Deficit Budgeting in Zambia: A Worrisome Return to Unsustainable Debts?

Deficit Budgeting In Zambia: A Worrisome Return to Unsustainable Debts?

By: Dr Mbita Chitala ; Executive Director – Zambia Research Foundation

In fiscal 2014, Finance Minister Alexander Bwalya Chikwanda  has announced that our national budget of K42,682,030,000 will be partly funded by a huge deficit of K10,516,870,000 in addition to domestic revenue of K29,538,540,000 and hoped for grants from donors of K2,636,630,000.

It should be noted that the projected GDP of Zambia in 2014 will be K135,744,646,000 according to the MTEFF, and  our 2014 budget will be K42,682,030,000 which  is 30.7% of our GDP

What observers see as worrisome is the impact of the huge deficit financing that represents 24.6% of the budget and 7.2% of GDP on the economy of Zambia. Does this mean a return to unsustainable borrowings where the country joined the HIPC group of counties or it is the beginning of growth of our economy.

The management of the public debt,  and its growth is currently a controversial issue in the debate over responsible fiscal policy. There is a continuing controversy as to whether governments should entertain deficit financing. The simple answer is that deficit financing of any national budget can be either good or bad depending on how it is managed.

What is Deficit Financing/spending?

Deficit financing is when a government spends in excess of tax receipts. In order to fill the gap of their deficit budgets, governments usually borrow or print money. In Zambia, the Bank of Zambia on behalf of government will issue Treasury Bills and Bonds which will be bought through open market operations. Furthermore, the government can also borrow from other governments, multilateral institutions as well as from private money market institutions or simply print currency to fill the gap.

Public Debt in Zambia

Deficit financing is part of the problem of public debt management. In the period from 1978 up to 2004, Zambia’s debt burden increased at a rapid rate because of borrowings. The public debt for Zambia has been growing exponentially.

In 1978, external debt stood at US$999.5 million reaching US$3.3 billion in 1980 and further increasing to more than US$7.2 billion in 1990. The external public debt went down during the early 1990s reaching US$3.7 Billion in1992  but climbed back to more than US$7 billion by the end of 1996 and reaching US$7.2 Billion in 2004.

 On the other hand, domestic debt stock in 1978 was a mere US$378.5 million. In 2003, it had risen to ZMK3.9 Trillion while in 2004, it stood at Zambian Kwacha 5.5 Trillion. In 2011, Zambia’s internal debt was K13.122 billion while as at September 2013, the internal debt has jumped to an all time high of K17.8 billion and the end year 2013 figures will certainly be higher.

The total external debt alone represented over 120 percent of Zambia’s Gross Domestic Product (GDP) in 2003. The external debt service of US$462 million in 2003 represented about 11 percent of GDP, 15.4 percent of total exports, about three times the national education budget and about four times the health budget. Indeed, the projected debt service without any debt relief agreement with the major creditors in 2004 and 2005 would have been US$470 Million and US$475 Million  representing 8.8 percent and 8.3 percent of Zambia’s GDP, respectively.

However, because of various debt cancellations and relief, the external debt service was reduced to ZMK229 billion and ZMK152 billion in 2003 and   in 2004 respectively. 

President Mwanawasa left a legacy of a sustained public debt management after  inheriting an unsustainable debt which in 2005 reached $7.2 billion. After successful negotiations with all creditor organizations (multilateral institutions, Paris Club and London Club), Zambia was able to enjoy the debt relief under HIPC which saw our external debt reduce to about $500,000,000 in 2007.

Soon after the demise of Mwanawasa, the administration of President Banda started borrowing. In 2009, the total public debt was K15,620,570,000 which was 24.17% of GDP and comprised of K9,502,060,000 domestic debt and K6,118,510,000 external debt. The public debt continued increasing and in 2011, the total public debt rose to K21, 310, 830,00 (K13,122,410,000 domestic debt and K8,188,430,000 external debt).

