ARGUMENTS FOR AND AGAINST AN IMF AUSTERITY PROGRAM IN ZAMBIA

Arguments for and Against an IMF Austerity Program
By. Dr. Mbita Chitala
I and many Zambians are relieved at the announcement by the Minister of Finance Hon. Felix Mutati that our government “is putting in place an economic program owned by the country and not by the International Monetary Fund.” (Zambia Daily Mail, September 29,2016). As one that participated in seeing Zambia exit the painful HIPC initiate, I feel compelled to make a few observations hoping that they will be useful in the country reaching consensus about our next economic program.
1.Challenges in the Economy
What are Zambia’s economic current challenges? Our copper export prices which have been averaging US$5,000 per metric ton has not been good enough to fund our development. In order to eradicate poverty in the short term, our economy must grow above 8% of GDP annually. However, our real GDP growth has reduced from 5.1% in 2013, 5.0% in 2014 , 3.2% in 2014 and will grow between 4-5% of GDP in the medium term.

The current account balance deficit has been growing from positive US$216.50 million in 2013 to negative US$581.20 million in 2014, US$767.70 million in 2015 and is likely to continue growing in 2016 and beyond because of the low commodity prices and the depreciation of the Kwacha.

Gross international reserves have dropped from US$3,182 million in 2015 to US$1.95 million in 2016 reducing the months of import cover from 4.2 in 2015 months to less than 2 months in 2016-09-25.

The merchandize trade balance deficit has increased to US$316.4 million in 2016 during the first half of 2016 as compared to US$231.7 million during the same time in 2015. The Non-Traditional exports where Zambia earned US$1,849 million in 2015 have dropped by 7.7% in 2016. The impact of this has been a drastic drop of foreign exchange in the country to support investment.

The exchange rate of the Kwacha depreciated by 72% in 2015 but in 2016, it has stabilized between K10-11/$ because of liquidity tightening policies by the Bank of Zambia. This has however resulted in the slow down in economic activities as the interest rates have risen to usurious unsustainable levels where borrowing has been impossible.

The fiscal deficit has been rising from K2,992 billion representing 2.4 % of GDP in 2011 to K4,306 billion in 2012 representing 3.3% of GDP, K8,205 billion representing 5.4 % of GDP in 2013, K8696 billion representing 5.2% of GDP in 2014, and K17,264.19 representing 9.4% of GDP. It is expected that 2016 figures will also be higher. This means that the country has been surviving on debt.

To fund our expansionary fiscal policy, our government relied on massive contracting of public debt. Our external debt has been rising from US$1,956.10 million (10.8% of GDP), to US$ 3,480.66 million (15.8% of GDP) in 2012, US$3,512.93 million (15.1% of GDP in 2013, to US$4,788.80 million (20.7% of GDP) in 2014 to US$6,288.80 million (37.4% of GDP) in 2015. The external debt service has also been rising. It rose from US$34.14 million in 2011, US$296.60 million in 2012, US$160.80 million in 2013, US$185.26 million in 2014 and US$297.26 million in 2015. The external debt service is projected to jump to US$549 million in 2017 and US$727 million in 2019 which will surely become unsustainable.

This year, the government will be running a very high budget deficit estimated to be around 7% of GDP on a cash basis and 13% on accrual basis. Furthermore, the government has unsustainable payment arrears mainly from infrastructural related activities such as road construction, petroleum subsidies, electricity import arrears – all estimated at about K20 billion. Because of non payment, many construction projects are on hold.

To worsen the challenges, the cooperating partners have since 1914 stopped providing to Zambia budget support and they have also drastically reduced on their grant aid and project support. Zambia has essentially been on its own.

Given the above challenges, what can Zambia do to reduce on the pressures of its macro economy? Noting that copper export prices will hover around US$4,000-5,000 range in the medium term meaning that Zambia will not have sufficient earnings from copper exports to fund its budgets; that cooperating partners will still not support Zambia’s budget; that the country will have increased and unsustainable external debt service obligations; how can our country build its reserve position and bring its current account into a surplus?

Is Zambia on its own capable of resolving the over K20 billion arrears in view of the reduced revenues from copper exports and reduced domestic borrowing? Will Zambia be able to pay when they fall due the foreign exchange denominated arrears to foreign contractors, fuel imports, electricity imports, fertilizer imports and other external debt service obligations? Furthermore, can Zambia on its own bring down to sustainable levels the high interest rates in the economy that is making investment for growth impossible?

These appear to be the challenges that our government faces and which the new Minister of Finance Hon Felix Mutati and his economic management team must address without reneging on the promises of the PF party as described in their election manifesto and what the people want from their government.

2. Peoples Demands
What do the people want? The people want a macro-economic policy regime and social spending approach that is targeted at eradicating poverty and underdevelopment in our country. The people want and have supported the PF fiscal policy and spending increases that have supported massive public investment, the building of essential economic and social infrastructure and the promotion of human and economic development.

The people want to continue with the PF expansionary monetary options that will allow the private sector to access affordable credit to expand the production of goods and services, create employment opportunities and in turn contribute to the tax base of our country. The people want that the Bank of Zambia manage lower reserve requirements to ensure that development finance is available and that there is no unnecessary capital flight from our country.

The people want a government that provides safeguards in the public sector wages, that the government continues to subsidize public goods to help the poor and vulnerable of our citizens access basic necessities such as affordable food, water, fuel, electricity and other social services. The people want a government that stops adding to the unsustainable debt burden of the country.

3. Is the IMF Program the Answer to the Challenges?
For the country to move forward, it is evident that Zambia needs new money to stabilize the economy but without compromising the peoples desires as enshrined in the PF manifesto.

