World Bank cautions on presidential elections

World Bank cautions on presidential elections
By Chiwoyu Sinyangwe and Fridah Zinyama
Tuesday September 09, 2008 [04:00]

GOVERNMENT should adhere strictly to the budget deficit target and stick to prudent macroeconomic policy to ensure that the forthcoming presidential election does not disturb the country's sustained economic growth, the World Bank has cautioned. And international economic consultant Bob Liebenthal has supported the government and Bank of Zambia's move to restrain demand pressure and keep the deficit down as a way of arresting the rising inflationary pressures.

Commenting on the announcement by finance minister Ng'andu Magande that the government hopes to cut its fiscal deficit to below 2.0 per cent of GDP this year and would take measures to fight a worrying current inflation rate of 13.2 per cent, World Bank country manager for Zambia Dr Kapil Kapoor however said the problem of controlling inflation was not unique to Zambia only.

Dr Kapoor said there was need for the government to remain alert as election-related expenditures could sometimes result in compromising fiscal targets.

"The increase in the international price of petroleum, accompanied by the increase in food prices across the globe has been a double whammy, which has resulted in many countries facing the same challenge that Zambia is presently facing - which is how to bring inflation down to projected target levels. Fortunately, there has been a significant decrease in the price of petroleum in recent months and oil is presently trading at under US $110 per barrel, which is a five-month low," Dr Kapoor.

"This is a pretty dramatic decline of about US$38 per barrel or a 26 per cent decline from the US $147 per barrel high in July this year. It still remains to be seen if, as some analysts are now beginning to predict, oil prices will fall below US$100 per barrel. Experience from other parts of the world demonstrates that countries need to be particularly watchful during periods when elections are scheduled as election related expenditures can sometimes result in fiscal targets being compromised."

Dr Kapoor, who observed that it was unlikely that the country was going to compromise on its fiscal target, reiterated that it was important that government finance the elections in line with the set economic expenditure framework.

He also said there was need to ensure that the financing for fiscal deficit does not fuel inflationary pressures or result in increasing the interest rates in the country.

"It is important for the policy makers to be vigilant and to ensure that the expenditures incurred are in line with the budget and consistent with the targets in the medium term expenditure framework," Dr Kapoor said. "As a general rule, most fiscal economists are not in favour of supplementary budgets as these can undermine fiscal discipline.

In fact, there has been a trend among some countries to pass balanced budget laws to ensure that they will spend within their means and will not have to finance fiscal deficits by printing more money, which can be very inflationary, or by borrowing from the domestic market, which can result in high rates of interest and therefore increases the costs of doing business for the private sector and consumers.

Therefore, having a budget deficit target and sticking to it makes for prudent macroeconomic policy. Zambia has done well on this score in recent years and I hope that trend continues as it is vital for sustained economic growth."

And Liebenthal, who supported government's move to cut down the fiscal deficit to 2.0 per cent of the GDP, said it would be hard to keep inflation below 10 per cent this year.

Liebenthal also urged government to hold back the recently-passed salary and allowance increases for ministers saying the move would help to contain the costs and to discourage a huge wage next year.

"It will be hard to keep inflation below 10 to 12 per cent this year, but government and the BoZ are right to restrain demand pressure and keep the deficit down. They should withhold the recently-passed salary and allowance increases for ministers both to contain the costs to the budget and to send a signal that they don't want to unleash a huge wage round in 2009," Liebenthal
said.

He also said although he did not know where the country stood in as far as GDP growth rate was concerned, he was optimistic that seven per cent might still be possible.

On the fears that the forthcoming Presidential elections would disrupt targeted fiscal deficit, Liebenthal said: "It's not only election expenses, it's the Fertiliser Support Programme, the additional support to Zesco and the additional salary costs above those provided in the budget.