Zambia’s public debt has continued to rise after the PF took over government. As at 31 December, 2012, Zambia’s external outstanding debt was $3,068,133,946.13 of which $2,944,687,444.08 was debt outstanding and the arrears comprised $78,540,177.05 of principal and $44,906,325.00 of interest. The consolidated domestic debt for 2012 is not yet available although an additional K1, 324.3 billion had been budgeted for borrowing in 2013. And for the 2014, the government plans to run another budget deficit by borrowing K10, 516,870,000 or 24.6 % of the budget or 7.5% of GDP.

The above policy regime is bound to not only increase our total indebtedness but may start creating another unwarranted debt overhang which will not be sustainable. A time after borrowing comes when the burden of annual repayments of loans and interest as percentage of current receipts will become unpayable when they fall due.  In the current situation, the government has been failing to redeem the public debt when it falls due and have tended to accumulate expenditure arrears in both the domestic debt and the external debt.

The challenge the government faces is on expenditure management, to devise a domestic and external debt management strategy that will ensure that the high debt stock and rising debt service burden shall not adversely impact on the country’s economic growth. Unless the government uses the debt so acquired prudently in programs that add to our GDP, the country may get back to the HIPC condition where our country would lose its credit worthiness and become a pariah in the world of civilized nations.

However as already stated, deficit financing by governments can be both good and progressive or bad and retrogressive depending on how the contracted debt is managed.

Arguments against Deficit Financing

Many critics of the PF government have objected to deficit financing arguing that it is bad policy. These fiscal conservatives contend that a government should always run a balanced budget and if need be, it should have a surplus budget to pay down any outstanding debt. This position has its origin from Adam Smith (1723-90) and was further advocated by Milton Friedman (1912-2006) of the Chicago School of Economics. This view is also associated with the gold standard where all currencies were fixed against gold. The idea is that a government must spend what it has.

Some critics have not only faulted state borrowing especially deficit financing for being inflationary, but also contended that it overburdened future generations. David Hume (1771-1776) was one of the first scholars to address the subject and criticized the idea of deficit financing. Adam Smith  devoted forty pages of his work “The Wealth of Nations” criticizing the principle of deficit financing. David Ricardo (1951) also condemned public debt creation by governments and noted that this principle tended to destroy capital. This criticism was extended further by J.S. Mill (1915) who viewed the public debt as a double burden which had to be opposed.

Generally, all these classical scholars opposed the idea of public debt creation and ascribed to the need for states to adhere to balanced budgets. These protagonists based their approach on the principle of strictly controlling growth in the money supply and argued that this approach was the one sufficient and essential condition for the control of inflation.

The basic flaw of this monetarism was revealed in practice, not because it was ineffective in bringing down inflation, but because it could only do so by means of strangling the real productive economy, and then could not prevent a recurrence of inflation in the event of a sustained revival of growth.

Other critics contend that deficit financing is inflationary and this is a bad thing. Governments normally print money to pay off debts when they fall due and thereby increase money supply which fuels inflation. This view is criticized by Keynesians who argue that deficit financing may not be the only factor that can be inflationally. There are other factors such as supply side shocks. An example for this is  an oil crisis. Inflation therefore depends on monetary policy.

 Furthermore, deficit financing is opposed as it is seen as an unnecessary way of creating public debt. In the case of Zambia, the government will borrow by using the Bank of Zambia to sell treasury bills and bonds as well as compel Bank of Zambia to printing money. The government also plans to borrow from foreign governments such as China as well as multilateral institutions such as the World Bank, IMF, ADB and from the Euro bond market. The burden of this debt on Zambia shall be the principal and the interest which shall be paid to holders of treasury bills and bonds and other promissory notes as well as to the external debt to be contracted. This ostensibly will restrict the government from being able to cut taxes or raise its expenditure.

A further argument against deficit financing is that spending today will require increased taxation of citizens in future to pay the debt. It is contended that it is unfair to burden future generations with suffocating debt obligations.

