Weekly Shots: Afghanistan, Zambia, Eskom, Tax, Abadali EEIP, IMF SDR
The Taliban Take Over And What It Means For The Afghan Economy
The Afghan economy has remained fragile, with its security spending at 29% of its GDP, compared to just 3% in other low-income countries. The country’s economy is shaped by aid dependence, which contributed almost 49% and 22% of its gross national income in 2009 and 2019 respectively.
Employment is concentrated in low-productivity agriculture, which is an income source for up to 60% of Afghan households. The nation was set to receive over US$370m on the 23rd of August 2021 as part of IMF’s response to the global economic crisis but this has since been suspended together with its access to the IMF's reserves in Special Drawing Rights (SDR) assets, due to political uncertainty caused by the recent Taliban take over, according to an IMF spokesperson.
The Afghan afghani has also depreciated, hitting a record low heralded by a 4.6% decline on Tuesday due to the political upheaval, the departure of the acting central bank governor as well as Washington’s decision to suspend shipment of physical US currency, reducing investor confidence. Western Union has also suspended money transfer services to Afghanistan "until further notice".
There is however potential for growth in the Afghan economy which is rich in natural resources with lithium having high growth prospects due to its increasing application in the motor industry and the green economy pushing for a transition to zero-carbon emitting modes of transport. Political stability and zero tolerance to corruption is however needed to boost foreign business investment.
The Hichilema Euphoria
Hakainde Hichilema’s victory in the Zambia August 12 presidential vote has sparked confidence in the Zambian economy with Zambia’s kwacha appreciating 7.8% this week making it per Bloomberg the best performance out of more than 140 currencies and on track for the strongest close since May 2020. Zambia's sovereign dollar bonds also jumped nearly 2 cents on Monday.
Hichilema is tasked with the duty of reviving the slumping economy as the price of the country’s main export, copper, of which it is Africa’s second-largest producer, fell amid the crippling impact of its debts. The Southern African country achieved middle-income status in 2011 having had a GDP growth rate of 6.8% between 2000 and 2014. However, the GDP growth rate slowed to 3.1% per annum from 2015 to 2019 due to declines in agricultural output and hydroelectric power generation due to insufficient rains, and insufficient policy adjustment to these exogenous shocks (World Bank, 2021).
Zambia was also Africa's first pandemic-era sovereign default in November 2020 having failed to honour the US$42.5 million Eurobond repayment. The president-elect has other challenges to battle with which include high levels of debt. The debt-to-GDP ratio sitting at over 100%. Per S&P Global estimates, Zambia spends 30% - 40% of its revenues on interest payments on its debt. Hichilema is also faced with the challenge of dealing with a high unemployment rate which currently sits at 15%.
The president-elect said “once we restore the rule of law, you will see more investments. You will see more economic activity. We will start from there." It has been said that Hichilema has room to manoeuvre due to favourable copper prices this year driven by the boom in electric cars. Copper producers are also planning to embark on expansion projects worth US$2 billion if the industry can agree on royalties with the new administration. The future of the Zambian economy will depend on the economic direction, monetary policy and fiscal policy Hichilema’s government will pursue.
Eskom- The Unbecoming.
On Thursday 19 August 2021 the national power producer Eskom indicated possible load shedding due to capacity constraints following the loss of four generating units. This is a tune that South Africans have become accustomed to. However, this occurs in a context where consumers are paying over 15% higher for electricity than they did at the beginning of 2021.
In April 2021 the National Energy Regulator of South Africa (NERSA) approved a 15.06% price hike for electricity. At a glance, it may appear that Eskom is a natural monopoly, and if it ever was, it is now unbecoming.
A natural monopoly occurs in a particular market if a single firm can serve that market at a lower cost than any combination of two or more firms. In essence, natural monopolies exist because of economies of scale. In May 2001 Eskom was named the Financial Times Global Power Company of the Year at the global energy awards ceremony in New York. According to former Eskom Executive “The power producer had the lowest electricity prices in the world and excellent technical performance when benchmarked against the rest of the world.”
Due to the failure to build excess capacity, Eskom has lost economies of scale over the years, resulting in large scale inefficiency and increasing operational costs, which have “risen by up to 30% since 2015”, the former Executive indicated. While the power producer retains monopoly power in electricity production- it is unbecoming. It is losing its status as a natural monopoly as it continues to lose economies of scale. Is there any hope in the long run for the power producer to regain its former glory? As Independent Power Producers enter the energy market what does the future for Eskom look like?
Can taxpayers afford to go BIG?
The Covid-19 social relief of distress grant has brought back into sharp focus the need and possibility of having a permanent Basic Income Grant (BIG) Programme. This week, the Department of Social Development proposed a 10% income tax hike to fund the programme.
The programme is in line with the government’s objective to universalize the country’s social grant system. The current system targets specific categories in the population such as the elderly, children and people living with disabilities, to the exclusion of the unemployed working-age individuals. Including the latter will enable them to participate in the economy, thus not only will the BIG will help with reducing extreme poverty it will also play a role increase economic activity through increased participation.
Worker representatives such as the trade union Solidarity argue that although the BIG is well-intended, taxpayers do not the capacity to fund the programme. The argument is that as it stands, South Africans are already over-taxed with individuals contributing at least 18% of their income into the public purse, in addition to the fuel (15.2%), food (6.7%) and electricity (15.06%) price hikes experienced in the current fiscal year as published by Statssa.
At the very basic level, implementation of the BIG would increase aggregate demand in the short run. Over the medium to long run, the increase in aggregate demand may result in firms increasing production capacity, thereby creating jobs and reducing unemployment. Thus, it appears that ceteris paribus, there might be benefits to the BIG that would benefit the taxpayer in the long run. So then, should taxpayers go BIG?
New Funding For SMMEs In South Africa
The leading financial services firm, J.P. Morgan, is the first international investment bank in South Africa to launch a DTIC-approved Equity Equivalent Investment Programme (EEIP). The Department of Trade, Industry and Competition (the DTIC) and J.P. Morgan announced the programme this week called the Abadali EEIP which aims to deploy R300 million through the Abadali Fund, a black business growth fund, and R40 million through the Abadali Grant. This is expected to create more than 1000 permanent jobs and R2 billion worth of financing transactions over the eight-year period of the Abadali EEIP.
Small and medium-sized enterprises are an important driver for innovation, economic growth and employment creation but given such businesses do not usually meet the underwriting criteria of general commercial banking requirements, there is a funding gap such that most of these businesses do not take off. SMMEs have also been the most affected by the COVID-19 pandemic.
The Abadali EEIP will provide funding, business and mentorship support for such businesses mainly in the industrial and green economy sectors thereby strengthening economic output. Per the DTIC, the programme will provide short-term financing for businesses with limited track records and no financials. Medium- to long-term finance will be offered at significantly subsidised rates below the commercial rate to businesses with a track record of at least 12 months of trading. The terms and conditions of the loans are also tailored to suit early-stage businesses.
A Shot in the Arm for the Global Economy.
The International Monetary Fund (IMF) Board of Governors has approved an allocation of Special Drawing Rights (SDRs) amounting to US$650 Billion (R9 trillion), effective on August 23, 2021. This is in a quest to boost global liquidity and cushion member countries from the effects of the Covid-19 Pandemic.
The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries, giving them the potential to claim on the freely usable currencies of the IMF members.
The IMF currently has 190 member countries out of 195 countries in the world. Each member will receive an SDR allocation that is proportional to their existing quotas in the Fund. This will see an allocation of about 42% of the SDR go to emerging markets and other developing countries.
According to the IMF Managing Director Kristalina Georgieva- “This is the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis”.