Ministry of Finance
THE STATE OF THE ZAMBIAN ECONOMY
Tuesday, 30th December, 2014
Country Men and Women, as we come to the close of the year, it is important that I share with you the performance of our economy in 2014 and provide my reflections on the outlook for the economy in 2015 and in the medium to long term.
MACROECONOMIC PERFORMANCE IN 2014 AND OUTLOOK OVER THE MEDIUM TERM
Growth in 2014:- The economy in 2014 has remained strong with preliminary real GDP growth of 6 percent; making Zambia the seventh and tenth fastest growing economy in sub-Saharan Africa and the world, respectively. This is consistent with our ongoing vision of becoming a middle income prosperous nation.
The positive performance was driven by agriculture, manufacturing, construction, energy, transport, communication, and the financial sector. Preliminary data shows that mining is expected to contract on account of operational challenges at some localities during the year under review. Considering that growth has been driven by non-mining sectors, this is clearly a reflection of the Government’s relentless efforts in diversifying the country’s sources of growth, income and employment.
Going forward, it is the intention of the Government to continue with policies and strategies that will further consolidate the diversification of the economy, and in the process ensure resilience to any adverse external developments, such as those associated with volatile copper prices.
Growth in the Medium-Term:- Over the medium term, 2015 - 2017, real GDP growth is expected to escalate to an average of 7 percent principally as a result of increased agriculture production, electricity generation, construction and growth in transport and communication. For the long-term, it is the desire of the Government to sustain and increase this growth trajectory to double digits in order to ensure greater impact on poverty reduction, particularly in peri-urban and rural areas.
Some economic analysts have been raising concerns over the outlook in the mining sector. There is no cause for alarm. As Government, we are confident that working in collaboration with mining companies, the concerns will not be insurmountable as they will be resolved with reciprocal amicability.
Let me say a few things on two major concerns.
(i) VAT Refunds
The Government remains committed to resolving the matter of VAT refunds to mining houses and other sectors. Movement on this issue has been delayed on account of the court actions which some mining companies have instituted. Our hope is that we can still resolve this matter in a manner that is mutually beneficial for both the country and mining companies.
For 2015, we have made provisions to cover normal VAT refunds as well as dismantling prior claims where sufficient documentation is provided.
(ii) 2015 Mining Tax Regime
Following the approval of the 2015 Budget and in particular the new mining fiscal regime, Government fully recognizes the reported concerns by some mines. Consistent with the desire to grow the economy, create jobs and alleviate poverty, Government will within the framework of the existing statutes engage the concerned mines, upon presentation of the likely adversity on their operations.
This will be with the view to coming up with a common position that will ensure profitable continuity of operations at the respective mines while taking due consideration for the Zambian people to benefit from their natural resources. The current tax structure is a final tax that has replaced the profit based tax, which was largely illusory and disadvantageous to the country.
In this vein, let me stress Government’s commitment to dialogue with mining houses as may be appropriate. I am confident that the concerned mines are exploring ways of resolving those issues that are within their ability. These are the tenets of running mature businesses anywhere in the world.
The Government in 2014 made progress towards fiscal consolidation. Our assessment of the deficit in 2014 indicates that it will be contained around 5.4% of GDP, a rate lower than the 6.5% of GDP registered in 2013.
For 2015, the projection is an even lower deficit of 4.6 percent, while in the medium term; the Government will reduce the deficit to around 3 percent of GDP, in line with the policy of promoting the availability of capital for private sector growth. The reduction in the deficit will be firmly anchored on continued re-alignment of expenditures to priority areas such as infrastructure, improved public service delivery, and rationalizing the Government wage bill to forestall structural imbalances and deformities. Recurrent expenditures of up to 70% largely emolument and emolument related cannot be a recipe for country-wide sustainable development.
Further, the Government will continue with reforms to the public pension system by implementing broader reforms and undertaking revenue administration reforms to enhance tax collections with the view of attaining higher domestic revenue. It is noteworthy that the expenditure and revenue strategies over the medium-term will moderate Government domestic borrowing. Reduced domestic borrowing by the Government will contribute to lower lending rates and in turn increased access to loanable resources for the private sector, particularly SME’s. The Government recognizes the importance of increased access to affordable credit by the private sector as it leads to increased investment and growth of the economy as well as job creation.
Through the Financial Sector Development Programme, efforts are underway to not only improve financial inclusion among the unbanked citizenry but also to ensure innovative and affordable credit for productive business ventures at every level of entrepreneurship across the wide expanse of our country. Clearly, our fiscal policy is grounded on strong fundamentals.
DEBT AND DEBT SUSTAINABILITY
The Government takes the issues of debt sustainability very seriously. For this reason, we undertake a periodic Debt Sustainability Analysis (DSA) to establish the sustainability of the country’s debt and to evaluate our capacity to service both external and domestic obligations. The last DSA was conducted in June 2014 and the full report is ready.