But against that, there may be some reductions and additional revenue especially from the mining taxes, though these are supposed to be held separately from the rest of revenue. It's hard to know precisely until the ministry comes up with specific numbers. The direct and indirect election costs are unavoidable, but what government must avoid is extra spending for campaigning."

Liebenthal said there was need for government to be cautious on spending and implement proper fiscal management to prepare for anticipated downfall of metal prices on the international market.

Liebenthal said the continued economic recession in the United States and United Kingdom and some Eurozone might negatively impact on the demand for copper as China, India and the rest of Asia seem to be the only regions fuelling the demand for metals.

However, he said the situation did not call for fright.

"The international economic scene is looking distinctly more gloomy. The US, UK and most of the Eurozone seem to be in, or heading to, a deeper and longer recession than appeared likely a few months ago. Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF) and others monitoring the global economy are revising their forecasts down," said Liebenthal.

"China, India and the rest of Asia seem to be the only engines of growth. It's not something to panic about, but the chances of less favourable conditions for Zambia next year - especially lower mineral prices - must have increased. This strengthens the need for caution on spending and fiscal management generally right now."

And a financial expert who elected to remain anonymous predicted that it will be difficult to achieve the targeted seven per cent GDP target for this year because the economic slow down the country has witnessed in the last few weeks of late president

Mwanawasa's death is likely to go on until after the November presidential election.

The expert suggested that the government should use some of the money from the newly introduced mining taxes to fund the forth-coming election.

The analyst explained that since the expected revenue from the mining taxes were not budgeted for in this year's budget; it would be more prudent for the country to use the money for the activity that was not equally planned for.

He also observed that the K240 billion that was expected to be spent on the same election was "too much" not to cause a disturbance in the country's fiscal targets.

"Well, I understand the Minister of Finance has some contingency funds somewhere, part of which could be used for the elections but on the other hand the money from the taxes could be used to finance the elections...of course this would be at the expense of other activities like building roads and schools but since this Presidential election was not planned for, it is more appropriate to use the money that was not budgeted for in the national budget," the analyst said.

"Those guys at the Central Bank are very intelligent and they know how to deal with inflation... they are the best experts around, but for them
to reduce the annual inflation rate from 13.2 to seven per cent before the end of the year, that is interesting.

"We have been having problems with electricity and now the challenges of petroleum, Zambia has the highest cost of fuel in Africa...I just can't see that being achieved. And most importantly, the economy has slowed down within the last two-three months following the uncertainty surrounding President Mwanawasa's illness leading to his death. So I see that trend (slow economic growth) going on until after the November elections. I just can't see Zambia achieving seven per cent growth rate."

Meanwhile, economic consultant Professor Oliver Saasa observed that the current bottlenecks the country is facing in the energy sector posse the biggest challenge to the attainment of the targeted seven per cent annual GDP growth rate.

Prof Saasa observed that the electricity deficit the country was experiencing would further affect production in the country.

"Whilst everything else is being put in place to reduce inflation, the energy crisis that Zambia is experiencing is going to have a negative impact on government's efforts to increase productivity," he explained.

Prof Saasa said although fuel prices were going down on the international market, it would not affect Zambia.

"The current pricing system does not take into account what is happening on the international market, Prof Saasa regretted.

He also said the expected donor inflows for the forthcoming election would further help to strengthen the local currency against the US dollar.

Prof Saasa said the excess dollars that will come into the economy from the donor community for the election will help to stabilise liquidity levels in the country.

Magande recently announced that the country hopes to cut its fiscal deficit to below 2.0 per cent of GDP this year and will take measures to fight a worrying current inflation rate of 13.2 per cent.

Bank of Zambia intended to mop up excess liquidity in circulation in a bid to rein in inflation. The latest target for the fiscal shortfall is lower than the 3.2 per cent deficit

figure forecast in the 2008 budget but higher than the 0.95 per cent fiscal deficit in 2007.

Magande said the budget has planned supplementary expenditure to finance a presidential vote expected in November following the death of president Mwanawasa.