African economies are primed to be ranked among the fastest growing in the world in 2019. According to the International Monetary Fund (IMF), projections for the region’s economic growth next year has been bumped up to 3.5% - 4% from earlier projections of 3% growth. If you set aside Angola, Nigeria, and South Africa, the region’s projected growth rate jumps to 5.7%.
Among those nations primed for growth is Zambia, which thanks to the steady rebound of commodity prices, an improvement in the global economy and improved capital market access, enjoyed 5% growth in the third quarter of 2018, up a half-point from a year earlier. Still, as many analysts express concern over the country’s management of debt, a fiscal consolidation programme has boosted confidence, resulting in improving medium and long-term forecasts for the country’s potential growth.
But Zambia is not quite out of the woods yet. Debt remains high, there's an ongoing tax row with the mining industry, and the political opposition complains of rough treatment. So the question is, can Zambia's reputation for resilience and stability continue to hold through this difficult period?
I recently had an opportunity of interacting with Christopher Mvunga, Zambia’s Deputy Secretary to Cabinet, to get his views on how the economy is performing and see what challenges may lay ahead for the Southern African nation.
Mvunga has had an interesting career: he joined both the Zambia Institute of Chartered Accountants (ZICA) and the Association of Chartered Certified Accountants (ACCA-UK) in 1994, eventually becoming a Fellow in 1999. During this time Mr. Mvunga worked as the Director of Corporate Finance at DevCorp Business Consultants, a Zambian firm, before eventually joining Standard Bank in 2002, where he held multiple positions. In 2011, Mvunga progressed to Head and Director of Network Management Africa at Standard Chartered Bank, South Africa, where he stayed until his nomination to Parliament and eventual appointment to his current role as Deputy Secretary to the Cabinet.
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Where does the Zambian economy stand today, on the regional and global stage?
Zambia has been successful in navigating several economic challenges over the past year, ranging from drought which took a heavy toll on agricultural production, slower than expected recovery of mineral prices, as well as uncertainty related to the trade war unleashed between the US and China. But Zambia is again proving resilient, with most projections showing Zambia outperforming the broader region in the next few years.
In terms of our size, location, and population, Zambia has consistently outperformed expectations. We currently view global economic trends to be in our favor this year, and anticipate the continuing expansion of our economy, steady reduction of debt, and, most importantly, delivery of development to the most vulnerable of our communities.
Market analysts often say that Zambia's debt is too high. Do you believe there is an accurate perception of risk outside of Zambia?
As mentioned before, there were certain challenges in 2018 that we have been able to overcome. But there have also been challenges relating to Zambia’s debt profile based on misleading information and periodically false information circulated that is not consistent with the facts on the ground.
There is a great need for improvement of accuracy in the production of debt related data, discipline in the implementation of debt and liability management plans, and a practical sinking fund programme.
This is why our reforms package has been so well received. I believe the increasing levels of confidence in Zambia are due to our demonstrated commitment to reduce public debt levels, the ongoing dismantling of arrears, and our proven ability to meet targets set by the government in the Economic Stabilisation and Growth Programme [ESGP] and the 2019 National Budget. Yes, we have challenges to address, but I believe we can all agree that we have the right strategy and approach.
Some investors express concern over what they view as deepening political turmoil in Zambia. Do you believe markets should trust Zambia's democratic credentials?
So much of the Zambia conversation among investors appears to be based on a flawed narrative.
There's a tendency among many in Western media to default to known stereotypes - elevating any political dispute to the crisis level of Congo or Zimbabwe - and the opposition has taken advantage to showcase their grievances. But the fact is that we are by and large a peaceful, democratic nation which has repeatedly demonstrated our commitment to rule of law and stability - a fact well known to anyone who spends time here. Nevertheless, the exaggerations pushed by certain enemies of government has contributed to false perceptions which have hurt Zambia. And it's our job to set the record straight.
How are foreign investors responding to recent economic trends in Zambia?
We are hopeful for a continued expansion of foreign direct investment in Zambia. Many people don’t realize that we enjoyed a 65% uptick in inbound foreign direct investment in 2017, in other words making Zambia one of only two countries in our development category that saw an increase in FDI on the continent last year.
