The question of how Zambia’s already weakened economy can survive the mounting fiscal pressure – exacerbated by COVID-19 – was recently examined in The Road to Recovery: A policy brief for a post-COVID Zambian economy, released by the Zambia Chamber of Mines. Many Zambians have since voiced their views on the value of its recommendations.
Mining for Zambia asked Zambian business owners, economists and other experts to weigh in on the debate around what measures should be taken to put the country back on a growth footing, following our own critique of the report.
There is international consensus on a two-phased policy approach, of protecting the businesses today that will enable a strong economy tomorrow. In line with guidance on a two-phased plan – ‘Protecting lives and livelihoods’, and ‘Recovery through growth’ – the report outlines a set of steps that it strongly recommends be taken to finance this recovery. We asked Zambian economist, Dr. Grieve Chelwa, for his opinion.
“I agree with a two-phased approach. Protecting livelihoods is obviously the most important thing — this is what most Governments across the world are doing; it’s best practice. In countries where Governments have the financial resources and the capacity for delivery (such as the US), they are supplementing incomes, and providing unemployment cheques. Regarding the second phase, in which growth is prioritised, no reasonable person can disagree [with this recommendation]. We have to sustain employment, and grow tax revenues in the long-term.”
Respected economist and thought leader, Professor Oliver Saasa, comments:
“There are a number of things [contained within the report] that we need to underscore and which, in my view, are very important for Government’s consideration. The first is the need for private sector resilience, and the importance of supporting the productive sector – especially in the short term, in terms of access to finance. Stimulus packages have been characteristic of economies almost everywhere in the world where Governments frantically try to avoid closures of companies. The resilience of the private sector in Zambia has been affected significantly, not only in terms of their bottom line, but to the extent that they’ve failed to fully retain their labour – in some cases because of how Government has responded [to the crisis]. Even at the social level, layoffs of labour can lead to really very serious ramifications – including political problems.”
Indeed, companies in all sectors and of all sizes are being forced to drastically cut their workforces. Proflight Zambia, a Lusaka-based airline that operates the largest fleet of aircraft in the country, is no exception. Ndola-born founder and CEO of Proflight, Tony Irwin, illustrates the severity of the situation on the ground:
“From April onwards, we had to cut people’s salaries by as much as 60-80%. Our staff knew how bad it was; they were very supportive. We thought we’d be operating at around 50% of our previous capacity by July. Instead, our turnover in July was only a third of what our salary bill would normally be.”
The African Tax Administration Forum (ATAF) and the Organisation for Economic Cooperation and Development (OECD) provided recommendations from as early on in the pandemic as March, in order to address businesses’ sudden cashflow challenges and, essentially, avoid cases of business distress such as this. Yet key businesses in key sectors – such as Zambia’s entire aviation sector, and its many linkages – remain unsupported.
Zambian businesses urgently need lifelines, including affordable access to finance (in the form of grants and low interest loans) and tax relief (via the waiving or deferment of certain taxes, tax holidays, zero VAT, or the removal of customs duties). The 416 Zambian businesses across 20 sectors that were surveyed by Impact Capital Africa this year indicated that their most urgent requirements fall into one of these two categories.
Zambian businesses urgently need lifelines, including affordable access to finance and tax relief.
Proflight is just one example of a business with working capital requirements that cannot be ignored. The sudden loss of revenue resulting from the drastic drop in scheduled flights will make aircraft maintenance and costly simulation training exercises impossible to fund.
If businesses in key sectors were given a grace period, with taxes temporarily deferred during the crisis, it would free up funds to provide much needed working capital, in order to pave the way for Zambia’s economic recovery in future. Measures that fall into these two categories would also encourage cross-border trade, create liquidity, and assist with cashflow and business solvency.
Closing doors (and windows)
Without urgent action, business failures could have significant knock-on effects throughout Zambia’s economy. “Many small to medium scale businesses are closing down,” says Saasa. “Retail outlets have closed down, the hospitality business has been affected badly; the big hotels in Lusaka have closed down.”
“But the point is: are these businesses closing for good?” says Saasa. “Will they be able to resuscitate themselves post-COVID? That is really what this report is asking. It’s possible that businesses like this will close down forever. But it’s also possible that, if Government takes the right steps, and business is incentivised to survive the pandemic – is put on oxygen in ICU, so to speak – then they can be resurrected. It’s all about what we do now in the midst of the COVID-19 challenge.”
Before the pandemic, Proflight had approximately 80% of market share for Zambia’s domestic aviation network. When international tourism is permitted once again, Zambia will need Proflight to be around, to fuel one of the country’s biggest contributors to both GDP and foreign exchange receipts. But, although Proflight is an important cog in the tourism machine, its main contribution to Zambia’s economy is “moving the people around who drive the Zambian economy,” says Chairman of Proflight, Captain Phil Lemba.
