Thoughts on Felix Mutati's appointment

President Edgar Lungu has started constituting his cabinet. On Wednesday he announced Felix Mutati as the new Minister of Finance. Mr. Mutati takes over from Alexander Bwalya Chikwanda who served in the role over the last five years. Many economists agree that Mr. Chikwanda's tenure was a disaster -- we lost count of the many policy flip flops that he presided over (remember the SI 55 and SI 33 debacle?). Even more devastating is the fact that the external debt stock increased four times during his tenure (see this graph). The fiscal deficit (a measure of revenue short-fall) went from 1% of GDP in 2011 to 7% of GDP in 2015 (see this graph). It's this latter mismanagement of the country's finances that's necessitated a re-engagement with the IMF for assistance.

In a piece for Quartz Africa last year, I calculated the country's revenue short-fall at about $1.9 billion. Bloomberg, in a piece published just before last August's elections and quoting the president's spokesperson, reported that the government will be seeking a loan of about $1.2 billion from the Fund. But this money won't come for free. It will require drastic expenditure cuts to reduce the fiscal deficit.

And this is where Mutati's appointment is incredibly important. He will have to negotiate, on behalf of the country, which parts of expenditure are to be trimmed down. Going by the IMF's history and its ideological underpinnings, the Fund will likely call for a drastic reduction in the types of expenditure that are incredibly important for the poor (subsidies to agriculture, education, etc...).

Following Mutati's appointment, many have questioned his ability to run the Ministry of Finance given that he's not an economist. I am much less worried about his training than I am about his ideological inclinations because this, more than anything else, will determine what Zambia looks like post-the IMF engagement. And here there's cause to worry.

Recall that Mr. Mutati has, for the most part of his political career, been a card carrying member of the Movement for Multiparty Democracy (MMD). And the MMD in the 1990s largely presided over the implementation of Structural Adjustment Policies (SAPs) in Zambia betraying the party's free-market inclinations. Frederick Chiluba, Zambia's first president under the MMD, was famous for quoting Adam Smith, he of the invisible hand mysticism. It is this party, with its ideological inclinations, that Felix Mutati joined early in the last decade culminating in his appointment as Commerce Minister in 2006. His job as Commerce Minister was largely to create an "enabling environment" for private sector (read: foreign capital) to flourish. And we shouldn't forget that Mr. Mutati currently believes he's the rightful head of the MMD.

Granted, MMD's policies moved slightly to left during Mwanawasa's tenure. For example, the incredibly successful Farmer Input Support Programme (FISP) was started under Mwanawasa's term. Discussions of a windfall tax on the copper mines were also started during this time. But the party still largely remained market-oriented in inclination. It is unimaginable, for example, that an Industrial Development Corporation would have been established under an MMD government.  

So given all this, I am less hopeful about the kind of role Mr. Mutati will play when those negotiations start. Will he, as a matter of principle, object to cuts on agricultural subsidies? Or will he agree to the cuts under the pretext that it's the practical thing to do? I can imagine that our "friends" in Washington are excited at the prospect of having to work with Mr. Mutati. (On issues of principle, recall that not too long ago Mr. Mutati endorsed Hakainde Hichilema's candidacy only to surprisingly change gear a few months later and endorsed Edgar Lungu).

I wish President Lungu had appointed a stubborn socialist as Minister of Finance given what's at stake here (think here of someone like the UPP's Dr Saviour Chishimba, abstracting for the moment from the constitutional issues around whether unsuccessful presidential candidates can serve in government). Yes, we need to cut back on some expenditure types. But a stubborn socialist would have given the IMF such a tough time that the only practical thing to do would have been to meet halfway.

In this age of uncertainty, the Kwacha's been surprisingly stable

Zambians went to the polls about three weeks ago on the 11th of August to elect a president. Up until now we still have no substantive president as the opposition United Party for National Development (UPND) has petitioned the outcome of the elections. According to the Zambian Constitution, a president-elect cannot be sworn in if there is a petition before The Constitutional Court. The Constitutional Court ruled this past Friday to continue with the process of disposing of the petition into the week starting Monday, 5th September. The petitioners and the respondents each have 2 days to argue out their cases starting tomorrow.

The implication of this is that the country will continue without a substantive president for a fourth week running, something that's not happened since independence (except for the time when Dr. Kaunda reportedly resigned for about a night in 1968).

But what's really remarkable is that in this age of unprecedented uncertainty, the Zambian Kwacha has been surprisingly stable (see Figure 1 below showing the USD/ZMW exchange rate).


                                   Figure 1: USD/ZMW Exchange Rate

                                        Source: Bank of Zambia

There was a slight depreciation in the days leading up to the election. Thereafter, the Kwacha's been relatively stable settling at an average rate of about K10 to the dollar. Between polling day (11th August) and last Friday (2nd September), the rate of change in the Kwacha vis-a-vis the dollar was about -0.5%, a slight appreciation but in effect a zero percent change. This stability is even more remarkable given the wide gyrations experienced last year.

