Trade volumes growth need to trickle down to local businesses – PSDA

Private Sector Development Association – PSDA president Yusuf Dodia has urged government to ensure that all bilateral agreements are tailored to promote local businesses and promote youth entrepreneurship in the country.

Dodia cited the recent increased bilateral trade between Zambia and China to be an opportunity that should be used to empower youth entrepreneurship together with local small and medium businesses in the country to realize the full benefits.

The PSDA President told the Zambia Business Times – ZBT in an exclusive interview that government’s bilateral arrangements should be targeted at opening opportunities for young people as the country constitutes over 60 percent of youths most of who are either unemployed or under employed.

He said engaging youths and local enterprises in trade development plans will enable them open business markets in neighboring countries and join in cross border trade adding that failure to create a favorable environment for small and medium scale business, any existing bilateral relations have less impact locally if the benefits do not trickle down to young people and local economy.

He adds that Zambia has significant opportunities to grow its exports portfolio by utilizing young entrepreneurs and small & medium businesses in the country. “The agreements that Zambia has with countries like Angola, China, Egypt, Japan and many others should be reviewed to ensure that they open up opportunities for young people to take part in trade and business in contribution to national development”, he said

He has however advised youths in the country to be proactive and engage themselves with institutions that promote trade at all levels such as COMESA, Cross Border Trade Association for more open opportunities and make the challenges they face known so that solutions can be found.

The Chinese ambassodor recently announced that trade between Zambia and China hit US$5 billion in 2018. This levels of trade volumes growth were welcomed by a cross section of economic players but questions have arisen on the trickle down effects of this trade volumes to locally owned small and medium size businesses and youths in Zambia.

With the diminished to stunted growth in formal jobs, there is a call for trade and business activities in Zambia to have a sizeable share reserved for local businesses for economic benefits to flow and trickle down to local citizens and youths.

In the construction sector for instance, there has been a policy of 20% sub-Contracting to local businesses but this move is not yielded the needed local empowerment due to lack of supporting legislation.

Private Sector Development Association - PSDA president

Attend to the cost of borrowing urgently!

Editorial

Private sector lending and household credit growth is a good measure of how an economy is doing and how it’s citizens and privately held businesses see the future economic prospects. One can involved in all sorts of marketing and public relations stunts to influence economic sentiment but it all comes down to what the hard numbers are saying.

The Zambian economy runs under a multiparty system that at every one time will have a ruling party and the opposition. These two sides of the same coin are ideally meant to provide the necessary checks and balances in the ultimate aim of getting balanced policies and implementation timelines.

The economic policy implementors are the civil service that are expected to supersede any political regime that comes to power for its limited term, to provide the stability in known policy pitfalls, to help guide political office holders at any particular time on the known exciting political promises but end up as pitfalls and guide the politicians in terms of the long term interests and drive for the country.

Following the monetary policy committee meeting and subsequent presentation of the fourth quarter results, we saw that private sector lending shrinked, household lending also slowed down. This is a telling statistic that the economy needs urgent administering of medicine and some strong medicine for that matter.

The government itself which is considered risk free has its treasury bills and bonds yield rates in double digits, treasury bill rates which are deemed risk free had yields of 23.5% in the latest auction. This simple fact is that market rates for similar tenor of upto 12 months would require rates of above 23.5% for lenders to be compensated and earn an extra margin for additional risk, otherwise its better to invest the funds with the government T-Bills.

To add salt to injury, Standard and Poors, a global credit rating agency though maintaining the sovereign credit grade at B-, they downgraded the outlook from stable to negative, a clear indictment on the economic prospect by what the external investors would deem an independent assessment.

The impact of these downgrades is not only on the government and its agencies, but percolates into the entire economy. The sovereign rating acts as the starting point for individual companies and consumers credit rating as seen from the global credit market.

As if this is not enough, the government statistics bureau, central statistic office – CSO and BOZ produces current and capital accounts net balances which are at times in avoidable deficits. All these increase the risk profile of the country and need tight management by state and government authorities.

The basic tenet of sound economic management is the tight management of the key macro economic targets and results. These then render confidence to the rest of the sectors across the economy.

