By Alan Whitworth
Zambia’s economic mismanagement of the last decade is a perfect illustration of George Santayana’s famous warning that ‘those who cannot remember the past are condemned to repeat it’. In a history of Zambian economic policy since Independence I showed how the United National Independence Party (UNIP) government’s economic policies had disastrous results, turning Zambia from a middle-income into a low-income country with some of the worst poverty and socio-economic indicators in Africa (Whitworth 2015).
By reversing many UNIP policies, economic performance improved considerably under the Movement for Multiparty Democracy government. However, any suggestion that this was evidence that Zambia had learned from its mistakes was soon dispelled by the Patriotic Front (PF) administration, which reverted to many UNIP policies. These had predictably damaging results, encapsulated by the Eurobond default in 2020 – just 15 years after the HIPC initiative had written off most of Zambia’s foreign debt. Under PF Zambia has indeed ‘repeated its past’.
Following the 2021 elections, Zambia is making a new start. While the United Party for National Development (UPND) administration appears economically literate, it is not clear that the general public understands Zambia’s history or the nature and extent of the problems inherited by UPND. To try and ensure Zambia does not ‘repeat its past’ yet again, this article highlights key economic lessons from the UNIP era and shows how, by repeating UNIP’s mistakes, PF created huge challenges for the new government.
United National Independence Party (UNIP)
Zambia’s first decade as an independent country coincided with a global copper boom, with both world prices and domestic production at record highs. With a highly effective tax regime transferring much of the mines’ profits to the Government of the Republic of Zambia (GRZ), GRZ received a massive 15% to 19% of GDP in mining tax between 1965 and 1970. This was both a blessing and a curse.
With huge resources at its disposal and no debt, GRZ was able to undertake a major infrastructure investment programme. Much of today’s health and education infrastructure, road network and government buildings (and the Kafue Gorge Upper hydroelectric scheme) were built in the 1960s and early 1970s.
However, investment was not confined to public infrastructure and activities normally associated with government. GRZ also used its plentiful resources to finance an extraordinary expansion in the role of the state across the economy. This took three distinct forms. Firstly, following UDI in 1965 and international sanctions against the Smith regime, GRZ invested in the TAZAMA pipeline, Indeni refinery and TAZARA railway in order to reduce economic dependence on Southern Rhodesia.
Secondly, in a bid to industrialise, GRZ invested in numerous new ventures (eg Nitrogen Chemicals of Zambia, Kafue Textiles) through the Industrial Development Corporation (Indeco). Thirdly, GRZ acquired majority stakes in existing large-scale enterprises, starting with non-mining firms in 1968 and followed by the mines in 1969. By the time the banks were taken over in 1970 the role of the state in the economy was probably larger in Zambia than in any other non-communist country.
The expansion of the state into industrial and commercial activity proved economically disastrous, with consequences that continue to this day, for two reasons – viability and mismanagement. Most investments in the first two categories were economically unviable. This was unavoidable with TAZAMA, Indeni and TAZARA, where GRZ was forced to invest by sanctions against Rhodesia. However, once Zimbabwe became independent in 1980 and normal trade to the south resumed, they became ‘white elephants’ – imposing substantial costs on the budget and economy.
With Indeco, industry was wanted for its own sake, almost regardless of cost. With Zambia’s tiny internal market and poor transport links, many Indeco investments were economically non-viable. While financial profitability could be secured through tariff and other protection from imports, this was at considerable cost to consumers and to competitiveness; once protection was removed many Indeco projects were doomed. Also, the industrial sector was highly import dependent. When copper revenues collapsed from 1974, leading to a balance of payments deficit, even viable projects had difficulty accessing foreign exchange – seriously disrupting operations. As a result, Indeco was incurring sizeable losses by the late 1970s.