The two choices available to Zambia is to continue with the expansionary policy of the PF government or to abandon PF program and adopt an IMF supported program. Let us discuss the issue of the IMF/World Bank program which some people particulary the neo liberals would want to force on Zambia.

For sure, one source of relatively cheap money is the IMF and the World Bank. Our country exited from the IMF/IBRD supported program in 2010 after we graduated out of the HIPC program. Some of our countrymen are advocating that we should seek for another program with the IMF to enable our country access between US$1.2-1.5 billion of balance of payments support. The submit that the receipt of the IMF and World Bank funding will assist in stabilizing the exchange rate, boost confidence in the economy, attract direct foreign investment in the economy and improve the country’s credit rating. These are the positives of an IMF program.

However, there are also disadvantages in a country adopting an IMF program. If a program is negotiated and approved, the IMF and World Bank will impose conditionalities based on what is termed the ‘Washington consensus’ that will demand for austerity and tightening of belts of the Zambians.

The IMF has a very negative reputation among development observers and practitioners and this has led many countries to avoid engagement with the Fund altogether. Our country may recall the food riots that Zambia experienced in 1990 which resulted in our former President Kaunda cancelling the IMF program because it turned out to be too painful and destabizing to our country.

Generally, the IMF/IBRD will demand that Zambia loses its authority to govern its economy as the policies will be predetermined under a package in Washington. The package so negotiated will tend to constrain public spending which in turn tends to impede recovery.

Furthermore, the country will enjoy some relief from its US$1.2 billion balance of payment support but will also be forced to pay its K20 billion arrears by cutting budgetary spending on education, health and other necessary public goods.

The country will be forced to eliminate basic food such as our FISP subsidies and transportation subsidies mainly those related to petroleum products, they will demand that the Kwacha is devalued to make exports cheaper. They will demand the privatization of our remaining strategic assets. They will demand the freezing of wages in the public sector and retrenchment of workers.

The IMF will for sure demand that our 2017 budget is an austerity budget instead of an expansionary developmental budget. They will demand for the introduction of belt tightening measures that will tend to increase the incidence of poverty in our country, reduce Zambia’s ability to develop a strong domestic economy and allow multinational corporations to continue dominating our economy and which will push Zambia into greater debt.

In other words, an IMF/IBRD bailout everywhere particularly in poor countries such as Zambia, tends to deepen rather than solve economic crises. IMF/IBRD policies tend to cause layoffs and undermine development in the long run. The programs may spack recessions by raising interest rates which in turn may lead to bankruptcies, unemployment and increased poverty. To the many critics of IMF programs, they criticize the programs as an immoral system of modern day colonialism.

That is why many of our progressive countrymen who are opposed to the country being humiliated by the IMF’s strict fiscal and austerity requirements, lending procedures and structures of accountability – which it is feared will in fact prevent our country from recovering but will instead push Zambia into greater debt and hinder long-term development of our country.

Such observers are of the view that our government comes up with its own home grown policy anchored on a stimulus providing and expansionary options. The announcement by Hon Felix Mutati, Minister of Finance that the “economic recovery plan that Government is putting in place will be driven and owned by the country and not by the International Monetary Fund” is therefore a welcome relief and assurance that our government will continue with programs that create wealth and seek to end the rampant poverty in our country.

It is recommended that our government continues with its expansionally policies and seek assistance from fraternal friends such as the Peoples Republic of China, the Kingdom of Saudi Arabia and others who may gladly advance us bridging finance to support our balance of payments challenges.
END.

