FORMER Finance Minister Felix Mutati says Zambia’s huge volume of debt serving has contributed to the kwacha’s rapid depreciation because it is harvesting a lot of foreign exchange from the market.
The kwacha has sharply depreciated against major convertible currencies in the last three weeks, easing to a new all-time low of K16.52 per dollar by Tuesday.
On the other hand, Zambia’s external debt stock peaked to an all-time high of US $11.2 billion as at December 31, 2019, for the first time in the country’s history, mainly on account of new disbursements on existing loans, mostly earmarked for infrastructure development.
In an interview, Mutati said for the exchange rate to be addressed, there was need for a cocktail of actions, measures and policy interventions that bordered on three separate components including: monetary and fiscal policy, and participation of the private sector.
“I think it’s not sufficient to dwell on the reasons why things are the way they are in the country. Perhaps much more important is what can be done in the current scenario to try and create some level of stability that will propel and inject hope into the growth of the economy. At the monetary policy-level, the central bank is equipped to be able to do very immediate and short-term interventions, but those interventions are temporal in their very nature and if they are taken beyond temporal, they can begin to hurt other components of the economy. In particular, they can play around with the policy rate and things like that. But the effect of that is to induce a reaction in terms of the cost of money. When you get to the policy intervention, what is it that government can do? One of the challenges that we’ve had, particularly in 2020, is the volume of debt servicing, which, obviously, is harvesting a lot of foreign exchange from the market and putting pressure on foreign exchange notwithstanding the fact that the imports are also putting pressure. So, I think the measures that were pronounced in terms of dealing with debt restructuring should be put into urgent motion so that the component of debt service that impinges on the exchange rate can be flattened a little bit,” Mutati said.
“Then, I think the second thing that is needed at fiscal level is to create a path on how we are going to deal with the first maturity of the Eurobond, which is in 2022. At the moment, the Eurobond is performing very badly, globally, and most of it is about creating a credible story that will have a plan to address the due date. And I think that plan must be sounded very loudly that there is a plan and that will influence the rate at which they are trading. The next thing on the fiscal level that we need to look at is the need to elevate with conversation with IMF. This is purely for confidence and to inject hope that IMF will come at some point and, therefore, all those that are placing investment, particularly in the bonds in Zambia and in Treasury Bills, can continue to do so. But on the basis of hope because investment is actually tied in and confidence is tied in on the basis of pronouncements that we make.”
Mutati outlined the need to review the 2019 mining fiscal regime to revive copper production, which had slumped last year, and encourage investment in the sector at private sector level.
“The third level is the private sector level. How can we expand the export base of companies, such as Zambia Sugar, to contribute to the flow of foreign exchange? I am sure the relevant component of government can begin to look at that; what is it that we need to do in that space to boost the foreign exchange earnings? And Nakambala is a good candidate because they already have footage in Europe in terms of the export market. But much more critical at the private sector level is the mining sector; in the last two years, the mining sector has been very subdued in terms of production. The projections were that by the end of 2019, certainly by the first quarter of this year, we would have hit one million tonnes in terms of production. But the figures that we are getting form there are not inspiring, we will be lucky to hit 800,000 metric tonnes this year. Unless we do some intervention,” Mutati observed.
“So, I think we need to look at the policy measures in the mines and tax regimes in the mining sector to be able to boost production and encourage investment in the mining sector. Once we are able to lift production, then the ability for the country to earn foreign exchange increases and it will have an impact on the exchange rate. So, the exchange rate impacts on all of us. So, you can begin to weigh to say: ‘do I continue to charge import duty on raw material imports from the DRC or do I re-look at that duty?’ Because what you are bringing in is cheap material. But when you turn it in smelters, it’s high value material. So, you get a lot more tax when you turn it into Zambia and you create a lot more employment opportunities when you turn that role material. But with the duty component, we are finding a situation where the smelters are under-performing. So, I think there is need to look at that policy and elevate the performance of the mining sector. So, I think there is an urgent need to have a productive engagement with the mining sector because they generate almost 60 per cent of the foreign exchange earnings and we can’t underplay their significance.”
And Mutati said there was need to create a path that would explain how government planned to deal with the first maturity of the country’s first Eurobond, which matures after next year.
“…That way, it won’t be rated as the worst performing, globally, because that also affects investor confidence. Yes, Bank of Zambia (BoZ) Monetary Policy can be used, but that is extremely temporal because their level of intervention is limited. They can play with the policy rate, they can inject some dollars through the reserves, but their reserves are low. So, we don’t want to deplete the little that we have got by way of continuous interventions. Let’s look at fiscal and private sector solutions in order to re-orient the fundamentals and that way, we are going to have a sustainable economy,” advised Mutati.