Quote of the week (Mike Mulongoti)

"Zimbabwe should quickly resolve its problems by holding free and fair elections before talking about the sanctions that have been imposed....The Zimbabweans need to exercise humility and show decency because they cannot insult President Mwanawasa and at the same time ask him to help them because as SADC chair he has done what he can...It is surprising that Mr Chinamasa, the man who lost an election is very vocal and bitter"

Mike Mulongoti [Zimbabwe Independent]

Chief Government Spokesman Mike Mulongoti responding to Zimbabwe's recent criticisms of Preseident Mwanawa's role as the chairman of the Southern African Development Community (SADC). These are the sorts of "insults" he has in mind.

An even stronger Kwacha? 2nd Edition

This Bloomberg article appears to settle the question of whether government plans to intervene in an event of a predicted strengthening of the Kwacha. Excerpt:

Zambian Finance Minister Ng'andu Magande said the kwacha, which has gained 13 percent against the dollar in the past six months, will continue to strengthen as copper production increases and metal prices gain.

Exporters should learn to adapt to the stronger currency as the government has no plans to ``interfere in the market'' to curb the kwacha's advance, Magande said in an interview in Maputo, Mozambique today during the annual meeting of the African Development Bank.

Zambia, Africa's biggest copper producer, will probably mine 700,000 metric tons of the metal this year, a 40 percent increase from last year, Magande said. Export revenue has also been boosted by the copper price, which gained 19 percent in the past six months and reaching a record $8,880 a ton in London on April 17.

``I have warned Zambians that the currency will continue to appreciate,'' Magande said. ``In 2010, we're going to produce 1 million tons of copper and with the price around $6,000, then you're talking about $6 billion from just copper. By that time, we'll be producing nickel, uranium and other metals as well.''

An even stronger Kwacha?

A new Standard Chartered bank assessment on Zambia released yesterday is now pointing to an even stronger Kwacha very soon, largely due to the windfall tax. Excerpt:

Now the mining sector faces a higher royalty rate (from 0.6% to 3%), higher corporate taxes (from 25% to 30%, although losses may still be carried forward according to a predetermined 75:50:25 formula), and – most significantly - will see a windfall tax imposed on copper earnings of up to 75% .... Moreover, it is probable that these payments will be made in ZMK, significantly increasing the demand for ZMK relative to the FX inflows to which the market is accustomed. There is some possibility that payments might be made in USD to the Zambia Revenue Authority, which will then convert the proceeds at an average interbank USD-ZMK rate in an off-market transaction with the Bank of Zambia, thus preventing the inflows from impacting the market severely. However, at the time of writing, our information suggests that tax payments will be due - and made – in ZMK. A sizeable currency appreciation appears imminent.

What will the impact of all of this be? Official attitudes to currency appreciation are still ambiguous. While Zambia, as a net oil importer, will benefit in the near term from a stronger currency, other factors are likely to dominate government thinking. Although Zambia plans to reduce its traditional reliance on donor financing, for the moment, the contribution of donors to Zambia's budget is large enough for the authorities to be wary of seeing dramatic and sustained currency strength. (The proceeds of the windfall tax have not been included in the 2008 budget. With domestic revenue collection set to surge, Zambia will be able to make rapid progress in reducing its traditional donor reliance, should it wish to do so. But questions about revenue sustainability and the optimal means of development financing must still be considered).

In recent years, Zambia has also tried to boost its 'non-traditional' sectors, especially agriculture and tourism. While we believe that demand for high-end tourism may be relatively inelastic with respect to the exchange rate, and that a stronger ZMK may actually help with the cost of imported inputs for agriculture, such as fertiliser, (to say nothing of the cost of much-needed infrastructure development), the authorities - under the influence of various lobby groups - may not be receptive to this view. There is therefore a risk that sharp ZMK appreciation might be met with an official effort to reverse or slow the currency's gains. We have incorporated this into our currency forecasts, with a mid-09 USD-ZMK rate of 3500, compared with a rate of 3120 by the end of this year. But it is not just the currency impact of kwacha strength on the economy that should be considered. The impact on future mining sector developments is equally important.