Arguments for and Against an IMF Austerity Program
By. Dr. Mbita Chitala
I and many Zambians are relieved at the announcement by the Minister of Finance Hon. Felix Mutati that our government “is putting in place an economic program owned by the country and not by the International Monetary Fund.” (Zambia Daily Mail, September 29,2016). As one that participated in seeing Zambia exit the painful HIPC initiate, I feel compelled to make a few observations hoping that they will be useful in the country reaching consensus about our next economic program.
1.Challenges in the Economy
What are Zambia’s economic current challenges? Our copper export prices which have been averaging US$5,000 per metric ton has not been good enough to fund our development. In order to eradicate poverty in the short term, our economy must grow above 8% of GDP annually. However, our real GDP growth has reduced from 5.1% in 2013, 5.0% in 2014 , 3.2% in 2014 and will grow between 4-5% of GDP in the medium term.
The current account balance deficit has been growing from positive US$216.50 million in 2013 to negative US$581.20 million in 2014, US$767.70 million in 2015 and is likely to continue growing in 2016 and beyond because of the low commodity prices and the depreciation of the Kwacha.
Gross international reserves have dropped from US$3,182 million in 2015 to US$1.95 million in 2016 reducing the months of import cover from 4.2 in 2015 months to less than 2 months in 2016-09-25.
The merchandize trade balance deficit has increased to US$316.4 million in 2016 during the first half of 2016 as compared to US$231.7 million during the same time in 2015. The Non-Traditional exports where Zambia earned US$1,849 million in 2015 have dropped by 7.7% in 2016. The impact of this has been a drastic drop of foreign exchange in the country to support investment.
The exchange rate of the Kwacha depreciated by 72% in 2015 but in 2016, it has stabilized between K10-11/$ because of liquidity tightening policies by the Bank of Zambia. This has however resulted in the slow down in economic activities as the interest rates have risen to usurious unsustainable levels where borrowing has been impossible.
The fiscal deficit has been rising from K2,992 billion representing 2.4 % of GDP in 2011 to K4,306 billion in 2012 representing 3.3% of GDP, K8,205 billion representing 5.4 % of GDP in 2013, K8696 billion representing 5.2% of GDP in 2014, and K17,264.19 representing 9.4% of GDP. It is expected that 2016 figures will also be higher. This means that the country has been surviving on debt.
To fund our expansionary fiscal policy, our government relied on massive contracting of public debt. Our external debt has been rising from US$1,956.10 million (10.8% of GDP), to US$ 3,480.66 million (15.8% of GDP) in 2012, US$3,512.93 million (15.1% of GDP in 2013, to US$4,788.80 million (20.7% of GDP) in 2014 to US$6,288.80 million (37.4% of GDP) in 2015. The external debt service has also been rising. It rose from US$34.14 million in 2011, US$296.60 million in 2012, US$160.80 million in 2013, US$185.26 million in 2014 and US$297.26 million in 2015. The external debt service is projected to jump to US$549 million in 2017 and US$727 million in 2019 which will surely become unsustainable.
This year, the government will be running a very high budget deficit estimated to be around 7% of GDP on a cash basis and 13% on accrual basis. Furthermore, the government has unsustainable payment arrears mainly from infrastructural related activities such as road construction, petroleum subsidies, electricity import arrears – all estimated at about K20 billion. Because of non payment, many construction projects are on hold.
To worsen the challenges, the cooperating partners have since 1914 stopped providing to Zambia budget support and they have also drastically reduced on their grant aid and project support. Zambia has essentially been on its own.
Given the above challenges, what can Zambia do to reduce on the pressures of its macro economy? Noting that copper export prices will hover around US$4,000-5,000 range in the medium term meaning that Zambia will not have sufficient earnings from copper exports to fund its budgets; that cooperating partners will still not support Zambia’s budget; that the country will have increased and unsustainable external debt service obligations; how can our country build its reserve position and bring its current account into a surplus?
Is Zambia on its own capable of resolving the over K20 billion arrears in view of the reduced revenues from copper exports and reduced domestic borrowing? Will Zambia be able to pay when they fall due the foreign exchange denominated arrears to foreign contractors, fuel imports, electricity imports, fertilizer imports and other external debt service obligations? Furthermore, can Zambia on its own bring down to sustainable levels the high interest rates in the economy that is making investment for growth impossible?
These appear to be the challenges that our government faces and which the new Minister of Finance Hon Felix Mutati and his economic management team must address without reneging on the promises of the PF party as described in their election manifesto and what the people want from their government.
2. Peoples Demands
What do the people want? The people want a macro-economic policy regime and social spending approach that is targeted at eradicating poverty and underdevelopment in our country. The people want and have supported the PF fiscal policy and spending increases that have supported massive public investment, the building of essential economic and social infrastructure and the promotion of human and economic development.
The people want to continue with the PF expansionary monetary options that will allow the private sector to access affordable credit to expand the production of goods and services, create employment opportunities and in turn contribute to the tax base of our country. The people want that the Bank of Zambia manage lower reserve requirements to ensure that development finance is available and that there is no unnecessary capital flight from our country.
The people want a government that provides safeguards in the public sector wages, that the government continues to subsidize public goods to help the poor and vulnerable of our citizens access basic necessities such as affordable food, water, fuel, electricity and other social services. The people want a government that stops adding to the unsustainable debt burden of the country.
2. Is the IMF Program the Answer to the Challenges?
For the country to move forward, it is evident that Zambia needs new money to stabilize the economy but without compromising the peoples desires as enshrined in the PF manifesto.
The two choices available to Zambia is to continue with the expansionary policy of the PF government or to abandon PF program and adopt an IMF supported program. Let us discuss the issue of the IMF/World Bank program which some people particulary the neo liberals would want to force on Zambia.
For sure, one source of relatively cheap money is the IMF and the World Bank. Our country exited from the IMF/IBRD supported program in 2010 after we graduated out of the HIPC program. Some of our countrymen are advocating that we should seek for another program with the IMF to enable our country access between US$1.2-1.5 billion of balance of payments support. The submit that the receipt of the IMF and World Bank funding will assist in stabilizing the exchange rate, boost confidence in the economy, attract direct foreign investment in the economy and improve the country’s credit rating. These are the positives of an IMF program.
However, there are also disadvantages in a country adopting an IMF program. If a program is negotiated and approved, the IMF and World Bank will impose conditionalities based on what is termed the ‘Washington consensus’ that will demand for austerity and tightening of belts of the Zambians.
The IMF has a very negative reputation among development observers and practitioners and this has led many countries to avoid engagement with the Fund altogether. Our country may recall the food riots that Zambia experienced in 1990 which resulted in our former President Kaunda cancelling the IMF program because it turned out to be too painful and destabizing to our country.
Generally, the IMF/IBRD will demand that Zambia loses its authority to govern its economy as the policies will be predetermined under a package in Washington. The package so negotiated will tend to constrain public spending which in turn tends to impede recovery.
Furthermore, the country will enjoy some relief from its US$1.2 billion balance of payment support but will also be forced to pay its K20 billion arrears by cutting budgetary spending on education, health and other necessary public goods.
The country will be forced to eliminate basic food such as our FISP subsidies and transportation subsidies mainly those related to petroleum products, they will demand that the Kwacha is devalued to make exports cheaper. They will demand the privatization of our remaining strategic assets. They will demand the freezing of wages in the public sector and retrenchment of workers.
The IMF will for sure demand that our 2017 budget is an austerity budget instead of an expansionary developmental budget. They will demand for the introduction of belt tightening measures that will tend to increase the incidence of poverty in our country, reduce Zambia’s ability to develop a strong domestic economy and allow multinational corporations to continue dominating our economy and which will push Zambia into greater debt.
In other words, an IMF/IBRD bailout everywhere particularly in poor countries such as Zambia, tends to deepen rather than solve economic crises. IMF/IBRD policies tend to cause layoffs and undermine development in the long run. The programs may spack recessions by raising interest rates which in turn may lead to bankruptcies, unemployment and increased poverty. To the many critics of IMF programs, they criticize the programs as an immoral system of modern day colonialism.
That is why many of our progressive countrymen who are opposed to the country being humiliated by the IMF’s strict fiscal and austerity requirements, lending procedures and structures of accountability – which it is feared will in fact prevent our country from recovering but will instead push Zambia into greater debt and hinder long-term development of our country.
Such observers are of the view that our government comes up with its own home grown policy anchored on a stimulus providing and expansionary options. The announcement by Hon Felix Mutati, Minister of Finance that the “economic recovery plan that Government is putting in place will be driven and owned by the country and not by the International Monetary Fund” is therefore a welcome relief and assurance that our government will continue with programs that create wealth and seek to end the rampant poverty in our country.
It is recommended that our government continues with its expansionally policies and seek assistance from fraternal friends such as the Peoples Republic of China, the Kingdom of Saudi Arabia and others who may gladly advance us bridging finance to support our balance of payments challenges.
END.