Given that our country is in unchartered waters, you would expect this uncertainty to show up in the exchange rate. But it hasn't, at least not quite yet. So what explains it? I can think of 4 candidate explanations:

1. Central Bank stewardship
Perhaps the Bank of Zambia (BoZ) has been carefully monitoring events and intervening where necessary?

2. Trust in local institutions 
Perhaps the financial markets trust that Zambian institutions are up-to-the task of resolving the dispute?

3. Politics don't matter
Perhaps politics don't matter for the performance of the Zambian foreign exchange market?

4. Inflow of foreign exchange
Perhaps this era of uncertainty has coincided with an inflow of forex such that even though there has been a "flight" away from the Kwacha, the forex inflow has been sufficient to meet the demand for safety?

I don't have enough information to discriminate among each one of these potential explanations. And these might not even be the only factors.

So what gives?

Some Thoughts on CCMG's Parallel Vote Tabulation (PVT) Exercise

The Christian Council Monitoring Group (CCMG), an alliance of faith-based organizations in Zambia, carried out a Parallel Vote Tabulation (PVT) exercise during last week's presidential elections. PVTs are a type of vote count verification mechanism and can be useful in checking the validity of final election results. A PVT was actually critical in proving to Dr. Kenneth Kaunda that he'd lost the 1991 elections. Dr. Kaunda is obviously a gracious man and would likely have accepted the results anyway. It's not improbable to imagine, however, that he would have protested the extent of his loss in the absence of a PVT (he only scooped 25% of the vote that year).

The CCMG has subsequently released a statement on the accuracy of the count from last week's presidential elections and concluded thus:

Now that the Electoral Commission of Zambia (ECZ) has declared results for the 2016 presidential elections, CCMG affirms that its PVT estimates for the presidential election are consistent with the ECZ’s official results. All stakeholders, particularly political parties, that participated in the election should have confidence in the ECZ’s presidential results. 

What is a PVT and how is it carried out in practice? And what does it mean for PVT estimates to be consistent with ECZ's official results?

In theory, a PVT works like this: a trusted entity (like CCMG) places agents at polling stations across the country. These agents observe all facets of the voting process from the voting itself to the counting of ballots afterwards. And the main and important idea is this: as the Electoral Commission collects and aggregates counted votes at polling stations across the country, the CCMG also does the same (hence the phrase "parallel tabulation"). At the end of the process, the Electoral Commission announces their final tally and so does the CCMG. The two totals should ideally be the same.

In practise, however, the CCMG cannot manage to send agents to everyone of the country's polling stations (which numbered 7,700 last week). They have to pick a "representative sample" of the 7,700 polling stations. Alternatively, a PVT can be conducted across all polling stations (called a Comprehensive PVT). But quite apart from it being prohibitively costly, a Comprehensive PVT, surprisingly, is more prone to systematic errors than simply sampling polling stations (read more here).

In picking its sample of polling stations last week, the CCMG used simple random sampling (SRS) techniques. But to guard against the possibility that the SRS only picked polling stations in one part of the country, the CCMG employed a version of Clustered SRS so that eventually polling stations were sampled from every province, district and constituency. The final sample contained 1,001 polling stations whose distribution largely mirrored the actual distribution of polling stations across the country. For example, since the Copperbelt holds 14% of all polling stations in the country, the CCMG's sample also had 14% of the polling stations coming from the Copperbelt. Using random sampling ensures that the characteristics of the polling stations (skill set of polling agents, availability of electricity etc...) in the sample are representative of characteristics across all the 7,700 polling stations. We don't want to only pick polling stations where there is electricity because this might not be representative of all polling stations in the country.

Since the CCMG worked with a sample of 1,001 stations and not the entire population of 7,700 stations, the CCMG's pronouncement on the election (for example what percentage of the vote went to candidate X) is called an estimate. And this estimate will come with a margin of error precisely because we are working with a sample and not the actual thing. (Technical note: The margin of error comes from the idea that if CCMG repeated this process of randomly picking 1,001 polling stations many times, they'd obtain a different estimate each time. The collection of these different estimates would form a distribution from which we could work out the margin of error). Ideally you want the margin of error to be as small as possible.

Table 1 below provides estimates of vote shares for each candidate from CCMG's PVT in addition to ECZ's official vote shares from last week's elections. The table also provides margins of error.      

                                  Table 1

An ECZ vote share is consistent with CCMG's vote share if the ECZ share is contained within CCMG's share plus the margin of error. For instance, Edgar Lungu of the Patriotic Front was declared by the ECZ to have obtained 50.4% of valid votes cast (see the second column). The CCMG's PVT, based on 1,001 polling stations, estimated Mr. Lungu's share at 50.2% with a margin of error of +/-2.5%. This implies a lower bound estimate of 47.7% and an upper bound of 52.7% of the vote share. ECZ's announced share for Mr. Lungu falls right within this range and is therefore consistent with CCMG's estimate.  

