The Unusual Business

1
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
The Unusual Business
The Unusual Business
ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
2
Business Unusual Policy Implications for
Zambia of the Global Economic Crisis
EAZ CRISIS RESPONSE TEAM
MUNA HANTUBA
ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
3
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
CONTENTS

• EXECUTIVE SUMMARY
• INTRODUCTION
• OBJECTIVES
• THE MACROECONOMIC FRAMEWORK
• Outlook for growth and poverty external outlook
  fiscal prospects, public expenditure and
  management, decentralisation
• ECONOMIC SECTORS Mining
• Agriculture
• Tourism
• Manufacturing
• SMEs and Empowerment

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
4
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
CONTENTS

• INFRASTRUCTURE AND SERVICES
• Financial services
• Energy
• Transport
• Construction
• SOCIAL SECTORS
• Education
• Health and HIV/AIDS
• Social protection
• THE CHALLENGE OF IMPLEMENTATION
• CONCLUSIONS AND RECOMMENDATIONS

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
5
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
CRISIS RESPONSE OBJECTIVES

• Conduct a situation analysis of the Zambian
  economy,
• Generate specific short-term proposals for 2009
  Budget
• Generate an agenda of topics for implementation
  within 6 months
• Share information and receive feedback

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
6
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
MACRO ECONOMY - PAST PERFORMANCE

• GDP growth average 5 in recent years
• Employment marginally increased
• Population continues to increase over 3 a year
• Living standards not improved
• Per capita income still low compared to region
• Inflation managed to reach single digits but now
  over 14
• Real interest rates up

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
7
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
MACRO ECONOMY - 2009 PROSPECTS

• Import bill likely to increase
• Forex reserves expected to come down
• GDP growth targeted at 5
• Kwacha weak Zkw5,000
• Reserve requirement kept up
• Base rates not likely to decline significantly
• Inflation target to 12, maybe difficult to
  achieve

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
8
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
ECONOMIC REVIEW

• Aggregate measure of production employment weak
• Rising political and economic risk index
• Weak global demand for base metals
• Mining manufacturing output dampened
• A number of mining investments aborted
• Fuel prices generally low but not enough
• Maize price to increase (poor harvest)

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
9
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
Macro Economic Framework

• IMPACT ON ZAMBIA OF
• Export value about half of 2008
• Government revenue about K1 trillion lower than
  2008
• GDP growth down to 5 (MTEF), 3.7 (EIU)
• Redundancies in mining and related industries.
• Ministry of Labour needs to quantify and prepare.
  

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
10
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
THE MACROECONOMIC FRAMEWORK

• Impact on Zambia of
• Lower mineral export prices
• Reduced financing for direct investment, as well
  as the appetite for risk
• On the plus side, lower oil prices and
• Zambia may benefit from facilities being
  developed to assist low-income countries manage
  the crisis

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
11
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
Macro Economic Framework

• External sector policy
• Exchange rate volatility has damaged NTEs.
• Depreciated exchange rate will only help
  diversification if exporters expect it to be
  sustained. Therefore
• Maintain a market-determined exchange rate, but
• Set up a rainy day fund, so as to offset Dutch
  Disease impacts of exchange rate appreciation
• Re-examine the liberal capital account regime.
  Risk of a return of short-term portfolio inflows
  during beyond 09 relatively low, a future spike
  in the copper price and high local interest rates
  could again provoke an appreciation of the
  Kwacha.

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
12
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
Macro Economic Framework

• Fiscal policy
• Create fiscal space by reducing spending on
  general public services (43 of budget) and
  personal emoluments (nearly 9 of GDP)
  austerity
• Keep deficit and domestic borrowing low to avoid
  upward pressure on interest rates and crowding
  out of private sector
• Raise PAYE threshold to stimulate spending and
  compensate for inflation
• Seek donor assistance to fill remaining gap

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
13
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
Macro Economic Framework

• Public expenditure management short term
• Tough austerity starting at head of state level
  e.g. reduce entourage. Budget savings not large,
  but important to send a signal
• Control vehicle use
• Reform vehicle purchase protocol for civil
  servants MPs
• Reduce number of ministers and deputy ministers
• Zero tolerance for corruption

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
14
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
Macro Economic Framework

• Public expenditure management medium term
• Accelerate PEMFA reforms, notably IFMIS
• Strengthen treasury management
• Institutionalise annual public expenditure review
• Pass a Budget Act to ensure effective
  parliamentary oversight regular reporting,
  external borrowing approval

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
15
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
Macro Economic Framework

• Decentralization
• Essential to improving service delivery and
  accountability, but only 3 of LA revenue comes
  from central government. Only 8 spent on
  service delivery
• Set performance benchmarks for LAs
• Introduce revenue sharing
• Reform LA revenue sources, but reduce incentive
  to introduce nuisance taxes

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
16
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
SECTOR REVIEW
SECTOR REVIEW
ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
17
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
AGRICULTURE

• Major prospect for diversification and poverty
  reduction
• Review and reform FSP
• Zero-rate VAT on agricultural products to the
  extent possible
• Prioritise livestock development and disease
  management
• Encourage early irrigated maize
• Accelerate implementation of farm blocks
• Improve extension and research for small farmers
• Allocate 10 of the budget to agriculture
• Mobilise the Irrigation Fund under CEEC

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
18
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
TOURISM

