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“Business Unusual: Policy Implications for Zambia of the Global Economic Crisis ” The Unusual Business ECONOMICS ASSOCIATION OF ZAMBIA Economic Crisis W/shop “Business Unusual: Policy Implications for Zambia of the Global Economic Crisis ” MUNA HANTUBA EAZ CRISIS RESPONSE TEAM ECONOMICS ASSOCIATION OF ZAMBIA Economic Crisis W/shop “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 “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 “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 “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 Living Per continues to increase over 3% a year standards not improved capita income still low compared to region Inflation Real managed to reach single digits but now over 14% interest rates up ECONOMICS ASSOCIATION OF ZAMBIA Economic Crisis W/shop “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 “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 “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 “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 “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 “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 “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 “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 “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 “Business Unusual: Policy Implications for Zambia of the Global Economic Crisis ” SECTOR REVIEW ECONOMICS ASSOCIATION OF ZAMBIA Economic Crisis W/shop “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 “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 “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 “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 GRZ’s 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 “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 “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 “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 “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 “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 “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 “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 “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 “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 “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 “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 “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 “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 “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 “Business Unusual: Policy Implications for Zambia of the Global Economic Crisis ” THANK YOU ECONOMICS ASSOCIATION OF ZAMBIA Economic Crisis W/shop