Zambia - The Windfall Tax Story

The issue of windfall tax in Zambia has always been a hot one. Many political ideas have revolved on windfall taxes from the government to the opposition. It is strange that this simple perspective of taxing has been such a hot topic in this country. More so, having implemented it for some time.

So Why the Fights?

Windfall tax is expected to generate a lot of financial rewards for the country in the light of higher copper prices that were witnessed. It is expected to bring in a lot of money to drive the economy. On the other hand, the politicians in the control say it is not possible to introduce a windfall tax. 

The fight got so heated up that some headlines would summarize it. For example it is quoted that those who were calling for windfall tax are lunatics. Check here and here.

Windfall Tax

So what is a windfall tax? The few definitions I came across will sum up as:

"A tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits." 

"A windfall profits tax is a higher tax rate on profits that ensue from a sudden windfall gain to a particular company or industry."

My favourite for simplistic issues is the last one from Wikipedia because it sums up all elements of the windfall tax and will have all you need for parameters of this discussion. 

Zambia and Windfall Tax

The mining sector in Zambia has an interesting tale. It is booming when the prices are high. However, most if not all mines are in loss making position. So the Corporate Income Tax (CIT) is never paid. On the other hand, mineral royalty (which is deductible) is paid and claimed back.

So the mineral royalty does actually hit the collection point for the nation, but it merely comes as a deposit and is later taken away when one address the issues of their tax position.

Therefore a windfall tax in this position has one element which many have missed - if you are not profitable, you can't pay it! Even when you are profitable, you need to be facing 'windfall profits' or higher than normal profits for the windfall tax to apply! So for a country with a sector that is 90% in loss making position, how then will you apply a windfall tax?

Any economist with the information on the profitability of the mines will find it interesting to call for a windfall tax. Why? How do you get "abnormal profit tax" when the mines have no "profit" in the first place.

The people needed to be told the truth about this. The assumption that everyone talking about windfall tax knew what they were talking about is wrong. people merely voice out what they want regardless of what the situation is on the ground. You need critical issues on the ground for any windfall tax to be implemented. Those parameters are what is missing. 

Where is the Profit?

If the mines had the so called profit position, they would pay taxes. If they made abnormal profits, they would then be a reason to introduce the windfall tax. The lack if profits makes it impossible to have a windfall tax.

Whey mines have no profit is a bigger issue to address and one that will make a good reading and analysis for the future of this country. Many have declared that mines cheat and use tax avoidance schemes to dodge any form of taxation. This has created a bad relationship with government leading to lack of trust between the two. This has led to push and pull issues being done in a way to be better than the other.

If it is true that a lot of cheating has been happening, then the mines will be responsible for this sour relationship and the misery that many people have been exposed to due to lack of resources. On the other hand, we need to ask ourselves as to why mines would go on for decades in a loss-making position. What did we do wrong in the sector? Was the privatization the greatest mistake we made? Can it be corrected?

Where are the profits for a sector that is doing so well in terms of the prices? Calling for a windfall tax without addressing any of this issues is doing the same thing we have been doing all these years and expecting a different result. Albert Einstein once quoted:  ” The definition of insanity is repetitively doing the same thing over and over and expecting different results”. (I have no idea where he was quoted, but that may link well with the lunatic link above). So instead of doing the same thing over and over, we need to do things differently.

One way of doing this differently is to over-look the issue of us sharing in the profits that will never come from the mines. Instead, lets charge them rent on our minerals. What they do with them is not our problem, but pay us for the minerals anyway. This rent is the simplest thing one can use. When you get into a house and rent, the landlord does not care when and how much you are paid, you just pay for the house at the end of the month or at the beginning of the month. If you earn no income in that month, it is not the landlord's fault. This is what is attempted in the 2015 Budget where a royalty will be charged but no CIT. 

The method avoids the chasing of profits on the mines, the transfer pricing issues, etc. It merely requires you to make a payment when the minerals are extracted from the ground. You dig, you pay principle.

Of the two methods, the issue is that both parties (govt andd mines) want to benefit. One method can benefit both, but the lack of trust makes that impossible to carry on. So all these are no alternatives to the issue of sharing the benefits.

Sadly, windfall tax has no effect in the Zambian context at this current situation when there is no profit. So extra or abnormal profits cannot be applied.