• Market likely to suffer from recession in US and
  Europe, cutback in mining exploration and local
  business tourism
• Reduce cost of Jet A1 fuel (mainly taxes)
• Address issues raised by airlines
• Reform licensing
• Infrastructure improvement

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
19
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
MANUFACTURING

• Indications that retail sales are falling
• Examine tax and duty reductions to reduce bread
  prices, encourage local edible oil production and
  stimulate Zambian commercial transport
• Expedite report and recommendations of Business
  Licensing Reform Committee to reverse growth of
  bureaucracy and red tape
• Revisit Industrial Minerals Act to allow wide
  participation
• 10 detailed recommendations are in the paper

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
20
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
MINING

• Restore investor confidence
• Ensure enabling Regulatory tax regime to
• encourages new investment take due account of
  the special position of high-cost mines producers
• Firm position against re-nationalization, but be
  prepared to increase GRZs minority shareholding
  or temporary capital injections, or to hold
  assets while a buyer is sought
• Review the licensing system to expedite
  consideration of applications
• Aggressively address the issues that make fuel
  and infrastructure costs high.
• High potential for value adding in gemstones

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
21
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
SMEs EMPOWERMENT

• Crucial sector for job creation and Zambian
  advancement
• Address financing constraints through banks, CEEC
  and DBZ. Consider equity fund
• Help develop bankable projects from large number
  of proposals in district plans
• Technical, entrepreneurial and skill training

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
22
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
INFRASTRUCTURE SERVICES

• Financial services
• Performance has improved, but narrow base and
  high cost
• Sources of external finance likely to become
  limited
• Risk of high defaults and impact on loan books
• Risk of higher cost of finance
• Reduced portfolio and direct investment flows
• Exchange market volatility

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
23
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
INFRASTRUCTURE SERVICES

• Financial services
• Mobilise resources from institutional funds
• Encourage SME lending
• Introduce options for hedging in foreign exchange
  market
• Pursue sovereign credit rating

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
24
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
INFRASTRUCTURE SERVICES

• Energy- Fuel
• Consider a feedstock procurement agency
• Keep economic viability of Indeni and Tazama
  under review. Consider options for more
  competition in supply
• Biofuels
• Energy ministry about to finalise sector strategy

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
25
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
INFRASTRUCTURE SERVICES

• Energy- electricity
• Maintain effort to finance Kafue Lower and
  Maamba, despite external finance difficulties
• Review options for independent operators
• Promote rural electrification and alternative
  sources

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
26
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
INFRASTRUCTURE SERVICES

• Transport communications
• Scale up road rehabilitation and maintenance,
  since financing is available
• Re-concession railway system
• Expedite Mchinji-Chipata rail link
• Upgrade airports
• Encourage Njanji commuter rail systems
• Accelerate fibre optic ICT infrastructure

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
27
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
INFRASTRUCTURE SERVICES

• Construction
• Fastest-growing sector in recent years,
• Major employer
• Encourage labour-intensive construction
• Formalize construction industry
• Lower interest rates
• Re-introduce advance payment, price escalation.
  Introduce performance bonds to reduce
  construction prices
• Capacity building and anti-corruption measures

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
28
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
SOCIAL SECTORS

• EDUCATION
• Stabilise financing at UNZA
• Strengthen and expand higher education building
  on private initiatives
• Shift emphasis towards science and engineering
• Scale up technical and vocational training and
  link more closely to labour market

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
29
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
SOCIAL SECTORS

• HEALTH HIV/AID
• Total health spending has doubled in last 6
  years, especially HIV, TB and malaria
• But shortfall to sustain ART scale-up and address
  human resource crisis
• Short-term measures
• Improve cost-effectiveness of procurement,
  implementation and asset management
• Ring-fence ART/TB programmes
• Advocate for external resource mobilisation
• Improving diagnostic facilities to halt treatment
  abroad

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
30
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
SOCIAL SECTORS

• HEALTH HIV/AID medium term measures
• Introduce health insurance
• Set up HIV fund
• Public/private partnerships to support ongoing
  private expansion
• Complete basic health care package
• Address implementation challenges multiple
  donors and political consensus-building

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
31
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
SOCIAL SECTORS

• SOCIAL PROTECTION
• Growing recognition of role and importance in
  poverty reduction
• Extend targeted social transfer programmes
• Review and expand food security pack
• Increase allocations for school feeding and
  bursaries
• Develop capacity for proactive labour market
  policies,concentrated on areas, especially
  Copperbelt, where formal unemployment is likely

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
32
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
OVERALL PROSPECTS DIM

• Fundamentals weak
• Lack of ingenuity
• Weak industrial infrastructure
• Feeble aggregate demand
• Undeveloped financial capital market
• Inadequate social protection
• RESULT
• Lack of fortification

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
33
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
THE CHALLENGES OF IMPLEMENTATION

• Strengthen Accountant General and Auditor General
  for better accountability
• Review and accelerate PSRP, especially pay reform
• Strengthen implementation monitoring and
  evaluation, starting at head of state and/or
  Cabinet level
• Comprehensive anti-corruption strategy

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
34
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
CONCLUSIONS RECOMMENDATIONS

• Business Unusual
• reprioritise to create and preserve jobs
• maintain and improve services
• re-commit to private sector led, public sector
  supported growth
• food security
• Equitable sharing of burden

ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop
35
Business Unusual Policy Implications for Zambia
of the Global Economic Crisis
THANK YOU
THANK YOU
ECONOMICS ASSOCIATION OF ZAMBIA
Economic Crisis W/shop