Presentation to the 3 rd High-Level Round Table Ministry of Finance and National Planning Options...

Presentation to the 3rd High-Level Round TableMinistry of Finance and National Planning

Options for AfricaZambia’s Case

Presentation to the High-Level Round Table Discussion at the African Development Bank

Annual Meetings

Dr. Situmbeko Musokotwane, M.P.Minister of Finance and National Planning


Outline

Impact of the crisis on Zambia

Our response to the crisis

Lessons learned and the road ahead



Zambian economy depends significantly on the mining sector Copper accounts for about 70 percent of exports Mining industry employs about 50,000 workers (9

percent of total formal employment)

Global copper prices have been the main transmission mechanism of the crisis and its effects in Zambia: Prices have tumbled from a peak of US$ 8985 per metric

tonne in August 2008 to US$ 2902 at the close of 2008


Transmission Mechanism of the Crisis to the Local

Economy



Effects of the commodity price shock: Significant fall in foreign exchange earnings, affecting

reserve position and balance of payments Heightened volatility and sharp depreciation (about 40

percent) of the Zambian Kwacha against major currencies, as a result of weaker investor sentiments leading to large portfolio withdrawals by investors

Cash flows of mining companies severely affected, particularly in high-cost operations

About 13,000 workers laid off, one third of the workforce due to closure or streamlining of mining operations

First and second order fiscal effects: direct losses on corporate taxes and variable profit taxes; indirect losses through reduced Pay-as-you-earn income taxes from mining sector


Impact of the crisis on Zambia contd.

Mining sector in 2009: Mining sector expected to slow down,

resulting in lower tax revenues. 2009 projected revenues from mining sector

is around US$ 73.7 million. In 2008, revenues stood at US$ 138.6 million.

1st quarter estimates indicate that these projections are still on-track, despite better than expected production data from mines


Impact of the crisis on Zambia contd.

The rest of the economy in 2009: Tourism expected to slow down as a result of weak global

demand for travel; initial indications are that there has been a sharp drop in bookings at Livingstone (Victoria Falls)

Construction, transport and communication to be affected as a result of weaker domestic conditions and displaced workers

For now, financial sector is stable but remains vulnerable to second-round domestic effects such as defaults, bankruptcies, etc.

Investments may dry up as global credit conditions aggravate the business environment


External Sector Vulnerability


Responses to the crisis

Immediate responses: Exchange rate allowed to adjust in line with changing

market sentiments, unlike in 70s and 80s where rates were not allowed to adjust. Depreciation of around 40 percent since crisis began; Central Bank market intervention restricted to smoothening volatility only.

Bank of Zambia actively monitoring financial sector developments, enhancing supervision and oversight activities so as to maintain investor confidence.

Through 2009 Budget, Government took steps to intensify its diversification drive in line with broad medium and long-term strategy


Responses to the crisis contd.

Immediate responses contd.: Revenue side:

New mining fiscal regime with reduced taxes on fuel imports, a more streamlined profit tax system, and incentives for additional investment in the sector (through 100 percent capital allowance)

Duty and tax incentives for agricultural equipment imports Customs, excise and VAT incentives to manufacturers to set

up economic zones and industrial parks Social sectors:

Significant real increases in education and health outlays in the Budget


Response to the crisis contd.

Medium/Long term responses: Two-pronged strategy to mitigate current crisis, and

use the opportunity to safeguard against future crises – à la Keynes

Immediate realignment of expenditures to focus on large public works and infrastructure, helping to create additional domestic demand

These expenditures target key projects in Tourism and Agriculture so as to diversify the economy away from mining.


Showcase: Nansanga Farm Block

A model for Agricultural Development in Zambia


Showcase – Nansanga Farm Block Contd.


Showcase – Nansanga Farm Block

155,000 hectares of fertile land about 400 km North of Lusaka

Government will provide roads, bridges, dams, and water supply facilities

Both large and small scale farmers to accommodate cross-section of economic activity; hub-and-spoke system, with smaller farmers supplying to larger ones

Tar roads leading to national highways; easy access to a number of markets (Lusaka, Copperbelt, Luapula and Northern Provinces)

Works have already commenced, will be completed later this year


Showcase – Nansanga Farm Block contd.