Total public debt is in the order of 32 percent of GDP, a level that is below the internationally accepted threshold of 40 percent. Our external debt as at end-September 2014 stood at US $4.7 billion. In net present value terms, this represents 17.6 percent of GDP. The domestic debt as at end-September 2014 was at 13.6 percent of GDP.
There is no room for complacency and euphoria. To this effect, the Government will continue to restrict borrowing to ensure that our debt sustainability is not compromised. The Government will also continue to undertake periodic DSA’s to establish the sustainability of the country’s debt. We will also continue to inform the public on the debt situation to ensure that there is no circulation of market harmful information by pessimists.
MONETARY AND EXTERNAL SECTOR DEVELOPMENTS
Inflation:- We had set an inflation target of 6.5 percent for 2014. The outturn for annual inflation in 2014 has been recorded at 7.9 percent. Part of the pressure on the general level of prices emanated from the depreciation of the Kwacha, especially during the first half of the year. Going forward, the Government will endeavor to contain inflation within the low and single-digit range to ensure that business planning and forecasting is not only credible but also resilient.
Exchange Rate:- Regarding the exchange rate, the trend this year has been towards depreciation, especially during the first half of the year. Some measures undertaken by the Bank of Zambia have led to relative stability of the currency. This was complimented by the Treasury that has been monitoring the level of balances in the banking system. Going forward, the Government will continue to monitor exchange rate developments to ensure stability as continued tight liquidity conditions may overtime harm the economy.
Interest Rate Developments:- We have noted that credit conditions have generally remained supportive of economic growth. For the year to September 2014, domestic credit increased by 14.8 percent. Government however, remains committed to ease liquidity conditions in the financial sector once relative stability in the exchange rate has been attained.
Trade and Current Account Balance:- Preliminary data indicates that by the end of 2014, the country will have recorded a surplus of over US $1,459.9 million on its merchandise trade. While a current account deficit is projected for 2014, we are, however, confident of a significant improvement in the external sector. The projected deficit is largely on account of lower copper prices coupled with reduced non-traditional exports (NTEs). Subdued global demand for copper on account of lower global economic prospects explains the low copper prices and subsequently, the weaker export earnings.
The lower NTE’s have been largely on account of stronger domestic demand for some key export goods such as cement and fabricated metal products. This increase in domestic demand is a testimony of the growing domestic economic activities in areas such as construction and energy, which as a result, have facilitated creation of the largest number of new jobs for our people. In this respect, as the diversification drive takes root and export firms increase output to meet both domestic and external demand, we expect NTE’s to rebound and continue to significantly contribute a larger proportion to export earnings.
Foreign Direct Investment Flows:- Investor confidence continued to be strong in 2014. Evidence to this was re-affirmation of the country’s sovereign credit ratings at a ceiling of B+ coupled with the continued rise in FDI inflows. As at end-September 2014, FDI inflows were US $2,231.5 million, 6.3 percent higher than for the whole of 2013. It is worth noting that the investments were broad-based covering Government’s priority and growth sectors such as agriculture, construction, manufacturing and mining.
Foreign Reserves:- Foreign reserves currently stand at approximately US $3.04 billion from US $2.7 billion at the end of 2013. This translates to around 3.4 months of import cover. The goal is to attain 4 months of import cover in the medium-term and 6 months thereafter.
OTHER ECONOMIC MATTERS
Relations with the IMF and Cooperating Partners:- The Government continues to enjoy good relations with the International Monetary Fund (IMF). Following the expiry of the last programme in June 2011, the Government has been interacting with the Fund through standard surveillance under the provisions of Article 8 of the Fund’s governing laws. The last review we had with the Fund was in the first half of December 2014.
The Zambian Government has continued to enjoy warm and cordial relations with other cooperating partners. We are very grateful for the support they have continued to render to the Zambian people and it’s Government.
Planning and Budgeting Bill:- In order to enhance transparency of the budget and increase oversight by institutions such as Parliament, the Government has made progress in drafting of the Planning and Budgeting Bill that we aim to present to Parliament in the course of 2015.
Countrymen and women,
As I conclude, let me indicate that the Government will continue with inclusive growth and job creating strategies through ensuring macroeconomic stability to support both local and foreign direct investment. Further, the Government will continue to pay particular attention to diversification of the economy and to support for SME’s. As it has been to date, we will continue to encourage mutually beneficial and regular engagements with investors and the private sector, with the underlying objective of accelerating growth, employment creation and poverty reduction.
The Government is committed and will ensure that the programmes and activities approved by Parliament in the 2015 Budget are effectively and efficiently implemented.
Compatriots, I thank you.
ALEXANDER B. CHIKWANDA, MP
MINISTER OF FINANCE