The monetary policy rate which is ideally supposed to be the key benchmark rate for both domestic and business Kwacha borrowing has now been applied only to the inter-bank overnight lending.

This rate is needed to reflect the cost of funds to the households and business community and the applicable margins are what should be subject to regulatory and market debate. Alas, there seems to be no clear actions that are shared to stem the cost.

Entrepreneurship need financing and cost of borrowing is key to enable businesses to thrive. Manufacturing and exporting of local produce needs lower cost of borrowing to remain competitive. Households quality of life, access to asset and mortgage financing all need affordable and competitive cost of borrowing.

Even the government itself could do with low cost of borrowing to finance the annual budget as well as long term infrastructure needs. The investment return on budget lines spending and infrastructure may not be high enough to support future repayment at higher cost of borrowing.

So there is a clear need, but the question is of weather we have the clear capability and motivation to drive the cost of borrowing down. The complications that we see in an economy is that whichever state of economy is obtaining, there are beneficiaries that would prefer to keep the status quo.

Zambia has the requisite professionals, economic managers and economists educated at the best institutions in the world, with experience working at some of the best managed institutions of the world at both the Bank of Zambia and Ministry of Finance that can be empowered to weigh in and administer the needed cocktail of medicine.

When our analysts speak to the two institutions responsible for monetary and fiscal policy, we sense a tendency of resorting to a blame  game. The Bank of Zambia will say its the fiscal policy side that is failing the country and the spending agencies will counter accuse the central bank of failure to put in place astute and shrewd monetary interventions.

Our take is that this problem needs collective efforts even by ourselves as media to highlight and provide alternative solutions. All citizens who have Kwacha assets, resident Zambians and investors all need to highlight these distortions so that we can have some level of borrowing rates that can make doing business and lifestyle much more enabled.

Chart below MPR linked more to banks overnight lending rate than cost of borrowing for consumers and SMEs

Editorial Private sector lending and household credit growth

Is swapping Zambia’s debt from US dollar to Chinese yuan viable?

By Philip Chulu

Zambia’s total external debt stock has of late been attracting attention from international rating agencies to multilateral lenders as well as the local analysts and economists. There are questions being asked about how the country will be able to pay off the annual debt obligations without compromising the treasury liquidity.

There seems to be no clear explanations and re-assuring messages from the treasury to convince the analysts and business community on how this seemingly impending problem will be dealt with leading to mostly a negative narrative taking root and weighing on the local economy.

There has been suggestions by some analysts and economists that the government of Zambia should explore the idea of Swapping external debt owed to China from dollar denominated debt to Yuan denominated debt.

Why you may ask? Well firstly it’s worth noting that as at end of 2018, Zambia’s external debt position stood at $10.5 billion with about $3.1 billion of that balance owed reported to be owed to China. Put in another way, about 31% of Zambia external debt is owed to China. This amount is significant and it’s managment in terms of repayment terms and interest would go a long way in reducing of repayment obligations on the treasury.

Well at a total external debt balance of U$10.5 billion, you can imagine how high the cost of debt servicing is to the treasury. To top it all, an embattled kwacha and strengthening dollar impacting on emerging markets is adding to this headache as more kwachas are required to service the debt.

Bank of Zambia – BOZ Governor Dr. Denny Kalyalya in February’s monetary policy committee – MPC Statement said “The kwacha depreciated by 15.3% against the US dollar to a quarterly average of K11.89 per US dollar from K10.31 per US dollar in the third-quarter.

Dr. Kalyalya attributed the depreciation to mainly on account of a high net demand for foreign exchange mainly for oil procurement. In addition to strengthening of the US dollar triggered by the hike of the federal funds rate and negative market sentiments arising from Zambia’s credit rating downgrade contributed to the weakening of the Kwacha.”

The point to note here is that the Kwacha is embattled and that we are currently in tough times for the Kwacha and its deprecation against the US dollar has made it more expensive to service the national debt and hence straining the treasury. It then makes sense to consider various ways of addressing this issue and consider viable options to mitigate or reduce this strain on the treasury.

But how appropriate is the strategy of pursuing a debt currency swap? What is the impact of swapping the US dollar debt and thereafter holding Yuan denominated debt?

