Zambia is suffering a severe hangover from its decade long commodity boom, as mounting debt and energy shortages are crippling the once vibrant economy.
Zambia has seen a decrease in GDP growth from an average of 7.4% from 2004-2014 to barely 3% for 2016. This figure is only slightly above population growth. When annual inflation is added – which despite having decreased from 22.9% in January to only 8.8% in November – it reveals that the livelihoods of Zambians are actually regressing. This slowdown has affected the government’s bottom line, as Zambia’s national debt continues to pile up.
Zambia facing overlapping economic crises
With copper exports accounting for 77% of government revenue, the 10.4% decrease in these prices through Q3 2016 (compared to the first three quarters of 2015), combined with rolling blackouts has led to a raft of financial shortcomings. Domestic revenues have fallen by 15% compared to 2015, with a 22% reduction in VAT income as well as an 18% reduction in customs and excise revenue. Moreover, increased borrowing costs have seen a 6% reduction in consumer spending in Q3 2016 alone.
Lower VAT revenue is in keeping with the multi-year effects of high inflation which has dampened purchasing power, along with the impact of energy shortages on Zambia’s non-commodity based sectors. Drought conditions led to record low reservoir levels in 2016, in turn undermining the country’s energy generation, of which 90% is hydroelectric. This saw generation rates fall to 75% during the first six months of 2016. Despite countermeasures, November was still seeing eight hour rolling blackouts across the country. The government’s solution to this – a 15 year deal with Rosatom to build a nuclear industry from scratch – is in the face the country’s limited finances, a questionable move.
As a result of unreliable electricity production (which has necessitated expensive emergency imports), a lack of liquidity and tight lending restrictions, growth outside the mining sector has stalled just when Zambia’s economic staples such as copper are underperforming. The government has already taken out several rounds of Eurobonds (worth some $3 billion), and is now having to refinance them, as this lack of funds has seen a massive growth in government arrears, with construction contractors still not having been paid for projects in 2015 — a trend that is threatening other, multi-year infrastructure projects in the country.
The combination of outstanding roadworks bills, government pensions, and late fuel and electricity import payments will result in a fiscal deficit of 3% of GDP for 2016. If government arrears totalling $2.04 billion (equivalent to 40% of government spending) are added, Zambia’s 2016 budget deficit amounts to 10% of GDP.
As a result of this dire situation, many observers are expecting an austerity budget for 2017, yet there are conflicting reports, as the government has signalled spending increases of $6.26 billion for 2017, compared to $5.14 billion in 2016. While this may hint at a stimulus-based approach, this will only further exasperate Zambia’s debt crisis as this increased spending combined with Eurobond refinancing will only weaken Zambia’s credit rating.
Is being addicted to debt any better?
The scale of Zambia debt – estimated at 91.1% of GDP after its latest refinancing efforts – has led some to call for unorthodox economic diversification strategies. A hot topic in the country is the potential for marijuana legalization to help turn the country’s finances around. The brain-child of Green Party leader Peter Sinkamba, marijuana legalization and exploitation is touted a potential game changer. Sinkamba has recently called for a $36 billion marijuana industrialization program as a means to finance the country’s Eurobond debt.
Sinkamba made similar statements during the 2014 presidential election, in which he argued that Zambia could capture 10% of the global marijuana market – valued at $140 billion in a 2005 UN report – by legalizing and exporting medical marijuana, which in theory could rival copper in terms of export revenue.
While we have all heard such statements from other fringe politicians, Sinkamba ideas are not without merit. Firstly, the efforts of legalization advocates have been buoyed by the fiscal success enjoyed by jurisdictions such as Colorado and Washington State. Sinkamba’s call for a domestic marijuana industry does mesh with government and international encouragement for a more diversified Zambian economy, especially in the agriculture sector where most of the population works. Currently reliant on cash crops such as cotton, the introduction of marijuana farming would help diversify risk, as well as offer a buffer to market shocks with domestic consumption picking up some of the slack in lean times, in a manner which is not possible with other products (such as cotton) reliant on mass processing not present in Zambia.
It is also important to note the legalization activists such as Sinkamba are not trying to introduce foreign consumption habits into the country, as marijuana has long been cultivated and consumed in Zambia, with even Dr. Livingstone remarking in 1855 on the crop’s wide reach in the country. Indeed, Zambia tops international studies on global marijuana consumption, ranking third in the UNODC’s 2014 World Drugs Report.
The widespread use of marijuana among the Zambian population provides Sinkamba with a significant potential support base, as well as a substantial domestic market for Zambian cannabis growers. Such a large market would aid economic development as it would help insulate marijuana growers from volatility in international markets, as well as aid the strengthening of domestic consumption driven growth.
Furthermore, widespread marijuana production would also reduce state expenditures, as Zambia faces exorbitant socio-economic costs related to prohibition. At 300% overcapacity Zambian prisons are some of the most overcrowded in the world, with one in four inmates incarcerated on marijuana-related charges. This number includes many poor farmers, women and children, who have been arrested for the possession of small amounts for personal use, as well as those maintaining micro-plots of marijuana to supplement their incomes.
Another benefit for Zambia would be reduced expenditure in anti-drug policing and other enforcement mechanisms, as well as a decrease in trafficking and the associated criminal activity it often fuels. Legalization would also reduce corruption surrounding the bribing of law enforcement officials to overlook possession charges and other related issues.
While observers are right to temper with caution the claims of Sinkamba et al, they nonetheless present an interesting take Zambia’s problems.