A SUGGESTION TO FORESTALL KWACHA COLLAPSE

By. Dr. Mbita Chitala – Public Policy Analyst

I have been challenged by many of my colleagues and students to state my opinion and offer advice on what could be done to resolve some of our economic challenges. These are my views.

KWACHA DEPRECIATION

Why is the Kwacha falling like a domino? The answer is not because of the eight months rule of President Lungu as some would like us believe or a creation of any Zambian. These economic problems have their genesis in the global economy. Kazakhstan’s Tenge tumbled more than 20% on Thursday against the dollar when the country said it would adopt a free-floating currency (pretty the same as Zambia). Vietnam devalued its currency for the third time this year. And this phenonomena is evident in all so called free markets.

For the past decade or so years, Zambia has enjoyed positive growth in excess of 8% of GDP spurred by global growth, high copper prices, low interest rates and a weak U.S. dollar. But now, Zambia’s main stay copper and other commodity prices are dropping. There has been an economic slowdown in China and the prospect of the Americans hiking interest rates soon mean our economy will be in deep trouble.

Early in September, 2015, China allowed its currency to devalue, sending the year down about 2^ against the dollar. Currencies in other countries such as South Africa, Brazil, Russia, Turkey and so on have also plunged down this year.

Furthermore, uncertainty surrounding China’s economic growth and the impeding interest rate hike in the US could send our currencies even lower, especially so in the case of Zambia, as our growth estimates of our copper export prices continue to fall.

This global economic debacle has in some cases led to currency wars in which countries compete to devalue their currencies against other countries to boost their exports.

In our country Zambia, we are experiencing a currency crisis – a situation where the value of the Kwacha has depreciated in a very short time and has continued to adversely affect the wider economic woes with long lasting repercussions.

This Kwacha crisis has emerged because many citizens now doubt that the Bank of Zambia has sufficient foreign reserves to maintain our exchange rate. The Bank of Zambia has tried to fend off this Kwacha crisis by satisfying the excess demand using our country’s reserves by releasing foreign currency on the market. But, this is temporary and it has not worked.

There is no widely accepted definition of a currency crisis but it is generally agreed that a currency crisis emerges when a nominal depreciation of a currency of at least 25% but it is also defined at least 10% increase in the rate of depreciation. Our Kwacha has suffered both.

WHY THE KWACHA IS DEPRECIATING

There are at least three things that can bring about a currency collapse:

First, is the speculative attacks in which people perceive that there will be a drop in the value of the Kwacha in the future and they tend to opt to sell their Kwacha to avoid a loss. As they sell their Kwacha, the value of the Kwacha begins to decline and the Bank of Zambia is forced to buy up excess Kwacha to keep the exchange rate stable. As the value of the Kwacha declines, people may begin to panic, selling off more of their reserves and causing the Kwacha to fall even further.

This speculative attack as we are witnessing it now, may be because of the huge public debt that is growing and people may suspect that it is not sustainable. The result of this speculative attacks can be fatal to our economy and if not addressed can cripple our government because, in due course, the government may fail to service its debt, since the Kwacha will have devalued so much that it is impossible to pay the debts when they fall due. It is important that our Minister of Finance must work smart and hard to address this potential challenge.

Secondly, runaway inflation can also lead to a currency collapse. The case of our sister neighbour Zimbabwe is most telling of a country that suffered political turmoil, hyperinflation and the collapse of the ZIMDollar. The Zimdollar was the official currency of Zimbabwe until January 2009 when the government legalized the use of other foreign currencies. This currency substitution is currently happening in Zambia. This measure for Zimbabwe led to the sharp drop in the usage of the Zimdollar and by April 12, 2009, te Zimdollar was abandoned as an official currency.

The Zimbabwean government has undertaken that they will only re-introduce the Zimdollar or some such national currency if industrial output would average 60% more of its current output capacity. In April, 2009, the output was 20%. It is important that Zambia ensures that we do not return to the runaway inflation before 1992 and that we increase our nations output by seriously diversifying our economy.

Thirdly, the government policy moves such as altering interest rates can also lead to Kwacha collapse.

Once a currency collapses, it is difficult for a nation to recover. Citizens will find that their savings are devalued. The cost of goods and services will rise as the nation is forced to pay much more for imported products. This is so for Zambia since our privatization destroyed our then buoyant manufacturing sector and our country has become a profitable market for imports.

On account of the Kwacha devaluation, foreign direct investment will be reluctant to come to Zambia or to invest in our Kwacha. From Germany in the 1920s to Argentina in early 2000 and Zimbabwe in 2009, the scene is the same: prices will sky rocket as personal savings are destroyed. Our government together with all well meaning citizens must combine their efforts to forestall this potential tragedy.