Zambia 50 Year Anniversary Note

Zambia turned 50 years of independence from the British rule. The occasion was marked with great celebration in Lusaka and many different locations across the country.

The Bank of Zambia released a Fifty Kwacha (K50.00) anniversary for the occasion. At Kwacha Economics, we loved it and would have loved to share it sooner. However, the passing of our President Mr. Micheal Chilufya Sata presented some logistical problems.

All the same, this is being shared now. The many feature is the faces of our presidents from independence to now.

The former presidents of Zambia: (Clock-wise) Dr. Kenneth D. Kaunda, 

Mr. Levy P. Mwanawasa, Mr. Michael C. Sata, Mr. Rupiah Banda and

Dr. Frederick T. J. Chiluba  

The five former presidents are:

1. Dr. Kenneth David Kaunda (24-October, 1964 to 2-November, 1991),

2. Dr. Frederick Jacob Titus Chiluba (2-November, 1991 to 2-January, 2002),

3. Mr. Levy Patrick Mwanawasa (2-January, 2002 to 19-August, 2008),

4. Mr. Rupiah Bwezani Banda (2-November, 2008 to 23-September, 2011), and

5. Mr. Michael Chilufya Sata (23-September, 2011 to 28-October, 2014).

May their soul rest in peace.

We hope for the peace, joy and unity in this great nation as our national anthem proudly declares. A new president will be elected within 90 days of the death of Mr. Michael Chilufya Sata. Dr. Guy Scott, the Vice President will be interim president during this period.

Special mention from Kwacha Economics.

May the soul of Elizabeth (Lizzy) Munjunga who died on 13th September, 2014 rest in peace. We miss you dearly.

As Zambia - We are Better Than That!

Zambia's president, Michael Chilufya Sata has died. He is the second Zambian president to die in office.

The vice president of the country is Guy Scott. He has since taken over to act as President for 90 days within which an election will be held.

That is the simplest way an ordinary Zambian will look at the issue. However, barely 5 hours of the news of his death, the second paragraph in Africa would be filled with hatred and racism and would read as follows: -

The vice president of the country is Guy Scott, a white man in the southern African country. He has since taken over to act as President for 90 days within which an election will be held as the country reverts to white rule! 

Seriously, Zambians are far better than that. While others see a white man, we see a Zambian. That Zambian can assume his call for the nation when called upon. African countries would rise up and fight each other when they have a constitution that spells out what they can and cannot do. This is the backwardness that has forced Africa into poverty and violence. 

Some headlines are so shocking for a Zambian. I wonder if these same "credible" news providers had headlines such as "America under black rule". Or is it that it is racist if it relates to America but not Zambia. I am so shocked and disappointed that this is coming from fellow Africans.

Zambia is better than that. We are more civilized that most countries and race to us has little obstacles. Not even some European countries can handle such a mature transition. We are a beacon for many, sadly out brothers in Africa are way behind. 

We shall rise above these problems and show the world how love for fellow human beings regardless of their skin colour and the following of the rule of law can transform a nation. Not the double standards that the world has on issues. Racism is big and wide - not even the FIFA carrying of campigns against racism has helped. Media houses are promoting it to unbelievable levels. Zambia is better than that!

Can Zambians tolerate such pure racist headlines! Please refer

- nyasatimes.com (Malawi): Zambia Returns to White Rule: Guy Scot Acting-President (http://www.nyasatimes.com/2014/10/29/zambia-returns-to-white-rule-guy-scot-acting-president/)

- The Maravi Post (Malawi): Whiteman Guy Scott ascends to the Zambian Presidency after the death of Sata (http://www.maravipost.com/201410297419/Politics/whiteman-guy-scott-ascends-to-the-zambian-presidency-after-the-death-of-sata.html)

- BBC (Britain): Zambian President Sata death: White interim leader appointed (http://www.bbc.com/news/world-africa-29818212?ns_mchannel=social&ns_campaign=bbc_breaking&ns_source=twitter&ns_linkname=news_central)

- Telegraph (UK): How Guy Scott became Africa's only white president (http://www.telegraph.co.uk/news/worldnews/africaandindianocean/zambia/11196185/How-Guy-Scott-became-Africas-only-white-president.html)

-  Business Recorder (Pakistan): Zambia 'King Cobra' dies; White Vice President Takes Reins (http://www.brecorder.com/general-news/172/1237532/)

To Zambians, this is not an issue and people have gone to social media to even comment "on a light note" as follows:

@decolanga  "Fare thee well Michael Sata. Africa may now have a white head of state"

@martobono "Once the VP takes over as #ZambianPresident then equation will be balanced. Black president in America and white president in #Zambia," 

That's the Zambia spirit, embracing each Zambian with love. As CNN reporter summed it up, race in Zambia is not an issue.

