2. Internal Economic Concerns
2.1 The Current Economic Situation and its Impact on the Business Environment
The Zambian economy has undergone major structural changes since 1991. Particularly with the privatization of the copper mines in 2000, the private sector now dominates productive economic activity. With the decontrol of prices, liberalization of the exchange rates and interest rates, removal of controls on externalization of profits, the opening up of several sectors such as insurance and telecommunications to competition, drastic reductions in external tariffs and largely free trade, Zambia has one of the most open economies in Africa.
The GDP growth rate over the past twelve years has, on average, been low and fluctuating. However, for the first time in a long time, there has been positive growth registered over three consecutive years - 2.2%, 3.5% and 5.2% in 1999, 2000 and 2001 respectively. This has occurred despite persistently low world market prices for ZambiaвЂ™s primary products, such as copper, cobalt and agricultural exports. Civil society shares, however, the expert opinion of economists that the high population growth rate of 3.1% would require a sustained growth rate of 7% or more if the country is to make a serious dent in reducing poverty. Hence, while the recent trends are encouraging, much more needs to be done on the growth front.
Although there has been a significant improvement from the picture of ten years ago, macroeconomic instability persists with a telling effect on private investment growth. The rate of inflation of 18.7% in 2001 was still high. The GovernmentвЂ™s target to bring inflation down to 13% (which would still be high) in 2002 is now threatened by the drought-related shortage of maize meal that sparked an increase in prices at the beginning of the year. According to the Bank of Zambia report of June 7, 2002 fortnightly statistics, the inflation rate stood at 20.9 %, largely due to the shortage of maize and subsequent increase in maize prices.
Exchange rate volatility still remains a problem, with the exchange rate fluctuating widely between K4,000 and K4,500 to the dollar in the first half of 2002. Such volatility generates uncertainty which, combined with the induced tendency towards dollarization, in turn induces hedging in the market. This produces artificially high prices for goods and services, making life even more difficult for the average Zambian who is living on less than US $1 a day.
Both nominal and real interest rates rose in 2001, despite the reduction in inflation. The unacceptably high commercial bank interest rates of up to 55%, are largely induced by the high cost of government domestic borrowing through Treasury bills and Government Bonds, which were as high as 43% in 2001, as compared to an inflation rate of just under 19%. Commercial banksвЂ™ preference of these government securities has rendered private sector borrowing expensive and marginal. In order to reduce the stock of domestic debt and interest costs, GRZ has announced its intention to systematically scale down its borrowing, particularly through Treasury Bills and Bonds, over the medium-term.
Civil society is aware that in the last 2000 CG meeting, the cooperating partners made pledges but that to date, most of these pledges have not been fulfilled. This forced the Government to tap alternative funding in the securities market, which contributed to the high interest rate regime. Therefore, with this background in mind, civil society urges that pledges of assistance made then and those to be made in this 2002 CG meeting be redeemed on schedule in order to enable Government to meet its objectives.
The positive performance of non-traditional export earnings, which reached $300 million in 2001, has been overshadowed by the alarming external debt situation. ZambiaвЂ™s external debt stock has increased substantially from about $6.4 billion in 1991 to $7.3 billion dollars in 2001. The increase of about US $1 billion in debts was mainly due to non-receipt of the expected donor debt relief totalling over US $770 million, despite Zambia reaching Decision Point under the Enhanced HIPC Initiative in December 2000, when all creditors, particularly bilateral and multilateral creditors, were expected to immediately extend interim debt relief. Creditors that delivered interim debt relief included the International Monetary Fund (IMF), the World Bank, the African Development Bank, Canada, France and the United Kingdom. The HIPC interim debt relief delivered enabled Zambia to meet its external debt obligations. In spite of HIPC, ZambiaвЂ™s external debt service payments increased by 13.5% to $116.5 million in 2001, because of rescheduled debt agreements coming due.
The external sector environment has been less favourable than expected in 2001, with ZambiaвЂ™s terms of trade deteriorating by 3.8%. The current account deficit worsened to $743 million in 2001, mainly due to the increase in the value of merchandise imports, particularly in the mining sector, which outpaced the increase in the value of exports. The slowdown in the global economy, which was exacerbated by the September 11 tragedy in the USA, had a dampening effect on the growth of export earnings through the drop in the prices of primary commodities. The average realized prices of copper and cobalt fell by 6.1% and 31.3%. The weak prices of copper in the world market and other considerations have prompted the largest of the private investors who bought Zambia's Konkola Copper Mines (KCM), the Anglo American Corporation (AAC), to announce in January 2002 its intention to cease financing above commitment levels agreed in the privatization negotiations. GRZ, the donors, are working together to ensure that KCM, which owns one of the richest ore bodies in the world, does not cease production.
Civil society remains gravely concerned by the impact of the above economic developments on the prevailing business environment. The continuing scenario of high inflation, volatile exchange rates, and very high commercial bank interest rates simply does not provide for a sanguine business environment. It is not conducive to business planning and investment, and raises costs of production, making Zambian goods less competitive. This adverse macroeconomic scenario is compounded by the high costs of electricity and fuel that exercise a further upward push on prices, making it still more difficult for businesses to increase production and create more jobs and finally disadvantages the poor even further.