Viability was not an issue with nationalised enterprises, which were mostly profitable when acquired. Instead, the problem was political interference and mismanagement. President Kaunda expected parastatals to be run at a profit, but also to ‘keep the national interest in mind at all times’. There was pressure to rapidly ‘Zambianise’ management, to create jobs and to avoid price increases. Along with problems accessing foreign exchange, this contributed to a steep reduction in profitability across all parastatals from the 1970s.
The impact on the macro economy was greatest in mining. Continuous maintenance and investment is needed in mining to maintain, let alone increase, output because ore grades decline and mineral deposits become less accessible (more costly) at greater depths. Nationalisation and the sudden cancellation of their management contracts in 1973, discouraged further investment by the former owners. Henceforth, investment needed to come from government. However, GRZ’s growing fiscal problems (see below) made this difficult.
Meanwhile, Zambia Consolidated Copper Mines (ZCCM) became a ‘state within a state’ and management ‘yielded to the whims of the government and …transformed ZCCM from a respectable mining group into a mindless conglomerate encompassing all sorts of irrelevant businesses’ such as maize milling, dry cleaning, commuter trains, farming, tractor assembly and tourist resorts (Sardanis 2003).
The combination of falling prices, lack of investment and poor management meant that copper production and profitability fell continuously for 30 years. Between 1997 and 1998, ZCCM’s losses totalled some US$650 million—almost US$1 million per day. The sector went from being GRZ’s main source of revenue after Independence to being a large drain on the budget.
While healthy mining tax revenue meant the above investments were affordable initially, they and other expenditure policies adopted during this period built up severe fiscal problems for the future. The infrastructure programme gave rise to increased recurrent expenditure commitments: expanded education and health facilities required more teachers and health workers, new roads needed to be maintained and so on. The size of the public service increased sixfold between 1964 and 1974, accompanied by a significant increase in wages. Finally, to try and insulate urban consumers from price rises, GRZ introduced subsidies for such items as maize, fertiliser and fuel; these cost an extraordinary 6.7% of GDP by 1980.
The combined result of the above was an enormous increase in recurrent expenditure from 18.8% of GDP during 1965–1970 to 26.5% during 1971–1975 – reaching 35% in 1975. This level of expenditure would have been unsustainable even with mining tax at 15-19% of GDP and no capital investment. However, with the end of the copper boom in 1974, compounded by changes in the mining tax regime, mining tax receipts collapsed – from 18% of GDP in 1974 to zero from 1977. The budget surplus of 3.4% of GDP in 1974 became a deficit of 21.5% in 1975.
Substantial expenditure cuts between 1975 and 1978 reduced the deficit but, with revenue continuing to decline, they were not sufficient. GRZ gambled that copper prices would rebound before long and that in the meantime it could finance the deficits by borrowing. Instead, prices continued falling until 2002, while interest on the loans added to expenditure. To make matters worse, from the late 1970s GRZ had to bail out parastatal losses resulting from the expansion of the state into commercial operations.
As a result, Zambia experienced a 30-year fiscal crisis, with some of the highest fiscal deficits ever seen anywhere over an extended period; the deficit averaged 14.5% of GDP between 1975 and 1979, 13.8% in the 1980s, 6.0% in the 1990s and was not brought under control until 2004.
With deficits mainly financed through borrowing, the fiscal crisis led in turn to a debt crisis. The external debt stock doubled from about US$800 million in 1970 to US$1.6 billion in 1975 and doubled again to US$3.3 billion in 1980, by which time it exceeded 100% of GDP and was already unsustainable. By 1990 it had reached US$7.2 billion, and Zambia was effectively bankrupt with the highest public debt per capita in the world.
The share of interest in total expenditure rose from 5% in 1975 to 31% in 1985. For 30 years GRZ expenditure was largely restricted to interest, salaries, parastatal bailouts and (until 1991) subsidies. Recurrent funding for textbooks, drugs, road maintenance, etc and new investment were crowded out. As a result, much of the post-independence investment in social infrastructure had severely deteriorated by the 1990s and basic social services virtually collapsed, particularly in rural areas.