We also see that Zambia was one of the hottest destinations in 2018 for FDI from African non-member and member countries of The Common Market for Eastern and Southern Africa – a free trade bloc. Investors are, and will continue to be attracted to our growing consumer class, our need for a wide variety of infrastructure and services, and of course, some of the largest copper and other metals reserves in the world, especially as copper prices trend upwards in the coming years.
Zambia’s proven record of democratic stability is also enticing to investors, and will to improve the attractiveness of the aforementioned assets. In fact at a recent meeting with the Honorable Margaret Mwanakatwe, Zambia’s Minister of Finance, the Director General of the UK’s Department for International Development (DfID) commended Zambia’s “inspiring” fiscal sustainability plans, and shared her optimism for continued Zambian stability and prosperity.
And we share her optimism.
What is the ‘Smart Zambia’ Initiative?
‘Smart Zambia’ is a package of policies aimed at preparing our country for the future, increasing access and opportunities in the technology space for our young, ambitious and innovative workforce. The plan, which includes the installation of over one thousand communication towers, is meant to transform Zambia into a middle-income country by 2030. And this week the government dispatched an official delegation to the Mobile World Congress in Barcelona – the largest mobile communications event in the world – to gain exposure to the best new ideas and innovations in information and communications technology so that they may be deployed in the Zambian economy.
What do you view as the main challenges to the economy?
As a landlocked nation, we are dependent on our openness and our positive trade relationships, which unfortunately have been unsettled by continued global trade tension. The rise in global oil prices has also been a source of pressure on foreign reserves. On the domestic front, negative market sentiment related to fiscal challenges; upward adjusted debt; sluggish credit growth; depreciation of the Kwacha from the third quarter which triggered some inflationary pressures; and, lower than anticipated agriculture output arising from the poor rainfall, impacted on the overall performance of the economy.
Inflation is however relatively stable and within our target range last year. The highest inflation rate of 2018 was recorded at 8.3% in October, which had decreased to 7.9% as of December and decreased again to 7.8% in February. And we believe our policy commitment will continue to meet targets despite expected pass through from fuel prices and foreign exchange positions.
We are also placing a much stronger focus on illicit outflows of capital, including money laundering and tax evasion via the 2019 budget tax reforms, which has been a pervasive problem in the country.
There have been some complaints from mining firms about Zambia’s tax reforms. They claim the tax regime is too aggressive – what is your response?
Thank you for this question, as this is a deeply misunderstood subject, and one characterized by a significant lack of awareness of the facts among international observers of Zambia.
Our government is doing everything possible to strike a fair deal for the Zambian people. Billions of dollars of wealth that has been extracted from our country with little to no return for many, many years, and now that has to change. These illicit transfers usually happen through trade invoicing fraud, hidden transfer pricing, hidden payments and debts between parent companies and their subsidiaries, and profit-shifting mechanisms designed to conceal revenues. In fact, the African Development Bank estimates that Zambia lost almost $29 billion due to these illicit outflows between 1996 and 2014.
Our proposed tax reforms are completely reasonable and within the comparative range of most other metals exporting countries – only a 1.5% increase in royalties and an additional windfall tax when copper prices are above $7,500 per tonne. In fact these royalty and tax rates remain well below many other competing markets, and are the only way that we can ensure that foreign direct investment contributes positively to the development of the country.
We need honest and transparent engagement with members of the mining community who are committed to partnership not just with their shareholders, but also with the Zambian people – that will entail taking a tougher line, but we maintain that it is fair and we are prepared to stand our ground.
Will Zambia be seeking relief from the International Monetary Fund (IMF) in 2019?
I cannot comment on any discussions with any international financial institutions, however I would note that many of the benchmarks sought by these institutions are already in place in Zambia, and should be an operational standard whether or not a given country engages with the IMF.
The key question here is not whether we agree to a package. The key question is how we deliver on our reforms. Our Ministry aims to set an example in terms of delivery of service that should be the envy of the Southern Africa region. The way that we achieve that is through the implementation of a new performance management programme throughout all directorates of our Ministry, an initiative that is supported by international organizations such as the UK DfID.
Such a model can be applied across all official agencies to enhance the quality of governance. Our aim is not only to meet our set targets and lock-in the reporting of crucial economic data, but also to have every officer in our organization meet high standards of professionalism, integrity, innovation, and diligence. I have every confidence our hardworking team will not fall short.