How will Zambia’s already weakened economy survive the mounting fiscal pressures of COVID-19? This is the central question tackled by a report presented by the Zambia Chamber of Mines on 23 July in Lusaka.
The free-to-download report, The Road to Recovery: A policy brief for a post-COVID Zambian economy, outlines steps for ensuring that the economy recovers before more irreversible damage is done to Zambia and her people’s livelihoods, and makes a strong case for providing financial assistance to the private sector — often, along similar lines to the interventions already initiated by Zambia’s peers from March onwards.
Drawing on local expertise, research from international financial institutions and think tanks, and survey responses from hundreds of business owners across the country, the report offers a narrow pathway to redemption which, if carefully followed, will set Zambia on the road to economic recovery and — crucially — on a growth footing for the future.
What does the pandemic mean for the mining sector?
Last year was a challenging year for the mining sector, and COVID-19 has clearly piled on more pressure. Chief Executive Officer of the Chamber of Mines, Sokwani Chilembo, who presented the report’s findings, revealed that Zambia’s mineral revenues dropped by an alarming 30% from February to April 2020. The greater part of this fall was due to the global restrictions on movement creating unprecedented bottlenecks in the mining supply chain, hindering the export and sale of copper. So, while the copper price has since rebounded, the reality of second (or third waves) of the virus — with a possible resumption of restrictions — means that the outlook for the industry remains distinctly uncertain and volatile.
Among the most worrying statistics in the report is that, according to a June 2020 survey conducted by Impact Capital Africa (ICA), between 50-60% of respondents from the mining and mining services sector (albeit mostly smaller operators) foresee their businesses failing within the next 3-12 months — unless urgent economic measures are introduced by the Government.
A floundering mining sector will have ripple effects on the wider Zambian economy, a fact that Zambian economist and academic Dr Grieve Chelwa made crystal clear in a recent comment to global media house, Quartz: “Our biggest economic driver is what really happens to copper exports and prices. When those things slow down, then the economy itself slows down.”
Mining is not the only sector to see slowdowns as a result of COVID-19, of course. The Chamber’s policy brief highlights the challenges faced by businesses in every sector. Business activity in Zambia decreased for the fifteenth consecutive month in May, according to Stanbic Bank’s Purchasing Manager’s Index (PMI), released in June. ICA’s report — for which 416 Zambian businesses across 20 sectors were surveyed — reveals that a startlingly high 48% are at risk of failure within the next 12 months.
Is there a way out?
Protecting the economy needs to be Zambia’s immediate priority, the report asserts; and, thereafter, growing it. The strain on the Government’s purse is very real, but squeezing businesses for tax revenues that will push them over the edge is not the solution. Instead, businesses need to be given an opportunity to survive and protect their workforces — along with their consumer and supplier relationships — in order to ensure that they remain taxpayers and contributors to Zambia’s economy in the future.
Taking action now, in the interest of the future
Protecting lives and livelihoods is the first part of a two-phased approach outlined in the Chamber’s report, which draws directly from the prevailing policy literature available to Governments.
Zambian businesses urgently need the very same lifelines that many of our African peers and neighbours’ Governments began extending in March 2020, a fact which the report backs up with statistics generated from ICA’s survey. In particular, businesses indicated that their most urgent requirements fall into two broad categories: 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). These measures would collectively provide liquidity, aid cashflow and business solvency, and ease and encourage cross-border trade.
These are the very same interventions advised by the African Tax Administration Forum (ATAF) and the Organisation for Economic Cooperation and Development (OECD) early on in the crisis in order to promptly address businesses’ sudden cashflow challenges. Had Zambia followed the ATAF and OECD guidelines earlier this year, the economic landscape may already look less gloomy.
But, as we enter the month of August, the same risks plague companies of all sizes, threatening nationwide economic disaster.
Can Zambia afford to defer taxes and provide financial assistance to the private sector?
