By Clive M. Siachiyako
All over the 
world today, countries are grappling with the current economic crisis and how to deal with it. Recently, the G-20 leaders met in London to share ideas on how to respond to the impact of a potential contraction in the global economy of 1.7 percent and a 6 percent drop in the volume of global trade. While it is true that the crisis didn’t originate in Africa, it is certain that African leaders should play a part in planning how to deal with it. In September 2008, the world economy officially entered a major economic down turn . The down turn was caused by a severe shock in financial markets of developed countries particularly the United State of America and Europe. The down turn in economic productivity that began in January 2008 persisted and was later declared a crisis towards the end of 2008. The economic crisis has ever since culminated into an ongoing slowdown in production indicators in major sectors of industrialised economies such as UK, USA, Japan, Germany, Australia and other Asian countries. This has led to a sudden reduction in demand for consumption and industrial commodities at both national and international markets. Decreases in demand for goods and services affected supply. Logically, the ripple effects of this constriction have permeated almost all economies of the world with varied intensity depending on the level of integration of domestic sectors in the international system.
world today, countries are grappling with the current economic crisis and how to deal with it. Recently, the G-20 leaders met in London to share ideas on how to respond to the impact of a potential contraction in the global economy of 1.7 percent and a 6 percent drop in the volume of global trade. While it is true that the crisis didn’t originate in Africa, it is certain that African leaders should play a part in planning how to deal with it. In September 2008, the world economy officially entered a major economic down turn . The down turn was caused by a severe shock in financial markets of developed countries particularly the United State of America and Europe. The down turn in economic productivity that began in January 2008 persisted and was later declared a crisis towards the end of 2008. The economic crisis has ever since culminated into an ongoing slowdown in production indicators in major sectors of industrialised economies such as UK, USA, Japan, Germany, Australia and other Asian countries. This has led to a sudden reduction in demand for consumption and industrial commodities at both national and international markets. Decreases in demand for goods and services affected supply. Logically, the ripple effects of this constriction have permeated almost all economies of the world with varied intensity depending on the level of integration of domestic sectors in the international system. According to the World Bank economic growth projections, developed countries in 2009 will grow by only 0.3 percent from 2.7 percent in 2007, while developing countries’ growth is expected to tumble to 4.5 percent in 2009 from 7.9 percent in 2007. Unlike in the previous economic recessions when low income countries (LICs) were not integrated in the world economy, they are now to a great extent more integrated through trade, foreign direct investment and remittances. With heavy dependency on one or two commodity exports, LICs are destined to face harder times as the economic depression continues.
Causes of the down turn
There are a lot of views to what actually precipitated the current crisis. Depending on the presumed cause of the crisis, the economic situation has emerged with different terms that are sometimes confusing especially to the lay person. In order to enhance an evaluation of the causes of the crisis, it is important to analyse in detail how possible subprime lending could have led to the crisis.
Subprime lending – International thoughts have come to hold that among others, the roots of the crisis can be traced directly to subprime lending by Fannie Mae and Freddie Mac, which are government sponsored entities to expand mortgage loans to low and mid level income borrowers. This was done to help boost a stagnated home ownership proportion that had hovered around 65 percent for many years.
The result was a push by the administration for greater investment by financial institutions into riskier loans. The inability of homeowners to make their mortgage payments due to primarily to adjusted rate mortgage resetting, borrowers overextending, speculation and overbuilding during the boom period eventually triggered the crisis. In addition, a 2000 US Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that US$467 billion of mortgage credit was poured out to low and mid level income borrowers. Two important catalysts of the subprime crisis were the influx of monies from the private sector and banks entering into the mortgage bond market and the predatory lending practices of mortgage brokers, especially the adjusted rate mortgage. Ultimately, the hazard lay at the core of many of the causes.
Deregulation – This again is pointing to weak financial systems in the USA. In 1992, Congress weakened regulation of Fannie Mae and Freddie Mac, the nation’s biggest underwriter of home mortgages, with the goal of making available more money for the issuance of home loans. The pair was allowed to keep a much smaller share of their funds on hand than other financial institutions in order to buy mortgage loans. Where banks that held US$100 could spend US$90 buying mortgage loans, Fannie Mae and Freddie Mac could spend US$97.50. Finally, Congress ordered that the companies be required to keep more capital as a cushion against losses if they invested in riskier securities. But the rule was never set and was only put in place mine years later. That was the housing bubble in the making.