Let me start by saying if this is done, the Central Bank of Zambia – BOZ will inevitably have to start hold substancial sums of the Yuan-Renminbi in their reserves for the simple fact that the current Chinese debt is large and will be subsequently serviced in Yuan.

This option was given impetus when Chinese Ambassodor announced that Zambia’s trade volumes with China have hit US$5 billion. If these trade volumes are secured with signed of trade deals between the two countries, it would act as a source of Yuan as well as reserves to be used to settle future debt obligations.

But again, this would amount to putting 31% faith into the Chinese currency despite the concerns that other countries such as the USA and some European countries have with the Chinese currency. There are wide debate and accusations that the Chinese Yuan is not reflective of it true value. US President Donald Trump has repeatedly accused China of manipulating its currency to bolster its export led economy. Would it be safe for Zambia to play in this area and risk being caught in the cross fire?

Whether it’s true or not that China does manipulate their currency has not been established. The US treasury department in its Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States report stated that “China has a long history of pursuing a variety of economic and regulatory policies that lead to a competitive advantage in international trade, including through facilitating the undervaluation of the renminbi (RMB).” However in its conclusion of the Report, the treasury department did not label China as a Currency manipulator, they did however state they would further observe the Yuan.

Having Yuan reserves then exposes the central bank to the risk of currency fluctuations (Volatility) in the Yuan reserves as it may not be a stable currency as the greenback has proved to be. The major reason why the Greenback (US$) is the major reserve currency of choice is because it is a stable currency and viewed with positive sentiment globally.

Taking into consideration all this, what then could be the government rationale for considering this path? Well the reason is simple, dollar reserves have been dwindling from over 3 months import cover to now 1.9 months cover. 

This currency debt swap maybe a good idea, however much consideration must be put into the risk of holding large Yuan reserves on the central bank’s balance sheet. Zambia must ensure that it takes its collective interest first and not be used by either the promoters of US$ or Chinese Yuan.

By Philip Chulu Zambia’s total external debt stock

Debt servicing obligations limiting liquidity in the economy – CTPD

CTPD Executive Director Isaac Mwaipopo said: “We have observed that Zambia is increasingly dedicating more resources towards debt servicing and thus leaving the government with limited ability to stimulate the economy for higher employment for the nation at larger and young people in particular.”

Mwaipopo added that the institution remain deeply concerned that social sector spending has been reducing as demonstrated by the relative low funding to tertiary education compared to primary and secondary education.

“It makes sad reading that government is failing to pay lecturers on time. As we speak, there are lecturers who have stopped teaching as they are demanding to be paid their salaries. Government should take note of research evidence which shows that tertiary education has a significantly higher impact on the growth in GDP in Africa than other levels of education,” he noted.

And Mwaipopo further urged  government to join hands with young people in finding lasting solutions to the challenges they are facing. According to the 2015 National Youth Policy, it spell out intentions that seeks to provide equal access to opportunities while the National Action Plan for Youth Empowerment and Employment targets to create 200,000 jobs annually of which 40% should be for the youths.

“There is great need to move away from the old tradition of always addressing young people; we need to find time to listen to them. They have ideas and solutions to most of the challenges they are facing. The increasing dropout rates, limited opportunities for University and College education, low funding to Institutions of higher learning, failure to harness the Entrepreneurial skills of Youths and many others, will conjointly create a population of disadvantaged youths,” he mentioned in a statement.

Mwaipopo further highlighted some of possible considerate measures needed to urgently address the rising cases of unemployment, which has become a serious factor to the growth of the country.

“Zambia needs to invest in human capital development through ICT and innovative practices in the Agriculture and Manufacturing sectors in order to generate more employment opportunities. The current construction boom needs to be supported through reducing interest rates in order to support construction sector employment creation.

causimgtGovernment should consider hosting a Jobs summit aimed at finding lasting solutions to employment challenges young people are facing, this must be a private sector led process aimed at bringing together industry players and policy makers,”

On March 12, 2019.  Zambia commemorated youth day under the theme;   “Zambian Youth: Generation unlimited.”

The Centre for Trade Policy and Development