CAPITAL CONTROLS THE ONLY SOLUTION

As for me and many progressives, it appears our country has no option but to introduce some capital controls. It is not helpful for those charged with this responsibility at the Ministry of Finance and the Bank of Zambia to remain mum and think that the challenges will resolve themselves.

Capital controls are measures such as transaction taxes, other limits or outright prohibitions that a government can use to regulate flows from capital markets into and out of a country’s capital account. These measures may be for the whole economy or sector specific (e.g the Banking Sector) or industry specific (e.g. the Mining Industry)

Until the early 1970s, almost all countries had capital controls until the IMF and the World Bank persuaded all of us wrongly that capital controls were harmful.

Presently, particulary after the global financial crisis of 2008, many countries have adopted capital controls alongside macro economic and prudential capital controls to damp the effects of volatile flows in their economies. This has also been accepted by both the IMF and the World Bank as necessary policies directions.

If our Minister of Finance A.B.Chikwanda and his team were now to seek advice from the IMF, they would be advised to consider introducing prudential capital controls to deal with our current economic crisis. Failure to recognize this necessity, is not helpful to Zambia.

During the 2008-2012  Icelandic financial crisis, the IMF proposed that capital controls on outflows should be imposed by Iceland. In 2009, Brazil imposed a tax on the purchase of financial assets by foreigners and Taiwan restricted overseas investors from buying Time Deposits. The Financial Times has reported tightening of controls in Indonesia, South Korea, Russia, Peru and so on. Indonesia implemented a one-month minimum holding period for certain securities. In South Korea, limits have been placed on currency forward positions. Taiwan has restricted foreign investors to certain bank deposits.

PRUDENTIAL CAPITAL CONTROLS

As everyone knows, Zambia has in recent years, experienced huge capital inflows resulting from the expansionary monetary policies of our governments. These capital inflows are both good and potentially bad. Many countries that experienced similar inflows, adopted prudential capital controls to reduce the risk of financial crisis and prevent the associated externalities such as currency collapse. Prudential capital controls is a process where a country regulates its capital account inflows to mitigate systemic risk, reduce business cycle volatility, increase macro stability and enhance social welfare of the people.

Prudential capital controls are necessary for Zambia. The doctrine of free capital movement as demanded by right wing ideologists does not correlate positively with economic growth. That is why Joseph Stigliz and his colleagues have written to President Obama to repeal he law in America the punishes those nations that adopt capital controls.

Capital controls as India and China have shown, are a progressive policy paradigm as for instance, by limiting Zambians to own foreign assets, this would ensure that domestic credit is available more cheaply and Zambian businessmen would have an inexpensive source of loans.

Large uncontrolled capital inflows and unabated outflows mostly as illicit outflows as Zambia has experienced in recent years have damaged our country’s economic development. The inflows have become loans dominated in forex and the repayments will be very expensive as our Kwacha continues to depreciate. This is what is called the “original sin”- a situation where our country will not be able to borrow abroad in our Kwacha or to borrow long-term even domestically. The illicit outflows is known as capital flight where companies instead of exporting only dividends earned also are allowed uncleverly, to export all their gross earnings everyday.

 End

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.

End

 

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

ZAMBIA'S DEBUT US$750 MILLION: A NOVEL WAY TO DEVELOPING FINANCING ?

By. Dr. Mbita Chitala; Executive Director: ZAMBIA RESEARCH FOUNDATION

 

The news that Zambia has managed to secure a US$750 million Euro Bond is both good for Zambia and Africa in general. The Zambians that led the offer must be thanked and lauded.

Two views define Portfolio Investment (PI) such as the Euro Bond that we have raised from international capital markets.

1.       The most prominent and popular view raised by many Zambians and Neo Liberals is that PI will for the first time give our government access to this vast pool of capital that is available on the global financial market for development. The money so obtained is competitively priced and efficiently allocated without corrupt tendencies associated with foreign direct investments and bank borrowing. The Euro bond  will promote economic growth of Zambia.

 

It is further argued that the Euro bond in its form is superior to foreign bank borrowing as it has no contitionalities and external control disadvantages like the one Zambia has been subjected to by the IMF and World Bank under Structural Adjustment Programs.

 

2.       However, in reality, Portfolio Investment (PI) such as our Euro Bond  can and may serve our development if it is used to finance investment projects. Our government is therefore challenged that this is strictly adhered to.  In real life, the Euro Bond will be  allocated by global capital markets in accordance with rate of return criteria and not necessarilt to advance economic development of Zambia.

The Deputy Minister has argued that the money so obtained from the bond will be in the Bank of Zambia soon and will be used as part of the national budget. This appears to be one way of utilizing the money. However, this will introduce unnecessary political costs.

 

In other countries, governments appoint investment bankers and fund managers to invest the money in projects that have high returns. In other words, portfolio investments  is advanced to the private sector. And because of this, the investments so made are usually in speculative projects like commercial real estate development rather than in public goods such as roads and railways. Because of this speculative content of Portfolio Investment, such investment may tend to widen inequality between citizens.

 

It should also be pointed that portfolio investment made through investment bankers has other unacceptable behaviors. For instance,  the investment bankers have been known to create derivatives and other instruments which they trade on without the authority of the owners of such bonds. In a financial crisis, this behavior can be very devastating to the holders of the debt as we have experiences in Greece. In other words, the investment bankers tend to create difficulties which may for bond holders where there is insufficient management. This is the case in Milan, Italy where they are a subject of criminal investigation by authorities.