With private investment deterred by nationalisation and macro-economic mismanagement, GDP contracted by an average of 2.6% per capita per annum between 1975 and 1991 – one of the steepest economic declines ever seen anywhere in peace time. Poverty increased substantially as Zambia went from middle income to least developed country status.
There is much to be learnt from UNIP’s disastrous economic management. We highlight below four key lessons that recent history shows are not yet widely understood:
• Government must ‘live within its means’ and ensure expenditure commitments are sustainable – fiscal discipline
• Only invest in projects which are economically viable
• Government should stick to providing conventional public services and leave business to the private sector
• Subsidies and price controls are an ineffective way of helping the poor
We now examine how well subsequent administrations had learnt these lessons, starting with MMD.
Movement for Multiparty Democracy (MMD)
The 1991 elections brought MMD to power with a strong mandate for reform. The new administration agreed a comprehensive reform programme with the IMF and World Bank aimed at stabilising and restructuring the economy and at stimulating growth. In order to ‘live within its means’ it introduced new revenue measures, established tighter expenditure control and abolished most subsidies. Helped by a resumption of aid, the fiscal deficit (after grants) started to come down from 1995—averaging 4.9% of GDP between 1995 and 2000.
The MMD election manifesto contained a strong commitment to privatisation, recognising the need both to stem the fiscal haemorrhage from loss-making parastatals and to attract investment to enable viable companies to survive. The Zambian Privatisation Agency was created to convert parastatals to private ownership. By 2000, 113 enterprises out of the original portfolio of 144 had been privatised. Although 38 parastatals were liquidated, most survived. The World Bank regarded Zambia’s privatisation programme up to 1996 (before privatisation of the mines) as the ‘most successful’ in Africa (Campbell White and Bhatia 1998).
Privatisation of ZCCM was a different story. Political interference contributed to delays and increased financial losses. Pressure from the IMF, World Bank and others resulted in the eventual sale of packages one by one through ‘often opaque, bilateral negotiations with pre-selected preferred bidders’ (Adam et al 2014). With copper prices near their lowest real level in a century, GRZ was in a weak negotiating position and was forced to offer generous tax and other concessions to close deals.
While poorly understood by the public, the privatisation programme was a turning point in the transformation of the Zambian economy. This is most clearly seen in mining where, despite a murky privatisation process, substantial foreign investment triggered a rebound in copper production – well before copper prices started to recover. Elsewhere, new investment led to rapid growth in such diverse areas as sugar, cotton, cement, dairy, livestock, maize milling, breweries, electricity transmission, trucking, construction and hotels. Meanwhile, GRZ was relieved of responsibility for bailing out parastatal losses.
The above and other reforms finally produced a return to growth from 1998. This was reinforced from 2003 by a rapid rebound in copper prices, which encouraged further investment. Zambia experienced an unprecedented period of sustained real GDP growth – averaging 5.4% p.a. between 1999 and 2012 – and regained Lower Middle-Income status. Booming copper exports eliminated the balance of payments deficit and replenished foreign exchange reserves.
There was also a marked fiscal turnaround from 2004. Zambia benefitted substantially from joining the Heavily Indebted Poor Country (HIPC) debt relief scheme in 2000. ‘Interim’ debt relief cut interest on foreign debt from 5% of GDP in 1998 to 1.3% in 2002. Along with the above fiscal measures, the end of parastatal bailouts, and GDP growth (which increased the denominator), this halved the fiscal deficit (after grants) to 2.9% of GDP in 2004 – much the lowest level in 30 years. It was sustained at a similar level through 2012, assisted by the (modest) return of mining tax. The establishment of fiscal discipline helped Zambia reach HIPC completion point, following which external debt was cut from US$6.2 billion in 2005 (86% of GDP) to just US$962 million (9%) in 2006. In per capita terms, Zambia received more debt relief than any other HIPC country, transforming the country’s balance sheet overnight. Foreign interest fell to just 0.1% of GDP by 2007.