Zambia VAT Rule 18 Amendment "On Hold"

An amendment which I was firmly against - for obvious reasons has been halted! That is the best news in the month of September that I have received. Check here.

Kwacha Economics ran a blog on the amendment and from it. A few people have indicated the desire to have it in place the way it is. So imagine the shock when the amendment was published in the papers. Luckily for us, that idea died quicker than it came. Seriously I was of the view that even more measures need to be added instead of the proposed amendment to remove some requirements.

For example, why not add even a waybill to the requirements - ok let us not get excited as the amendment may come back. 

2015 - 2017 MTEF (Green Paper)

Medium Term Expenditure Framework (MTEF) for the period 2015 - 2017 has been released. This is the famous Green Paper that is always talked about.

So maybe we should make sure we know what we are talking about. MTEF is government's strategic policy and expenditure framework. Ideally the MTEF balances what is affordable against policy priorities of the government within the available resources or resource envelop.

This is done with a top-down resource envelop and a bottom-up estimation of current & medium-term (in Zambia we use a 3 year period as the medium-term). All the expenditures or costs are matched with available resources for the period. It is important to note that in Zambia we use a three (3) year rolling MTEF. Simply put there is a 2014 - 2016 MTEF period which is accompanied by the 2014 budget and the next one is the 2015 - 2017 MTEF to be accompanied with the 2015 Budget. The fact that is it rolling, reviews are carried on while the other one is in motion.

The Game Plan

The "Green Paper" has the government's plans for the period through the budget. So it is important to have a look at this before you even have the 2015 Budget. This is the game plan that would be used in the period 2015 - 2017.

Government's strategic priorities are set forth in the Green Paper and you can easily deduce what the issues for the period will be. Resource allocation and the areas considered priority will determine what kind of business the government's business will be. All policy prioritization, alignment of policies and objectives under available resources. Resource mobilization will also be dependent on the type of expenditure the government will be embarking on. As some people say, you can literally arrive at what taxes will go down and what will go up. I'm yet to find that because, the resource envelope though embedded, might depend on other factors and not really the issues of priority. In the same vein though, you can see what will be taxed less if it will lead to efficiently meeting the overall objectives of the policy priorities. This is because revenue estimates (mainly taxes, non-tax, borrowing, grants, etc.) are done in line with the macroeconomic framework.

Sector Focus

Sector strategies are formulated to link budget allocations with expected policy achievements at each sectoral level. Sector focus ensures that the resources are allocated in line with the overall strategy. 

For example, if education will be the main focus, you expect a huge allocation of resources to education in the budget and over the medium-term. In some cases, there's a plan for both conservative and optimistic scenarios. This will ensure the overall plan has scenarios that suit the expected worst scenario and the best possible. I am not sure which one is given to the public in Zambia.

Baselines are also put forward to indicate whether or not policies are sustainable and are in line with the budget in medium-term.

Lastly of course the dreaded sector and Ministry, Province or Spending Agency (MPSA) ceilings. The cap to how much will be available for a particular MPSA in terms of resources within which their budgeting will have to be made. This ceiling is because of the resource constraint and a need to prioritize and only budget for strategic areas in full. You may need to note that ceilings are fixed for the medium term and each of the year in the medium term.

Zambia's 2015-2017 Medium Term Expenditure Framework

The Green Paper addresses the focus as: 

The 2015 – 2017 MTEF will build upon the favourable macroeconomic performance recorded over the last five years which was evidenced by high economic growth rates, attainment of single digit inflation and positive trade balances. The specific broad economic policy intentions include; promoting high growth in the labour intensive sectors of agriculture, tourism, manufacturing, and construction; sustaining economic growth rates of not less than 7 percent; keeping inflation low and stable; continuing to promote Zambia as an investor friendly destination and implementing structural reforms aimed at reducing the cost of doing business.