 

Furthermore, if this high value Euro Bond is not regulated by our government, it has the potential of increasing  macro economic instability. A collapse in speculative bubbles in stock markets can lead to a financial crisis and increase in poverty rates and income inequality.  Asset volatility can increase uncertainty, induce systemic instability and can therefore create vulnerability to the financial crisis and allow regressive capital flight from Zambia; Kwacha currency depreciation that will adversely affect export performance; debt service unsustainability and a return to pre HIPC syndrome where our country became vulnerable to a devastating debt overhang;    and asset price deflation.

 

Furthermore, Portfolio Investment  such as the Euro Bond can introduce constraints on policy autonomy in our country. The investors will usually forbid government from implementing an expansionally monetary policy which is the policy direction that works. They will oppose policies that result in reduction of interest rates as this will be seen to be abating or cohorting with the hated inflation. In other words, our government will not be allowed to enact laws or policies that restrict investor freedom

 

3.       The policy advice one can give is that, in general, the PF government has started well. The government must  as soon as possible  create a development vision by stating explicitly their industrial strategy, design policies in sectors and design performance targets and incentives. It will become apparent if this is considered, that, the government will need to create strategies that regulate capital inflows and outflows. Our country may consider advancing blunt restrictions on Portfolio Investment as is the case in China, India, Chile and others or introduce temporary controls as occurs in many countries that attempted to use global bonds such as the Euro Bond to develop their infrastructure. We must address our tax system  so that it influences the composition, and/or maturity structure of the portfolio investment so that we restrict capital flight and stop continued underdevelopment.

End.

Programs/ Projects Advocated by the Think Tank during the election campaign of the PF in the 2011 General Elections