Credit Creation – As a result of the following initiatives, the central bank of the United States artificially kept
interest rates very low for a long period of time. This fiscal measure resulted in ill-investment and overconsumption of investors and consumers which prompted the development of the now famous “housing bubble” that ultimately burst, precipitating the financial crisis. This crisis together with much needed financial control and cutbacks by consumer spending, businesses and banks led to the recession.Over Leveraging – Another factor that unquestionably amplified the magnitude of the economic downturn was widespread miscalculation by industrialised countries’ banks and investors of the level of risk inherent in the unregulated collateralised debt obligation.
Impact of the downturn on LICs
The impact of the global economic crisis is being transmitted to low-income countries (LICs) through at least four different channels: rapid decline in commodity prices; reduced investment; decline in remittances – exacerbated by reverse migration and unemployment; and the specter of a decline in aid. While developed countries have experienced and are still experiencing acute contractions, households in low-income countries have become much more vulnerable and at higher risk of experiencing serious consequences of the economic downturn in the short and medium term. The crisis in low-income countries has signaled the end of the 8-year commodity boom that began around the year 2000. The past few months in 2009 have clearly revealed that LICs are far from being immune to the effects of the global economic crisis. Cases below give a synopsis on how low-income countries have been impacted.
Bangladesh – The crisis has threatened the country’s biggest export sector, the textile industry which produces ready-made garments greatly dependent on western markets. This industry which employs over 2.5 million people, mainly women earned Bangladesh US$10.7 billion equivalent to two-thirds of the country’s annual export income in the fiscal year 2007-2008. In September 2008, before the crisis deepened, buying orders from Europe and the USA had dropped by a stunning 7 percent. Worse still, over 700 chain stores of major US apparel brands that outsourced to Bangladesh have either wound up or plan to do so if the crisis prolongs.
Ethiopia – Two Israeli-owned flower farms have been put up for auction for failing to service bank loans due to reduced export sales at the end of 2008. Thus, income from flower exports reached only 60 percent of a targeted US$298 million. The widespread crisis poses a threat on the Horn of Africa achieving its targets to earn US$207 million from flower exports in 2009 as consumers in Europe and the USA cut back on luxury purchases.
Uganda – A country which depends on foreign assistance (approximately) 60 percent of direct budget support) now faces a significant drop in funding. It is also expected that due to reduced demand on Ugandan exports from the USA and Europe, Uganda’s major export markets, the economy is anticipated to grow by between 5 percent and 6 percent instead of the expected 8 percent in 2009.
Congo DR – The country has suffered major job losses rising over 300,000 mainly due to closures of copper mines since September 2008, (JCTR 2009). Investors have pulled out and the ripple effects continue to deepen in severity.
Latin America – Migrant workers from Latin America were recorded to have sent less money home in 2008 after strong growth in remittance flows for several decades. Remittance flows slowed totaling US$69.2 billion in 2008 only slightly more than in 2007. Flows will definitely be affected by the length and severity of the crisis in 2009. It is not yet predictable by how much remittance flows would fall, though the first quarter of 2009 has already shown massive reductions. In Latin America and Caribbean, remittance flows reflect a strong commitment to family and community, and are a vital source of income. Seven countries in this region receive 12 percent or more of their Gross Domestic Product from workers abroad.
The impact of the global economic downturn on low-income countries has been substantial and significantly varied from one country to the other within the low-income group. Scores of these economies have been faced with massive job cuts, declining remittances, possible reductions in foreign direct budget support and steep falling exports and subsequently major decline in national incomes. In essence, the above situation exemplifies that countries are different from one another and as such solutions to mitigate the impact of the economic downturn must be country specific to achieve success.
Bangladesh – The crisis has threatened the country’s biggest export sector, the textile industry which produces ready-made garments greatly dependent on western markets. This industry which employs over 2.5 million people, mainly women earned Bangladesh US$10.7 billion equivalent to two-thirds of the country’s annual export income in the fiscal year 2007-2008. In September 2008, before the crisis deepened, buying orders from Europe and the USA had dropped by a stunning 7 percent. Worse still, over 700 chain stores of major US apparel brands that outsourced to Bangladesh have either wound up or plan to do so if the crisis prolongs.
Ethiopia – Two Israeli-owned flower farms have been put up for auction for failing to service bank loans due to reduced export sales at the end of 2008. Thus, income from flower exports reached only 60 percent of a targeted US$298 million. The widespread crisis poses a threat on the Horn of Africa achieving its targets to earn US$207 million from flower exports in 2009 as consumers in Europe and the USA cut back on luxury purchases.