Now, there is an important proviso to this process that I have not seen anyone else raise in the discussion of the CCMG's PVT this past week. And this involves the issue of measurement error which is different from the margin of error. The margin of error is a given in a process where you use a sample to make statements about a population. In making such a statement, there is, however, an assumption that what you are measuring (eg the vote count) is done properly. In practice, you are always going to commit some type of measurement error but the idea is that such errors should be small and not systematic. An illustration: suppose there are two groups of people A and B that are engaged in trying to figure out the average weight of Lusaka residents. Group A is going to use a random sample and Group B will visit each one of Lusaka's residents and take their weights. Both groups are each given a scale to measure the weight. But it turns out that both scales were manufactured with the same type of defect - they add 2kilos to the actual weight. If the sampling is done right (i.e. margin of error is minimized), the estimate of the average from Group A and the one from Group B will be consistent with one another, but might be 2kilos more because of a systematic pattern in measurement error. So if there is measurement error and if it's systematic, the PVT process will not be informative of the voting process. Just as the average weights from our defective scales will not be informative of the actual average weight in Lusaka.

Lastly, according to CCMG's PVT, Mr. Lungu's vote share could range anywhere from 47.7% to 52.7% of valid votes cast. This PVT tells us that there is likely a range of vote shares where Mr. Lungu did not get the majority needed to prevent a run-off (from 47.7% to 50%) and there is likely a range where he did (50% + 1 to 52.7%). Note that this conclusion holds even when there is zero measurement error, which the CCMG assumes here. I don't know what to make of this last point or if it's even important at all.

                               

Where to Voter Turnout?

The 2016 General Elections in Zambia are less than a fortnight away - in 10 days time to be precise. At this late stage in the game, discussion seems to have shifted from talking about the popularity of the PF/UPND, the two clear front-runners for the presidency, to talking about what voter turnout will be like on August 11.

Focusing on voter turnout, at this stage, is quite understandable: there's little that the PF/UPND can do now to convince a *significant* fraction of PF/UPND voters to vote for them. Minds are already largely made up. The question now is will voters turn out in large numbers to vote for their preferred candidates?    

So what's been the historical pattern of voter turnout in Zambia's General Elections since the reintroduction of multiparty democracy in 1990?

Figure 1 below plots voter turnout against date of election. The first thing noticeable is that getting a voter turnout of at least 70% has been historically difficult -- the only time this happened was in September 2006 when the turnout was 71%. The average turnout for the 7 elections that have involved choosing a head of state since 1991 is 53% (59% if you exclude the two presidential by-elections in 2008 and 2015).


                               Figure 1: Voter turnout, 1991 to 2015

                                Source: ECZ

The second noticeable pattern from Figure 1 is that in "normal times", relatively low voter turnout has coincided with a change of government (for this conclusion, we need to exclude the extraordinary presidential by elections of 2008 and 2015 -- voter turnout in these elections is a function of many things, not least of which is the fact that the elections are not preceded by an updating of the voters' register given their suddenness). 

Figure 2 below excludes the two presidential by elections of 2008 and 2015, and there it becomes clear that the two lowest voter turnouts (1991 and 2011) coincided with a change of government (I was actually surprised to learn that the momentous elections of 1991 had such low voter turnout!). 

                            Figure 2: Turnout excluding 2008/2015 by elections

                                Source: ECZ

So what could be going on here? At an intuitive level it does make sense why low voter turnout might coincide with a change of government: the many supporters of the once popular ruling party might choose to stay away, because of disillusionment, instead of voting for the opposition party (a protest vote of sorts). At the sametime the relatively fewer supporters of the opposition might come out in full force.

So will this pattern play out on August 11? Only time will tell. And the election on August 11 is different to those that have come before precisely because there’s a rule change. It’s no longer “first-past-the goal post”. The winner has to command a majority to win the election otherwise there’s a second round of voting. And a second round might bring about a change of heart from the ruling party’s protest voters – they might think that the ruling party’s defeat (or lack of clear victory) in round 1 was punishment enough and perhaps the party has learnt its lesson. Or the opposition's near victory in round 1 might scare the ruling party's protest voters into coming out in full force for round 2 -- the thought of the opposition forming government might be too much to bear even though the ruling party has done little for them. 

But all this could be armchair theorizing on my part. So don’t listen to me but vote wisely next week.

The Big Zambian Growth Slow Down

The IMF was in town and released a press statement late on Friday (as per their tradition) summarising their findings. The gist of the statement was that the Zambian economy was under "intense pressure" (their words) and it's looking increasingly likely that a bailout is in the works.