As a major carrier in Copperbelt Province, the mining sector in particular has come to rely on Proflight’s regular routes between Ndola and Lusaka – and, recently, South Africa’s business capital, Johannesburg. “Proflight’s Ndola-Johannesburg route is a mining-driven flight. After South African Airways pulled that route in January 2020, Mopani [Copper Mining Plc] guaranteed us a certain level of occupancy to entice us into operating the route. We had up to five flights a week scheduled in April before COVID. We expect to see that kind of demand – primarily driven by mining and business activity – bouncing back quicker than local and leisure demand.”
Is Lemba concerned about the recently reported drop in the mining sector’s revenue? Naturally. “The mining industry is the engine that drives the economy, so yes, there are concerns.”
How does Zambia get the private sector back on its feet, and pay its debts?
With an estimated 40% of annual tax revenue collections being used to service debt (based on figures from a 2019 Ministry of Finance Economic Report), Zambia’s Government currently has no fiscal space to even think about setting the country on a growth footing.
When international tourism is permitted once again, Zambia will need Proflight to be around, to fuel one of the country’s biggest contributors to both GDP and foreign exchange receipts.
The Chamber’s report points out that debt management and significant spending cuts could go some way towards alleviating the situation, but the funding gap is too large for these measures alone to be enough. According to the 2019 Ministry of Finance Economic Report, Zambia’s annual revenue collections and non-debt related costs amount to $5 billion coming in and $5.5 billion going out. Add to this the estimated $1.4 billion in debt servicing costs paid in 2019 – and payable annually – plus a total of $2.1 billion in domestic arrears, and the gap between revenue collections and overall costs becomes unsustainable.
Enter the IMF
Unfortunately, Zambia’s relations with the IMF have been fraught in recent years, with talks fizzling out again in July – but Zambia may yet convince the IMF to take a few more steps, over the threshold. The key to securing financial assistance, the report says, is for Zambia to present a credible plan for managing its liabilities while also boosting investment and growth to encourage a revival within the private sector. But the immediate priority is to secure substantial debt relief, it says, so that Zambia’s debt servicing costs can be funnelled towards protecting lives and livelihoods.
Austin Chijikwa, who heads up the investment banking division at Zambia National Commercial Bank (Zanaco), weighs in, commenting in his personal capacity: “An IMF package is definitely an important option. Having a concessional loan from the IMF would free up liquidity and help debt negotiations with existing lenders – otherwise the government’s hands are tied to provide the economic relief required in this pandemic. We also need to go back to the table with China and the holders of the Eurobonds, and re-negotiate more favourable terms with our commercial lenders.”
Chelwa offers his view on multilateral assistance: “Concessional loans are much harder to get, compared to accessing commercial debt. Zambia goes to the IMF because it clothes us in a cloak of credibility. It signals that, if the IMF is doing business with Zambia, it must be the case that the economy is in order. If the result of talks is that the IMF agrees to work with Zambia, something will have changed. Prospective investors will see that the IMF has ticked its boxes. The current perception of Zambia is of a country that doesn’t seem to have its house in order. I think we have no choice.”
Saasa elaborates: “Right now, there is some kind of a stalemate [with the multilaterals] as we haven’t reached an agreement. The IMF and the World Bank are insisting that we come up with a very clear fiscal stance, generally, and a clear and bankable strategy towards debt management, in particular. Domestic debt is beginning to become [something akin to] a small elephant in the room, which must be addressed – especially now that Government is issuing long-term bonds to raise some money. One has to be very careful accessing those magnitudes [of money] because you are starving the private sector of accessing the same money; you are fishing from the same pond. One has to be very careful about how freely Government can raid the capital market locally, to a level where it begins to adversely affect the long-term growth and development of the private sector.”
The lack of access to affordable finance for businesses, and the Government’s staggeringly high level of domestic arrears – with $2 billion owed to local businesses, according to Ministry of Finance statistics – could be a fatal combination.
Chelwa agrees. “The Government should prioritise paying domestic debt holders – Zambians who bought Zambian government bonds, suppliers who haven’t been paid – and [try to] reestablish trust. In my opinion, the report’s debt recommendations are pretty spot on. There will be a lot of pressure on Government when revenues decline; a significant share of the Government’s budget is spent on servicing debt. We need to restructure our debts, or negotiate with our creditors. Bridge financing would work.”
What are some of the biggest risks to the Zambian economy right now?
Chijikwa responds: “Although COVID is creating some degree of havoc, the biggest challenges to our economy right now are the ones we had going into this crisis. One example is the mines’ issues with the tax regime, which existed before COVID, and have only been exacerbated by the pandemic. The underlying issues in the economy are the ones that need to be addressed. The debt issue is a big one. It won’t go away magically, it’s something that must be addressed.”
Saasa has his finger on the pulse, and has been closely following the media’s reactions to this policy brief. “Anyone who reads the Chamber’s report without wearing ‘Us and Them’ spectacles [in the context of the complicated history between the mining sector and Government] will find this report to be a major contribution to how we move forward. Anyone who rubbishes it may, in fact, be ‘shooting the messenger’ [so to speak], rather than responding to the message. It underscores the importance of dialogue between the Government and the private sector – including the mining houses – to find common ground regarding how to navigate the headwinds going forward, to allow for a win-win situation.”