Uganda – A country which depends on foreign assistance (approximately) 60 percent of direct budget support) now faces a significant drop in funding. It is also expected that due to reduced demand on Ugandan exports from the USA and Europe, Uganda’s major export markets, the economy is anticipated to grow by between 5 percent and 6 percent instead of the expected 8 percent in 2009.
Congo DR – The country has suffered major job losses rising over 300,000 mainly due to closures of copper mines since September 2008, (JCTR 2009). Investors have pulled out and the ripple effects continue to deepen in severity.
Latin America – Migrant workers from Latin America were recorded to have sent less money home in 2008 after strong growth in remittance flows for several decades. Remittance flows slowed totaling US$69.2 billion in 2008 only slightly more than in 2007. Flows will definitely be affected by the length and severity of the crisis in 2009. It is not yet predictable by how much remittance flo
ws would fall, though the first quarter of 2009 has already shown massive reductions. In Latin America and Caribbean, remittance flows reflect a strong commitment to family and community, and are a vital source of income. Seven countries in this region receive 12 percent or more of their Gross Domestic Product from workers abroad.The impact of the global economic downturn on low-income countries has been substantial and significantly varied from one country to the other within the low-income group. Scores of these economies have been faced with massive job cuts, declining remittances, possible reductions in foreign direct budget support and steep falling exports and subsequently major decline in national incomes. In essence, the above situation exemplifies that countries are different from one another and as such solutions to mitigate the impact of the economic downturn must be country specific to achieve success.
Impact of the downturn on Zambia
Zambia is one country that has been hit quite severely with reduced international commodity prices. The global recession has reduced job opportunities from abroad and remittances from repatriates working in rich countries who are under pressure in the job market. These negative effects confirm that Zambia has not been spared of the consequential effects of reduced productivity in industrialised countries. The 5 percent growth forecasted in the 2009 national budget will certainly be challenging to achieve in the current economic environment.
Positive economic performance recorded in the first half of 2008 was on account of high copper prices and increased copper production especially with increased capacity utilization by Kansanshi mine in Solwezi. Copper prices reached a record high of US$8, 985 per tone in July 2008 before falling to US$2, 902 per tone at the close of the year as a result of the global economic slowdown that reduced demand for copper and the articles thereof. As such, the year 2009 kicked off with a severe trade deficit of K237.8 billion at the end of January, meaning that the country’s exports were outweighed by imports causing a trade imbalance. Statistics further reflect a deeper cumulative trade deficit of K401.1 billion for January and February 2009 compared to a trade surplus of K126.1 billion at the same period in 2008.
Therefore, the situation in Zambia as regards the impact of the crisis on the economy has been a daunting experience as most mining companies have completely suspended operations and laid-off thousands of workers. Towards the end of the 2008 fourth quarter, as metal prices on the London Metal Exchange market experienced their all time lows since 2001, massive job cuts in mines were announced. Luanshya Copper Mine withdrew from the sector by putting the companies on care and maintenance. This action declared over 2000 mine jobs redundant.
Given that Zambia is largely dependent on copper exports for its national revenue, copper mining industry is one of the largest employing sectors in the country absorbing nearly 50, 000 people. The decline in macroeconomic activity has had a direct impact on several sectors but chief among them, the tourism and mining sectors. An outline below gives a sense of what has transpired.
Positive economic performance recorded in the first half of 2008 was on account of high copper prices and increased copper production especially with increased capacity utilization by Kansanshi mine in Solwezi. Copper prices reached a record high of US$8, 985 per tone in July 2008 before falling to US$2, 902 per tone at the close of the year as a result of the global economic slowdown that reduced demand for copper and the articles thereof. As such, the year 2009 kicked off with a severe trade deficit of K237.8 billion at the end of January, meaning that the country’s exports were outweighed by imports causing a trade imbalance. Statistics further reflect a deeper cumulative trade deficit of K401.1 billion for January and February 2009 compared to a trade surplus of K126.1 billion at the same period in 2008.
Therefore, the situation in Zambia as regards the impact of the crisis on the economy has been a daunting experience as most mining companies have completely suspended operations and laid-off thousands of workers. Towards the end of the 2008 fourth quarter, as metal prices on the London Metal Exchange market experienced their all time lows since 2001, massive job cuts in mines were announced. Luanshya Copper Mine withdrew from the sector by putting the companies on care and maintenance. This action declared over 2000 mine jobs redundant.
