Commentary December 29th, 09 – 4th January, 10

Finance and National Planning Minister Situmbeko Musokotwane should expect a tough 2010 fiscal year as he has to meet the numerous stakeholder expectations which seek to balance economic growth with poverty reduction through job creation.

As we close the year 2009, government projections are that the economy will grow beyond the average of 6.1 percent attained between 2006 and 2008. Businesses and economists are however, highly skeptical about the projected real growth rate as the main sectors driving the Zambian economy such as agriculture, manufacturing, mining, tourism and construction have not generated growth in employment levels.
On the contrary, these sectors contracted in terms of staff compliments in 2009 mainly due to the global credit crunch. What the nation expects is the quick translation of economic growth into the creation of new jobs. A growth rate of over six percent should create more than 10,000 new jobs; which still remains too small to have a significant impact on the labour market. However, in Zambian terms, this is better than nothing and we should aim at achieving it in 2010.

The government starts the year under the new budget cycle which requires government to immediately start funding spending agencies as early as January. This should translate into early economic activity and open up numerous cash-flow bottlenecks that the public and private sectors face during the face three months of each year. The handicap the Ministry of Finance and National Planning faces is that the Decentralization Implementation Plan has not yet been approved by government and this will render the early implementation of the 2010 budget marginally ineffective.

The other real challenge for Dr Musokotwane is to ensure the private sector responds effectively to the seeming stability in the economy. Inflation which is projected to end at 10 percent by end of 2009 should never be allowed to rise again in 2010. Zambia has only focused at containing inflation during the last few months of each fiscal year. Inflation should be kept low from January to December and this will require government to minimize the impact of food and energy prices on inflation by quickly diversifying the economy.

In similar fashion, the interest rates should correspond with the reduction in the inflation rate. The reason commercial banks have failed to reduce interest rates in 2009 is that, among other reasons, they still believe inflation will rise in the first six months of 2010. The unpredictable weather pattern and the new system of allocating agricultural inputs may have a negative impact on the inflation rate and this is what banks are watching. In any case, we have only recorded a single digit inflation rate for one year since the 1980s.

Dr Musokotwane has significantly built a huge gross international reserve to nearly five months of import cover. This is as a result of increased export earnings and concessional loans. The expectation now is that the huge reserve should signify long-term stability of the exchange rate so that both exporters and importers win. Additionally, as has been observed by other quarters, the reserve should be brought down to two and half months of import cover with the excess going to investment in infrastructure such as road-networks to productive centers of the country.

As the government boasts of the expansion in gross international reserves, Dr Musokotwane should effectively and rationally watch the growth in external debt. Between 2006 and 2008, being the post HIPC period, external debt has increased from US $1.6 billion to US $2.3 billion. Some of this debt has been acquired by parastatals and the government itself. This also implies government will have to speedily restructure parastatals which are, by-and-large, a huge liability on the treasury. Accruing any further additional external debt will make the economy highly vulnerable to external shocks in the near future.
The other challenge Dr. Musokotwane faces is the likely impact of the 2011 general elections on the 2010 national budget. Though allocations for the elections will be contained in the 2011 budget, the reality holds that certain expenses will have to be made in 2010. The temptation will be to finance some of these requirements off the budget.

I expect Musokotwane to remain resolute, disciplined and focused on delivering for what has been budgeted for. He has so far stabilized the key macro economic variables which are fundamental for economic growth. Treasury management has so far been very good and donor support is according to projection. He has a reasonably strong platform from which he can grow the economy in 2010.

I have no doubt that Zambia has an opportunity to grow its economy beyond 7 percent this New Year mainly through an increase in private sector investments. But for the government to deliver on results there is need for prudent and effective management of resources, timely execution of policy benchmarks, fiscal discipline and good co-operation between government and the private sector.

I wish the government and Dr. Musokotwane in particular a successful 2010 fiscal year!