Some political economists also believe that government deficit financing takes away loanable funds from banks and thus push up interest rates. The high interest rates tend to crowd out or discourage private investment cancelling the so called fiscal stimulus and impeding growth of the economy.

Most observers agree that for domestic debt, the borrowing should not create unnecessary and costly distortions in the economy. If the domestic debt affects the economy adversely through high interest rates, it may in turn lead to a slow down on economic growth.  The central point is that whereas borrowing domestically is healthy, it must be within limits because excessive borrowing could be distortionary and it would tend to slow capital formation.

Furthermore, a large public debt can create adverse effects on national income. A large government debt can clearly be detrimental to long run economic growth. First, as the debt accumulates, more and more private capital is displaced resulting in lower national output. Secondly, additional taxes are levied to pay interest on rising debt stock resulting in inefficiencies which in turn leads to lower output. Taking the two together, output and consumption will grow slowly than they would had there been no large government debt and deficit.

Arguments for Deficit Financing

The arguments for deficit financing are espoused by those who advocate the administrative control of prices and wages as the most appropriate means of controlling inflation. John Maynard Keynes (1936) in his seminal work “The General Theory of Employment, Interest, and Money” debunked the classical view that low levels of demand in an economy were self-correcting.

Keynes advocated that when an economy was in or likely to go into recession, the central government must engage in deficit spending. This doctrine meant that a government could borrow money to spend on public works and other public goods. In so doing, the government would expand overall demand. Keynes further advocated expansionary monetary and fiscal policies, meaning, the use of expanding money supply and lowering taxes to stimulate economic activity.

Broadly speaking, Keynes advocated the management of demand to maintain full employment in the economy. Said differently, John Maynard Keynes (1883-1946) argued that that deficit financing is desirable and necessary. A country should run deficits when there is recession to compensate for the shortfall in aggregate demand. When an economy has high unemployment, an increase in government purchases creates a market for business output, creating more money in people’s pockets and encouraging increases in consumer spending. This multiplier effect further increases demand for goods and services and raises the GDP and employment opportunities. Deficit financing works as a stimulus in an economy and will encourage companies to invest more capital and in the process they will be assured with reaping high profits.

It is important to note, however, that deficit financing  can stimulate demand if the government’s deficit is spent on such things as capital items that will in turn increase potential output in the long run

The Post Keynesians such as the Chartalists even go further and contend that deficit spending money is what is taxed at the end.  A government cannot bust its budget as a national budget is simply an account of national spending priorities.

Furthermore, it is argued that deficit financing is necessary for monetary expansion in an expanding economy such as has been the case for Zambia for the last ten years. If the economy grows as it has been at more than 7% of GDP annually, the money supply should also grow. And this can only be accomplished by deficit financing. If this is not done, it may lead to a credit bubble and a financial crisis. Deficit financing is acceptable but it depends on the level of GDP growth.

The Neo- Monetarist Argument

The Keynesian advocacy of deficit financing has however been opposed by the so called neo-monetarists who take the view that the control of inflation in an economy is more important than reducing unemployment. This view is closely identified with the ideas of the Nobel Prize-winning Professor Milton Friedman who also greatly influenced the now failed Structural Adjustment Policies of the World Bank and the IMF.

The neo-monetarists advocate tight monetary and fiscal policies and the balancing of state budgets. They warn of the future consequences of debt accumulation and its burden upon later generations. Neo-monetarists contend that debt finance places an unfair burden on future generations, firstly, by reduced capital formation when resources shift from the private sector to the public as occurs when the state borrows domestically. Secondly, by sadling future generations with an obligation to service the foreign debt.

The weakness of the neo-monetarist conception is that they confuse the tasks at hand. The question is not whether a government can repay the debt, because public debt and the economic management are a continuing undertaking. When a debt issue matures, it is paid off as the necessary funds are obtained by issuing new obligations. The issue rather is how interest service will affect the economy and how outstanding debt enters into the liquidity structure of the economy.

