Effects of the Economic Crisis on the Zambian Young Age

INTRODUCTION

This paper seeks to give an analysis of the impact of the global economic crisis on the Zambian economy generally, and specifically on how it has affected the operations and stability of the financial markets in the country. In doing so, the paper has significantly relied on the studies and observations already undertaken by several stakeholders in the private sector, academic institutions and the donor community. In addition, Government’s policy framework as set by several planning instruments, such as the Fifth National Development Plan (FNDP) as well as its implementation tools as highlighted in the medium term expenditure frameworks and subsequently the approved budget for 2009, have created a strong basis upon which this analysis has been done.The paper acknowledges the undesirable impact of the global financial crisis on the Zambia economy. The crisis has undoubtedly produced macroeconomic imbalances. Inflation and interests rates have risen while stock prices have declined. The overall trade balance has been adversely affected, while the kwacha has significantly depreciated against major currencies. In reaction to the drastic decline in copper prices, the Zambian mining sector bore the blunt of the impact leading to some mines scaling down their investment and production levels while other mining houses closed down completely. These developments have caused an estimated loss of 8000 jobs in the mining sector alone and consequently have created a ripple effect that has negatively impacted on secondary industries supporting the sector in the tourism, energy, and transport and warehousing sectors. While acknowledging the negative impact of the world recession, It is the assertion of this paper that it would be unadvisable for government policy to become reactive by significantly departing from the fundamental policies that have contributed to the recent growth and macroeconomic stability experienced prior to the global credit crunch of September 2008. In order to buttress this argument, the paper will first outline the policy framework that has prevailed in the last few years and subsequently give an account of the macroeconomic achievements resulting from this regime. Once this basic context has been set, the impact of the crisis will then be analyzed. The paper will conclude by making recommendations that are in line with its general assertion of remaining resolute to its overall current policy framework; a policy framework that may take into consideration the various recommendations that have been made by several stakeholders.
2.0 CURRENT POLICY FRAMEWORK
For the first time since the early 1970s, Zambia has for the last nine consecutive years achieved a level of sustained economic growth and stable macroeconomic performance. The growth in Gross Domestic Product (GDP) over this period has been as a result of strong expansion in mineral, agriculture and services sectors. This economic expansion has been supported by the pursuance of a prudent macroeconomic policy framework which has been enshrined in two primary planning instruments. The Vision 2030 takes a long term planning focus while the Fifth National Development Plan (FNDP) takes a medium term focus spanning a five year period. In the long term, a number of developmental goals are identified. These include: (a) reaching middle income status; (b) significantly reducing hunger and poverty; and (c) fostering a competitive and outward oriented economy. The FNDP 2006 to 2010, building on the success of the Poverty Reduction Strategy Programme (PRSP) is an important step towards the realization of these objectives. The theme of the FNDP is therefore to ensure Broad Based Wealth and Job Creation through Citizenry Participation and Technological Advancement while its strategic focus is Economic Infrastructure and human resources development.Under the theme of broad based wealth creation, the plan acknowledges that the recent growth has been concentrated in mining, wholesale and retail as well as construction, which are mostly urban based and capital intensive. While these sectors will continue to be important, the plan focuses on pro- poor growth oriented sectors that create employment and have strong linkages with the rest of the economy such as agriculture and manufacturing. For this reason the promotion of large scale commercial farming and the fostering of increased small-holder participation is seen as a vital component of government policy. Hence the thrust in the plan IS towards economic diversification. Under the strategic focus, the plan recognizes that at the core of an enabling environment is the need to have a strong and sustained economic infrastructure, especially roads, bridges, dams and various means of communication. These developments are important in creating the connectivity between rural and urban areas for purposes of providing markets for agriculture products. The plan also recognizes that once the infrastructure has been created, economic growth should largely depend on the private sector. Consequently one of the key targets of the FNDP is to create the enabling environment supportive of private sector growth. The realization of the plan therefore requires that some of the following interventions are made:Macroeconomic policiesa) Inflation and interest rates reduction (preferably to single digits;b) Transparent debt contraction and management;c) Effective public expenditure and revenue management; d) Sound economic governance and transparency;e) A stable and competitive exchange rate; andf) Financial sector policies, including microfinance Rural Sector Policies a) Irrigation developmentb) Attainment of food securityc) Provision of microfinance d) Development and/or rehabilitation of infrastructure, especially feeder and all weather roads; ande) Livestock development

Structural Policies
a) Private sector Development, especially relating to improving the business and investment climate; and,b) Strengthening the financial sector.
