By Nawa Mutumweno – Zambia’s economy in 2014 remained strong with preliminary real GDP growth of 6 percent; making the country the seventh and tenth fastest growing economy in sub-Saharan Africa and the world, respectively, Minister of Finance, Alexander Chikwanda has revealed.
In a State of the Zambian Economy statement issued to the media in Lusaka on January 5, 2015, the minister said this is ‘’consistent with our ongoing vision of becoming a middle income prosperous nation by 2030.’’
This positive performance was driven by agriculture, manufacturing, construction, energy, transport, communication and the financial sectors.
‘’Preliminary data shows that mining is expected to contract on account of operational challenges at some localities during the year under review. Considering that growth has been driven by non-mining sectors, this is clearly a reflection of Government’s relentless efforts in diversifying the country’s sources of growth, income and employment,’’ he elaborated.
It is Government’s desire to sustain and increase this growth trajectory to double digits in order to ensure greater impact on poverty reduction, particularly in peri-urban and rural areas.
In the recent past, some economic analysts have been raising concerns over the outlook in the country’s key sector. Government is of the view that the concerns are not insurmountable as they will be resolved with reciprocal amicability.
- VAT Refunds
The Government has confirmed that it remains committed to resolving the matter of VAT refunds to mining entities and other sectors. A mutually beneficial solution is being sought.
For 2015, provisions have been made to cover normal VAT refunds as well as dismantling prior claims where sufficient documentation is provided.
- 2015 Mining Regime
Following the approval of the 2015 Budget and in particular the new mining fiscal regime, Government fully recognises the reported concerns by some mines. Consistent with the desire to grow the economy, create jobs and alleviate poverty, Government will within the framework of the existing statutes, engage the concerned mines, upon presentation of the likely adversity on their operations.
This will be with the view to coming up with a common position that will ensure profitable continuity of operations at the respective mines while taking due consideration for the Zambian people to benefit from their natural resources.
The current tax structure is a final tax that has replaced the profit-based tax, which was largely ‘’illusory and disadvantageous to the country.’’
The Government in 2014 made progress towards fiscal consolidation. An assessment of the deficit in 2014 indicates that it will be contained around 5.4 percent of GDP, a rate lower than the 6.5 percent of GDP registered in 2013.
For 2015, the projection is an even lower deficit of 4.6 percent, while in the medium-term, the Government will reduce the deficit to around 3 percent of GDP, in line with the policy of promoting the availability of capital for private sector growth
The reduction in the deficit will be firmly anchored on continued re-alignment of expenditures to priority areas such as infrastructure, improved public service delivery, and rationalising the Government wage bill to forestall structural imbalances and deformities.
Reduced domestic borrowing by the Government will contribute to lower lending rates and in turn increase access to loanable resources for the private sector, particularly small and medium enterprises (SMEs).
The Government recognises the importance of increased access to affordable credit by the private sector as it leads to increased investment and growth of the economy as well as job creation.
Through the Financial Sector Development Programme (FSDP), efforts are underway to not only improve financial inclusion among the unbanked citizenry but also to ensure innovative and affordable credit for productive business ventures at every level of entrepreneurship across the wide expanse of the country.
Debt and Debt Sustainability
The Government takes the issues of debt sustainability very seriously. For this reason, it has undertakes a periodic Debt Sustainability Analysis (DSA) to establish the sustainability of the country’s debt and to evaluate the capacity to service both external and domestic obligations. The last DSA was conducted in June 2014 and the full report is ready for scrutiny.
‘’Total public debt is in the order of 32 percent of GDP, a level that is below the internationally accepted threshold of 40 percent. Our external debt as at end-September 2014 stood at $4.7 billion. In net present value terms, this represents 17.6 percent of GDP. The domestic debt as at end-September 2014 was at 13.6 percent of GDP,’’ Mr. Chikwanda has assured.
However, many analysts are concerned at the fact that this colossal amount has been accrued by the Patriotic Front (PF) government in a short period of just three years.
Monetary and External Sector Developments
Inflation: An inflation target of 6.5 percent was set for 2014. The outturn for annual inflation during the year under review has been recorded at 7.9 percent. Part of the pressure on the general level of prices emanated from the depreciation of the Kwacha, especially during the first half of the year. The Government will endeavour to contain inflation within the low and single-digit range to ensure that business planning and forecasting is not only credible but also resilient.
Exchange Rate: Regarding the exchange rate, the trend in 2014 has been towards depreciation, especially during the first half of the year. Some measures undertaken by the Bank of Zambia (BoZ) have led to relative stability of the local unit. This was complemented by the Treasury that has been monitoring the level of balances in the banking system.
The Government will continue to monitor exchange rate developments to ensure stability as continued tight liquidity conditions may over time harm the economy.
Interest Rate Developments: Credit conditions have generally remained supportive of economic growth. For the year to September 2014, domestic credit increased by 14.8 percent. The Government, however, remains committed to ease liquidity conditions in the financial sector once relative stability in the exchange rate has been attained.
Trade and Current Account Balance: Preliminary data indicates that by the end of 2014, the country will have recorded a surplus of over $1 459.9 million on its merchandise trade. While a current account deficit is projected for 2014, it is hoped that a significant improvement in the external sector will be achieved.
The projected deficit is largely due to lower copper prices coupled with reduced non-traditional exports (NTEs). Subdued global demand for copper on account of lower global economic prospects explains the low copper prices and subsequently, the weaker export earnings.
The lower NTEs have been largely on the backdrop of stronger domestic demand for some key export goods such as cement and fabricated metal products. This increase in domestic demand is a testimony of the growing domestic economic activities in areas such as construction and energy, which as a result, have facilitated creation of the largest number of new jobs for the locals.
In this regard, as the diversification drive takes root and export firms increase output to meet both domestic and external demand, NTEs are expected to rebound and continue to significantly contribute a larger proportion to export earnings.
Foreign Direct Investment Flows: Investor confidence continued to be strong in 2014 evidenced by the country’s sovereign credit ratings at a ceiling of B+ coupled with the continued rise in FDI inflows.
As at end -September 2014, FDI inflows were $2 231.5 million, 6.3 percent higher than for the whole of 2013. The investments were broad-based, cutting across priority and growth sectors such as agriculture, construction, manufacturing and mining.
Foreign Reserves: Foreign reserves currently stand at approximately $3.04 billion from $2.7 billion at the end of 2013. This translates to around 3.4 months of import cover. The goal is to attain four months of export cover in the medium-term and six months thereafter.
The Government will continue with inclusive growth and job creating strategies through ensuring macroeconomic stability to support both local and foreign direct investment. Further, it will pay particular attention to diversification of the economy and to support SMEs. The underlying objective is to accelerate growth, employment creation and poverty reduction.