The 2015 – 2017 Medium Term Expenditure Framework (MTEF) has been formulated with the overall objective of enhancing the benefits to citizens from the positive economic growth that has been achieved over the past few years. This is in line with the spirit of the Revised Sixth National Development Plan (R-SNDP) which is “people-centerel economic growth and development”. Government will focus on ensuring that growth is inclusive and propoor so that the benefits of a stable macroeconomic environment, positive economic growth and single digit inflation bring about improved standards of living for the Zambian people. This will be done by stepping up both human effort and financial resources in areas that have a direct impact on

the improvement of individuals’ quality of life, such as education and skills development, health care, agricultural support, citizen empowerment, employment creation, provision of public infrastructure and social amenities. With these interventions the Government is confident that inroads will be made in creating jobs, raising incomes and reducing poverty.

You can download the 2015 - 2017 MTEF (Green Paper) here.

Zambia VAT Rule 18 - Proof of Exports

I have heard a lot of talk on the issue and it has become political (like everything else in Zambia)!

VAT is a consumption tax. It is charged on goods and services that are consumed in a country. The simplest aspect of VAT is that only the last consumer is supposed to pay for the VAT. Or, as wikipedia may add (not sure this is any simple)

"From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs."

So from this point, when goods and services are exported, they wont be consumed in that country but be consumed in the destination. This is sometimes called the destination principle of VAT. So when companies export, they get a refund of VAT so that the VAT on that good be charged in the destination country.

What is this Rule 18?

Rule 18 therefore exists to prove or provide a means to which we have proof that the goods were exported and therefore the company that exported should be refunded. However, this comes up in most cases due to the crookedness of some companies which use this for benefiting from this measure. Check here.

So what is the famous Rule 18? This is what the rule says (amendments) in GAZETTE NOTICE No. 27 OF 2013:

RULE 18 – PROOF OF EXPORT

(1) Unless the Commissioner-General shall otherwise allow, a taxable supplier

claiming that a supply is zero-rated under the Second Schedule to the Act on the grounds that the supply is an exportation of goods, shall produce to an authorized officer-

(a) copies of export documents for the goods, bearing a certificate of shipment

provided by the Authority;

(b) copies of import documents for the goods, bearing a certificate of importation

into the country of destination provided by the customs authority of that

country;

(c) tax invoices for the goods exported;

(d) proof of payment, made by the customer, for the goods;

(e) documentary evidence, proving that payment for the goods has been made

by the customer into the exporters bank account in Zambia; and

(f) such other documentary evidence as the authorized officer may reasonably

require.

The amendment requires taxable suppliers dealing in exports to provide documentary proof to prove that payment from the importer has been received for the exports in a bank account in Zambia for the purposes of zero-rating.

In conclusion, we need to ask why this has brought so much talk and drama in Zambia. If at all other countries deal with the same measure, do they have the same items and issues as we do? Should be amend it? Or do we need the companies to just go away and get a refund.

As a comparison, lets look at the UK proof of Export with explanations found here:

6.Proof of export

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6.1 What does this section cover?

This section explains the evidence that is required for a supply of goods exported outside the EC to be zero-rated for VAT.

For VAT zero-rating purposes you must produce either official evidence as described in paragraph 6.2 or commercial evidence as described in paragraph 6.3. Equal weight is put on official and commercial transport evidence but both must be supported by supplementary evidence to show that a transaction has taken place, and that the transaction relates to the goods physically exported. If the evidence of export provided is found to be unsatisfactory, VAT zero-rating will not be allowed and the supplier of the goods will be liable to account for the VAT due (see paragraph 11.2).

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6.2 Official evidence

Official evidence is produced by Customs systems, for example Goods Departed Messages (GDM) generated by NES. See section 5 for more detail on how official evidence of export is produced.

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6.3 Commercial transport evidence

This describes the physical movement of the goods, for example:

• Authenticated sea-waybills.
• Authenticated air-waybills.
• PIM/PIEX International consignment notes.
• Master air-waybills or bills of lading.
• Certificates of shipment containing the full details of the consignment and how it left the EC, or
• International Consignment Note/Lettre de Voiture International (CMR) fully completed by the consignor, the haulier and the receiving consignee, or Freight Transport Association (FTA) own account transport documents fully completed and signed by the receiving customer.

Further details on the purpose of these documents can be found in Notice 275 Customs: export procedures.

