Upcoming challenges in the environment?
I had a moment.
In that ‘moment’, I decided to blog my views on the current economic environment in Zambia and what we can expect going forward. These ‘views’ have been on my mind, like the sweat from the October sun, for a few weeks. But unlike the sweat, which can be removed with a nice shower, the thoughts have remained.
What closed off the thought process and invoked the blogging process, was a couple of days ago, the IMF closed off their country visit to Zambia. As is customary in the many member states, they held a joint conference with the Ministry of Finance to announce that they were done. Many times, these events go unnoticed or are not well reported in our local media. So, like many others, I had to engage with various friends across the economic divide to help me clarify, internalise, and firm up my perspectives.
For starters, there was a positive – the messages from the IMF, in their written statement, mirrored what the Honourable Minister of Finance had told Parliament and the nation, at large, on 20 October. It is good to see the Government and the IMF singing from the same hymn sheet. This is always encouraging.
Unfortunately, one might argue, that is where the good news ends… (but is it?). Let us analyse the messages I refer to above.
In his address to Parliament, the Minister highlighted negative external challenges arising from low commodity prices. In this case, the main commodity is copper, though we do have other minerals in the form of Zinc, Cobalt, Coal, Gold and various emeralds. The IMF were a bit less direct in reference to commodity prices and talked of ‘low exports’. This encompasses the commodities, but also highlights the need to expand our export base.
In 2008 and 2009, when we last saw such low commodity prices, copper led the way in recovering back to ‘reasonable’ levels. I remember listening to a news programme that was discussing the recovery of copper prices. Granted the sustained strength of, and demand from, the Chinese market place helped; but they did say that copper is one of the better commodities in leading a recovery. Simply because it is ‘useful’ and relatively cheap. ‘Useful’ because copper is used in producing cars, constructing houses, in many electrical applications, shipbuilding, piping, roofing, and household consumer products. China has been a big driver of commodity prices, but as other countries begin to manufacture various products, we can only wait and see when the prices will rebound above the $6,000 mark.
As we wait for that favourable price, we, as the business community, need to find a way of increasing our exports to boost the $ inflows. I am hoping that the budget later this week, will provide a strong foundation for businesses to achieve this.
The external shocks are important to understanding our situation, but it is better to dwell on internal shocks as those are more controllable.
On the internal challenges, the Minister referred to:
- The power crisis (load shedding) and high inflation (caused by load shedding and volatility in the exchange rate).
- Policy reversals – this simply means that our Government changes its mind too often. Businesses need consistency to be able to make long term decisions.
- The impact of growing Government expenditure pressures – this primarily arises from the focus on infrastructure, without due reference to the return on investment, and the subsidies on fuel, electricity, farmer inputs and maize.
The IMF alluded to similar challenges, but added one item that the Minister omitted – subdued private sector consumption and investment. One may argue that reference to inflation affecting production, indirectly speaks to this issue, but I think it needed a lot more emphasis in the speech.
The reason I refer to that last element as significant, is because of the environment in which we operate in Zambia. We are a consumer nation. To grow a consumer nation, the general population needs to consume. But to consume, you need money….
Now, we all know the situation we are in. Fuel prices were recently hiked by the Energy Regulation Board by between 15-40%. We all knew this was coming because our fuel prices were unreasonably low, or put it another way, ‘our fuel was being subsidised by our taxes’.
We also know that electricity tariffs are expected to ‘resume their normal service’. If you read various statements, they rarely talk of ‘raising tariffs’ they focus on ‘removing subsidies’. This implies the prices have already gone up! Lastly, our Excellency said it himself as he addressed business leaders, that he intends to take ‘…painful but decisive measures to grow the economy…’
With the above scenario, are we really going to get the consumption that we require?
My view is ‘Yes’. People will take time to adjust their lifestyles to the new cost structures. We will feel inflation as cost of production and distribution of goods goes up. However, with higher electricity tariffs, we might have less load shedding and therefore lower energy costs in production. Reduced load shedding also means improved productivity. I don’t need to be seating in my office constantly looking at the battery meter to see if it’s time to leave. As I write this blog, power went at 8am and is only back at 2pm….
Similarly, the Government needs to prop up the currency. I expect this can be done through investor confidence and to an extent – using IMF money. The first investor that the Government has to target through the various ministries is the local citizen and local entrepreneur. There is a huge resource that the Government sits on, if only they can get 3 out of 10 Zambians to become an investor in this country.
Similarly, the diaspora community represents an under-utilised resource for the Government. Getting the confidence of both local and diaspora investors will always have a favourable ‘trickle down’ effect on other would-be foreign investors. To emphasise the point, there needs to be a concerted effort by both the Government and the local business community to push for local investment and diaspora investment. We should not rely on foreign investment to build our coffers. Why? I once heard someone say ‘if you ask someone to furnish your house, don’t be surprised when you find him sleeping in your bed’. (enough said on that point…)
So, what are some of the other positives that makes me think that consumption will return? Industrial Development Corporation is one of those. I know there are many sceptics out there who have nothing, but negative words, thoughts and views about company. Personally, I think it is a good idea. The execution currently looks good, but we wait to see what happens in the coming months. I also support the social cash transfer programme that helps the most vulnerable in the economy. This will continue to spur consumption by those people and the money recycles in the economy, while uplifting the individuals.
I have reached here and realised I could keep going and going, so let me refrain myself. I have faith in the economy and the plans of the Government to spur growth. However, the challenge is in execution.
But that said, are you going to wait for the execution to know whether your business is going to survive the ‘painful, but decisive’ actions? How will you prepare yourself for the upcoming developments? Some ideas:
- Risk assessment – we are still waiting to get final direction of Government policy. This is going to be clear once the budget is presented to parliament and the 7th National Development plan is launched. However, you cannot wait until then before you start running simulations and sensitivity analysis on your budgets and plans.
- Control environment – in tough times, ‘unity of purpose’ from the directors down to the newest staff member becomes critical. This is driven by have strong stakeholder engagement by having relevant and timely information at your hand.
- Financial planning – as I mentioned above, there are various sources of funding that the economy has available to them for purposes of investment. Entrepreneurs need to focus more on targeting cheaper sources of funding outside the traditional pools.
Entrepreneurs are looking for assurance that they businesses are ready for the knocks that are coming. 3K&L is well positioned to partner with you and provide that assurance.