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Inevitability of the Economic Recovery Programme MEDIA EDITORS’ LUNCH Radisson Blu Hotel 16th March 2017 “Working Towards the formulation of Sound Economic Policies” 1 Is the economic recovery programme dubbed Zambia Plus necessary? Is IMF support necessary or is it too risky for Zambia? “Working Towards the formulation of Sound Economic Policies” 2 1.1 The Debate Debates in the media, in the general public, among key players like CSOs (NGOs, FBOs), donors, etc. Is an economic recovery really necessary for Zambia? If yes, is IMF support really necessary or is the IMF too risky so that we should “go it alone”? We say Zambia Plus and IMF are both very necessary… Our paper is a step back, to understand why… “Working Towards the formulation of Sound Economic Policies” 3 1.2 Zambia: Macro-economy in 2015 External shocks: Copper prices collapsed, falling by 35% in 2015, & cause trade & current account deficits. In July, severe electricity shortages set in (load-shedding: 8hrs/day); manuf. & agro-processing productivity dropped by 30-70% and US$4.3 billion in current GDP was lost. The Kwacha collapsed, depreciating by 26% in Sept and 60% over the year. Inflation rose from 7.7% in Sept to 21.1% by Dec, due to imported inflation. “Working Towards the formulation of Sound Economic Policies” 4 1.3 Zambia: Macro-economy in 2015 Domestic policy responses: Monetary policy became tighter – inflation & exchange rate came under control but interest rates rose & squeezed out the private sector. Fiscal policy remain expansionary (“spending what we did not have”) – very little fiscal adjustment. “Working Towards the formulation of Sound Economic Policies” 5 1.4 Zambia: Macro-economy in 2015 Growth performance decline (real GDP growth rates): 6.9% 2.9% 1999-2014 2015 3.4% 2016* For a small open economy, 2015 was a big slowdown!! Zambia Plus is necessary to lock out possible instability & to recover our growth path. “Working Towards the formulation of Sound Economic Policies” 6 2.1 Consequences of Inaction Without a deliberate programme to ‘force’ discipline, Zambia’s fiscal slippages will continue… 0.0% (% of GDP) -2.0% -4.0% -6.0% -3.8% -4.1% -5.7% -6.9% -8.0% -10.0% -10.0% 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 -12.0% Fiscal balance target Fiscal balance outcome, cash basis Fiscal balance outcome, commitment basis Fiscal balance projection, commitment basis Without Zambia Plus, budget deficits will remain deep “Working Towards the formulation of Sound Economic Policies” 7 2.2 Consequences of Inaction To sustain the huge budget deficits, Govt. will have to keep borrowing over 2017-2019. But the debt burden is already very heavy!! Budget allocations: External & domestic debt servicing & arrears payments are 23% of 2017 National Budget. 12.5% 13.4% Road infrastrcture External Debt Interest Domestic Debt Interest 6.8% 10.1% 6.7% 7.7% Dismantling of Arrears 5.1% Farmer Input Support… 1.9% 4.4% 1.5% Public Service Pension Fund 2.6% Strategic Food Reserve (by… 1.4% 1.5% 0.6% Social Cash Transfer (SCT) 0.9% 0.7% Economic Empowerment Fund 0.3% Rural Electrification… 0.2% 0.2% “Working Towards the formulation of Sound Economic Policies” 2016 (K53.1 billion) 2017 (K 64.5 billion) 8 2.3 Consequences of Inaction The debt burden means Zambia will use nearly ¼ of the budget on debt servicing/arrears in 2017. This is equivalent to each of the 16.4 million women, men & children in Zambia paying K896 (or a family of six paying K5,391 as debt servicing) in 2017. But as of 2015, 54.4% of Zambians were poor; could not afford the minimum annual consumption basket – K2,568 (or K214 per month) – needed to kept a family of six above the income poverty threshold. “Working Towards the formulation of Sound Economic Policies” 9 2.4 Consequences of Inaction When shocks happen, from a budget point of view, 5.0 120% who suffers? 90% (K millions) Economic empowerment fund (82% underspending SCT (18% under) Public pension fund (13% under) 4.0 80% 58% 40% 3.0 Budget approved 0% 2.0 1.0 -13% -18% -82% 0.0 “Working Towards the formulation of Sound Economic Policies” -40% -80% Preliminary release -120% % difference between release & budget 10 3. Is the IMF Relevant to Zambia Plus? Yes, the IMF is relevant. Three reasons why… Zambia is eligible to a US$1.3 bn interest-free loan from IMF; this can cover Zambia’s total external debt service needs (US$1.36 bn) for the next two years. IMF also offers technical support on macroeconomic policy design and implementation (also automatic checks and balances for Govt.) IMF also signaling that Zambia is serious about recovery & open for business; brings extra resources from donors & FDI “Working Towards the formulation of Sound Economic Policies” 11 3. Is the IMF Relevant to Zambia Plus? Risks of IMF programme stringent fiscal adjustment and other conditionalities… (recalling SAPs); IMF has reformed, but… But the solution is not for Govt. to run away from them; Govt. simply needs to manage the risks… “Working Towards the formulation of Sound Economic Policies” 12 4. In Closing… Zambia Plus is absolutely necessary for full recover: locking in stability; and re-establishing robust growth. IMF is key for: extra extermal resources; technical assistance (& accountability); & signaling about Zambia. But Zambia also needs: rational & consistent fiscal policy; strong, insulated & accountable institutions & policy-makers; and political will & social restraint. p/s: Please look out for the macroeconomic imbalances paper… “Working Towards the formulation of Sound Economic Policies” 13 “Working Towards the formulation of Sound Economic Policies” 14