Photocopy certificates of shipment are not normally acceptable as evidence of export, nor are photocopy bills of lading, sea-waybills or air-waybills (unless authenticated by the shipping or air line).

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6.4 What supplementary evidence is available?

You are likely to hold, within your accounting system some or all of the following:

• customer’s order
• sales contract
• inter-company correspondence
• copy of export sales invoice
• advice note
• consignment note
• packing list
• insurance and freight charges documentation
• evidence of payment, and/or
• evidence of the receipt of the goods abroad.

You must hold sufficient evidence to prove that a transaction has taken place, though it will probably not be necessary for you to hold all of the items listed.

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6.5 What must be shown on export evidence?

The text in this box has the force of law
The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify: the supplier the consignor (where different from the supplier) the customer the goods an accurate value the export destination, and the mode of transport and route of the export movement.

Vague descriptions of goods, quantities or values are not acceptable. For instance, 'various electrical goods' must not be used when the correct description is '2000 mobile phones (Make ABC and Model Number XYZ2000)'. An accurate value, for example, £50,000 must be shown and not excluded or replaced by a lower or higher amount.

If the evidence is found to be unsatisfactory you as the supplier will become liable for the VAT due.

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6.6 What evidence will I need to obtain to substantiate VAT zero-rating when I do not arrange shipment of the goods?

Typically this occurs when goods are supplied ex-works. If your overseas customer arranges for the goods to be collected from your premises and exported to a place outside the EC Member States it can be difficult for you, as the supplier, to obtain adequate proof of export as the carrier is contracted to your overseas customer. For this type of transaction the standard of evidence required to substantiate VAT zero-rating is high.

Before zero-rating the supply and releasing the goods to your customer, you must confirm what evidence of export is to be provided.

If the evidence of export:

• does not show that the goods have left the EC within the appropriate time limits, or
• is found, upon examination, to be unsatisfactory

you, the supplier, will become liable for payment of the VAT.

For these reasons you should consider whether to:

• include the requirement for the buyer to provide export evidence as part of the sales contract between you and your customer, and/or
• secure against the possibility that your buyer will fail to provide the proper export evidence by, for example, taking a deposit from your customer equal to the amount of VAT you will be liable to pay if the evidence is not sent to you.

The deposit can be refunded when you obtain evidence that proves the goods were exported.

Evidence must show the goods you supplied have left the EC. Copies of transport documents alone will not be sufficient. Information held must identify the date and route of the movement and the mode of transport involved. It should include the following:

• a written order from your customer which shows their name and address, and the address where the goods are to be delivered
• copy sales invoice showing the invoice number, customer’s name and a description of the goods
• delivery address for the goods
• date of departure of goods from your premises and from the EC
• name and address of the haulier collecting the goods; registration number of the vehicle collecting the goods and the name and signature of the driver
• where the goods are to be taken out of the EC by an alternative haulier or vehicle, the name and address of that haulier, the registration number of the vehicle and a signature for the goods
• route, for example, Channel Tunnel, port of exit
• copy of travel tickets, and
• name of ferry or shipping company and date of sailing or airway number and airport.

The information held should also include (if applicable):

• the trailer number
• full container number, and
• the name and address for consolidation, groupage or processing.

At the time when the goods leave the EC the above information could be obtained from your customer, the haulier, the freight forwarder or the documents listed in paragraph 6.4.

See paragraph 7.3 for goods that your customer intends to export in his baggage or his private motor vehicle.

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6.7 How long must I retain export documentation?

To substantiate zero-rating a transaction you must make sure that the proof of export is:

• kept for six years, and
• made readily available to any visiting VAT Officer to substantiate the zero-rating of your exports.

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6.8 What happens if I do not hold the correct export evidence?

If you do not hold the correct export evidence, within the appropriate time limits, then the goods supplied become subject to VAT at the appropriate UK rate. See paragraph 11.2 for details of procedures to follow in these circumstances.

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6.9 If I am an overseas customer arranging my own export what do I need to do to make sure that I get the benefit of zero-rating?

Once you have collected the goods or arranged for the goods to be taken to the port or airport, for export, you should provide the supplier of the goods with all of the documentary evidence you hold to prove that the goods have been physically exported. You should make sure that the supplier is in possession of this evidence to allow them to meet the time limits for export.