Keeping in conformity with these and other objectives highlighted in the FNDP, government has been implementing various sector reforms intended to create a conducive environment for the private sector to thrive. In this regard, expenditure in the last three medium term expenditure frameworks has tended to gravitate towards infrastructure development and the allocation of greater amounts of resources to economic sectors such as agriculture. In order to create a firm foundation for economic growth, government has pursued prudent monitory and fiscal policy. Towards structural reform, Government has undertaken a number of initiatives that are aimed at improving the investment and business environment in Zambia.
Among the most prominent of these reforms are the Private Sector Development Programme (PSDP), Financial Sector Development Plan (FSDP) and the Strategic Action Initiative for Economic Development (SAIED), commonly referred to as the Triangle of Hope (ToH). In addition to these initiatives and in order to give impetus towards their implementation, The Zambia Development Agency and the Citizen Economic Empowerment Commission (CEEC) have been established. To a large extent, although by no means the only reason, these policy reforms have contributed to the positive economic developments that have taken place over the last several years. 3.0 RECENT ECONOMIC OVERVIEW Zambia has, in the more recent years, experienced positive economic growth. Real gross domestic product (GDP) has grown by almost 50 percent from K2, 499 billion in 2000 to K3, 737 billion in 2008. All available data indicate that the economy grew at an average rate of 4 percent per annum between 2000 and 2003. The average rate of growth between 2004 and 2008 increased to 5.6 percent. The result of this growth was an increase in GDP per capital which trebled from US$ 315 in 2000 to US$ 918 in 2007. Following the country’s qualification of HIPC completion point in the second quarter of 2005 and the unprecedented surge in copper prices, the local currency gained significant strength and appreciation against major international currencies. The annualized inflation rate reached its lowest level in thirty (30) years, recording a single digit figure of 9.4 percent in April 2006 and declined further to close at 8.2 percent in December 2006. The rate of inflation had reached as high as 30.1 percent at the end of 2000. The general positive trend in the macroeconomic indicators and the relative favorable performance of the real sector enhanced investor confidence in the domestic economy and led to increased foreign direct investment (FDI) inflows into the country. FDI inflows to Zambia reached a record U $ 938.5 million in 2008, up from US $126 million in 2000.

3.1 The Financial and Money Market
The rate of inflation, which averaged well above 15 percent before 2006, fell to a record single digit level and closed at 8.2 percent in 2006, rose by 0.7 percentage points to close at 8.9 percent in 2007 before rising again to close at an unsatisfactory 16.6 percent at end of 2008. This upward surge was as a direct consequence of the onset of the global financial meltdown. The bank lending interest rates, though relatively high, equally stabilized and averaged 26.4 percent over a three-year period. The average lending rates fell from 27.9 percent in 2006 to 24.4 percent in 2007 before rising to 26.9 percent at the close of 2008.Average Treasury Bills rates were recorded at 16.0 percent at the end of 2008 from 13.5 percent at the end of 2007. Composite yield rates on the 24-month Government Bond, which had been at 14.4 percent at the end of 2007, rose to 16.6 percent at the end of 2008. The local currency (Kwacha) exhibited a record strength and buoyancy against major international currencies, over the recent years. The Kwacha/U S Dollar exchange rate appreciated from K4, 520 per U S Dollar at end of 2005 to an impressive K 3,600 per U S Dollar in 2008, appreciating by a significant 20% over the period.The country’s attainment of the HIPC completion point in the second quarter of 2005, coupled with unprecedented high copper prices on the London Metal Exchange saw the local currency appreciate significantly and exhibited buoyancy against major international currencies for two consecutive years of 2006 and 2007. Following the onset of the global recession, coupled with the downward trend in copper prices, in the fourth quarter of 2008, however, the exchange rate rose to K 4,880 per U S Dollar at end of 2008, representing an unsatisfactory and disastrous 35.6% depreciation. This reversal literally erased the gains achieved in the previous two years. 3.2 The Capital Market
On the capital market both trades and turnover ( including foreign portfolio investment) exhibited a favorable and increasing trend over the recent years, prior to the onset of the global recession, with the number of companies listed on the Lusaka Stock exchange having stood at 19 at close of 2008 . During 2008, the Lusaka Stock Exchange recorded a total of 8,384 trades, up more than twice from their 2006 level of 3,662 trades. In value terms, the trading activity resulted in a turnover of $167.8 million, from $23.9 million recorded in 2006. Market capitalization equally increased from $3.1 billion in 2006 to $4.1 billion in 2008.With regard to foreign portfolio investment, total inflows rose from $11.7 million in 2006 to US $ 58.3 million in 2008, representing a significant 90.5 percent increase while total outflows were recorded at US$3.7 million in 2006 and US $ 64 million in 2008, resulting in an unsatisfactory net positions of a surplus of US $7.9 million and a deficit of U S$ 5.7 million in 2006 and 2008, respectively.3.3 Direct Investment In tandem with a favourable and increasing trend in global foreign direct investment (FDI), Zambia experienced an unprecedented level of FDI inflows during the recent years. FDI inflows increased from US$615.8 million in 2006 to record US$837.7 million in 2008. Led by the mining sector, the manufacturing, construction and service (including telecommunications) sectors also attracted significant level of FDI under the period in review. 3.4 The Real Sector