World Experience

 The reality on the ground is that all countries incur public debt of one type or another purely on the basis of necessity. For instance, over 80 per cent of Organization of Economic Cooperation and Development (OECD) governments borrowing was in the form of marketable instruments such as government bonds and treasury bills. On average, since the year 2000, OECD countries have been running budget deficits of around 4 per cent of GDP. Even prudent Asian governments, including Japan, have been running budget deficits of an estimated 3 per cent per annum during the decade 1980-90. The OECD predicted that by 2008, its members would be sitting on central government debts totaling 86 per cent of their combined Gross Domestic Product (GDP).

This situation repeats itself in almost all developing countries. For instance, in the United States in the 1950s and 1960s, the country’s debt exceeded its GDP. However, this is the time the USA experienced long prosperity. President Obama’s stimulus program in the USA that has been used to defeat the recession is anchored on  huge government deficit spending.

For a country to engage in deficit financing, it means that the private sector is in surplus. In other words, deficit spending will permit the private sector to accumulate net worth. This is why all governments run budget deficits.

Deficit financing: Good or bad

The majority of economists would agree that if a government borrows in order to deal with a recession or spends on public investment on infrastructure, education, public health, on public goods that will advance capital accumulation, then such deficit financing is bearable, beneficial and even necessary. If on the other hand deficit financing is for current consumption such as wages and so on, this would tend to suffocate the economy.

The challenge for Zambia is to ensure that the debts being contracted by the PF government are  expended on programs that will allow Zambia accumulate investable surpluses for capital accumulation and expanded reproduction. What is necessary is therefore to ensure that government expenditures are productive in the sense that they should contribute to the growth of national income.

Furthermore, the government may wish to address the need to create a debt management policy and strategy which may include creating a professional debt management office, reform the legal, institutional and administrative framework, and adopt best practices in public debt management.

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Nuclear Energy and the Fate of Mankind

NUCLEAR ENERGY AND THE FATE OF MANKIND

By. Dr. Mbita Chitala

Executive Director- Zambia Research Foundation

 

The study by the Zambia Council of Churches entitled “The Revelation: A Review of Ionizing Radiation Protection Act 2005”, offers a good starting point for our policy makers to  reflect  and take preventative action and address the dangers posed by uranium mining, milling and transportation in Zambia.

Uranium Mining in Zambia

Presently, Zambia has three companies mining uranium. The first company is the African Energy Resources (AER) which owns the Chirundu Mine in Kariba Valley and has outlined over 11.1 Mlb of U3)8 (5,035t) in resources at Nyame and Gwabe resource.

The second company is the Denison Mine Zambia Limited (DMZL) which owns the Mutanga and Dibwe deposits in Siavonga District.

The third company is Lumwana Mining Company (LMC) owned by Barrick Gold. The company mines uranium as a by-product of its copper mining at Malundwe and Chimiwungo in North Western Province. It has about 3800 tu indicated resources at 0.079% of u and 2570 tu in inferred resources.

Once mined, the uranium ore in rock form is taken to the uranium mill where the ore is crushed, mixed with water and ground into fine particles. The mixture is then put through a chemical procedure to purify it. This process produces uranium oxide U3O8 – a yellow compound called yellow cake which can be exported. In Zambia, we are still piling the yellow cake as no policy on exporting has yet been formulated.

Nuclear Fission Discovery:

The discovery of nuclear fission by the German Physist Otto Hahn in 1938 and the realization that the energy from fission could be used to produce a nuclear explosion, has become one frightening scientific discovery which if not well managed, can lead to the self annihilation of all mankind and life as we know it. The science behind all this is well understood. Fission occurs when a neutron enters the nucleus of an atom of uranium or plutonium isotopes. When fission occurs, the original nucleus is split (fissioned) into two nuclei called fission products. A self-sustaining fission chain reaction can be produced in this way. The larger the quantity of Uranium 235 or Plutonium 239 (this results when Uranium 238 absorbs some of the neutrons produced in the fission process to become isotope Uranium 239) that is fissioned, the greater the explosive yield of the nuclear explosion.