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6.10 What if I have lost or mislaid export evidence?

If you have lost or mislaid the official or commercial evidence of export supplied by the ship owner or carrier, duplicate evidence of export may be obtained. The replacement evidence of export must be clearly marked 'DUPLICATE EVIDENCE OF EXPORT' and be authenticated and dated by an official of the issuing company.

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7.Proof of export for zero-rating in specific circumstances

This section covers the specific evidence of export that you must obtain according to the method of export used. In all cases the official or commercial transport evidence you obtain must be supported by the supplementary information set out in paragraph 6.4 to show that the transaction has taken place.

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7.1 Air and sea freight

If you are using commercial transport documents as proof of export for goods exported outside the EC by:

• Air - you must obtain and keep an authenticated master or house air-waybill endorsed with the flight prefix and number, and the date and place of departure.
• Sea – you must keep one of the copies of the shipped bill of lading or sea-waybill (certifying actual shipment) or, where a shipping company does not issue these, a certificate of shipment given by a responsible official of that company.

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7.2 Road freight

The International Consignment Note (CMR) provides evidence of the identity of the contracting parties when goods are transferred by road. It is in three parts and is completed and signed by the sender of the goods, the carrier and the person receiving the goods. Where the overseas customer arranges for the goods to be collected ex-works the CMR alone is not conclusive evidence that the goods in question have left the EC but, where the CMR is used as part of the evidence, it is important that the information is complete and all the details legible.

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7.3 Merchandise in Baggage (MIB)

Commercial or business goods exported in accompanied baggage are known as MIB. Commercial evidence of export is normally only available where goods are shipped as manifested freight, as individual consignments or as part of groupage consignments. Currently MIB is outside the scope of the National Export System and you will need to complete a non-electronic paper Single Administrative Document (SAD) Form C88 and follow the procedures below.

Provided the goods and correctly completed SAD copies 2 and 3 are presented to the MIB officer, official certification of copy 3 of the SAD can be obtained for the following:

• Merchandise in Baggage.
• Re-export of temporarily imported goods
• Transfers of own goods (see paragraph 2.15).
• Purchases by overseas persons.
• Exports where commercial documents are not available (for example where an ATA carnet has been lost).

In all these cases the certified copy 3 of the SAD (Form C88) is your evidence of export.

(a) Where you export the goods

If you export goods in baggage or in a private motor vehicle, you must:

• Include 'MIB' in box 44 of the export SAD (C88).
• Arrive well before your scheduled departure time and present copy 2 and copy 3 (marked 'for VAT purposes only') of the SAD, with the goods, to the MIB officer at the UK place of export from the EC for the reverse of copy 3 to be certified that goods have been shipped.

Copy 3 will be handed back to you as evidence of export for retention in your records.

(b) Where your customer exports the goods

Where your overseas customer collects the goods from your premises and arranges transportation in baggage or in a private motor vehicle you must:

Give your customer a completed SAD with your name and VAT number shown in box 2. (This will make sure that your overseas customer does not include your supplies on a single SAD covering goods purchased from a number of UK suppliers. If they did this, they would be unable to provide you with an original officially certified copy 3 for your records).

Your overseas customer must:

• Arrive well before their scheduled departure time and present copy 2 and copy 3 (marked 'for VAT purposes only') of the SAD (Form C88) with the goods, to the MIB officer at the UK place of export from the EC. The MIB officer will certify the reverse of copy 3 to show that goods have been shipped and hand it back to your overseas customer.
• Send you copy 3 as evidence of export for retention in your records.

(c) Leaving the EC via another Member State

If you or your customer depart the EC via another Member State copy 3 of the SAD (Form C88) will be certified by Customs at the place you leave the EC.

Full details of the MIB procedures are given in Notice 6 Merchandise in Baggage.

Unstable Power Supply Effects On The Economy

Unstable power supply has a lot of effects on the economy. The effects are great with the stability levels.

Zambia has been facing a lot of challenges regarding electricity. The effects are however never addressed on the effects on the economy. I believe the issue should be addressed with full knowledge of the effects on lifestyle, economy, education, health, etc

Lack of Guaranteed and Stable Electricity

Without guaranteed and stable electricity, the economic stability of any country will be threatened. Is it no secret that Zambia has a shortage of power supply, resulting in continuous "load-shedding". Load-shedding is the cutting of electricity supply to some households in order to stabilise supply in other areas or sectors. The load-shedding has no specific time, bears no regard to what needs to be done and bluntly it is just applied. The worst part is that different areas experience different "load-shedding" levels and intensities and some never even experience it. You have to realize that when power supply is cut, all work, machinery or activities that depend on electricity will not be possible. The activities come to a stand still. 

