Problems with Central Bank's take on Bill 10

Readers of this blog will recall that in July I raised concerns about a proposed amendment to the functions of the Bank of Zambia (BoZ). The proposed amendments are contained in the infamous 2019 Constitution Amendment Bill (aka Bill 10).

Specifically, Bill 10 proposes to delete clause (2) of Article 213 of the current Constitution and replace it with a new clause. Article 213 (2) of the current constitution spells out BoZ's functions as follows:

"(2) The functions of the Bank of Zambia are to— (a) issue the currency of the Republic; (b) determine monetary policy; and (c) regulate banking and financial services, banks, financial and non-banking institutions, as prescribed."

Bill 10 proposes that Article 213 (2) be replaced with:

"(2) The function of the Bank of Zambia is to formulate and implement monetary policy."

The concluding section of my July blog post read as follows:

"So it seems that the Draft Amendment Bill seeks to strip away from the Central Bank the functions of issuing currency and the regulation of the financial sector. These two functions are pretty core to what central banks do across the world. And I can't see how another entity would logically takeover these functions, particularly the one to do with issuing currency. And the Draft Amendment Bill is silent on where functions (a) and (c) will now sit.

This is a strange amendment and one hopes that Members of Parliament will probe for details and justifications once the Bill is tabled in the National Assembly."

Yesterday, BoZ issued a belated press statement seeking to explain the reasons for the proposed amendment. Below is an excerpt of the most important parts of their press statement:

"The proposed provisions relating to the Central Bank were motivated by the Bank which is of the view that the Constitution should only contain broad constitutional principles which are operationalised through detailed legislation passed by Parliament. In this regard, the Bank submitted proposals for amendment of the Constitution regarding the Central Bank's functions to be restricted to the primary function, while additional functions, objectives and powers will continue to be subject of an Act of Parliament as envisaged under Article 215 of the Constitution of Zambia, Act No. 2 of 2016. 

The Bank has thus submitted to the Government that the primary function of the Bank should be to formulate and implement Monetary Policy. This submission is consistent with best practice on central banking and also complies with the SADC Model Law for Central Banks which stipulates that all Central Banks in the region should move towards adopting a single primary objective."

BoZ's press statement revealed that they are the originators of the proposed amendment. Further, the proposed amendment, according to BoZ, has two objectives: 1. Maintain broad principles in the Constitution but have specifics spelled out in subsidiary legislation and 2. Bring the Bank's "primary function" in line with "best practice" and in line with SADC Model Law for Central Banks. 

I find the Central Bank's motivations to be highly problematic and also confusing. First, the issuance of currency is no ordinary function such that its specifics can be left out of the Constitution. Relegating specifics about currency issuance to subsidiary legislation leaves them wide open to manipulation. The requirements to amend subsidiary legislation are much less demanding than those required to alter sections of the Constitution. Suppose the specifics about currency issuance were only spelled out in subsidiary legislation such as the BoZ Act, nothing would stop a government with sinister aspirations from proposing an easily achievable amendment to remove this function from BoZ and give it to some other less competent entity. And these kind of things are very much possible given the current political context in the country.

Second, BoZ argues in their press statement that they are proposing the amendments to meet "best practice" and SADC objectives. This is the bit that is confusing. The Constitution is a document meant for the people of Zambia and should only contain the aspirations of the people of Zambia and no one else. Any "best practice" or regional norms should be reflected in our Constitution to the extent that they are in line with our aspirations and our own unique set of circumstances. The latter point is important because the current political climate teaches us every day that we need to make our Constitution ever more specific in its contents rather than make it vague with dilutions. This may not be the case with other countries in SADC who might have better political contexts where such vagueness may not pose existential threats. In any case, the same objective of satisfying "best practice" and SADC norms can still be met by spelling those out in subsidiary legislation and leaving the current Constitutional provisions intact.

In a nutshell, I don't find BoZ's justifications convincing and I am still of the opinion that this proposed amendment should be withdrawn and Article 213(2) should remain as is. Many countries have come asunder due to the careless handling of the printing press.

  

Electricity tariff hikes will harm the poor

Zambia is once again experiencing crippling power outages with load-shedding of at least 6 hours a day in many parts of the country. The last time load-shedding was this heavy and this widespread was 2015. ZESCO, the electricity utility, says this year's load-shedding, just as the one in 2015, is due to low water levels at the country's main hydro power plants. Zambia generates most of its electricity from hydro sources.

The Zambian government is considering importing up to 300MW of emergency power from South Africa as a coping mechanism. Given the strained state of the country's finances, the Minister of Energy has suggested that electricity tariffs could be increased by as much as 75% to pay for the imports.

Research that my colleagues and I have conducted suggests that such a tariff increase would have grave consequences for the poor.