Programs/ Projects Advocated by the Think Tank during the election campaign of the PF in the 2011 General Elections Desirous to support the election campaign of the Patriotic Front, a Think Tank outside the PF main stream organization, provided a framework of the campaign after analyzing the PF Manaifesto. Whereas the PF Manifesto was a Letter of Intent, the Think Tank actualized the desires contained in the manifesto into programs on which the public could reasonably evaluate the use value of the PF promises. The group of PF campaigners in the Think Tank comprised among others, Mr. Bob Sichinga, Dr. Mbita Chitala, Mr. Mike Mulongoti, Col. Panji Kaunda, Mr. Pius Mambo, Mr. Simusa and others. Presented below were the undertakings advocated by the Think Tank members on behalf of the PF campaign. Sector Objective Strategy Programs/Project as per PF Manifesto Comments/suggestions Administrative and sovereignty Central administration Capacities building in the public services Public sector restructuring - Provide in budget for fund to Start Constructing Houses for Civil Servants. - Raise salaries/improve conditions of service - Raise pension payments to minimum wage and peg rates to inflation 1. Professionalize Civil Service 2. Implement recommendations of Salaries Commission 3. Retire appointments based on nepotism PS, DC, Diplomats, Parastatals 4. Reintroduce civil service examinations and reintroduce merit appointments 5. Seek advice from other civil services such as India and the UK 6. Annul appointments based on nepotism in Civil Service, Police and other arms of government 7. Create new Ministry of Planning in the Presidents’ Office to coordinate Capital Budget Foreign Representation Improve the country’s image abroad and attract foreign investment Rehabilitating & building or purchasing of permanent chanceries & residences in a number of countries - Reduce/streamline foreign missions - Develop career diplomacy - De-nepotize appointments 1. Recall appointments based on nepotism. 2. Professionalize service Barotse Agreement 1964 Permanently resolve the question 1. Appoint a committee to draft government position within 30 days or appoint a Commission of Enquiry to advise government on the way forward 2. Negotiate with the Litunga and enter into a new agreement within 90 days - on lines of Tanganyika/Zanzib or right to self determination of Barotseland outside Zambia, or annulation of BA 64 and replace it with federalism as is in Mozambique and RSA or provide governance on lines of the Royal Bafokeng Nation in RSA. Anti Corruption 1. Reenact Art 37 of the ACC Act. 2. Zero Tollerance policy against corruption 3. Appoint tribunal to complete all plunder cases within three months 4. Re visit the Chiluba Case and appeal the London Judgement to the Supreme Court 5. Constitute a Task Force to investigate the Banda regime abuses Information Services Collect and disseminate information in the public interest Boost reception in rural areas, and insure availability of high quality and consistent production of print media - Enact Freedom of Information Act - Implement IBA and ZNBC Acts - Professionalize ZNBC on lines of BBC - Autonomy of Times of Zambia and Zambia Daily Mail 1. Repeal Statutory Instrument 111 to allow for liberalization in Telecoms 2. Increase funding to Zambia Information Services to enable them disseminate government information 3. Re Nationalize Zamtel Legal and Constitutional matters1 - Establish Committee of Experts to review all past recommendations and draft new constitution and subject this to referendum within 90 days - Establish office of public defender in each district to replace legal aid - Improve conditions of service - Rehabilitation of police , prisons and military camps 1. Complete drafting new constitution within 90 days 2. Conduct Referendum within 180 days 3. Birth of 3rd Republic within 180 days 4. Redeem judicial system by professionalizing it 5. Annul appointments based on nepotism Electoral Reforms - Enact a new electoral Act to provide for appointment of commissioners by Parliament, political party representation, registration of parties and funding of parties 1. Implement Electoral Reforms as advised by Electoral Advisory Committee and Mung’omba Constitutional Commission Law and Order Promote good governance Creating a society in which all citizens have opportunities to realize their full potential and to exist in dignity and harmony - Establish Constitutional Court, Resident Magistrate Courts at all Districts and Traditional courts. - Parliament to appoint tribunals - Improve conditions of service of the military, Police and other law enforcement agencies 1. Rehabilitate Homes of Army, Airforce, ZNS, Police and Prisons 2. Provide a fund for Home Ownership of officers 3. Revamp Police Service by ending appointments based on nepotism Defence and Security 1. Professionalize the wings Local Government & Regional Administration Improve the quality of life in both rural and urban areas Improving the quality of life in both rural & urban areas - Create new admin system of ward village councils, District Chiefs Councils and Provincial Chiefs Councils. - Resolve Barotse Agreement Question - Subsidize water, - create social housing scheme, - upgrade squatters, public works. - Increase funding to councils - Lusaka and Copperbelt road rehabilitation - Urban tram construction 1. New Agreement with Barotse Royal Establishment 2. Repeal the Local Government Act to provide Establishment of Provincial Governments and Assemblies 3. Capitalize Fire fighting Departments of all local councils 4. Constitution to create devolved on lines of system of government 5. Improve funding of Local Authorities and introduce system of Executive Mayors to be elected by rate payers Economic Sectors Finance and National Planning - Develop a Transitional Development Plan - Promote reduction of interest rates - Control inflation - Lower taxes to promote compliance - Lower PAYE - Exempt or zero rate VAT on food, transport, education/materials, agriculture inputs and medicines - Reduce VAT - Re negotiate with mines on a fair, equitable and enforceable tax regime - Reduce company tax - All loans to be ratified by parliament - Strive to be independent of foreign aid - Introduce Activity Based Budgeting - Dismantle domestic debt - Increase budget to social sector , infrastructure and empowerment funds 1. Abolish discretionary tax holidays 2. Reduce Company Tax and PAYE 3. Abolish nuisance levies such as TV levy, Commodity Levies by Councils 4. Broaden Tax Base by abolishing tax holidays, stop capital flight thru capital controls, abolish transfer pricing introduce progressive VAT, introduce taxes on financial speculation – forex, stock transfers,short term capital flows 5. Reduce rates of presumptive tax, turnover taxes, withholding tax on rentals, taxation of marketeers and small scale traders 6. Reduce and or abolish some charges imposed by central authorities such as ZICTA,ERB, PACRA, ECZ, ZAWA, Road Traffic Authority, Immigration, Zambia Bureau of Standards,, Tourism Licences 7. Reduce taxes on Petroleum and Electricity 8. Policy of joint venture ownership on basis of 70% Zambian and 30% foreign. 9. Ensure all forex earnings are banked and reported in Zambian banks. 10. Kwacha to be convertible on current account transactions only as is in India and China & Taiwan. 11. Transform ZCCM-IH into an active investor. 12. Create a sovereign fund from excess earnings on metals. 13. Re introduce BOZ Management of interest rates 14. Re introduce BOZ management of Exchange rates by way of currency pegs and capital controls 15. Ensure BOZ is imbedded and politically accountable to promote growth, employment and social welfare. 16. Enact a Budget Act 17. Expenditure policy to be expansionary on industry, agriculture, infrastructure and social programs. 18. Introduce Zero Based Budgeting 19. Exit from External Dependency on donors 20. Establish Public Debt Commission 21. Re Nationalize ZANACO as a strategic national asset or create another national bank . Agriculture Promote development of small & large scale commercial Promoting smallholder productivity, improving rural infrastructure, rehabilitating feeder roads, promoting cooperatives - Subsidize agriculture. - Land tenure security in rural areas. - Livestock restocking - Disease control, tsetse fly eradication. - Water provision - Agriculture commercialization 1. Settle more than K1.2 Trillion to Bank s borrowed in2010 2. Purchase 2011 Crop 3. Insure disposal of or Sale of FRA 2010 Reserves 4. Capitalize Lima Bank as a national strategic farmers bank 5. Restock Cattle in all provinces. 6. Develop outgrower scheme. 