Zambia: IMF talks must not sacrifice fuel subsidies, manufacturing chief says

By David Whitehouse
Posted on Monday, 13 June 2022 07:00

International Monetary Fund logo is seen in Washington
REUTERS/Yuri Gripas

Bailout discussions between the Zambian government and the International Monetary Fund (IMF) must not lead to the sacrifice of fuel subsidies, Florence Muleya, CEO of the Zambia Association of Manufacturers (ZAM), tells The Africa Report.

The subsidies, in the form of tax breaks, are critical for the country’s manufacturing capability and play a key part in determining the overall cost of living, Muleya says. “Fuel is the basis of production” and higher fuel costs will drag up the prices of everything that is manufactured.

Zambia defaulted on its debt in 2020, as it struggled under a burden worth 120% of GDP. Finance minister Situmbeko Musokotwane said in December at a joint press briefing with the IMF that the government had decided to reduce spending on fuel and electricity subsidies. In May, Musokotwane said that he expected an IMF programme to be concluded by the end of June and that an orderly debt restructuring process will be hard to achieve without one.

The tax breaks that reduce power costs are still in place, but Muleya fears that scrapping or reducing them is still on the agenda. That risks being a false economy as manufacturers already grapple with erratic power supply, and there would also be a heavy social impact, she argues. The IMF and the government “seem to forget that the poor depend on public transport”, and bus fares have already been rising due to higher fuel costs. “The poor will be hurt more” if fuel prices rise further, says Muleya.

  • “We need to look at the root causes of high costs” for manufacturers, and not the symptoms such as fuel subsidies, Muleya says.
  • Chief among them is the weakness of the kwacha, which feeds into inflation with a time lag of three to six months – a point that the IMF and the government seem to forget, she argues.

Currency weakness

The fact that inflation has recently slowed is because the kwacha appreciated from August to November 2021. But kwacha depreciation since the start of this year means Muleya is pessimistic on the outlook for inflation in coming months. “There may now be an upward trajectory.”

She points to the requirement that export earnings have to be deposited with the central bank as a structural factor behind the kwacha’s weakness. Commercial banks have to request dollars from the central bank when they need them, and even a request for $10,000 may take two or three days.

The lack of spot availability fosters speculation, and allowing foreign exchange earnings to circulate freely in commercial banks would be a short-term way to help stabilise the currency, Muleya says.

The long-term way to achieve currency stability, Muleya says, is to build up the country’s export base. Reliance on imports creates a constant need for foreign exchange, which needs to be reduced. A refinancing of the Indeni petroleum refinery is “essential” to reduce the import bill, she says.

The refinery’s operations have been suspended since December 2020 for financial and technical reasons. Energy minister Peter Kapala said in March that the refinery will no longer refine crude petroleum and that products will be imported.

There is also a pressing need to slash red tape. The plethora of licenses that manufacturers need to apply for hinders their growth, Muleya says. Currently, a manufacturer needs 46 statutory licenses to be able to operate, and companies need to deal with 19 different agencies to get them, Muleya says.

  • The government of President Hakainde Hichilema, which was elected in August 2021, has made progress, for example in setting up a public-private dialogue forum to discuss improving the licensing system, Muleya says.
  • But she sees many challenges that still need to be tackled. Interest rates need to be brought down to make borrowing more affordable.
  • Increased exports would make that easier without weakening the currency, she argues.
  • The government and the IMF “need to be aware of the costs of doing business”, and the number-one priority should be to get them down, she concludes.

The bottom line

The IMF risks compounding the problems it aims to solve if it insists on dropping fuel subsidies as a bailout condition, says Florence Muleya, CEO of the Zambia Association of Manufacturers

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