By Darlington Chiluba
THE year 2018 will be remembered as the year Zambia experienced the brutal side of international finance markets and speculative behaviour. What would have been local debate a few years ago about national finance made international news and affected the economy such that by August 2018 the Kwacha depreciated by 2.5 percent against the United States (US) dollar. Some speculated that actual debt exceeded what was on record and nuanced Zambia’s incapacity to meet her debt obligations. None of this came to pass.
Indeed, part of what we learned during the year was the absolute need for proactive information from the authorities. Reactive information did very little in the heat of that moment and appeared to open other avenues of speculation which, without correct interventions by the central bank, could have been detrimental.
The case of the Asia crisis in 1997/8 serves as a lesson of how easily money flows into an economy when conditions such as interest rates and policy are favorable; and how easily money flows out of an economy when the same conditions are perceived to be absent or ineffective.
This causes fear and notions of economic mismanagement or failure arise. Malaysia serves as one of the finer examples of how to respond to such a crisis in the face of speculative behavior.
Another lesson was the power of international markets to either build or ruin an economy based on available information, misinformation or pure speculation. And due to this speculation, the value of our Eurobonds depreciated and became a genuine cost to the economy. Both these scenarios imposed a status that saw debt repayment take precedence over other sector expenditure in recent history of national budgets.
Across Africa, the cost of debt has been borne out of ambitious infrastructure expansions from Ethiopia to Kenya and Zambia. Similarly, the proposal to slow down on infrastructure spending has met unanimity in Africa as one of the ways to slow down debt contracting. And like Zambia, most African states and indeed global economies are now looking to restructure their economies by rebasing so that the revenue base is widened more than deepened. Deepening entails taxing the same sectors and the same finite number of employed citizens in various different ways such that eventually it erodes the money available for people to spend, i.e., disposable income, private consumption and ultimately weakens the public-private finance nexus.
Widening the tax base
Widening the tax base suggests structural expansion of existing sectors, for example, financial services mostly included banks and pension funds a few years ago. At the moment mobile money or digital finance has become a huge global phenomena and should become a significant component of Gross domestic product (GDP) and a revenue source. When revalued and included in the rebasing exercise, it would show a true picture and value of that sector and the same goes for health, agriculture and fisheries. So it’s a positive thing to rebase.
GDP in Zambia was about $2.5 billion in 1991
Looking at some of the 2018 issues it became tempting to forget that GDP in Zambia was about $2.5 billion in 1991 while debt exceeded $ 7 billion. The reverse is almost true in 2018, GDP is over $25 billion while debt is hovering about $9 billion because of consistent improvement in policy and institutions of government and finance overtime. This is why the Euromarkets were amenable to Zambia’s borrowing on the international market. As 2019 dawns, expectations of economic performance by different countries, regions and continents is all the discourse. Domestically, an ideal scenario in support of rebasing the economy would be rebasing to expand services and their contribution to GDP, and renewed focus on soft commodities.
This is why:
As stated above, the financial sector is not just a space for banks, pension funds, insurance companies and micro-finance institutions any more. The recent upsurge in digital platforms especially money transfer options has added significant value to that sector and will continue to do so beyond 2019.
There are currently 300 million mobile accounts in the world and more than 30 percent are based in sub- Saharan Africa. Further, it is expected that over U$ 150 billion will be invested in financial technology in the next three (3) years. This means homegrown companies like Zoona, Probase and Kazang are potential major contributors to GDP and revenue sources for government beyond current capacity. Their role and value in the future of our economy will not be on the fringes of finance but likely in the front.
Finance and insurance services in Zambia
The second reason is that finance and insurance services in Zambia have not grown beyond 10 percent as a contributor to GDP since 1970 according to our national accounts numbers. It peaked at 5.04 percent in 1995 but by 2001 had dropped to 4 percent and now hovers at about 6 percent according to record. Recent numbers show that the two sectors were the largest contributors to economic growth in December 2018.Imagine capturing the real value of the entire sector as contributor to GPD and revenue in 2019 and coming years. While the size of the economy will grow numerically in the instant, the actual benefits will take a while but should add to national revenue markedly once realised
Two of the quickest ways to achieve this is through Farmer Input Support Programme (FISP) and the social cash transfer (welfare) scheme. Both include citizenry that are generally outside the finance and technology circles, and generally stationed in far flung areas of the country where few banks dare to set up branch for (justifiable) cost reasons. Both groups are exemplary of public-private partnership in financial services because government provides the funds and the market while the private sector provides the technological solutions for sending government funds to that market. The FISP already employs a combination of finance and technology to pay for farmer inputs. Those stationed in locations where banks shy away from will this year be paid through modern transfer means. Most of this group is captured in the finance-technology circle in some form, so not so much work is needed.
The welfare scheme via the social cash transfer is meant for the most underprivileged of our population and different from FISP beneficiaries because most of them do not own mobile phones and live in places where network itself is a challenge. These are not entrepreneurs but vulnerable groups in our society. They don’t sound an attractive group until one observes that government has allocated over ZMW 699 million in the 2019 budget or just under $ 60 million at the year-end dollar to kwacha rate of 12. The hindrances may be more complex than providing welfare beneficiaries free basic phones through which they can receive funds and withdraw through existing infrastructure or mobile technology; they may even be more intricate than placing network towers in strategic locations, may be. But the truth remains that capturing this unbanked populace into the finance and technology circle would be a huge boost to the services sector and the economy. It would also reduce the number of the unbanked because mobile accounts are a part of the modern financial system.
The third reason to support services growth is that Demand for copper in 2019 is expected to be moderately lower than it was in 2018 partly because of the US-China trade war which has impacted China’s income from exports into the US market and subsequently its ability to spend as it did previously on copper, in this
case. For Zambia this means that receipts from copper exports could be low. By extension, if this constrains debt servicing the next option is to reroute funds meant for other functions. This is no scenario for economic failure but a simple recipe for constructive and structural solutions.
At a broader level the reasons to focus on services are more compelling. As a note, the World Trade Organization (WTO) shows that over 80 percent of world trade relies on finance (related) services. This includes trade in intangible services like bank guarantees and letters of credit which are short term but effective at the economic level.
Most of this trade revolves largely in developed nations and part of the reason is that over 70 percent of labour in North America, for instance, is employed in services while over 65 percent in Europe is employed in services. But as recent as 2016 only 25 percent of labour in Africa is employed in services and over 65 percent in agriculture. This entails opportunity than failure because technology and finance keep advancing.
As such, most fast growing economies for 2019 in Africa and Asia are focused on growing information and communication technology (ICT) which encompasses services, on one hand and public investment in infrastructure on the other. To prove this point, India and China are two economies projected to grow the most in 2019 at over 7 percent and 6 percent respectively. Both economies are global economic powerhouses, both are invested in Africa and both strategically focus on exporting engineering, construction and ICT.
As 2019 dawns, we would have known that one of the fastest growing sectors in Zambia grew by 36 percent in December 2018 while only contributing 6 percent to GDP. We would also have known that insurance and banking are the two fast growing sectors in the country. It would be clear that leaning towards expanding services provides us a better chance in the current and future global economy. Statistics provide evidence of what has been done before; we have capacity to make the statistics change in our favour. As a final note, Africa as a whole is expected to perform better than developed nations in 2019 especially regions that are focused on services such as Cote d’Ivoir and other nations. Commodity driven economies will be demand driven and susceptible to shocks.