In 2017, ZESCO was allowed to implement a tariff hike of 75%. The motivation was that local tariffs were not cost reflective and needed to be adjusted upwards. Such an upward adjustment would make investments in electricity generation attractive for private sector players (the jury's still out on whether this has actually happened).

In a research paper that Mashekwa Maboshe, Akabondo Kabechani and I published this year in the journal Energy Policy, we simulated the likely impact of the 2017 tariff hike on different income groups in Zambia (published version here; ungated version here).

We found that the poorest 10% of Zambian households (the poorest decile) were likely to experience a 9.4% reduction in real household expenditure as a result of the tariff hike. In comparison, the real household expenditure decline for the richest 10% (richest decile), was only going to be 3.2%. In other words, the poorest 10% were going to see their real household expenditure decline at 3 times the rate that it would decline for the richest 10%.

An increase in electricity tariffs has the same impact on our incomes as inflation. Inflation, which is the general increase in prices, reduces the number of goods we can really (or actually) buy with our incomes. In other words, inflation reduces our real incomes or real expenditures. Electricity tariff increases have the same effect. Firstly, the tariff increase immediately affects the price of electricity (the direct effect). Second, because electricity is a vital input into the production of other goods, the prices of other goods also increase (the indirect effect). The poor are hardest hit because electricity and goods produced with electricity occupy bigger shares of their household budgets than the well-off. 

Lastly, our simulations showed that an additional 100,000 people would become poor as a result of the tariff increase. This is because their real expenditures would fall below the poverty line as soon as electricity prices went up.

Our work shows that the burden of increased electricity tariffs in Zambia falls overwhelmingly on the poor. One hopes that Cabinet and the public will take this into consideration as they debate the next round of tariff increases. 

(This piece has benefited from discussions with my coauthor Mashekwa Maboshe)

Yes, debt payments are high and rising

This past Friday president Lungu delivered his annual address to the National Assembly. The address is meant to provide policy guidance for the year ahead as well as signalling the start of a new session of parliament. One of the most striking paragraphs from the president's address to the House was this one:

Our non-discretionary expenditure, which comprises personnel emoluments and debt stands at 50.1% and 40% respectively, giving a total of 90.1% of our annual budget. This leaves the discretionary expenditure amount to stand at 9.9% of our annual budget. This Mr. Speaker is an alarming ratio.

I initially thought that the president's speech writers had gotten their facts wrong around debt expenditure  -- surely our debt service payments weren't as high as the president was making them out to be?

I was compelled to factcheck this statement all the while hoping against hope that the president, or his speechwriters, were wrong.

The most sensible way of fact checking this is to compare the president's statement with the official position on debt expenditure as contained in the 2019 Budget Address. According to the budget, the total amount of money set aside for debt service payments for 2019 was K24billion (K9billion for domestic debt and K15billion for external debt). Total expenditure for the budget as a whole was K87billion. This gives a debt expenditure share of 28%.

So did the president exaggerate the budget's debt share by a whole 12 percentage points? Not exactly.

Recall that in August of this year, the new Minister of Finance Dr. Bwalya Ng'andu asked parliament to approve a supplementary budget of K9.8billion. Dr. Ng'andu wanted the extra money to mostly pay for unexpected increases in debt service payments as a result of a weaker Kwacha among other reasons. Adding the amount that Dr. Bwalya asked for brings the total debt expenditure for 2019 to K34billion, representing a budget share of 35%. A number that's very close to what the president said in the National Assembly. (I invite better informed readers to figure out what might account for the 5 percentage points difference between what the president said and what I have estimated here).

Have we always spent this much of our budget on servicing debt? Figure 1 below shows that debt service payments were only 9% of the budget in 2009 and began to grow at alarming rates starting about 2015. By 2019, the debt service share in the budget was 28% (35% if you add the supplementary expenditure). So the share of the national budget dedicated to debt has grown by over 200% from 2009 to 2019 and is now at least a third of the budget if not more!

Figure 1: Total Debt Service Share in the National Budget
Source: Various National Budgets

It's also interesting to figure out what the structure of debt payments has looked like over this period. In other words, what has been the share due to domestic debt payments versus external debt payments?

Figure 2 provides this split. From 2009, the external debt expenditure share in the budget was very small (at 2.4%) and less than the domestic share (at 6.4%). However, beginning in about 2013, the external debt share began to increase rapidly so that by 2019, the budget was spending 17% on servicing external debt and spending 10% on domestic debt service. And servicing external debt is a Herculean effort because you need to use precious, and hard to earn, foreign currency to do it.

Figure 2: Total, Domestic and External Debt Shares in National Budget
Source: Various National Budgets

Finally, it's worth comparing the budget's expenditure on debt payments versus expenditure on what most citizens would deem as desirable expenditures over this period.

Figure 3 provides this information. In 2009, the shares of the budget dedicated to education (17%) and health (12%) were both greater than the share allocated to total debt service (9%). Today, the opposite is true -- the total debt share in the budget far exceeds the shares allocated to education and health combined!