As a result of fiscal discipline and debt relief, combined domestic and foreign interest fell from 4.1% of GDP in 2002 to 1.2% in 2011 (Whitworth 2012). Mineral tax revenues resumed in 2005, reaching 1.9% of GDP in 2010. With GDP growing by some 75% over the period, GRZ finally had ‘fiscal space’ to enable it to start tackling the huge backlog of expenditure on public services. By the 2011 elections, good progress had been made in restoring the paved road network and expenditure on health and education had increased substantially. Poverty had also been reduced, though mainly in urban areas.
The dramatic turnaround in economic performance demonstrated the importance of government living within its means and leaving business to others. MMD had clearly learned those lessons. It was less clear how well it had absorbed the other lessons above. While most subsidies had been removed in the early 1990s, as the fiscal crisis eased MMD reintroduced subsidies for fertiliser and Food Reserve Agency maize purchases; together, these cost 2.8% of GDP in 2011. Meanwhile, its reluctance to allow ZESCO to increase electricity tariffs (often the lowest in Africa) meant there was little investment in increasing capacity for three decades from 1977. This resulted in the load shedding Zambia has experienced continuously since 2007, following the rebound in mining demand (Whitworth 2014).
MMD also showed little interest in economic viability. Most of the fiscal space allocated for investment in the late 2000s went to paving roads, despite their poor economics (see below).
Notwithstanding these caveats, the MMD government was arguably one of Africa’s most successful economic reformers. While the reforms caused considerable pain initially, boosted by the second copper boom from 2003, they laid the groundwork for the establishment of fiscal discipline and macroeconomic stability from the mid-2000s and the longest unbroken period of growth in Zambia’s history.
Patriotic Front (PF)
The PF administration inherited an exceptionally healthy macroeconomy, with rapid growth, a thriving mining sector, a low fiscal deficit, little debt, single digit inflation, a balance of payments surplus, healthy reserves and a stable exchange rate. Mining taxes were back and GRZ had real fiscal space. Moreover, public expenditure was no longer limited by tax revenue. Following debt relief, GRZ had an unusually healthy balance sheet and, with a good outlook for copper, was in a strong position to resume borrowing. China was keen to finance infrastructure investment and, following Zambia’s first sovereign credit ratings in 2011, a completely new opportunity presented itself – issuing sovereign bonds. In short, Zambia finally had a solid platform for investment and growth and a real opportunity to rebuild public infrastructure and services and to reduce poverty.
This opportunity was wasted by the PF government, with its reckless economic mismanagement. This can be seen by examining PF’s performance against the above four ‘lessons from UNIP’.
Fiscal Discipline / living within your means
Seemingly oblivious to its contribution to growth under MMD, PF showed little concern for fiscal discipline. Instead, it took advantage of growing fiscal space and the unprecedented opportunities for borrowing to go on a decade-long ‘spending spree’.
In 2012 President Sata launched the ‘Link Zambia 8000’ Programme to upgrade 8,200 km of roads to bitumen standard at an estimated cost of US$5.3 billion over five years, 3-4% of GDP annually. Then in 2013 GRZ announced a huge 45% increase in the public service wage bill. As well as retaining subsidies on fertiliser and maize prices introduced by MMD, PF reintroduced subsidies on fuel – costing US$145 million (0.6% of GDP) in 2012 and US$220 million (1.1%) in 2013.
With little change in revenue, the inevitable result of such expenditure increases was that the fiscal deficit (after grants), which was in the range 1-3% of GDP between 2004 and 2011, jumped to 7.5% of GDP in 2013. Despite occasional attempts to rein it in, the deficit averaged 8.4% of GDP between 2012 and 2018. Financing such large deficits required substantially increased (mainly domestic) borrowing.