7. Increase Farmer Support pack by providing 4 and 4 and ensure community accountability Commerce, Trade & Industry Boost the development & competitiveness in the manufacturing industry Amending the customs and excise duty - Establish fund for Small Businesses. - Establish special industrial zones, parks - Establish Industrial Development Commission. On lines of INDECO - Enact legislation to protect Zambian entreprenuers - Re capitalization of NCZ 1. Establish a Small Business Bank 2. subsidize interest rates 3. Steam line Empowerment Commission to be focus for indigenous capital formation 4. Reduce tax on capital items used in manufacturing 5. Enforce Citizen Empowerment Act 6. Foreign Investment via joint venture with Zambians only 7. Stream line Indeco Properties Ltd and ZIMCO properties Ltd and incorporate a new Industrial development parastatal as investment wing of the state Energy Promote optimum supply & utilization of energy with emphasis on indigenous forms while maintaining a safe & healthy environment Rehabilitating the major energy infrastructure promoting rural electrification, and promoting the wider use and dissemination of renewable energy technologies - Scale up hydro power construction. - Promote solar, bio-fuels, wind - Expand rural electrification. - Rehabilitate Indeni, TAZAMA pipeline, - Lower petroleum taxes - Unbundle ZESCO - Promote oil, gas exploration 1. Invest in Hydro Power – complete Kariba expansion, Lower Kafue and Itezhi Tezhi aswell as Kalungwishi etc 2. Unbundle ZESCO 3. Let Local Councils to retail electricity 4. Reduce electricity rates 5. Reduce petroleum rates Environment & Natural Resources Manage & utilize resources in a sustainable manner Improve the quality of life in both rural and urban areas, insuring people’s participation - Control deforestation - Bee keeping Development 1. Set up waste disposal authorities in councils and empower them 2. Recapitalize ZAFFICO to expand plantations 3. No foreign ownership of Land except as joint venture with Zambians Mining Attract investment for the development of both large and small scale mining Producing geo-science maps of the country, privatizing state owned mining companies, providing information on availability & uses of agro, industrial and building minerals - Create fund for Zambian miners. - Establish center for marketing minerals. - Create a plant hire scheme - Equitable and fair taxation of mines – consider windfall taxes 1. Reenact new and fair mining tax to allow for windfall taxes. 2. Enact new Mining Tax code to allow for windfall taxes and other royalties. 3. Abolish Development Agreements 4. Implement policy of joint ownership of all mines with at least majority Zambian interest- 70/30 % 5. Convert at least 40% of annual copper production into finished products in Zambia. 6. Establish Mining Council of Zambia as a Think Tank 7. Establish a Sovereign Fund from excess earnings on metals 8. Transform ZCCM-IH into active investor 9. Mining companies to be required to house workers and invest in social welfare. Tourism Facilitate, co-ordinate & support the country’s tourism development Improving the infrastructure - Employ village scouts - Establish community funds - Infrastructure development - Establish Tourism Development Fund 1. Establish a revolving Tourism Fund for citizens Transport & Communication Improve existing infrastructure& develop new ones Rehabilitating& maintaining existing infrastructure, constructing new facilities - Road construction - Bridge construction to replace pontoons - Create maintenance camps - Ring roads for cities - Re negotiate concession on Zambia Railways and invest in railways on PPP basis - National airline on PPP basis - Construct airports, harbours and canals - Establish District Works Departments - Establish fund for Zambian contractors 1. Repeal SI 111 of 2010 to liberalize telecoms 2. Set up system for Toll roads 3. Construct at least one major road per province within three years 4. Construct railway to North Western Province, spur from Nseluka to Mpulungu, Chipata to Mpika 5. Establish national airline 6. Nationalize Zamtel as a strategic industry Social Sector Education Increase access to and improve quality & relevance of education at all levels Rehabilitating & expanding infrastructure, constructing new ones where necessary - Construct nurseries in all wards. - Free and compulsory education from grade 1 to 12. - Raise education budget from 18% to 23%. - Re introduce apprenticeship system. - Construct institutional houses - Raise salaries of staff to regional levels. - Mortgages and loans for teachers - Construct at least one university per province - Provide bursaries to all students in tertiary tied to future repayment 1. Introduce massive country wide adult literacy campaign to ensure illiteracy is more than halved within three years 2. Employ new teachers including retirees Health and Nutrition Improve access to and quality of health services for all Rehabilitating health institutions, controlling epidemics and chronic diseases, providing drugs and medical equipment/supplies - Raise budget allocation to 15%. - Abolish user fees - Rehabilitate all hospitals - Establish ICU s In all hospitals - Improve conditions of service - Expand training facilities - Ensure medicine availability - Enact new law to fill vacuum left by repeal of NHS Act 2005 - Reduction of HIV/AIDS infections 1. Rehabilitate all hospitals 2. Hire new staff including retirees to man hospitals and clinics 3. Establish a social safety scheme for vulnerable such as lactating mothers, invalids 4. Free anti retrovirals and other essential drugs Community Development & Social Welfare Improve the quality of life of the poor and vulnerable Promote entrepreneurial development and income generation - Increase funding to ZAD - Free govt. services to all disabled - Subsidize and provide grants to vulnerable, welfare centers, libraries - Conduct a nationwide adult literacy campaign 1. Establish a Social Safety Fund for poor people 2. Conduct a National Literacy Campaign to reduce Illiteracy from 60% to 20% in three years Employment & Welfare Institute measures that will mitigate poverty Providing safety nets for the retrenched and youths, improving conditions of service and health schemes for employees - Abolish casualization of labour - Create law on out sourcing services - Reestablish Labour Department to maintain register of skills - Pay all retirees within 24 months - Re adjust pension to inflation - Create employment opportunities (6 million Zambians un/and underemployed as only 500,000 in formal sector). 1. Create Public Works program 2. Implement a Zambia National Service scheme for all school leavers 3. Create 2 million job opportunities in 3 years Housing & Resettlement and Land Facilitate the provision of housing for ownership, establish resettlement schemes in all provinces Supporting institutions which provide low cost housing, developing necessary infrastructure in resettlement schemes - Create National Housing Fund to support councils and central government construct houses. - Establish land audit commission - Establish Ground Rent Tribunal - Regularize ownership of all untitled land - Provide for security of land tenure in rural areas 1. Rezone land to ensure cities and towns access land for housing development 2. Construct more than 2 million houses in five years 3. Land for Zambians Foreign ownership by way of joint venture with Zambians only Science & Technology Improve vocational and technical education Rehabilitating existing infrastructure, providing modern equipment, developing relevant training materials, retaining technical & professional staff - Revamp NSIR - Revamp and re-equip training and research institutes 1. Set up Centres of Excellence 2. Rehabilitate UNZA, CBU and all Colleges 3. Set up a University in each Province Youth, Sport & Child Development Provide the services in the areas of youth, sport and child Providing sporting infrastructure, improving service delivery in the youth training and production centers, improving child welfare - All school leavers to have access to vocational training - Introduce apprenticeship - Construct District Training centers in all districts - Establish a Youth Fund - Gender affirmative action - Establish National Arts and Cultural Centers at District, Provincial and National levels - Provide law for protection of property rights - Allocate in budget funds for construction of sports facilities - Lower tax on sports manufacturers - Introduce sports scholarships 1. Construct sports stadia in all districts 2. Introduce National Service for school leavers and young people Water Supply & Sanitation Improve water supply and sanitation facilities Rehabilitating and maintaining existing water & sanitation facilities - Rehabilitation of water supply and sanitation systems in all districts - Procurement of plant and equipment for dam construction - Development of ground water 1. Reduce water levies charged by corporations 2. Construct public toilets in all districts 3. Provide land for burials and disposals in all districts Church and NGOs - Church and state to be mutually inter dependent - Promote civil dialogue 1. Secularity of the state to be upheld in terms of citizens rights and freedoms