ZAMBIA’S ECONOMY PERFORMING BETTER – MUSOKOTWANE
ZAMBIA’S ECONOMY PERFORMING BETTER – MUSOKOTWANE
Read the statement
MINISTERIAL STATEMENT ON THE PERFORMANCE OF THE ECONOMY AS AT 31st JANUARY, 2024
Madam Speaker,
I thank you for the time accorded to present a Ministerial Statement on the State of the Economy. This is a broad statement about the economy which should enable Members of Parliament also to follow up with broad questions.
This is the first time Parliament is meeting in 2024, so it is a great opportunity to acquaint the House on some salient aspects of the economy in 2023 and also touch on some of the contemporary issues about the economy which are on the minds of our citizens.
Madam, Growth in 2023 at 4.3 percent was satisfactory. It was slightly less than the growth of 4.7 percent in 2022, though. What is clear, however, is that since 2021 growth has been consistently positive year after year and contrasts with the economic decline of 2.8 percent in 2020.
This Government has its eyes fixed on getting even stronger growth in the coming years as the key strategy for fighting poverty. How this growth in the sectors takes place is a subject that has been discussed in the National Development Plan and several times also during the various Budget Addresses in this House. I move on to make some remarks on the performance of the external sector, which reflects transactions between Zambia and the rest of the world.
Madam Speaker, Copper export earnings as at end of the third quarter of 2023 decreased by 18.96 percent to US$ 5.1 billion from US$ 6.3 billion in the corresponding period of 2022 due to lower export volumes and realised copper prices. The reduction in copper exports was due to a decline in copper output amidst low ore grades, operational challenges and routine closures for maintenance at some mines.
Madam, the drop of copper exports by almost 19 percent in 2023 was significant and was the most important factor in the depreciation of the Kwacha against foreign currencies last year. I will return to this matter later in my speech.
Let me at this point provide a summary of how the 2023 Budget performed.
Madam Speaker, I wish to express pride that under the New Dawn Administration, budget credibility has become the hallmark of fiscal operations.
Simply stated, the Treasury disburses money strictly following the appropriations passed by this House. For example, when the House appropriates money for recruiting teachers, or for paying pensioners or for financing free education, the Treasury ensures that cash for these activities is released without fail.
Madam, these good things are new developments in our country. Colleagues who have served here longer will recall how this House would appropriate money for CDF.
For three years however, this money was never released by the Treasury. That type of conduct is now history.
On the actual fiscal operations, I am happy to report that we mobilized revenues and grants amounting to K122.1 billion in 2023, representing an overperformance of 7.7 percent above the budget target of K113.4 billion. This was mostly due to over-performance from non-tax revenue collections and grants receipts as tax revenue collections were however below target.
On the expenditure side, a total of K160.0 billion was released and was 4.4 percent below the target of K167.3 billion. Notable expenses were as follows:
o Personnel Emoluments at K44.9 billion against a target of K46.5 billion;
o Government operations at K13.0 billion against a target of K14.9 billion, of which drugs and other medical suppliers constituted K2.6 billion;
o Debt service payments amounted to K41.3 billion against a target of K48.8 billion;
o Transfers and Subsidies at K25.7 billion against a target of K25.9 billion, of which K1.8 billion went towards grants to schools, K7.3 billion for the 2022/2023 Farmer Input Support Programme and K4.7 billion for the Constituency Development Fund;
o Social Benefits at K6.5 billion against a target of K6.4 billion, of which K2.0 billion for the pension financing gap under the Public Service Pension Fund and K3.8 billion for implementation of the Social Cash Transfer Programme;
o Arrears clearance at K12.1 billion against a target of K6.8 billion; and,
o K362 million to empowerment funds broadly in line with the target of K362 million.
Madam, I now wish to provide updates on topics that are currently of interest to the public. These are the exchange rate of the Kwacha, the future of debt restructuring and the financial consequences of the looming drought under the current agricultural season.
Madam Speaker, The exchange rate of the Kwacha depreciated substantially during 2023. This depreciation continued in January and part of February 20224.
The depreciation of the Kwacha well beyond expectations no doubt has brought about some economic problems. This has seen the rate of inflation rise from the single rate of 9.9 percent in December 2022 to the double-digit rate of 13.1 percent in December 2023.
As stated earlier when I described external sector developments, the most important driver of the exchange rate has been the drop in copper production in 2023, resulting in reduced inflows of foreign exchange. So, why did copper production drop. Two factors. Firstly, high rainfall in early 2023 resulted in some mines having excessive water which took time to remove from pits.
Secondly, some of the operating mines (those that did not close) had before the 2021 elections decided to leave Zambia, citing an unconducive environment that prevailed then. Because they had made the decision to leave, they did not make arrangements to develop new mining areas which would be exploited when the areas currently being mined got exhausted.
Madam Speaker,what measures are being instituted to stabilize the exchange rate?
