal prudence and the outlined medium-term expenditure framework, growth target of above 4.5 percent is very likely.
“However, risks to growth will be characterised by the outcome of the negotiation between the mining houses and the Zambian lawmakers over the 2019 proposed tax regime change. This has potential to impact mining productivity which is a key driver of growth,” Mr Zulu said.
He said other risks to growth include effects of a prolonged dry spell which could impact agricultural productivity.

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