Debt management in the era of pressing infrastructure needs
IN the past 15 years, we have seen average growth of about 5% to 7% than the global average, which however has been mostly commodity driven.
This rising growth episode is almost gone and future growth will be replaced by the new strategies we put in place now to reposition our economy.
The commodity era has been and continues to be fraught with risk particularly with the slowdown of China’s economy.
And so, as we seek an agenda for growth, it is relevant to look at some topical issues around growth in particular debt management and infrastructure needs.
In the recent past, the most common public discussions relevant to debt in Zambia has mostly been predicated on setting up sinking funds and debt repayments, while others speak to the need to reduce the infrastructure development agenda so that the country can have a sustainable debt position but none (except perhaps the refinancing dust off) has brought into collective conscious the fact that it is also a strategy not to reduce debt, in so far as the cost and risk tradeoffs connected with the debt portfolios are aligned to the country’s budgetary constraints.
Most economist are not ambivalent about the correlation between infrastructure development and economic growth particularly that infrastructure development is a productive multiplier which also goes to amplify the country's growth productivity and tend to provide the most advantage given that it accelerates increased economic opportunities and decreasing inequality as would a road in a previously not assessed areas in terms of faster access to markets.
It is also not a topic of debate that almost everyone is in agreement that we have to diversify from the commodity based economy by either industrializing or moving to a more agro based economy, however what is perhaps subject of disagreement is how that diversification can be stimulated.
It is also true that to finance the infrastructure investment with our level of country deficit, we needed to borrow to grow at the level necessary to positively impact the vulnerable sectors in our economy.
It must however be noted that it is also true that the level of current debt makes this a relevant point of discussion.
The focus by those that are opposed to deficit financing is that we must begin to focus on building a sinking fund to settle the sovereign debt when due, and it does sound sensible in view of the current subsisting fundamentals, however a better focus if we are truly invested in modernizing our tax collections systems and are confident that we are growing at the 4 to 5% growth rates indicated is to seek to restructure our debt portfolio into longer tenure profiles.
In other words any strategy that seeks to drain the more than US$2.5 Billion in the next five years in form of debt repayment would have adverse unintended consequences to our economy.
It is clear to a number of economists that if we decide to find funds from within our economy in the midst of current growth prospects to settle the sovereign debt that will be falling due in the next 4 to 5 years, it may have an effect of contracting our economy.
In addition, the risks to our economy arising from the uncertainty in copper prices and lack of infrastructure will continue in the foreseeable future.
Therefore in the context of discussing the debt management strategies, it is important to note the role that infrastructure development will continue to have to develop and shape private and public entities participation in the context of our industrialization ambition.
It is worth of note to state that Zambians have historically come to view debt more suspiciously given our pre-multiparty democracy debt position and the effect of the subsequent structural adjustment program.
Added to that, is the polarization that a multi-party democracy engenders, which tends to equate those position that are in opposition to government position to be more suitably intellectually grounded and so any good position advanced by government such as refinancing are viewed suspiciously and are unduly opposed in some circles. It should not be so.
It must be acknowledged that debt discussions are an emotive topic for most people and so you may ask? Why raise the issue after the various dusts are up because of this issue alone. The reasons are twofold; firstly, in an increasingly interconnected global marketplace, it is an important focal point that we develop our competitive advantage in various ways and the development of our competitive position requires the development of infrastructure because it is in itself a precursor to growth.
The fact that infrastructure development is a necessary growth factor raises the need for funding for the development of infrastructure, however this further leads to concerns about debt and which then raises the need for refinancing of some of our debt stocks.
Therefore a better choice for us is to seek to manage rather than reduce our debt stocks in the next five years.
There is a caveat to that. It is currently self-evident (from developments in our communities) that there has been significant growth in the economy particularly in the last few years, yet it is also clear that our revenue generating capacity has not improved as a consequence and thus debt seems to have grown disproportionally as a consequence of non-monetization of this latent growth. It must be understood that taxation must be at the center of growth and development as it facilitates the provision of funds needed to further develop infrastructure and drive growth. Therefore a strategy to manage our debt rather than pay down must be done in tandem with the adoption of a holistic approach to review our current tax structure aimed at developing more modern tax reforms that recognize the fractured nature of our economic base.
To be clear, the Zambia Revenue Authority in the past few months have done so much in this regard.
We have seen the new push for compliance which is raising a possibility that taxation can be the central tools in unlocking the potential for diversifying our economy.
We have seen the various measures they have introduced that speak to broadening of the tax base, while there is still more that needs to be done in terms of simplifying the tax laws and making it easy for tax payers to be compliant.
Having noted the above, it is important not to under estimate the monumental challenge of increasing tax revenues and in turn achieve fiscal sustainability.
It is a difficult road that will require the Zambia Revenue Authority to devise win-win measures to encourage citizens particularly in the informal sector to be tax compliant.
If government does manage to get it right with the tax revenue in 5 years, there are a lot of benefits that can accrue, including enabling a more accurate assessment of our GDP which will go a long way in assuaging external perceptional risks and bringing on new capacity to manage the existing debt stocks.
Late last year following the national budget presentation, the Deputy Secretary to the Cabinet for Finance and Economic Affairs alluded to a potential that our GDP is grossly underestimated which inevitably makes the debt position appear to be large relative to our GDP and revenue base.
I tend to agree with that assessment and largely on account of the significant economic leakage that are present within the informal sector. However if the current tax modernization initiatives begin to bear fruit, it is possible in a few years that the resulting tax revenue increases will speak positively to our GDP and revenue base.
Short of this investment, our economy will remain commodity orientated, and given private consumption has become a key growth driver; our growth expectations may be adversely impacted.
Investment in infrastructure is necessary for both the improvements in revenue collection and to collate investments by the private sector
In Zambia the debate must be about all the above, about adopting debt sustainability measures that are expansionary and about growing our revenues to levels that are needed to impact current levels of inequities.
It requires an emphasis on a proactive, action-orientated approach that is attuned to emerging and future trends and which remain focused on closing our infrastructure gaps.
As an example, in the last few years, the increase in the transportation networks has provided small scale farmers with relative cost effective access to market and is in turn spurning entrepreneurial opportunities that could accelerates the country's economic growth in the next decade.
The development of our infrastructure particularly in road and telecommunication sectors is necessary for the private sector to be incentivized to invest.
It is very clear when looked at objectively that ten years down the line, with the modernization of the tax administration system, it is likely that the current investments in road infrastructure will be viewed more positively than it currently is.