Led by the mining sector, the manufacturing, construction and service (including telecommunications) sectors also attracted significant levels of investment and subsequently increased productive capacity leading to the creation of employment. While the secondary (manufacturing) sector posted positive growth rates averaging 8.6 percent, the tertiary (service) and primary (agriculture, forestry and fishing, mining and quarrying) sectors recorded average growth rates of 7 percent and 2.7 percent, respectively over the period 2006 to 2008, Zambia’s total exports rose from U S $ 3.9 billion in 2006 to US $ 4.9 billion in 2008. Of the US $3.9 billion and US $ 4.9 billion value of exports, metal exports accounted for US $3.2 billion and US $ 4 billion in 2006 and 2008 respectively, while non traditional exports rose from $715.3 million to US $876.2 million over the same period, representing a satisfactory 22.5% increase in non-traditional exports.
4.0 THE GLOBAL FINANCIAL CRISIS IMPACT ON THE DOMESTIC ECONOMY
Ignited by the U S financial crisis and described as the biggest global economic shock since World War II (EIU, Dec.2008), the current global recession has had devastating impact on the economies of developing and emerging economies like Zambia. In the Zambian case the direct consequence was a reduction in copper revenue which greatly contributed to export earnings declining by 11 percent in 2009 from the previous year. Consequently, the balance of trade was reduced from US$610 million in 2007 to US$29 million in 2008. In totality, the biggest possible negative impact of the crisis is in threatening the prospect of Zambia’s continued growth. This is clearly indicated by the revision of the Medium Term Expenditure Framework 2009- 2011 in which government has had to adjust downwards the projected growth rates for the economy. The original growth targets were 7 percent for each year until 2011. However these have been adjusted to 5 percent in 2009, 5.5 percent in 2010 and 6 percent in the 2011. 4.1 Impact on Industry
The immediate negative impact of the global financial crisis, on the Zambian economy was the closure and suspension of operations by some mining companies with an estimated 10,000 jobs lost (ZBF, 2009). The closure of mining operations by some mining companies had a multiplier negative impact on other sectors of the economy which were principal suppliers to the mines.
More recent monitoring of companies recently issued with Investment Licences across sectors indicated that some companies have reduced production on account of reduced demand for their respective products (ZDA, PIMC report 2009).4.2 Impact on Investment The level of direct investment on the domestic economy continued to exhibit a favorable and increasing trend despite the world recession. Direct investments registered (pledged investments) with the ZDA stood at an unprecedented U S $6 billion in the last quarter of 2008, mainly on account of huge commitments in mining and mining exploration, as well as committed investment in the energy sector by ZESCO rehabilitation works and bio-fuel (jatropha ) planned investment. Registered investment for the first quarter of 2009 stood at US $ 198.8 million, which compared unfavourable with US $ 454.7 million recorded during the first quarter of 2008. However, this performance was far better than first quarter pledged investment in 2007. In terms of annual total, the pledged investment of an estimated 10.3 billion in 2008 was far above the 2007 amount of 1.7. Billion dollars. The real negative impact of the global financial crisis in terms of changing the direction of investment pledges from the current trends, therefore, may only be clearly seen and evaluated at the end of the 2009.4.3 Impact on ExportsWhile both the World Trade Organisation (WTO) and the Organisation for Economic Cooperation (OECD) forecasted overall reduction in the volume of trade by 9 and 13 percent (ZBF, 2009), respectively, the impact of the global crisis on Zambia’s exports has yet to be felt.Although the total value of exports marginally fell from K 3,665 billion in the fourth quarter of 2008 to K 3,567 billion during the first quarter of 2009, the export earnings for the first quarter of 2009 compared favorably (up 28 percent) with K 2,783 billion recorded in the first quarter of 2008. Similarly, with an overall trade deficit of K 367 billion in the first quarter of 2009, Zambia’s international trade reflected an improvement down from a trade deficit of K 1,830 billion in the fourth quarter of 2008. Clearly, both the WTO and OECD’s pessimistic outlook of the impact of the global financial crisis for 2009 has not yet been felt.4.4 The Depreciation of the Kwacha and the