Civil society implores the Government to rationalize its expenditure in order to reduce deficits and inflation. Apart from countries in various degrees of civil strife, Zambia remains the only country in the region with double-digit inflation. Whereas civil society understands that Government needs to use T/bills and G/bonds instruments to raise money to finance some of its requirements, securing money from commercial banks at 43% interest, when the rate of inflation is 18.7%, does not make sense. The Bank of Zambia should develop a different modality of arriving at interest rates on Government securities to bring the rates closer to the inflation rate. Government should work closely with the private sector to arrive at energy tariffs for electricity and fuel that do not unduly constrain business. Civil society supports the GovernmentвЂ™s efforts to counter the trend towards dollarization through re-affirming the Kwacha. Government should, however, restrain from appeals to enforce regulations against indexing local prices in US-Dollars.
2.2 Budgetary Issues
The budget is an important instrument of policy, which, among other things, is used as a mechanism of resource allocation. Civil society is aware that in releasing funds to units, Government has not been adhering to the approved budget. The result is that some sectors receive bigger amounts while others receive less than their approved budgeted. This divergence between approved expenditures and actual disbursements alters the original priorities in the budget that were approved by Parliament.
Parliament and civil society do not adequately participate in the budget preparation and scrutiny of the proposed budget. The document is made public and published after the Minister of Finance and National Planning has presented it in Parliament, leaving room only for subsequent academic analysis. Checks and balances are just on paper since the serious time lag in the publication of the Auditor GeneralвЂ™s report makes it outdated and its relevance to the current situation questionable.
Civil society has also observed that the budget does not give priority to new investments. Capital expenditure has over the years been largely foreign financed. The budget also fails to address the issue of allocation for particular areas such as districts and constituencies because funds have always been channeled through ministries.
The major weakness is, however, the failure by the government to accommodate the views of civil society and the failure to make public the views of other stakeholders. With this, it is not possible to make comparisons as to whether these views were incorporated in the Budget or not. Therefore, civil society demands that:
Government has to make sure that the donors, who committed funding 39.6% of the total budget, fulfil their pledges.
- Civil society be given an opportunity to not only participate in the budget preparation, but also to scrutinize it before it is presented in Parliament.
- The Auditor GeneralвЂ™s report be published six months after each financial year as stated in the Constitution of the Republic of Zambia.
- The Auditor General be given constitutional powers to prosecute erring officers named in the audits.
- The Auditor GeneralвЂ™s Office be decentralized to establish a presence throughout the country.
2.3 Economic Diversification in Zambia
Economic diversification has been a recurrent theme since ZambiaвЂ™s independence. Despite this, diversification is as much an issue today as it was at independence. There are seven major themes of economic diversification that have been sought to be pursued over the decades with comparatively little achievement.
Today, with the looming crisis in the mining sector and especially in the Copperbelt, the issue of diversification has once again been brought to the fore. With the support of GRZ and cooperating partners, EAZ and the World Bank organized a workshop in June 2002 in Kitwe on вЂњDeepening Economic Diversification in ZambiaвЂќ. The workshop came at a time when the risks of excessive dependence on copper and cobalt mining were laid bare by the closure of Roan Consolidated Copper Mines (RAMCOZ) in Luanshya and the impending withdrawal of Anglo-American Corporation (AAC) from the ZambiaвЂ™s largest copper mine, Konkola Copper Mines (KCM) as noted earlier. The economic and social ramifications of the collapse of the copper mining sector are too ghastly to contemplate, hence the recent urgency being shown in economic diversification to reduce dependency on copper/cobalt mining, which account for over 90% of Zambia foreign exchange earnings and for 6-8% of its GDP.
- Sector diversification: This entails reducing the dominance of the copper mining sector;
- Export diversification: This implies promotion of a variety of non-traditional exports;
- Resource use diversification: This requires local raw materials in the production of goods;
- Technological diversification: This implies movement from capital-intensive production technologies to appropriate labour-intensive technologies;
- Scale diversification: This means reducing the dominance of large-scale production by enhancing the role of medium- and small-scale production activity;
- Structural diversification: This entails strengthening the production structure by promoting activities with high degrees of internal backward and forward linkages; and
- Regional diversification: This requires tapping the comparative advantages of the different regions in the country with the aim of uplifting the living standards of all the inhabitants and bringing about balanced regional growth and development. (Seshamani, 1991: Zambia After Copper: Prospects for Economic Diversification).
Amongst other things, the workshop recommended the following:
- Establishment of a Copperbelt Diversification Authority;
- Focus on value adding production of goods and services;
- Concentration on sectors with high-growth potential in the short and medium term;
- Optimizing ZambiaвЂ™s participation in and benefits from the global market and regional/international trade agreements;
- Appointing a task force to spearhead detailed studies on feasibility and prioritization of development sectors/sub-sectors in the Copperbelt;
- A cluster approach to sector/sub-sector development;
- Decentralized implementation of economic diversification;
- Concurrent harmonized selective implementation of export processing zones (EPZs) and tax free zones, based on a model that does not comparatively disadvantage local suppliers of the EPZ.
Civil society is alarmed by the disparity in living conditions between the line of rail and the rest of the country. The continuing rural-urban drift reflects this reality. The current uncertainty surrounding the copper mining sector reminds us of ZambiaвЂ™s failure to meaningfully utilize the vast resources to be found in each province of the country. Economic diversification by leveraging opportunities throughout the country is central to successfully empowering and motivating people in the provinces to restore their economic dignity. Enabling communities to plan, manage and invest in their resources in a democratic manner makes decentralization both a political and economic imperative.
Civil society therefore urges Government to move pragmatically forward with decentralization. However, Civil society considers that there has not been sufficient stakeholder consultation on the most appropriate options for implementing decentralization in the Zambian context. The decentralization policy believed to be currently before Cabinet should be the starting point for national dialogue to ensure popular participation, awareness and endorsement.