Growth Diagnostics for South Africa

The South African National Treasury has just put on its web site all the papers that were completed during a two-year project that Dani Rodrik and other prominent economists were involved in (along with a long list of other economists and social scientists). The papers run from straightforward research exercises to detailed policy recommendations. If you want a summary of the main results and recommendations, read this piece by Ricardo Hausmann. Of course Zambia does not need experts, we have the IMF / World Bank to do the growth diagnostics for us!

Securing our food...

This fascinating article on the Food Security Pack Programme provides a good case for government to expand the agriculture sector and move Zambia to a position that would guarantee food security. Although Zambia's food production has increased in recent years following those dark periods of the IMF's SAP, Zambia's agricultural industry is now facing renewed threats on top existing structural weaknesses (e.g. higher transport costs given our landlocked position). These new threats include significant power shortages, strengthening of the Kwacha with a potential knock on rural agriculture and of course rising costs of fuel which are adding significant to transport costs. To make matters worse, the government's agricultural policy seems to have lost some bearings of late, culminating a disastrous decision in the recent budget to reduce spending on agriculture. At this critical point in time, when food prices are escalating Zambia has actually reduced spending on agriculture!

Most of these problems (aside from rising oil prices) are within our power to control and more should be done to address them. But I think there also other areas we need to look at as we move forward. As good as the Food Security Pack Programme is, we cannot afford it to be our last stand. I have two additional suggestions where attention also needs to turn.

First, the potential benefits of more mechanised farming should now be explored. With the impending crisis world over, should we not now be asking ourselves seriously whether we are doing enough in Zambia to expand our food basket? I think now is the turn to look to the Brazilians and ask ourselves how they have been able to develop large farms. We have the land just as they do, why can't we put together the same programme in place? I would propose that to partly offset the strengthening of the Kwacha, we must now use the new revenues from mining taxes and pour them into mechanised farming. It must surely be the long term hope for feeding the many hungry mouths in our urban areas. I am confident that the Food Security Pack Programme will deliver what we need in the long term for our rural areas, but I am less confident it will deliver the sort of urgent demand for food that is needed in our urban areas.

Secondly, better investment in education and research. We need to create better educational institution that supports farmers. Statistics show that only 3% of graduates in the higher sectors study agriculture. This is both unsustainable and unacceptable. Further investment is needed to encourage more research and development.

Finally, there is a case for reforming existing institutions such as the Food Reserve Agency (FRA), epecially in relation to how it deals with small scale farmers. The National Association and Small Scale Farmers of Zambia Associate have previously complained that the FRA sets the price too low and thereby discourages small scale farmers from going into maize farming. To make it worse, the FRA apparently rarely pays the farmers on time. The FRA has actually become a negative distortion in its own right, failing to provide the level of certainty in revenue streams that farmers desperately need to invest in more maize and other products. Is it any surprise that small farmers often have bad credit?

ZCGA on the prospect of "dutch disease"

I recently noted the worrying implications of an ever stronger Kwacha. The ZCGA's Nigel Seabrook naturally agrees :

“This will have very serious implications on the country’s rural economy and could eliminate any opportunity that the country has to achieve its Millennium Development Goals in respect of the rural population.....The cotton industry plays a vital role in Zambia’s agricultural development and rural poverty alleviation. Currently, about 200,000 smallholder farmers directly depend on cotton, making it by far their most important cash crop.....This industry needs genuine investors who wish to expand cotton growing and not just exploit the existing, indeed currently shrinking, farmer base.....It is apparent that in the last two seasons, due to a number of reasons, those ginners who have pre-financed, have had poor input recoveries. If those ginners were to reduce their future pre-financing as a result of this, it would have a disastrous effect on national cotton plantings and could destroy the, already struggling, industry.”

The ZCGA position is hardly surprising, but I think the comments illustrate a critical dimension often ignored with regards to the probable effects of the "dutch disease". That is the immediate distributional impact from even minor appreaciation in the Kwacha may be significant. Simply put, for many rural Zambians relying on the agriculture sector, its bad news indeed. The urbanites of course aren't too bothered. Higher copper revenues means higher urban wages, and cheaper imports for urbanites. A stronger Kwacha might therefore widen the inequality between rural and urban dwellers even much further.