Economic DownturnThe negative impact of the global financial crisis severely impacted on the domestic foreign exchange market. Having traded at K4, 880 against the US Dollar at the end of 2008, the Kwacha significantly depreciated against the major international currencies, averaging K5, 260 against the US Dollar during the first quarter of 2009. This exchange rate compared unfavorably with the first quarter of 2008 when the kwacha traded at an average of K3, 700 to the US Dollar, representing an unsatisfactory and a significant 42 percent depreciation, on an annualized basis.The depreciation of the Kwacha is largely due to the global recession that has caused decline in both demand for and price of copper, Zambia’s principal foreign exchange earner. The situation created speculative currency withdraws leading to scarcity of foreign exchange on the market. The recession had also caused a significant decline in the purchases of kwacha financial assets such as government securities and domestic company equities by foreign portfolio investors, thus, further reducing the flow of foreign currency on the market.
4.5 The High Interest Rates and the Economic DownturnThe bank lending interest rates have, for a long time, been at relatively high levels, thereby stifling private sector borrowing for investment. The average lending rates for commercial banks though stabilised at an average of 26.9 percent for both fourth and first quarters of 2008 and 2009, respectively. This rate compared unfavorably with the average rate recorded in the first quarter of 2008, which was recorded at 24.3 percent.Interest rates on Treasury Bills, as lead indicators of commercial bank lending rates, were recorded at an average of 14.8 percent during the first quarter of 2009, down from 16 percent recorded in the fourth quarter of 2008. On an annualized basis, however, the rate compared unfavourable, having increased from the 12.6 percent recorded in the first quarter of 2008. Composite yield rates on the 24-month Government Bond increased by 3 percentage points to 17.1 percent in the first quarter of 2009 from 16.6 percent in the fourth quarter of 2008. It is evident from the analysis that the negative impact on bank lending interest rates has yet to be felt.
5.0 RECOMMENDATIONS
5.1 ZDA’s Perspective The Global economic crisis has had an impact on the Zambian economy primarily because of it high dependency on single mineral resources for it exports. Additionally the fact that the copper mining sub-sector has previously formed the basis, upon which the overall economy has depended, has created an undesirable position in which the country is highly vulnerable to external shocks. While the economy may not have the financial capacity to completely mitigate against the immediate impact of the crisis, it is clear that if a similar situation is to be avoided in the future, a vigorous policy of diversification must be pursued. As has been indicted in the main body of this paper, the Fifth National Development Plan has already made this recognition. A number of initiatives are being implemented in order to diversify the economy and ensure that the private sector is provided with a conducive environment in which it can operate. To drastically change the trajectory of economy policy in order to accommodate the current crisis may dislocate the long term strategic focus of the country's economic development agenda.The government must ensure that they remain resolute to what has worked in the past few years and only make adjustments towards mitigation in those areas that will not entail a reversal of the current macroeconomic framework. This point is being emphasized in light of some of the suggestions that have come from the private sector encouraging government to impose capital control measures, and reintroduce some form of managed exchange rate control. In addition it has been suggested that government expand expenditures for social protection while at the same time reduce the tax burden on the manufacturing sector so as to make them more competitive in the region. While this change may bring immediate relief to certain sectors, it may only be short lived and will eventually result in a negative impact on government revenues and therefore budget execution towards infrastructural development.In its 2009 budget, government has already pursued some form of an expansionary policy that is intended to stimulate the economy. Government intends to spend 25.4 percent of GDP as compared to 24.8 percent in 2007. The 2009 budget will be financed 70 per cent from domestic revenues, 18 per cent from donors and 12 per cent from domestic borrowing. In order to support this expansionary budget and meet the shortfall from domestic revenues, government will increase domestic borrowing from 1.3 per cent to 1.8 per cent of GDP. This is a significantly higher rate than the targeted domestic borrowing of 1.0 percent for 2009 as indicted in the 2008-2010 Medium Term Expenditure Framework. If not carefully handled this could create additional pressure on interest rates and subsequently have a ripple effect on other macroeconomic indicators. Perhaps one strategy that government can pursue is to negotiate for enhanced financing from lending agencies such as the International Monetary Fund (IFM) and the African Development Bank for financial resources that will help stabilized the exchange rate and inject some liquidity in to the financial sector to