A fission or atomic bomb has only been used once in Japan at Hiroshima and Nagasaki on 6^th August, 1945 by the United States of America when more than 250,000 people were killed.

Nuclear Fusion

Nuclear fusion on the other hand, occurs when nuclei of hydrogen isotopes fuse together to form nuclei of helium. During fusion, neutrons are produced and energy is released. In a boosted weapon, these fusion neutrons are used to produce more fission in the Plutonium 239 and produce explosive power of up to 50 KT. The fission weapon in this case acts as a trigger in these hydrogen bombs or thermonuclear weapons. In 1962, the then USSR exploded one at its test site at Novaya Zemlya with an explosive yield equivalent to that of 3,000 Nagasaki weapons. These weapons have not yet been used to kill human beings.

Nuclear weapons

There are about 30,000 nuclear weapons in today’s world. The USA and Russia each deploy about 9,000 nuclear weapons. The other countries with nuclear weapons include China (400), France (350), UK (200), Israel (200), India (60), Pakistan (35). The USA and Russia possess aggregate deliverable nuclear arsenal of about 19,000 warheads of almost 10,000 Mt. The total nuclear arsenal, including tactical weapons, warheads in stock comes close to 50,000 warheads and 15,000 Mt.

Furthermore, there are about 30 countries operating 438 nuclear power reactors for generation of electricity. These countries include South Africa, Argentina, Brazil, India, Mexico, Pakistan, Israel, Japan and so on. The dangers of breakdown of these reactors and endangering the life of human beings and life in general are best illustrated by the recent history of Japan at its Fukushima facility and earlier at Chernobyl  in the Ukraine where nuclear fallout killed many people.

In addition to the nuclear countries mentioned above, North Korea and Iran have also been involved in active nuclear proliferation. The North Korean facilities at  Yongbyon include a processing plant to remove plutonium from spent reactor fuel elements, a plant to make reactor fuel elements and two nuclear power stations.

Iran’s program are carried out in secrecy and has not been allowing inspections from the UN watchdog in Vienna. The UN system has placed Iran under sanctions and isolation. It is hoped the current talks in Vienna can succeed in persuading Iran to subject itself to international inspection to ensure that it abandons the idea of producing nuclear weapons. The claim that its program is for peaceful purposes needs to be tested by subjecting it to verifiable inspection.

For North Korea, it has always said that it retains the right to have nuclear weapons. This is a dangerous argument. The recent events in the Korean Peninsula where North Korea threatened to unleash its nuclear arsenal on South Korea and the United States, poses a challenge to mankind  on the dangers of nuclear energy.

North Korea is an extraordinary closed and sensitive country. I last visited North Korea in 2002 when I accompanied the then Vice President Lupando Mwape on a state visit.  North Korea has had a nuclear program since 1965 when it began operating a small nuclear research reactor at Yongbyon Nuclear Facility. At that time, Zambia also had a small reactor in Lusaka. Many countries operate these reactors, called , Research and Test Reactors - to produce radio isotopes for medical, industrial and agricultural use and training Physicists and Engineers. Radio isotopes are used in medicine to diagonize and treat diseases; in industry, to radiograph large structures; and in agriculture, to kill pests and sterilize male insects to reduce their numbers. The small reactor at the former Zambia National Council for Scientific Research appears to be inactive or it may have been decommissioned.

Possible Nuclear Armageddon

Our earth is a small spaceship in the universe which cannot survive a nuclear war, even for a limited one of 100Mt. If such is unleashed on the Korean Peninsula in anger for instance, calculations by scientists show that the dust and smoke will spread to engulf the whole earth carrying in its wake, a destruction of life unparalleled and shall imperil the future of humanity. Scientists have estimated that about 100Mt nuclear threshold is the currently defined as critical to produce a “nuclear night” – when air temperature will drop to below freezing leading to “nuclear winter” or the abrupt exceptionally harsh and prolonged cooling of the air over our earth- freezing all living things surviving nuclear fires.