Basic Needs Basket (April 2008)

The JCTR Basic Needs Basket for Lusaka (April 2008) can be found here and the associated Press Release here. The cost of basic food items for a family of six in Lusaka stood at K742,700 in April, representing an increase of K59,000 from the March cost of K683,700. The total cost of non-food essentials (charcoal, bath soap, etc) remained relatively stable at K1,197,100 in comparison to the cost of K1,196,600 for the month of March. JCTR have also released food baskets for several copperbelt towns, Kasama (crucial for rural comparisons) and Livingstone ( a tourist town).

A Marshall plan for DRC?

The Democratic Republic of Congo has unveiled details of a controversial $9.25bn agreement that pledges millions of tonnes of copper and cobalt to China in exchange for roads, railways and other infrastructure. Excerpt:

Congo's Infrastructure Minister Pierre Lumbi, in a speech to MP's publicly unveiling the details the agreement for the first time, called it a "vast Marshall Plan for the reconstruction of our country's basic infrastructure."

Under the terms of the deal, some aspects of which had previously been announced by various Congolese government officials, China promised $3.25 billion to revitalise the country's potentially lucrative mining sector. Another $6 billion will go towards building more than 6,500 km (4,000 miles) of paved roads and railways, two hydro-electric dams, and the rehabilitation of two airports.

The opposition criticised large tax breaks for Chinese companies as well as risks the massive loan could further indebt the cash-strapped former Belgian colony. Congo is seeking to qualify for debt relief as a Highly Indebted Poor Country (HIPC) under World Bank and International Monetary Fund initiatives (IMF). The IMF last year warned Congo of the possible macroeconomic effects of the loan.

MP's also denounced the decision to cede to Chinese companies mining rights to over 10 million tonnes of copper reserves and around 600,000 tonnes of cobalt, which they say makes the deal heavily lopsided in favour of China. "The result of simple arithmetic makes the Congolese contribution at least $87 billion," Mbusa said.

Zambia Corruption Statistics

A useful statistical datasheet by the Anti Corruption Commission on Zambia corruption.

Quote of the week (Mwala Kalaluka)

This week's "Quote of the week" is a full article, written by Mwala Kaluluka (The Post reporter) on Retracing Lenshina's followers.

Dani Rodrik on the "Great Question"....

Linking Zambia....

Two new links worth checking out - The new Ministry of Education website and Lebson's Weblog.

Lumwana & The New Mining Tax

The latest Equinox presentation on Lumwana was released this week. You can access it here. As always very visual, with interesting facts and figures e.g. Lumwana will add 35% to Zambia's copper mining tonnage in 2009 - equivalent to $1.4bn of additional copper revenues. The most eye catching section is on page 36, on "Zambia Tax Issues" which suggests the Equinox DA is still in force:

History of Tax Concessions:

• Implemented in mid-1990s – early-2000s
• Copper prices < $0.60/lb meant mines losing money – privatization process

But since Copper prices jumped in 2003:

• Operating mines have made massive profits
• This created the political imperative for “a better return to the Zambian people”

Tax Package introduced April 2008:

• 30% Corporate Tax – 3%
• Royalty Variable Profits Tax – Windfall Profits Tax (Cu prices >$2.50/lb)
• Reduced capital write down – 25% per year

However, Equinox has a Development Agreement (“DA”):

• Legally binding DA signed in Dec 2005 (already high Copper prices)
• Lumwana is ‘greenfields’ development – unlike other mines that acquired existing operations and infrastructure
• Equinox has not been making ‘windfall profits’ – it has been investing $800m
• Zambian Government recognises that Lumwana is different

The terms of the Equinox DA have been applied to date and the Government continues to do so

Hidden in the Mealie Meal

We have been discussing the lack of "legal enforcement" as an hindrance to reducing informality. Now here is another area identified by the Human Rights Watch as critical. As always, poor enforcement like corruption, always beats people when they are down. Excerpt :