enable continued movement of economic activity. Given the already existing policy context of government, however, what may be at issue and of great concern is the manner, quality and pace of implementation of the various reform programmes that are being undertaken. Therefore, in order to address the concern of implementation capacity, an effective monitoring and evaluation system, designed to track the effectiveness of programme execution should be put in place both by the executive and the legislature. A rigorous system of punitive sanctions should be put in place for those agencies and government ministries which are not in compliance with the quality and time table that implementation demands.5.2 Private sector Perspective The Private sector, through the Zambia Business Forum (ZBF) has also made some recommendations that they believe may mitigate the impact of the crisis. While ZDA may not be in total agreement with all the recommendations, the agency does agree to some aspects of their suggestion. In this regard the following recommendations by the private sector would have some measure of support from the analysis undertaken by the agency;5.2.1 Business Licencing and Regulatory ReformsUnder the Private sector Development Reform Programme and business licensing framework, the paper acknowledges the availability of the Eva Jhala Study Team report which proposes the streamlining of all business licences in the country. ZDA is in support that Cabinet office should approve its recommendations and agree on a roadmap for implementation. In addition, all the various recommendations that have been made under the PSDP and the Strategic action Initiatives for Economic Development should be rekindled in order to give greater impetus towards execution. 5.2.2 Macro-economic stability In regard to macroeconomic management a number of measures have been proposed. Those that ZDA agrees with include the following;a) Introduce option for hedging against exchange rates b) Introduce enforcement measures against dollarizationc) Establishment of a treasury department in the bank of Zambia to ensure, among other things, that there is a positive correlation between inflation and bank lending rates, andd) Support non-traditional export as a source foreign exchange
5.2.2 Manufacturing
Government in collaboration with the private sector to undertake baseline studies of the manufacturing sector and draw up a list of products than can be manufactured in Zambia efficiently. Investment funds for these projects can be organized through organization such as the Zambia Development Agency and the Citizen Economic Empowerment Commission. Towards this general thrust, there is need to support existing and new Small and Medium scale enterprises (SME) to start small scale manufacturing. In this regard the draft policy presented to government in 2008 should be adopted as soon as it is practical, while every effort should be made to strengthen the capacity of the MSME division at ZDA.5.2.3 Increased Infrastructure InvestmentAs a land-locked country, bordering eight neighboring countries, Zambia is best suited as an ideal infrastructure hub for the Southern and Eastern African Sub-Region. Given the country’s high cost of doing business, huge investment should be made in both economic and social infrastructure, notably roads and railways, telecommunications, civil aviation, energy, education and health. The private sector however feels that this task should not only be left to government but should be a shared responsibility with them. In this regard the private sector is prepared to participate if some of the following measures are undertaken.a) Enactment of the Public Private Partnership (PPP) legislationb) Establishment of a PPP Unit within the Ministry of Finance and National Planningc) Unbundling of the rail network systemd) Muti-Facility Economic Zone incentives regime is applied to PPP investment-led project e) Duty on building material should be lowered and council should open up serviced land for housing and business centre construction, andf) Enactment of new ICT legislation that will facilitate for a converged licencing regime6.0 CONCLUSION
The analysis undertaken acknowledges the undesirable impact of the global financial crisis on the Zambia economy, particularly has it has affected the mining sector and consequently the significant numbers of jobs lost. Clearly, the overall trade balance has been adversely affected, while the kwacha has significantly depreciated against major currencies. That the imbalance created in the macroeconomic fundamentals has created a situation in which Zambia’s continued growth is threatened. The recommendations resulting from the analysis take cognizant of the fact that some remedial measures must be put in place in order to stimulate the economy by pursuing prudent expansionary policies and negotiating for additional cooperating partner resources in order to inject liquidity into the market. That all effort should be made to ensure that implementation of the various recommendations originating from all stakeholders be expeditiously implemented and ensuring that a monitoring and evaluation framework is put in place. However, the paper holds the firm view that the government should not become reactive by significantly departing from the fundamental policy framework that has contributed to the recent growth and macroeconomic stability experienced prior to the global credit crunch.