Africa’s second-biggest copper producer, Zambia, told the International Monetary Fund (IMF) that it will cut subsidies amounting to about $1 billion as part of an economic recovery plan. The statement was issued by Zambia’s finance Minister Felix Mutati on Sunday. The Zambian government is currently in talks with the IMF for the approval of a $1.2 billion loan package.
Zambia’s kwacha has experienced a slump in 2016 due to a downward slide in copper prices, the country’s main export. Zambia’s currency has weakened about 26 percent against the dollar over the past 12 months, the fourth-worst performance in Africa, pushing the inflation rate to more than 20 percent. Power shortages, low copper prices, and low levels of rainfall have dampened the country’s economic growth which is estimated to decline to 3 percent in 2016 from 5 percent growth in 2015.
An IMF working paper reveals that global subsidy spending is estimated at $5.3 trillion, or 6% of global GDP. This is more than all government spending on health care. The biggest subsidies are in the poorest countries, where they can reach 18 percent of GDP. In Zambia, subsidies currently account for 60 percent of the government’s budget.
Zambia spends about 90 percent of its agricultural budget on subsidies. About 60 percent of Zambians live below poverty line. Zambia’s agriculture currently employs more than 70 percent of the labour force and provides the main source of livelihood for more than 80 percent of the population living in the rural parts of the country, while contributing 20 percent to the National Gross Domestic Product (GDP).
Subsidies have been proven to be ineffective as subsidized materials like fertilizers are regularly delayed and sometimes are delivered after the planting period. Corruption has been a major hindrance to the achievement of subsidy programs as the proposed beneficiaries sometimes don’t fully partake from the plans of the government.
Subsidy programs have created a neglect of other activities that could generate greater yield in the growth of the agricultural sector and in reducing poverty. Research shows that activities such as crop research, agronomic management extension programs including minimum soil tilling, irrigation and road infrastructure could generate greater growth in the agricultural sector.
Zambia’s proposed subsidy removal is argued to be of great benefit to the economy. Former Zambian Finance Minister Alexander Chikwanda said, “Fuel subsidies inflict a heavy burden on government budgets and add to wasteful consumption, which in turn, diverts much-needed resources from more pressing needs, such as health, education, and infrastructure development.”
A boost in the investments that would yield greater growth in Zambia should be the focus of the government. A subsidy reform by the Zambian government is laudable as the government needs to stop carrying the private sector on the back but rather guiding them to crawl and then walk. Attention should be placed on how to ensure the self-sustainability of its private sector.
Several countries are taking great strides in creating subsidy reforms. Countries like India, Egypt, Indonesia, Nigeria and Thailand have experienced recent reforms in their subsidy programs. As a result of the reforms, Indonesia has saved an estimated $15.6 billion which reflected an increase in their 2016 budget.
The mode by which the government would remove their subsidy should be conditioned. An abrupt removal of subsidies in Zambia without temporary support programs put in place could have an adverse effect on the populace. The government should assume a gradual cut in subsidy, which would lead to the temporary hardship of the citizens through a temporary hike in the price of food stuff and fuel prices amongst other commodities. On the long run, increased participation and competition in the private sector would lead to a more stabilized economy.