Zambian women do not enjoy effective legal protection of their property rights and as a result practices like property grabbing (the unlawful appropriation of marital property upon the death of a spouse by in-laws) and the unequal distribution of marital property according to customary law for women who divorce are widespread. Women who are subjected to these practices often suffer abject poverty and are unable to afford transportation to clinics or even afford food to take along with HIV treatment. They therefore experience increased vulnerability to HIV and a reduction of their capacity to respond to the pandemic. Fear of divorce in a context of discriminatory customary laws and where women are economically dependent on men leads some women to remain in abusive marriages, which in turn can impede treatment. This discrimination is sanctioned by Article 23 of Zambia’s current constitution—currently undergoing review—which gives primacy to customary law in marriage-related matters. Although Zambia has a law that regulates distribution of inheritance where the deceased did not leave a will (the Intestate Succession Act of 1989, amended 1996), which should help counter property grabbing, this law is ill-enforced.

A new Government bank for farmers? revisit'd....

BOZ Governor Caleb Fundanga has now officially dismissed the idea of a new government bank proposed by Agriculture Minister Ben Kapita last year. Moral hazard appears to be his main worry. The government, with the help of IFAD, last year adopted a NABARD style programme. This is probably the future of rural and agriculture finance.

A credit management database for farmers...

A fantastic development suggested not too long ago by MrK on this blog :

....Cotton Association of Zambia, with the assistance of the Zambia National Farmers Union (ZNFU), the government and USAID has launched Credit Management Database, whereby the industry would build up a history and type of credit reference bureau to identify not only the farmers with excellent loan repayments, but also those farmers with poor loan repayment histories....

Parastatal Madness, 2nd Edition

The blog Parastatal Madness noted that part of the reason why many parastatals are under performing and simultaneously remain in government hands can be found in the huge debts owed to them by government agencies. Two new articles on this - Government Agencies owe Zesco a staggering K55bn and ZSIC owed over K100bn.

Wasting away ?

A serious sanitation problem which has attracted little attention from the media and policymakers. Excerpt:

In Zambian cities, most of the unplanned settlement areas have pit latrines, where human waste mixes with floodwaters. Febby Mbewe is a resident of Kanyama, a Lusaka township where buildings are straw shacks and latrines are pits. She says, “There is too much water [in township] toilets. Roads have submerged in the floodwaters. Every time it rains the water level rises. Now it has gone up over knee-level. Because of that the houses, toilets [pit-latrine] and roads are all flooded.”.......The Water and Sanitation Council of Zambia acknowledges the problem. Osward Chanda is a coordinator of the council, “We need a policy change in the sanitation sector because people are building structures anywhere without proper sanitation facilities. So who’s responsible for where they are disposing the human waste? We need to police the sector properly; by this I mean having someone responsible to oversee the sector development. “

CSO on Income Inequality

The latest CSO April Edition has a fascinating article on income inequalities remain high in Zambia. Article replicated below :

Inequality in income distribution is one of the factors that determine inequality in the levels of household expenditure and access to goods and services. In measuring inequality the Lorenz Curve (a graphical representation of income distribution of a population) and Gini Coefficient (the use of an index of inequality to measure income distribution) are used.

In terms of distribution of income, the survey results revealed that the bottom 80 percent of the population in terms of earnings were reported to have acquired only 31.3 percent of the total income, while the top 20 percent of the population claimed 68.67 percent of the total income. This shows that income is very unevenly distributed in Zambia. The gini coefficient for Zambia in 2006 was 0.60, a decline from 0.61 percent in 1996. It was 0.54 in the rural households and 0.66 in the urban households. This reveals that the income inequalities in 2006 were more pronounced in the urban areas than in the rural areas.

Trend analysis of the income distribution from 1996 to 2006 shows that there has been no major change in inequality regarding the distribution of income. In 1996, the bottom 50 percent of the population claimed a mere 11 percent of the total income. This slightly reduced to 9.1 percent in 1998, and then increased to 21 percent in 2004 and then reduced further to 8 percent in 2006.

Should we be bothered? Absolutely! Socially, as bad as poverty is, its much worse when you see others are better off than you are, and the gap appears to be unchanging. Economically, the conventional thinking is that economic growth could be unsustainable in the long term without policies that reduces the divide between members of society or at the very least prevents a widening of the existing divide. It is therefore necessary to ensure that pro-growth policies go hand in hand with social and income equality goals.