Finance for roads and other infrastructure investment came from two main external sources, China and Eurobonds (Brautigam 2021). Whereas much of UNIP’s borrowing was on concessional terms, PF’s borrowing was mainly commercial. As more loans were signed, interest costs increased – further adding to the deficit. The first Eurobond in 2012 was marketed as finance for infrastructure investment. However, by the second and third Eurobonds in 2014 and 2015 GRZ was increasingly borrowing to finance fiscal deficits.
The pace at which debt was accumulated was extraordinary. PF inherited just US$3.6 billion of total public sector debt in 2011 (20.6% of GDP) (IMF 2015). By June 2021 it had reached US$26.4 billion (115% of GDP), including arrears – of which US$16.3 billion was external and US$10.1 billion local debt (Ministry of Finance 2021). This excludes sovereign guarantees of parastatal loans exceeding US$1.5 billion. A 2017 IMF warning that Zambia was at high risk of debt distress and downgrading of its sovereign credit ratings by the rating agencies were ignored, as borrowing continued unabated.
Interest costs increased along with the debt stock, from 1.2% of GDP in 2011 to 5.6% in 2020. As in the UNIP era, interest both added to the fiscal deficit and crowded out expenditure on basic public services. Inevitably, deficits and debt service eventually became unsustainable; in 2020, just 15 years after HIPC had wiped out most of its foreign debt, GRZ became the first African country (and first HIPC beneficiary) to default on a Eurobond.
Borrowing on the above scale would have led to a debt crisis even if all the money was well spent. To compound matters, much of it was wasted on non-viable projects. Apart from the Kafue Gorge Lower hydroelectric scheme, which had been appraised by the International Finance Corporation, no major PF infrastructure investments were independently appraised and demonstrated to be viable.
With Link Zambia 8000, which accounted for much of the borrowing, it was simply taken for granted that paving roads was a ‘good thing’. In reality, few paving projects were viable. To contribute to growth the value of the benefits of paving a road (eg savings in time, fuel and maintenance) must exceed the costs over time – after discounting. It is globally accepted that traffic of at least 150 vehicles a day is required to make paving viable. Below this threshold rehabilitating and maintaining gravel roads is more economic. Being such a large and sparsely populated country, few non-urban roads in Zambia carried 150 vehicles a day – and most of these had already been repaired by MMD.
By ignoring viability, Link Zambia 8000 and other uneconomic projects such as airport terminals added enormously to debt – without producing the growth needed to pay for it.
Role of Government
Despite the evidence that: (a) UNIP involvement in economic production had impoverished the country; and (b) MMD privatisation contributed significantly to the economic turnaround, the PF rejected privatisation. Clearly reflecting public opinion (Cheeseman et al 2014), it sought a greater role for the state in the economy, reminiscent of the UNIP era.
Its first move was to cancel the 2010 privatisation of ZAMTEL on the grounds of alleged corruption. This was popular even though the US$257 million paid by Libya exceeded all the other privatisations combined and probably exceeded market value – since Gaddafi had a policy of over-bidding for privatised assets to buy political goodwill around Africa. It was followed by the unilateral cancellation in 2012 of a 20-year concession (signed in 2003) to operate Zambia Railways (ZR). GRZ was once again responsible for servicing ZAMTEL and ZR debt and for financing losses.
In 2014 the Industrial Development Corporation was reincarnated with a mandate to ‘spearhead the Zambian Government’s commercial investments agenda aimed at strengthening Zambia’s industrial base and job creation’, as well as becoming GRZ’s investment holding company for the remaining parastatals (including ZCCM-IH, ZAMTEL, ZESCO, ZR). Its Board Chair was the President.
In 2021 GRZ re-launched Zambia Airways, despite the collapse of all three previous (one public, two private) Zambian national flag carriers and growing competition from foreign airlines.