Given that Zambia is largely dependent on copper exports for its national revenue, copper mining industry is one of the largest employing sectors in the country absorbing nearly 50, 000 people. The decline in macroeconomic activity has had a direct impact on several sectors but chief among them, the tourism and mining sectors. An outline below gives a sense of what has transpired.
Mining Industry
The Zambian flagship industry and a major income earner for the economy have withered with the economic downturn. The industry has until recently accounted for about 90 percent of Zambian’s exports. Using the scope of the Jesuit Center for Theological Reflection Basic Needs Basket for estimating, it can be assumed that each of the 50, 000 workers is a bread winner for a family of six. It would right therefore to infer that the sector provides a source of livelihood to about 300, 000 Zambians. But as per Zambian culture and tradition, nuclear families always have to provide financial support to members of the extended family. In this case, a single family would probably be offering direct support to more than two members of the extended family, so 3000 is a bare minimum population directly dependent on the sector.
ports. Using the scope of the Jesuit Center for Theological Reflection Basic Needs Basket for estimating, it can be assumed that each of the 50, 000 workers is a bread winner for a family of six. It would right therefore to infer that the sector provides a source of livelihood to about 300, 000 Zambians. But as per Zambian culture and tradition, nuclear families always have to provide financial support to members of the extended family. In this case, a single family would probably be offering direct support to more than two members of the extended family, so 3000 is a bare minimum population directly dependent on the sector. According to Ministry of Labour officials, at the beginning of March 2009, close to 19, 000 of the approximately 50, 000 mine workers had lost jobs. From the Basic Needs Basket point of the JCTR’s view, about 120,000 people of the 300,000 people typically dependent on mining jobs for their livelihood have been affected. In a ministerial statement, the Minister of Mines and Mineral Development highlighted that Bwana Mkubwa Processing Plant closed down in the fourth quarter of 2008 and laid off over 345 workers, Luanshya Copper Mine and Chambishi Metals suspended mining metallurgical operations respectively in January 2008 and laid off 1, 716 and 1, 011 respectively. In addition, other job cuts from Kansanshi, Mazabuka Nickel and Chililabombwe mines have undoubtedly pushed these figures to staggering levels.
On a macro level, in spite of the crisis, copper still accounts for the major export product in Zambia. This depicts how grossly dependent the economy is on the commodity. In a period of nine months from May 2008 to February 2009, the country experienced a sharp decrease of 40 percent in copper export earnings. Whereas K1, 109, 924 million was earned from exports of copper and articles thereof May 2008, nearly half of these earnings were
recorded in February 2009 export earnings. This substantial loss in export earnings has caused a strain on the economy’s stable fiscal position which has manifested in high inflation and consequently deep currency depreciation. The further deepening of the financial crisis in the developed world has increased volatility in the local currency against other major currencies giving rise to higher lending rates. At the end of 2008, the local currency depreciated by 27.3 percent against the US dollar to an average of K, 882.3 per US dollar from K3, 835.7 per US dollar in December 2007. The situation has worsened as the currency was trading t an average of K5, 680.5 at the end of March 2009.Tourism Industry
The sector is among the worst hit sectors in the country and there are probably two major reasons that could be attributed to the rapid growth the sector experienced over the past five-year period of economic boom prior to the 2008 downturn. Firstly, the success in the mining sector and the general stable economic outlook stimulated much interest in foreign nationals to visit the country with United State, the United Kingdom and recently Asia accounting for the greater part of Zambia’s tourist market. Secondly, Zambia seems to have “unfortunately” benefited significantly from Zimbabwe’s political and economic turmoil. Meaning that whereas in the past Zimbabwe received more tourists than Zambia, the situation changed after the year 2000 when President Mugabe and his government institutionalised the land policy that repossessed massive land owned by white farmers. This situation spelt the beginning of better days for the Zambian tourism sector.
Several lodges and hotels had sprung up predominately in Livingstone and Lusaka and recently in Solwezi to accommodate an influx of tourist most of whom would have previously preferred to visit Zimbabwe. Solwezi and other mining areas registered positive growth in the sector owing to the hype in the mining activity. In terms of accommodation in lodges, the areas almost always had 100 percent occupancy which perceptibly meant more jobs and more foreign exchange.