The policy linkage is important because inequality has important implications for social cohesion (i.e. whether we as a society feel more as one nation with common interests). Social cohesion is important because a more united nation would be able to have internal peace and its citizens would lead happier lives. This is why responsible Governments generally pursue policies that encourage civic engagement through initiatives such as devolved decision making and greater voter participation. Unless we as society are more cohesive, the problems of crime and disorder would not be easily eliminated.

No one has described the the linkage between greater inequality and a less cohesive society better than James K. Galbraith. In his book Created Unequal : The Crisis in American Pay (1998), Galbraith argues that when citizens have diverging access to services (due to income and social inequality) the result can be social and political fracturing. Inequality may endanger society’s ability to think of itself as a single entity or nation. In his words :

“With high inequality, it becomes easy to know whether one is likely in the long run to be a net gainer, or a net loser, from public programs of family assistance, pension security, and health care. High inequality therefore weakness the willingness to share at the same time that it concentrates resources in the hands least inclined to be willing. In this way inequality threatens the ability of society to provide for the weak, the ill, and the old”.

Zambia Statistics - April 2008

The CSO April Edition can be found here. Single digit inflation is no more. Inflation was recorded at 10.1 percent as at April 2008. This rate is 0.3 of a percentage point higher than the March rate of 9.8 percent. Compared with the same period last year, the annual rate of inflation declined by 2.3 percentage points, from 12.4 percent in April 2007 to 10.1 percent in April 2008.

For Zambian Aviation enthusiasts!

An interesting piece on the resurgent Zambian airways, with good information on the history, their current market position and fleet composition. Would be nice to see something similar on other local airlines.

Affirmative action...for Zambian women?

Interesting comments from Marian Munyinda (NGOCC Chairperson) on the need for the new constitution to have some element of affirmative action for women vis-a-vis electoral participation before the 2011 elections. Excerpt :

"We would like a situation where political parties can enshrine certain provisions aimed at advancing the development of women such as ensuring that 30 per cent of women adopted are women and also the Electoral Commission of Zambia adopting and implementing an affirmative action….For example, in Uganda there are certain areas where only women candidates compete against each other because of course there are fears that if men are put with women they may lose because the reality is that women are still disadvantaged in a lot of areas."

It was only a matter of time before someone suggested this. We have seen recent parliamentary bills reserve positions for women e.g. the new mining bill calls for a “deputy chair [of the mining watchdog] to be a woman if the chair happens happens to be a man”. Similar provisions are found in the pending ICT bill. Whilst I am not opposed to affirmative action in principle, I am amazed how the drive to set mandatory minimum female participation in certain areas has proceeded without debate.

What is not always clear to my mind is whether proponents like Marian see “minimum female participation" as Zambia development in action (end in itself) or as a crucial step towards economic growth. I think in so far as equality between sexes is a noble aspiration, any drive to improve it must be viewed as necessarily development. However, the question of unintended consquences must also be considered. Clearly having a minimum quota of MPs reserved for women may not be efficient for society as a whole if it delivers uneducated female MPs incapable of serving their constituents properly. There are clearly difficult trade-offs to be made and that is why a debate is necessary.

Of course may be Marian really believes that affirmative action is the way to achieve sustainable growth! For example she might believe that in the long term economic prosperity lies in reducing gender inequality. Either through preventing further social fracturing or by more positively breaking down barriers that prevent effective competition for top jobs. The argument here again needs to be better debated to see whether that is indeed the case.

Obstacles to growth

A useful IMF summary paper on the Zambia electric power market and potential obstacles to growth.

Chinese Investment in Zambia (A Special BBC Report)

BBC Newsnight Programme reports on China's influence in Zambia - A special two part report :

Part 1


Part 2

Election Special - To run or not to run? (Reuters)

A reuters report on the current stand off. The MDC appear stuck on the next move - run and risk brutality from Mugabe's henchmen, while legitimising his hold to power in the process. Refuse and risk handing it to Bob on a plate, since the international community appear powerless :

Quote of the week (Oscar Kalumiana)

“There are some symptoms of problems at Zesco but this is not because it is too big….Zesco only generates 1,700 mega watts of power and I don’t think tha would be considered a huge responsibility compared to other power utilities such as Eskom in South Africa which generates 45,000 mega watts of power. This is a huge difference but the South African government has maintained the company in public hands.”

