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A tough climate and weakened economy: how debt concerns businesses and employeesBy CUTS on 16 Nov 2018
With 90% of employment created by the private sector, how does debt impact businesses and employees like you?
Businesses of all sizes are at the heart of the country’s development as they create employment for many Zambians and are a major provider of tax revenues for the Government. It is therefore important for the Government to create an environment in which the private sector can thrive and contribute to the development of the country. However, Zambia’s debt position is making it difficult for businesses to sustain themselves.
We are already seeing the impact of high debt levels on business which could lead them to effect redundancies or even close down. The 2019 national budget speech confirmed non-performing loans (loans where scheduled payments have not been made) are at 11.7% higher than the standard 10% threshold. This is a sign that businesses are struggling with finance and could be linked to the high level of payment arrears in the economy. With more and more money being channelled to paying off its debt, the Government is short of cash, making it difficult to pay companies and contractors. This results in a build-up of payment arrears to the private sector which stood at K13.9 billion in March 2019. Payment arrears have negative implications throughout the economy as contractors cannot pay suppliers, hitting many businesses’ cash flows, leaving them struggling to make more investments and even pay their workers.
High levels of domestic borrowing by the Government have also made it harder for businesses to access finance to make investments or simply keep going in times of poor cash flow. This situation has occurred through what’s called a ‘crowding-out’ effect whereby banks would rather give credit to the Government than businesses. This is because these investments with the Governmet are seen as safer which increases the cost of lending to the private sector, thereby reducing their borrowing. Government is increasingly looking for overseas investment to reduce this effect, but interest rates remain high and access to credit difficult for companies of all sizes.
Finally, in order to raise revenues to pay back public debt the private sector becomes a target. Small businesses in particular may find it harder to operate when taxes are increased as this affects their profits. In the proposed 2019 budget small and medium enterprises (SMEs) are expected to be paying more in taxes and fees next year. Turnover tax which is a tax charged on small business with an annual turnover of K800 000 or less is expected to increase next year to 4% from 3%. All fees and fines will be adjusted upwards in line with inflation and thereby the cost of operating businesses will further increase next year.
We spoke to the Zambia Association of Manufacturers (ZAM) Chief Executive Officer Chipego Zulu to find out what debt means for businesses. She pointed out that reinvesting in the sector was difficult for manufacturers because of heavy Government borrowing on the domestic market. “The current high debt levels are increasing the cost of production for local manufacturers making our products less competitive than products outside Zambia. Small scale industries need to scale up operations but heavy domestic borrowing has resulted in lack of affordable finance as interest rates have remained stubbornly high above 20% despite interventions form the Bank of Zambia to reduce the cost of borrowing.” This shows that key economic sectors such as manufacturing are struggling to grow because of the country’s debt position.
Not only have high debt levels created a difficult environment for businesses to prosper, they are weakening the wider economy. As we know from our previous articles, debt levels have contributed to depreciation of the Kwacha which has direct and indirect effects on businesses. Firstly, businesses will directly suffer from higher costs of inputs such as fuel and other imported good, increasing running costs. Secondly, inflation threatens to reduce demand for goods and services in the economy as Zambians’ incomes are squeezed by higher prices. A weakened economy can lead to reduced profits and job losses.
Furthermore, the outlook for the economy is worrying because high debt levels leave it vulnerable to shocks such as a fall in the copper price, failing rains or currency depreciation. High debt servicing costs also limit the Government’s ability to inject cash into the economy to stimulate growth and have (among other factors) reduced foreign currency reserves, which the Government uses to protect the kwacha against depreciation. The Government would therefore be unable to cushion the impact of an economic shock, threatening economic collapse, which would see businesses close down and unemployment increase.
The private sector is very important for the growth of the economy as it creates jobs and provides income for Zambians. Increased debt accumulation is negatively affecting the operations of businesses, slowing down growth and ultimately leaving the economy vulnerable to collapse. Businesses are already underperforming, holding back growth, and will suffer if the Government does not address the debt problem, resulting in increased unemployment, coupled with higher cost of living and increasing poverty in the country.
Continue to follow the series next week and follow the conversation on social media #DebtConcernsMe.
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