For those with economic dependence on electricity will not perform their economic activities at the time of load-shedding. All possible economic activities in a particular area that depend on electricity die. That is the bottom line. You can actually witness the demand through the buying of generators, solar panels, etc. The sectors affected however, would not result in all of them depending on solar panels and generators. If this was the case, ZESCO would have been replaced by now. Few barbershops, entertainment places actually use these alternative sources even though they can easily provide for them.

Zambia's fight to increase entrepreneurship for the young people has severely been affected by lack of stable electricity. Few would venture into it without regarding power. It is assumed the load-shedding is only applied to residential areas, but how many businesses start up in residential areas? Even big multinational companies started in one's garage. It should be appreciated that some economic activity depend on electricity and it would help if we had stable electricity supply for our economic benefit.

Therefore, lack of stable electricity in Zambia has produced a lot of negative effects on the economy. The effects are far reaching and need to be addressed. The cost of this unstable supply of electricity should be regarded as the cost of downtime during an outage which would include but not limited to the opportunity cost of economic activities that would otherwise be carried out. Further social, medical, psychological costs in terms of injuries, deaths resulting from lack of power, failure in advancement in education due to failure to study. Any other costs from the lack of power should be included in the cost of unstable power in order to assess the full impact of unstable power supply. 

Cost Reflective Pricing

I have always loved the terminology used by ZESCO/ ERB, etc in justifying an increase in prices or fees. So what is the cost reflective-ness that is always being talked about? Do we really have different costs for companies and residential clients?

We have to take on board the feeling that people have of the big companies not paying their fair share of the costs of electricity. This has to be confirmed to each and every stakeholder. We feel we pay our share and even subsidize the big companies. Bluntly speaking, the cost reflective-ness for the two (residential clients and companies) cannot be the same in actual terms, I believe one should be greater than the other.

In this light then, cost reflective-ness though welcome, needs to be explained to us. We always feel we pay a lion's share of the cost.

Change Our Business Timings
We should remember that cutting of electricity supply comes with risks. In particular, health related institutions like hospitals and mining entities.

Therefore, we are left to cut power supply in areas with minimal side effects. Households pose a good group of people who should be cut from supply. But I tend to think they are also the group which uses it less compared to those that are using it in manufacturing. 

To this effect, we should ensure that the big electricity consuming companies also do their fair share of the "load shedding" by working at times that households do not use. That will be a fair way of sharing the limited resource.

All in all, unstable power supply has a lot of effects on the economy and should be looked at with the seriousness that it deserves. We as a country need to appreciate that we can only do so much when we have enough power. Self employment opportunities should be addressed in full. There is no need to look elsewhere when we can provide these opportunities. The cost on the economy are not measurable. 

Has The Kwacha Stabilized?

I would like to apologize as I have been out and about to blog on a few things that have been happening. Sadly, the kwacha was the main issue that has been happening and a blog with that name should surely have been providing the needed updates. Nonetheless, I will try and make up for the lost time.

There are many stories that surround the dive that the Kwacha took and many of these are close to the truth. Kwacha economics has a perspective which I feel is closer and need attention to all that are concerned.

To begin with, there are many factors that can lead to a currency to fail that quick in such a short time. Many of these can be explained not necessarily immediately but after careful analysis of the happenings. 

Monetary Policy and Only with Fiscal Policy

I am a firm believer that monetary policy and fiscal policy should work together to affect certain desirable positions in the economy. The Kwacha's fall once again proved that better than any text book would do. We all remember the amounts of dollars that were off-loaded on the Zambia markets, the effect they had on the falling is as good a guess as any. Check this [here], [here] and [here] Maybe a series of analyses can look into a it but we need to examine how things changed when the fiscal policy was called to the war.

So why was the offloading of dollars so ineffective? 