Mining was affected too. In 2019 GRZ attempted to liquidate Konkola Copper Mines on the grounds that Vedanta had failed to honour commitments made when it assumed ownership. In 2020 GRZ acquired 100% ownership of Mopani Copper Mines from Glencore in return for assuming a US$1.5 billion debt owed to Glencore’s parent company.
To a historian the above developments represent a step backwards. History shows that political involvement in business in Zambia has invariably meant mismanagement, wasted resources, financial losses and higher fiscal deficits. The extra debt assumed aggravated the debt crisis.
Subsidies and Price Controls
Despite the fiscal situation, subsidies increased significantly under the PF administration. As noted, PF retained subsidies on fertiliser and maize prices introduced by MMD. The former increased to 2.8% of GDP for the planting season preceding the 2021 elections.
Energy subsidies were particularly costly. Like MMD, PF resisted electricity tariff increases. When a prolonged drought from 2015 cut hydroelectric generation, greatly increasing load shedding, ZESCO was forced to start importing power – costing over US$250 million in 2015 and 2016. Since the price of imported power was much higher than ZESCO’s tariffs, they were finally allowed to increase. However, the increase was not sufficient to cover the extra costs. As a result, ZESCO has incurred substantial financial losses since 2015 and accrued payment arrears to independent power producers – exceeding US$300 million to Maamba Collieries alone.
Fuel subsidies also grew substantially. According to the Secretary to the Treasury, prior to cuts in December 2021:
‘Zambia’s subsidy on fuel [was] about US$67 million per month or US$800 million per year and on electricity [was] over US$40 million per month or US$500 million per year’ (Observer 5/12/2021).
Two observations should be made. Firstly, subsidies on this scale are simply not affordable – they have contributed directly to the fiscal and debt crises and have crowded out expenditure on public services. Secondly, unlike public services, they are of little benefit to the poor. As the Finance Minister has noted, fuel subsidies mainly benefit car owners; and only 30-40% of Zambians (the wealthiest) have access to electricity. Attempting to support the poor through energy subsidies is horribly wasteful, therefore. Zambia can reduce both expenditure and poverty by ending subsidies and using some of the savings on targeted payments to the genuinely poor.
It should be no surprise that reverting to UNIP economic policies produced similar results. As well as the fiscal and debt metrics discussed above, the severe deterioration in economic performance under PF can be seen in indicators such as:
• GDP per capita growth fell from an average of 4.4% between 2001 and 2011 to 1.0% between 2012 and 2019 (World Development Indicators)
• The exchange rate depreciated from ZKw 5 to the US Dollar in 2011 to ZKw 21 in 2020
• Inflation was 6.0% in 2011 but 19.2% in 2020
• Previously profitable utilities such as ZESCO and ZAMTEL are now loss-making and heavily indebted
With expenditure on basic services once again crowded out by debt service it is no surprise that ‘Overall poverty is estimated to have consistently increased since 2015’ (Paul et al 2021).
Zambia received more debt relief per person from HIPC than any other country, in return for undertakings to use the savings to help the poor and to manage the economy responsibly. Instead, HIPC’s sponsors were double-crossed – damaging Zambia’s international reputation. While factors beyond its control (eg drought) compounded matters, PF’s economic mismanagement was some of the most irresponsible the world has ever seen. The economic decline under PF was all the more tragic because Zambia had ‘been there before’. Instead of learning from UNIP’s mistakes, PF repeated them. Yet despite producing the same results second time around, it is still unclear how well lessons have been learned.
Having inherited a macroeconomy in good shape from MMD, PF bequeathed huge problems to UPND. While there are encouraging signs that the new administration has learned from history, unless substantial debt relief can be secured (again) the need to service PF debt will tie its hands fiscally for years to come – casting doubt on the realism of its job creation promises. To remove the prospect of Zambia ‘repeating its past’ yet again, it will be important for UPND not only to implement reforms that reflect the above lessons but also to communicate them (and their results) effectively to the public – some of whom still see the UNIP era as a ‘golden age’.
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