The favourable environment in the sector had created jobs, businesses and incomes and improved people’s livelihoods. Now with the credit crunch in the developed countries, the sector has already recorded massive job losses. It is estimated that whereas lodges and tourist centres had before the crisis recorded nearly 100 percent accommodation occupancy, the percentage sharply dropped to about 20 percent. This entails that there are no messed beds to make, no bath and bed sheets to launder, no dirty rooms to clean, no customers to eat the food and hire vehicles for sightseeing. Hence, there are no jobs for housekeepers, for cleaners, for cooks and no business for food suppliers and lodge and hotel owners. The above is indicative of the social severity of the crisis on individual households as poignant life stories being told by affected families have revealed.
Effects of the downturn on the macroeconomic front – Public Debt
The past four years have seen debt indicators, specifically external debt indicators, in Zambia improve significantly. Debt relief through highly indebted poor countries (HIPC) and multi-lateral debt relief (MDR) initiatives of 2005 and 2006 respectively, had significantly reduced the large external debts and the debt service burden by about 86 percent. Whereas nearly US$200 million was used to service public debts annually, the amount was noticeably reduced to about US$50 million annual debt service. The improved debt sustainably has helped create investor and donor confidence as can be evidenced by sizeable FDI and to some extent aid flows in the recent past. A lower debt servicing burden has also freed up resources for development programmes. With the deepening of the international financial crunch, LICs will be advised by IFIs like in the past to borrow externally which is likely to pose serious risks on debt sustainability. For instance, in February 2009, the government received a US$200 million loan from the IMF to boost national reserves that fell so drastically. If this borrowing desire continues, public debt will soon rise way beyond the 1.8 percent of GDP expected in the 2009 budget. This situation will possibly lead to accumulation of once again unsustainable debts and the resulting adverse repercussions. At the close of 2008, inflation for Zambia hit 16.6 percent from 12.2 percent in June 2008. The deepening currency depreciation and its direct effect on exchange rates indicate that debt servicing specifically on external debt with short maturities has become more costly.
US$50 million annual debt service. The improved debt sustainably has helped create investor and donor confidence as can be evidenced by sizeable FDI and to some extent aid flows in the recent past. A lower debt servicing burden has also freed up resources for development programmes. With the deepening of the international financial crunch, LICs will be advised by IFIs like in the past to borrow externally which is likely to pose serious risks on debt sustainability. For instance, in February 2009, the government received a US$200 million loan from the IMF to boost national reserves that fell so drastically. If this borrowing desire continues, public debt will soon rise way beyond the 1.8 percent of GDP expected in the 2009 budget. This situation will possibly lead to accumulation of once again unsustainable debts and the resulting adverse repercussions. At the close of 2008, inflation for Zambia hit 16.6 percent from 12.2 percent in June 2008. The deepening currency depreciation and its direct effect on exchange rates indicate that debt servicing specifically on external debt with short maturities has become more costly.Conclusion
A country is considered to be more exposed to the global economic downturn if before the crisis, poverty was a big problem. While in the short term, developed countries may seem to be the most hit, past experience from past economic crises suggest that the adverse impacts are likely to spread in the medium-term to poor countries infiltrating vulnerable households. For all intents-and-purposes, this means that millions of households in LICs face hard times ahead with the economic downturn. The poor have no assets, limited risk coping strategies, and less access to capital markets. Realizing the heterogeneity of poverty dynamics in LICs; innovation, commitment and dialogue within countries is the way to achieve success in formulating country-specific offsetting mechanisms against debilitating effects of the downturn. LICs, specifically Zambia need to realise that the current crisis also presents itself as an opportunity in disguise for governments and states to carry out an introspection of development goals and get rid of archaic and clichéd initiatives. In Zambia for example, global crisis or not, the country has been in a reprehensive state for a long time which in itself is a crisis. Huge sums of public funds misappropriated year in year out, increased litigations of senior government officials abusing authority for self gain, high levels of corruption are all signs of deterrents to growth in the system that need to be fixed.
year in year out, increased litigations of senior government officials abusing authority for self gain, high levels of corruption are all signs of deterrents to growth in the system that need to be fixed.References
Jesuit Centre for Theological Reflection 2009, The Global Economic Downturn: Impact on Low Income Countries – the case of ZambiaWorld Bank November 2008, Weathering the storm: Economic Policy Responses to the Financial CrisisIMF March 2009, The Implications of the Global Financial Crisis for Low Income Countries.The Community Reinvestment Act After Financial Modernisation (April 2000)MoFNP February 2009: Economic Report 2008 CSO December 2008 and January to March 2009 Monthly Bulletins MoFNP February 2009: Economic Report 2008
Clive M. SiachiyakoZDA Fellow
Clive M. SiachiyakoZDA Fellow
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