The first point is to remember that the primary shock to the exchange rate emanated from reduced copper earning. This shock needs addressing.
This entails bringing back into production the two mining giants of Konkola Copper Mines (KCM) and Mopani Copper Mines (MCM) back into production. These two companies have been out of serious production for about four years when they got closed under PF.
In terms of KCM, only one step remains before it is handed back to Vedanta and production will resume. This should happen soon. In terms of MCM, the target date for handing it over to the new investor is end February 2024.
The importance of these two mining firms is that even before they increase production, they are already sending money to Zambia, in foreign exchange, to pay local creditors and to prepare for increased production. This is happening now. These payments are supporting the Kwacha.
Beyond this preparatory stage which is already supporting the exchange rate, we are looking forward to increased copper production and foreign exchange earnings as the two companies get to work. The effects of the return of the two mining companies is set to change things positively.
The second leg of increasing copper production is by expanding production at First Quantum (Kansanshi) and Barrick (Lumwana). As indicated already, both companies had contemplated leaving Zambia because of unconducive investment climate under the PF government. Had that happened, almost the entire mining industry in Zambia would have closed since it would have meant KCM, MCM, FQM and Lumwana all being non-operational. The economic consequences would have been unimaginable.
After the UPND government assumed office in 2021, both companies were successfully persuaded to stay. But their earlier decisions to leave has impacted production now because they had not developed new ore bodies in time. Both FQM and Barrick have started developing the new ore bodies and have put in $1.3 billion and $2 billion respectively to achieve enhanced production.
Madam Speaker,the shock to the exchange rate was largely attributed to problems in the mining sector. This has been a temporal problem which this government has resolved. Going forward the people of Zambia should feel comfortable that the future is bright. On account of the mining sector alone, without considering other sectors, concrete steps will soon be visible as production towards the three million tons target takes shape. I am sure my colleague in charge of mining will at an appropriate time share the projected expansion of the sector.
The final remark on the stability of the exchange rate is this. Stability comes about because supply and demand for foreign exchange roughly balances. We have already discussed the supply, as we described developments in the mining sector because it is the main source of foreign exchange. The demand side can be managed by monetary policy actions such as those instituted by the Bank of Zambia. These included the withdrawal of government deposits from commercial banks to the Bank of Zambia and the increase in the statutory reserve ratios.
Both measures have the effect of reducing access to local currency financing from the banking system and, therefore, dampens effective demand for domestic expenditure, including on foreign exchange purchases. Once again, the positive effects of the monetary policy actions are evident today.
Moving on to debt restructuring Madam Speaker, I am happy to report that significant progress has been achieved. We all recall that there are two broad categories of external debt: the official and the private. For official debt restructuring, this was already achieved last year. All that remains is to complete the formalities which are expected to be signed shortly.
Regarding the private sector creditors, the focus of the work now is to clarify the meaning of comparable treatment of all creditors. Members will recall that as a way of ensuring that no creditor takes advantage of other creditors, a requirement exists which demands that any proposal for debt restructuring must satisfy the criteria of comparable treatment.
This concept was not properly clarified, leading to ambiguous understanding by different creditors. With progress made to clarify the term, this should pave the way for agreement on the private creditors as well.
My final point on the state of the economy is with respect to the drought during the current agricultural season. It is very clear that this season is one of the worst in living memory with many of our citizens in different provinces facing their worst food insecurity calamities.
Madam, the President has vowed that no one should be left to starve. As such, the government will be left with no choice but to propose adjustments to the 2024 budget so that financing room is created to enable the financing of the vulnerable households. Madam Speaker, this government will this year ensure that all citizens are food secure.
Madam Speaker, The challenge of food security is not alone. Our national dependency on hydroelectricity equally means that in this year of drought, power will become limited unless we find alternatives. As in the case of food security, the Treasury awaits response proposals to guide how the 2024 budget will be adjusted.
Given the imperatives arising from the drought calamity, the need for judicious care of our limited financial resources has never been more important. That being the case, requests for supplementary budget or requests for subsidies of any sort will not fly.
As I conclude, I am happy to say that this economy is poised to be in a very strong position this year going forward. The drag on the economy in the past few years, which also reflected itself on the exchange rate, high cost of living and poverty was due to the absence normal production at KCM and Mopani. This made the economy act like a lame person. The two mining giants are now very close to resuming normal operations, which will revive lives on the Copperbelt and the rest of Zambia.
On top of that, the expansions taking place at FQM, Lumwana and the anticipated new mines will in a few years put Zambia on a different scale of development.
Madam, other sectors of the economy are poised for greater heights. Tourism is doing great, so are the telecommunications, manufacturing, and construction sector.
Madam Speaker, by the time we reach 2026, the citizens of this country will say “well done” to this UPND administration because the additional positive changes I am describing will be so evident.
I thank you.
Dr. SITUMBEKO MUSOKOTWANE, MP
Minister of Finance & National Planning.