Figure 3: Total Debt Share, Education Share and Health Share in National Budget
Source: Various National Budgets

A closer inspection of Figure 3 suggests that the health share, for example, begins to decline around about the time that the total debt share begins to explode (the response in the education share is a little bit delayed). Any student of social sciences, however, knows that correlation is never proof of causation -- in other words, the declines in the health and education shares may have nothing to do with the increase in the total debt share even though they both happen at the same time.

We do, however, have some very good scholarly evidence that the relationship depicted in Figure 3 is likely to be causal especially in sub-Saharan Africa. In other words, the declines in the health and education shares in Figure 3 are very likely caused by increases in debt service payments. And this is likely to get worse as debt service payments continue to occupy ever bigger chunks of the national budget going forward.

A curtailment of the Central Bank's powers?

Like everyone else, I have been reading through the draft of Zambia's 2019 Constitution Amendment Bill.  The Bill, which is yet to be tabled in the National Assembly, proposes a host of amendments to the current constitution. Many of the proposed amendments have been condemned by different sections of Zambian society including, and surprisingly so, the ruling Patriotic Front. One of the things that's caught my attention in the Bill, and that hasn't been touched on yet, is what appears to be a curtailment of the Bank of Zambia's powers.

The memorandum that accompanies the Draft Amendment Bill from the Attorney General lists a series of objectives of the Bill. Objective (n) reads: "...to revise the functions of the Bank of Zambia". Article 71 of the Bill spells out the exact revision that is sought as follows:

71. Article 213 of the Constitution is amended by the deletion of clause (2) and the substitution therefor [sic] of the following: (2) The function of the Bank of Zambia is to formulate and implement monetary policy. 

However, clause (2) of Article 213 in the current Constitution (the clause to be replaced) reads [for completeness I am also reproducing clause (1)]:

213. (1) There is established the Bank of Zambia which shall be the central bank of the Republic. (2) The functions of the Bank of Zambia are to— (a) issue the currency of the Republic; (b) determine monetary policy; and (c) regulate banking and financial services, banks, financial and non-banking institutions, as prescribed.

So it seems that the Draft Amendment Bill seeks to strip away from the Central Bank the functions of issuing currency and the regulation of the financial sector. These two functions are pretty core to what central banks do across the world. And I can't see how another entity would logically takeover these functions, particularly the one to do with issuing currency. And the Draft Amendment Bill is silent on where functions (a) and (c) will now sit.

This is a strange amendment and one hopes that Members of Parliament will probe for details and justifications once the Bill is tabled in the National Assembly.

Audio: Panel on the AfCFTA at the Norwegian Council for Africa

Last week Wednesday, I was part of a panel discussion in Oslo organized by the Norwegian Council for Africa on the prospects of the African Continental Free Trade Area (AfCFTA). The AfCFTA came into force last Friday and is being billed as the biggest Free Trade Area in the history of the world. The overarching objective of the AfCFTA is to increase the level of intra-African trade which has been estimated to not be more than 20% of all Africa's trade. The United Nations Economic Commission for Africa reckons the AfCFTA could increase this number by 50%! Our panel engaged with various aspects of AfCFTA particularly the prospects for success. You can listen to the audio of the panel discussion below. My co-panelists were Andreas Moxness, professor of economics at the University of Oslo and Cathrine Jahnsen of the Norwegian-African Business Association. The moderator was Celina Bright-Taylor of the Norwegian Council for Africa. 

Audio: Sishuwa Sishuwa at the University of Cape Town

This past Wednesday, Dr. Sishuwa Sishuwa of the University of Zambia gave a lecture at the University of Cape Town's Graduate School of Business under our Distinguished Speakers Series. The title of his lecture was "Africa Day in the Age of Xenophobia: Another Perspective". The lecture was given in honour of Africa Freedom Day (Africa Day) which falls on 25th May. I moderated his talk and recorded it for posterity. You can listen to the recording below.

Audio: Goodwell Mateyo at the University of Cape Town

This past Tuesday, the Graduate School of Business at the University of Cape Town hosted Goodwell Mateyo as part of our Distinguished Speakers Series. Mr. Mateyo is currently president of the Zambia Chamber of Mines and General Counsel of Mopani Copper Mines in Zambia. The title of Mr. Mateyo's talk was "Challenges and Opportunities of Mining in Africa: The Case of Zambia". Mr. Mateyo spoke for about 25minutes and thereafter I engaged him in a conversation. This was followed up with a Q&A session with the audience. 

We were delighted to have in attendance Dr. Situmbeko Musokotwane and Mr. Bradford Machila, former cabinet ministers in the Zambian government. Dr. Musokotwane, who was a Minister of Finance, also made some remarks in the Q&A session. 

The audio recording of the event is below (unfortunately the recording started about 10mins into Mr. Mateyo's talk).