The simplest form of understanding exchange rate market (that some senior made me to believe way back), is that you have a basket of dollars (or any other foreign currency) and another one with Kwacha (or any local currency), and you are comparing the values. If there is less dollar than the local currency, the value of that foreign currency will appreciate as there will be more local currency than the itself at any value. So for every dollar that exist in that basket, more and more of the local currency will be needed to equalize the status quo. 

So from the above, a depreciated currency will entail there is a lot more of that currency that the foreign currency. So the two things that can happen is to flood the economy with the foreign currency - which the Bank of Zambia did, or suck out the local currency! I believe the two are better handled using the different policies of monetary and fiscal. Monetary policy can flood the economy with foreign currency effectively and efficiently while the fiscal policy can suck out the local currency very efficiently.

Our handling of the fall in the first few weeks was a 'flooding of economy with foreign currency' strategy which did little too late. The use of both flooding and sucking out worked!! Monetary policy and fiscal policy produced wonders!

Why this should be have been expected!

It is interesting that this was not expected! But having little history of this, maybe we should not expect people to realize what was happening. So lets look at the signs on the ground.

Zambia has not been in a position where they have invested so much in infrastructure development in long time. Lets just look at roads for the time being. I don't remember a time that so much money has been put in road construction. Specifically "Link Zambia 8000" or even Lusaka's "L400". Before these projects started, the only other "major" road construction was the election linked "Formula 1".

The two projects of "Link Zambia 8000" and "L400" have had a major cash injection for materials, equipment, employees, etc. The materials and construction equipment are imported. So no matter how much Kwacha is dished out, the contractors will need the Dollar to import the materials and equipment to be able to undertake the construction. So there is a leakage of Dollars and this is not in small amounts, but huge cash outflows from the Zambian economy. Such outflows will put a strain on the local currency and will serious lead to its depreciation. Its a simple demand and supply phenomenon.

Taking into account all such flows of money, the Kwacha was bound to be severely hit. 

So the counter measures to this scenario was to ration the disbursement of road construction funds or plan the release in such a way that the Fiscal  and Monetary policy worked on that issue together. Of course we have to remember that such happenings are new to everyone around and in institutions that are handling these policies. So a future happening can be handled much better.

If All Else Falls, Get Your Money Back!

The last kick in the system is when all else fails, the fiscal gets its money spread around in commercial banks back to the Central bank and let the invisible hand be helped with a loaded dice. It always works. No one can have more money that the fiscal machinery unless there is a sick economy arrangement or there is need to spend.

Sweeping of fiscal related accounts produces good results for the entire economy when there is need to control the exchange rate depreciation, but works against expansionary fiscal happenings. Banks will have no money to create more money with, and the fiscal can be assured of a greater demand for the local currency in a short time period that other methods. The opposite stands true when an appreciation is needed to be controlled.

The current arrest of a free falling Kwacha sums up the rules of the game - Monetary policy and Fiscal policy are different sides of the same coin. It just depends on which side you picked to start the tossing of the coin!

So now has the Kwacha stabilized for good?

Kwacha Depreciation

I have always looked at the way we handle the depreciation of the Kwacha and the panic that is associated with it in wonder. There is nothing wrong with an floating exchange rate to float! That is why it's called floating.

Let the Kwacha Depreciate

If it needs to, let it depreciate. However, just ensure that there is stability on this depreciation path. It's safe economics.

The worst thing that can follow such a move (which mostly has happened in the past in this country) is to come up with funny policy changes and falling into the trap of the people you had been trying to catch. There are a lot of theories on what can happen and why it is happening. The safest is to look at the decisions that need to be done and then work your way in ensuring that those do not negatively affect the economy.

I love it when there is so much work on the background by people affected by one measure and how they convince the world that is we do this, things would change. The interesting part is that, that same thing has absolutely nothing to do with the other. You feel like you are watching leverage season "Zambia".

Why is it Falling?

Why is the Kwacha falling? That is easier to find than MH370! We surely don't even need the satellite. There is tones and tones of statistics that can be used to gauge this. We even have SI 55 as a tool to use for extra input into our analysis. We just need people seating on it and working through. If there is nothing major but supported by the expected economics that we are bringing less and less of the dollar into the economy, we simply go out there and work our way into correcting that. That is how it works. If we see a policy not related to this and no major economic explanation, we may have used politics over economics - the worst possible way out of this.

Kwacha Economics will watch this unfold and will surely love to write on the outcome of this issue.