For this post, I want to focus on a striking statistic mentioned in the IMF's press statement. According to their preliminary assessment, the rate of growth of the economy (GDP growth rate) for 2015 was only 3%. Their assessment, if accurate, implies that this is the lowest growth rate the economy has registered in 15 years (see the figure below).

                                    Source: World Development Indicators Database

In 2000, the economy grew by about 4% and the rate of growth increased right through that decade. The average growth rate for the decade 2000 to 2010 was a healthy 7% per year and in 2010, for probably the first time in our history, we hit double digit growth. The economy, in that year, grew at 10%! Since then, the trend has been downward, although still respectably healthy. For the four years running from 2011 to 2014, the average rate of growth has been 6%. 

So the 3% for 2015 is really an outlier in what has otherwise been an incredible growth story. 

And growth rates matter. Growing at 7% per year implies that the size of your economy doubles every 10 years (see Rule of 70). Growing at 3%, on the other hand, implies that you take twice as long to double the size of your economy.  

We need to quickly get the economy growing again at about 7% per year. 

Is Minister Kaingu trying to tell us that government is broke?

This week, the Minister of Higher Education Dr Michael Kaingu announced that government would scrap off the payment of meal allowances (popularly known as “BC”) to students at the University of Zambia (UNZA) and the Copperbelt University (CBU). According to him, the government had decided to withdraw the allowance because it “has been abused and that it has over the years been a source of unrest at the two universities”. Meal allowances have been an institution at the two universities and I was lucky to get “BC” during the time I studied at UNZA. Life would have been unimaginably difficult without BC, coming as it did at a time when there was great financial uncertainty for my family. That's my wife's story too. And my sisters' story and countless others who have benefitted from BC over the years and gone on to join the ranks of tax paying citizens.

My point here is not to debate the Minister’s reasons for scrapping off the allowance, even though he doesn’t provide any evidence for his assertion. For instance, is he saying that the payment of meal allowance leads to unrest (for example, cash flash students go get drunk and then throw stones at cars)? Or is he saying that students become unruly when the meal allowance is not paid on time? The conclusions one can draw are radically different depending on what’s causing what. Nor do I want to debate the legality of the decision he’s taken. Others have done so. Nor do I want to be roped into a debate about the unfairness of having few students obtain meal allowances when students at other colleges and universities aren’t doing so. Of course it's unfair that only a minority of students in the country get the allowance. But scrapping it off for everybody is a terrible type of equality - it meets the fairness principle but most people, when pushed, would see that this is undesirable. Instead we should achieve equality by moving in the other direction: making sure that every student gets the allowance. But that’s a post for another day.     

What I want to point out here is that the government’s decision says something about the country's fiscal situation. The decision is controversial if not unpopular (have a look at the commentary on social media). So why would a government announce what appears to be an unpopular decision a few months before a general election? Election years are for dishing out largesse not scrapping it off.

The only answer I can think of is that the government’s finances are currently stretched. Have a look at the figure below that tracks annual interest payments on the country’s outstanding stock of domestic and external debt from 2012 to 2016.  

Source: Budget Speeches

The interest payments are in billions of Kwacha (the rebased currency).* Notice that in 2012, total debt service payments (both domestic and external) were budgeted at K3.1bn. By 2016, the amount budgeted for external debt (K3.6bn) and domestic debt (K3.5bn) are each, on their own, greater than the total budgeted for 2012! That is, total debt service payments between 2012 and 2016 have grown by an incredible 120% (with the external portion growing at 150% and the domestic portion growing at 105%). Also notice that 2016 is the first year where external debt service payments are greater than domestic debt payments – itself a reflection of the growing importance of external debt in our total debt stock. Lastly, notice the incredible steep rise in external debt service payments between 2015 (K2.4bn) and 2016 (K3.6bn). That is, an increase of K1.2bn in a single year! Wow. Even more daunting if you remember that external debt service payments are made in foreign currency.  

Now according to the 2016 budget, the total budgeted for “Student Loans and Bursaries” is K310million (this is a total figure that includes the meal allowance). It is far less complicated to cut funding to this or that social service than to miss an interest payment when a government is debt stressed (there’s actually academic evidence showing this). Missing an interest payment screams loud and clear that you are broke. You can't spin this any other way. On the other hand, you can spin cutting back social spending by simply saying that it was being wasted or it encouraged unruly behaviour (after all, who hasn't heard of the entitled car-smashing students). 

The money originally meant for student loans and bursaries doesn’t, however, come close to plugging the fiscal hole. Implication: Times ahead are gonna be tough. 

* The numbers presented here are in nominal terms. The distinction, in my opinion, between real and nominal doesn't matter so much here because inflation has been quite low over the period covered - the uptick in inflation only happened towards the end of last year after the budget for the current cycle had already been announced.