It can’t afford not to — that is a message that comes through loud and clear, in this eye-opening policy brief. It is the settling of domestic arrears, it posits, that will ensure the continued survival of Zambian businesses. Ministry of Finance statistics show that, domestically, the Government owes over $2 billion in a combination of goods and services delivered that haven’t yet been paid for, and outstanding VAT refunds. The report points out that a portion of these arrears are linked to already delivered infrastructure projects, which is both telling and unsettling when correlated with survey responses from within Zambia’s construction and infrastructure sectors, which show that businesses in these sectors are at greatest risk of failure.
As we enter the month of August, the same risks plague companies of all sizes, threatening nationwide economic disaster.
The central message in the report is: spare businesses in key sectors from paying tax now, so as to pave the way for an economic recovery in future.
The logic of deferring tax collection at a time when Government revenues have shrunk beyond expectation may not be immediately apparent. But this proposed plan for Zambia’s economic recovery — and, indeed, revival — has been devised with a clear eye to the future. If society is ever going to be in an economically sound position — with the country able to pay off its debt — forgoing revenues in the immediate term is the only way forward. The alternative, the Chamber argues, is to kill off the chance of economic recovery before it has even a hope of success.
Sustaining individuals and companies through a period of economic inactivity — through a strategic system of tax deferments and financial lifelines — is what will give them a chance of resurfacing post-crisis, when growth will need to take centre stage.
How does Zambia get the private sector back on its feet, and pay its debts?
Zambia’s Government needs the fiscal space to set the country on a growth footing, and this is impossible when an estimated 40% of annual tax revenue collections are being used to service debt, based on figures from the 2019 Ministry of Finance Economic Report. The same Economic Report shows that Zambia’s annual revenue collections and non-debt related costs amount to $5 billion coming in and $5.5 billion going out, which doesn’t sound like an impossible funding gap to bridge. But the additional weight of debts and unpaid bills changes the picture dramatically.
Add to the $5.5 billion last year’s estimated $1.4 billion in debt servicing costs (payable each year) and a total of $2.1 billion in domestic arrears, and we have an unsustainable gap between revenue collections and overall costs.
Sustaining individuals and companies through a period of economic inactivity will give them a chance of resurfacing post-crisis, when growth will need to take centre stage.
Debt management and significant spending cuts have the potential to help the situation, the report points out, but funding assistance from international financial institutions such as the International Monetary Fund (IMF) will be necessary to bridge the remaining gap. Unfortunately, Zambia’s relations with the IMF have been fraught in recent years, but that doesn’t mean that all is lost, despite the most recent collapse in talks. The key to securing financial assistance, the report says, is to present a sound, credible policy plan for both managing liabilities and boosting investment and growth, to encourage a flourishing recovery in the private sector, and thus more sustainable national finances. How else will the money eventually be paid back?
However, the immediate priority must be to secure substantial debt relief, so that Zambia’s debt servicing costs can be repurposed towards protecting lives and livelihoods.
It is also vital that Zambia does not increase its commercial debt at this crucial time, which would only increase the funding gap, setting in motion a Sisyphean debt cycle. “The country needs ample breathing space, to allow for revenues to first fall, as investment is drawn in, and then grow as the economy is rebuilt through the next 5-year period,” the report says.
But ‘why should the Government deploy its limited financial resources on the private sector, when its own revenues are under pressure?’ the report asks rhetorically. The answer is clear: “The future of government revenues depends upon the continued existence of the private sector, and the taxes and duties that flow from it.”
The order in which the suggested policy steps are taken is of paramount importance, the report asserts: “Firstly, protect viable businesses and sectors through the period of crisis; ease the existing pressure of government liabilities in order to do so; then, review existing policy frameworks to encourage renewed investment to initiate an economic recovery.”
The path to greater revenue collection will be reached by growing the economy and the tax base. As the adage goes, it’s about growing the size of the pie.
Zambia ought not to lose sight of the future, the Chamber’s report urges. Only through growth can we deliver more.
Keep an eye out for our subsequent critique of this report, where Zambian business owners, economists and other experts weigh in on the debate around what measures should be taken to put the country back on a growth footing.