Nansanga farm block: Once completed, investors can move in

quickly and commence operations with low gestation periods

Model for agricultural development in Zambia

Aim is to develop at least one each year across the country


Response to the crisis… contd.

Other key medium/long-term projects: “Livestock can be the next copper”

Development of livestock disease-free zones to foster meat exports Improving livestock extension service

“Zambia can be the energy provider of Southern Africa” Commencement of energy projects which will transform Zambia’s

vast energy potential in the medium-term Enhancing competitiveness

Reducing the cost of doing business through business licensing reforms

Increased spending on road infrastructure


Way Forward

“Good crises like these don’t come easily”: Need to take advantage, seize the moment

and engage in rapid and aggressive economic diversification, while ensuring that the vulnerable are protected

Otherwise, we will be back in the same place when the next crisis strikes


Way forward

Need to take a deeper look at what other countries have done: East Asia, India opening up to FDI, embracing modern

technology and processes (particularly in agriculture) UNIDO Study (2007 data):

Irrigation as a percentage of arable land is only around 5 percent in Africa; 38 percent average in basket of 9 countries (Bangladesh, Brazil, China, India, Pakistan, Philippines, South Korea, Thailand, Vietnam)

Average tractors: 28/1000 ha in Africa against 241/1000 ha in the 9 countries

Fertilizer use: 13kg/ha in Africa ; 208kg/ha in the 9 countries


Way Forward

Role of donors: More effective channelling of aid:

Money isn’t going to areas where it is most needed Easier to build a school than a road Often, donors discuss directly with sector ministries,

posing difficulties at a later stage when resources must be realigned

Focus must be on providing resources (grant, credit, semi-concessional debt) that provide a way out of donor dependency: Africa does not want to be dependent on aid forever!

Presentation to the 3rd High-Level Round TableMinistry of Finance and National Planning Source: Annual Reports and Statistical Compendiums

Total Lending Approvals1960s – 2007

(US$ bn.)


Total Lending Approvals1960s – 2007

(% allocation of total portfolio)

Source: Annual Reports and Statistical Compendiums


Infrastructure Lending1960s to 2007

(US$ bn.)



Infrastructure Lending1960s – 2007

(% allocation within infrastructure portfolio)



Way Forward

There has never been a better time for Africa to get serious on regional integration Cross-continental infrastructure such as roads,

power lines Reducing the cost of doing cross-country business

Dismantling trade barriers: border crossing times, checkpoints

Promoting open skies Actively sharing information to prevent money-

laundering


Showcase: North-South Corridor

Connecting Eastern and Southern Africa


Showcase: North-South Corridor

North-South Corridor: Initiative of COMESA, EAC, and SADC Aimed at enhancing regional trade through the improvement

of infrastructure (road corridors) and reducing transaction costs for cross-border transactions

High-level conference held in Lusaka last March reaffirmed commitment to this important project Strong financial and technical commitments US$ 1.2 billion in commitments from development partners to

upgrade rail, road and port facilities Pledged to improve integration of national and regional planning

processes Pledge to harmonize policies and regulations such as tariff

regimes, customs and immigration procedures, etc.


Conclusion

While it is true that: This crisis was not of our making and originated

beyond our borders We have remained steadfast to development

agenda, principles of good governance and prudent macroeconomic management


Conclusion

We must still face the hard fact that the crisis is here to stay for some time.

And so, we must all do our part: Governments must seize this as an opportunity to push

through harder reforms that will safeguard against future crises

More regional integration and cooperation to ensure that we are doing everything we can as a continent

Donors must scale up assistance and ensure strong alignment to national priorities and honour and make operational commitments that have been declared to deal with the crisis.


Finally, as you will agree, Ministers of Finance must do everything they can to mitigate the impact of the crisis on their countries.

I would be failing in my job if I did not show you what awaits you on your next holiday:

Conclusion


Investors:[email protected]

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Thank you!

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