Oscar Kalumiana (The Post 30/04/2008)

Oscar Kalumiana (Acting Energy Permanent Secretary) objecting to calls for ZESCO to be separated into three separate companies generation, distribution and transmission in order to make the power market more competitive and encourage investment in the market. Although ZESCO is not a statutory monopoly, it handles virtually all generation, transmission, and distribution of electricity in Zambia. ZESCO is a company on the ropes, beset by inefficiencies and high costs. According to the Cost of Service Study, ZESCO experienced five straight year of losses from 2002–06 and in the last few months has overseen significant power shortages in the country including the Black Weekend. Mr Kalumiana's response to all this is that size is irrelevant, although he perhaps could have said size has advantages. In any case citing Eskom is simply sakism. The wrong thought process among Zambian politicians that just because others are doing it, we should also do the same thing. Other people's actions [in this case RSA] are the best reasons for your own actions.

Mining Watch (Guinea)

Guinea has joined the quest to earn bigger share from profits of foreign mining companies. Careful readers of the article will also note that Mineweb believes "Zambia expects to earn US$650 million in additional revenue this year" from its new regime. This figure is higher than the $415m previously quoted. If $650m is the new "additional" estimate, then overall copper revenues might well be around $750m on 600k tonnes in 2008. But without knowing precise the methodology used to assess the $650m its difficult to believe any of these figures. There's also the additional complexity of other measures (e.g the 15% export tax on copper concentrates).

Parastatal Madness

Secretary to the Treasury, Evans Chibiliti disclosed earlier this week that a number of companies (Zamtel, Zesco etc) owe the Zambia Revenue Authority (ZRA) billions of Kwacha in unremitted taxes. Apparently ZRA has sufficient legal tools to compel defaulting clients to pay,but the situation is tricky because of " the strategic importance of the erring firms and institutions".The truth of course is that this is not entirely true. One only needs to peruse through the PAC report to see that most of the parastatals are actually owed a lot of money by the government, this is why they never pay taxes! Many of us have previously called for these parastatals to become independent, but reality is that incentives for government to act are very weak. Parastatals help governments to shift debt around! Mr Chibiliti calls this implementation of "various debt swap and cancellation initiatives".

Its not that the government has a poor command of economics or that it believes its own argument that "parastatals are crucial for national security", its just that it has weak incentives to make parastatals more independent. The government knows the right approach is to fully commercialise the firms and ultimate privatisation (with adequate regulation where necessary), but they fear that doing so would make them pay the debts back! In particular, fully commercialise / privatised parastals makes its very difficult for the sitting government to use them as engines for direct / indirect campaign during election time. For example, they can no longer get a Zamtel phone connected for free or get ZESCO to provide power for free etc! There are other disincentives of course, most notably incurring the wrath of laid off employees (see the ZAMTEL post), possibly culminating in an electoral defeat. Indeed in some cases the pressure from employees represents the greatest stumbling block for reform because they fear job losses! Although in the long run as the company expands it will be able to take on more employees and with better prospects.

ZAMTEL on the verge of collapse?

Staggering news that Zamtel is operating a K150 billion deficit, and plans to retrench more than 800 workers this year to save the firm from total collapse. It appears the truth has finally hit home, that ZAMTEL is truly inefficient and very costly to the Zambian tax payer. According to Acting ZAMTEL MD, Mukela Muyunda :

"The current situation should be brought under control without any delay. We are spending more than 70 per cent on staff costs. I want to assure all our employees that those who are going to lose their jobs, both unionised workers and senior managers, are going to be taken care of. This is a surgery which is expected to be conducted to save the company. The company has been operating on losses. We have to start by making a profit of at least K20 billion this year alone in order to make the company viable again".

The quest to become SADC's transport hub...

Mozambique is in a hurry to develop, and central to the strategy is significant investment in its port capacity through issuing international tenders for concessions. The latest plan is a $900 million upgrade of the Nacala and Beira ports and associated surface access infrastructure. It has its eyes on landlocked neighbours Zimbabwe, Malawi and Zambia as key customers.