The main consequences of nuclear war leading to ecosystems degradation include the following: Radiation shock which will range between 500-1,000 rads and will kill off all mammals and birds and cause serious damage to all plants; Huge fires would wipe out all forests and farms; Oxides of nitrogen and Sulphur will form into acid rain to devastate soils and waters; Enhanced UV radiation doses will damage the ozone layer which shields the earth from UV radiation from the sun and will suppress photosynthesis which in turn inhibit and damage any survived animal’s immune system and kill all bacteria in the surface layer of the soil.

International Instruments

The key international instrument to prevent proliferation of nuclear weapons is the 1970 Nuclear Non-Proliferation Treaty. As of today,  a total of 190 parties have had ratified the NPT including the five nuclear powers. North Korea withdrew from the NPT in 2003. Israel, India and Pakistan are also outside the NPT as they all doubt the effectiveness of the IAEA safeguards to verify compliance with the treaty.

Progressive human beings have consistently argued that nuclear weapons and warfare is a crime against humanity and must be abolished. The report in the Post Newspaper of 18 October, 2013 reporting that that Zambia’s Ambassador to the United Nations Dr. Mwaba Kasese Bota called for the ban and elimination of nuclear weapons is a progressive stand. It is gratifying to note that Zambia is state party to the Treaty on the Non Proliferation of Nuclear Weapons (NPT) and the Comprehensive Nuclear Test Ban Treaty (CTBT).

There are other treaties that attempt to manage nuclear proliferation. The Convention on the Physical Protection of Nuclear Material signed in 1980 by 145 state parties is one such other treaty. In Africa, there is the African Nuclear Weapon Free Zone Treaty or the Treaty of Pelindaba which Zambia has since ratified.

However, Zambia has not yet adopted the “code of Conduct on the Safety and Security of Radioactive Sources” or the “Supplementary Guidance on the Import and Export of Radioactive Sources”. Furthermore, Zambia has as yet to ratify the “Radiation Protection Convention, 1960 Number 115” and the “Occupational Cancer Convention, 1974, Number 139. The ratification of these conventions by Zambia has become necessary now as miners and other citizens at the various mines that are currently mining radioactive substances have become vulnerable to radioactive contamination.

Challenges

The biggest challenge humanity faces is to abolish all nuclear weapons. It is possible to use nuclear energy safely to advance humanity’s civilization. However, this advancement does not include the development of self annihilation instruments such as atomic bombs.

In Zambia, the challenges we face are include the following:

1.       We must ratify all the essential treaties as presented above in this essay.

2.       With so much uranium, Zambia can start a peaceful and safe nuclear program to enrich Uranium 235 to be used in electricity generation, medicine and agricultural research. This will involve us investing in a conversion plant to separate isotopes of U 238 and U 235 and so on. We could then export this enriched uranium and earn a lot of foreign exchange.

3.       Our country needs to come up with a policy on mining of uranium and other radioactive mineral ores. The current vacuum is dangerous as it allows mining companies such as the Lumwana Mine for instance to continue discharging radioactive tailings into the Lumwana river and contaminating the water without any safeguards. Worst still, there is no policy for the compensation of workers or citizens that may suffer contamination.

4.       Zambia must streamline the eight pieces of legislation that currently  address mining of radioactive substances.  

5.       The Radio Protection Authority which currently has only 4 employees from an establishment of 44 needs to be revamped.

6.       It is important that the Radiation Protection Authority is also re-aligned from mere Hospital Administration to include other functions such as regulation of exploration, mining, milling and transportation of ionizing radiation materials. Currently, we do not have an institution that  is tasked to regulate these potential dangerous activities.

End